James H.M. Sprayregen, P.C. Paul M. Basta Jennifer L.

Marines KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022-4611 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 and Anup Sathy, P.C. (admitted pro hac vice) Marc J. Carmel (admitted pro hac vice) KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654-3406 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel to the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: INNKEEPERS USA TRUST, et al.,1 Debtors. ) ) ) ) ) ) ) Chapter 11 Case No. 10-13800 (SCC) Jointly Administered

DEBTORS OMNIBUS REPLY IN SUPPORT OF THE DEBTORS CASH COLLATERAL MOTION, CASH MANAGEMENT MOTION, LEHMAN DIP MOTION, AND FIVE MILE DIP MOTION, AND IN RESPONSE TO OBJECTIONS THERETO1

The Debtors in these Chapter 11 Cases, along with the last four digits of each Debtors federal tax identification number, are: GP AC Sublessee LLC (5992); Grand Prix Addison (RI) LLC (3740); Grand Prix Addison (SS) LLC (3656); Grand Prix Albany LLC (3654); Grand Prix Altamonte LLC (3653); Grand Prix Anaheim Orange Lessee LLC (5925); Grand Prix Arlington LLC (3651); Grand Prix Atlanta (Peachtree Corners) LLC (3650); Grand Prix Atlanta LLC (3649); Grand Prix Atlantic City LLC (3648); Grand Prix Bellevue LLC (3645); Grand Prix Belmont LLC (3643); Grand Prix Binghamton LLC (3642); Grand Prix Bothell LLC (3641); Grand Prix Bulfinch LLC (3639); Grand Prix Campbell / San Jose LLC (3638); Grand Prix Cherry Hill LLC (3634); Grand Prix Chicago LLC (3633); Grand Prix Columbia LLC (3631); Grand Prix Denver LLC (3630); Grand Prix East Lansing LLC (3741); Grand Prix El Segundo LLC (3707); Grand Prix Englewood / Denver South LLC (3701); Grand Prix Fixed Lessee LLC (9979); Grand Prix Floating Lessee LLC (4290); Grand Prix Fremont LLC

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Innkeepers USA Trust and certain of its affiliates, as debtors and debtors in possession (collectively, the Debtors), hereby submit this omnibus reply in support of the Debtors Cash Collateral Motion, Cash Management Motion, Lehman DIP Motion, and Five Mile DIP
2 3 4

(3703); Grand Prix Ft. Lauderdale LLC (3705); Grand Prix Ft. Wayne LLC (3704); Grand Prix Gaithersburg LLC (3709); Grand Prix General Lessee LLC (9182); Grand Prix Germantown LLC (3711); Grand Prix Grand Rapids LLC (3713); Grand Prix Harrisburg LLC (3716); Grand Prix Holdings LLC (9317); Grand Prix Horsham LLC (3728); Grand Prix IHM, Inc. (7254); Grand Prix Indianapolis LLC (3719); Grand Prix Islandia LLC (3720); Grand Prix Las Colinas LLC (3722); Grand Prix Lexington LLC (3725); Grand Prix Livonia LLC (3730); Grand Prix Lombard LLC (3696); Grand Prix Louisville (RI) LLC (3700); Grand Prix Lynnwood LLC (3702); Grand Prix Mezz Borrower Fixed, LLC (0252); Grand Prix Mezz Borrower Floating, LLC (5924); Grand Prix Mezz Borrower Floating 2, LLC (9972); Grand Prix Mezz Borrower Term LLC (4285); Grand Prix Montvale LLC (3706); Grand Prix Morristown LLC (3738); Grand Prix Mountain View LLC (3737); Grand Prix Mt. Laurel LLC (3735); Grand Prix Naples LLC (3734); Grand Prix Ontario Lessee LLC (9976); Grand Prix Ontario LLC (3733); Grand Prix Portland LLC (3732); Grand Prix Richmond (Northwest) LLC (3731); Grand Prix Richmond LLC (3729); Grand Prix RIGG Lessee LLC (4960); Grand Prix RIMV Lessee LLC (4287); Grand Prix Rockville LLC (2496); Grand Prix Saddle River LLC (3726); Grand Prix San Jose LLC (3724); Grand Prix San Mateo LLC (3723); Grand Prix Schaumburg LLC (3721); Grand Prix Shelton LLC (3718); Grand Prix Sili I LLC (3714); Grand Prix Sili II LLC (3712); Grand Prix Term Lessee LLC (9180); Grand Prix Troy (Central) LLC (9061); Grand Prix Troy (SE) LLC (9062); Grand Prix Tukwila LLC (9063); Grand Prix West Palm Beach LLC (9065); Grand Prix Westchester LLC (3694); Grand Prix Willow Grove LLC (3697); Grand Prix Windsor LLC (3698); Grand Prix Woburn LLC (3699); Innkeepers Financial Corporation (0715); Innkeepers USA Limited Partnership (3956); Innkeepers USA Trust (3554); KPA HI Ontario LLC (6939); KPA HS Anaheim, LLC (0302); KPA Leaseco Holding Inc. (2887); KPA Leaseco, Inc. (7426); KPA RIGG, LLC (6706); KPA RIMV, LLC (6804); KPA San Antonio, LLC (1251); KPA Tysons Corner RI, LLC (1327); KPA Washington DC, LLC (1164); KPA/GP Ft. Walton LLC (3743); KPA/GP Louisville (HI) LLC (3744); KPA/GP Valencia LLC (9816). The location of the Debtors corporate headquarters and the service address for their affiliates is: c/o Innkeepers USA, 340 Royal Poinciana Way, Suite 306, Palm Beach, Florida 33480.
2

Debtors Motion for the Entry of Interim and Final Orders (A) Authorizing the Debtors to (I) Use the Adequate Protection Parties Cash Collateral and (II) Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 363, (B) to the Extent Approved in the Final Order, Granting Senior Secured Priming Liens on Certain Postpetition Intercompany Claims, (C) to the Extent Approved in the Final Order, Granting Administrative Priority Status to Certain Postpetition Intercompany Claims, and (D) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(b) [Docket No. 13] (the Cash Collateral Motion). Debtors Motion for the Entry of an Order Authorizing the Continued Use of (I) Existing Cash Management System, as Modified Herein, (II) Existing Bank Accounts, (III) Existing Business Forms, and (IV) Certain Existing Investment Guidelines [Docket No. 14] (the Cash Management Motion). Debtors Motion for the Entry of an Order Authorizing the Debtors to Obtain Postpetition Financing from an Affiliate of Lehman ALI Inc. on a Priming Basis Pursuant to Sections 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1), and 364(e) of the Bankruptcy Code [Docket No. 23]; Supplement to the Debtors Motion for the Entry of an Order Authorizing the Debtors to Obtain Postpetition Financing from an Affiliate of Lehman ALI Inc. on a Priming Basis Pursuant to Sections 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1), and 364(e) of the Bankruptcy Code [Docket No. 200] (together, the Lehman DIP Motion).

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Motion, and in response to the objections thereto (the Reply). In support of this Reply, and in further support of their Cash Collateral, Cash Management, and DIP Motions, the Debtors respectfully state as follows:

Debtors Motion for the Entry of an Order Authorizing the Debtors to Obtain Postpetition Financing from Five Mile Capital Partners on a Priming Basis Pursuant to Sections 364(c)(1), 364(c)(2), 364(c)(3), and 364(e) of the Bankruptcy Code [Docket No. 24]; Supplement to the Debtors Motion for the Entry of an Order Authorizing the Debtors to Obtain Postpetition Financing From Five Mile Capital Partners on a Priming Basis Pursuant to Sections 364(c)(1), 364(c)(2), 364(c)(3), and 364(e) of the Bankruptcy Code [Docket No. 201] (together, the Five Mile DIP Motion and with the Lehman DIP Motion, the DIP Motions). Objection of C-III Asset Management LLC to Debtors (1) Motion for the Entry of Final Order Authorizing the Debtors to Use the Adequate Protection Parties Cash Collateral and (2) Motion for Entry of an Order Authorizing the Continued Use of Existing Cash Management System, As Modified [Docket No. 254] (the CIII Asset Management Objection); Objection of Wells Fargo Bank, N.A., as Trustee for the Registered Holders of Credit Suisse First Boston Mortgage Securities Corp., Commercial Mortgage Pass-Through Certificates, Series 2007-C1 and U.S. Bank National Association, as Trustee for the Registered of ML-CFC Commercial Mortgage Trust 2006-4, Commercial Mortgage Pass-Through Certificates, Series 2006-4 to Debtors Motion for the Entry of a Final Order (A) Authorizing the Debtors to (I) Use the Adequate Protection Parties Cash Collateral and (II) Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 363, and (B) To the Extent Approved in the Final Order, Granting Senior Secured, Priming Liens on Certain Postpetition Intercompany Claims, and (C) to the Extent Approved in the Final Order, Granting Administrative Priority Status to Certain Postpetition Intercompany Claims and Joinder to the Objection of Midland Loan Services, Inc. [Docket No. 255] (the Wells Fargo Objection); Objection of CWCapital Asset Management LLC to Debtors (1) Motion for the Entry of Final Order Authorizing the Debtors to Use the Adequate Protection Parties Cash Collateral and (2) Motion for Entry of an Order Authorizing the Continued Use of Existing Cash Management System, As Modified [Docket No. 257] (the CWCapital Objection); Amended Objection of Midland Loan Services, Inc., Special Servicer for the Fixed Rate Trustee to (1) the Motion (A) Authorizing the Debtors to (i) Use the Adequate Protection Parties Cash Collateral and (ii) Providing Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 363 and (B) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(b) and (2) Motion for Entry of an Order Authorizing the Continued Use of (I) Existing Cash Management System, as Modified Herein, (II) Existing Bank Accounts, (III) Existing Business Forms, and (IV) Certain Existing Investment Guidelines [Docket No. 259] (the Midland Objection, and together with the C-III Asset Management Objection, the Wells Fargo Objection, and the CWCapital Objection, the Objecting Representatives Objections); Appaloosa Investment L.P. Is Objection to: (I) Debtors Motion for the Entry of Interim and Final Orders (A) Authorizing the Debtors to (I) Use the Adequate Protection Parties Cash Collateral and (II) Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 363, (B) To the Extent Approved in the Final Order, Granting Senior Secured, Priming Liens on Certain Postpetition Intercompany Claims, (C) to the Extent Approved in the Final Order, Granting Administrative Priority Status to Certain Postpetition Intercompany Claims, and (D) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(b); and (II) Debtors Motion for an Order (A) Authorizing the Debtors to Assume the Plan Support Agreement and (B) Granting Related Relief [Docket No. 279] (the Appaloosa Objection). Midland Loan Services, Inc. (Midland) previously filed an objection to the Debtors usage of Cash Collateral and Cash Management System on July 19, 2010 [Docket No. 36]. C-III Asset Management LLC (C-III), Wells Fargo Bank, N.A., and U.S. Bank National Association (the Property Level Lenders), CWCapital Asset Management LLC (CWCapital), and Midland are defined collectively as the Objecting Representatives. Omnibus Limited Objection of the Official Committee of Unsecured Creditors to the Debtors Motions to Authorize the Debtors to (I) Use Cash Collateral, (II) Obtain Postpetition Financing from an Affiliate of Lehman ALI, Inc., and (III) Obtain Postpetition Financing from Five Mile Capital Partners [Docket No. 265] (the Committee Objection) filed by the official committee of unsecured creditors (the Committee); (b) Limited Objection of

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Introduction To maximize value, the Debtors must be able to use Cash Collateral to fund their operations and the costs of their restructuring, as well as to realize the ultimate goal of chapter 11a confirmed plan of reorganization. This point is not in dispute. No one challenges the fundamental proposition that these Chapter 11 Cases should be funded primarily through Cash
8 7

TriMont Real Estate Advisors, Inc., as Special Servicer, to Debtors Motion for the Entry of an Order Authorizing the Debtors to Obtain Postpetition Financing from an Affiliate of Lehman ALI Inc. on a Priming Basis Pursuant to Sections 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1), and 364(e) of the Bankruptcy Code [Docket No. 267] (the TriMont Objection) filed by TriMont Real Estate Advisors, Inc. (TriMont); (c) Objection of Ad Hoc Committee of Preferred Shareholders to (I) Debtors Motion for Order Authorizing Debtors to Assume Plan Support Agreement and (II) Debtors Motion for Entry of Order Authorizing Debtors to Obtain Postpetition Financing from Five Mile Capital Partners on a Priming Basis [Docket No. 269] (the Preferred Shareholder Objection) filed by the Ad Hoc Committee of Preferred Shareholders (the Preferred Shareholder Committee); (d) Local Texas Tax Authorities Objection to Debtors Motion for The Entry of An Order Authorizing the Debtors to Obtain Postpetition Financing From an Affiliate of Lehman ALI Inc. on a Priming Basis Pursuant to Sections 364 (c)(1), 364(c)(2), 364(c)(3), 364(d)(1) And 364(e) of the Bankruptcy Code [Docket No. 287] (the Taxing Authorities Objection) filed by the Texas counties of Bexar, Dallas, and Tarrant (the Texas Taxing Authorities); and Limited Objection to Debtors Motion for the Entry of an Order Authorizing Debtors to Obtain Postpetition Financing from Five Mile Capital Partners on a Priming Basis [Docket No. 311] (the Wells Fargo Objection, and, together with the Committee Objection, the TriMont Objection, the Preferred Shareholder Objection, and the Taxing Authorities Objection, the Objections) filed by Wells Fargo Bank, N.A. (Wells Fargo). The Committee, TriMont, the Preferred Shareholder Committee, the Texas Taxing Authorities, and Wells Fargo are defined as the DIP Objectors.
7

All capitalized terms used but otherwise not defined herein shall have the meanings set forth in the Cash Collateral Motion, the proposed final order approving the same, filed as Exhibit A to the Supplement to Debtors Motion for the Entry of Final Order (A) Authorizing the Debtors to (I) Use the Adequate Protection Parties Cash Collateral and (II) Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 363, (B) to the Extent Approved in the Final Order, Granting Senior Secured Priming Liens on Certain Postpetition Intercompany Claims, and (C) to the Extent Approved in the Final Order, Granting Administrative Priority Status to Certain Postpetition Intercompany Claims [Docket No. 310] (the Final Cash Collateral Order), the applicable DIP Motion, or the proposed final orders approving the DIP Motions, filed as Exhibit A to the Supplement to the Debtors Motion for the Entry of an Order Authorizing the Debtors to Obtain Postpetition Financing from Five Mile Capital Partners on a Priming Basis Pursuant to Sections 364(c)(1), 364(c)(2), 364(c)(3), and 364(e) of the Bankruptcy Code [Docket No. 201] (the Five Mile DIP Order) and as Exhibit A to the Supplement to the Debtors Motion for the Entry of an Order Authorizing the Debtors to Obtain Postpetition Financing from an Affiliate of Lehman ALI Inc. on a Priming Basis Pursuant to Sections 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1), and 364(e) of the Bankruptcy Code [Docket No. 200] (the Lehman DIP Order and, with the Five Mile DIP Order, the DIP Orders), as applicable. See, e.g., In re Journal Register Co., 407 B.R. 520, 528 (Bankr. S.D.N.Y. 2009) (confirmation of a plan of reorganization is the statutory goal of every chapter 11 case) (internal citations omitted); Lisanti v. Lubetkin (In re Lisanti Foods, Inc.), 329 B.R. 491, 497 (D.N.J. 2005) (same); In re Good, 428 B.R. 235, 242 (Bankr. E.D. Tex. 2010) (The debtors ultimate goal in Chapter 11 case is a successful reorganization through a plan confirmed by the Court.).

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Collateral, as they must, given the lack of sufficient unencumbered assets to procure sufficient additional postpetition financing at a reasonable price. Moreover, no one in these Chapter 11 Cases can credibly question the need for the Debtors to perform their overdue PIPs. To achieve this, the Debtors need the DIP

Financingfinancing whose sole purpose is to enable the Debtors to fund the PIPs and to make other appropriate capital expenditures on the enterprises hotel properties, including as required under the Marriott Adequate Assurance Agreement and as necessary for the Debtors to avoid defaulting under the Debtors valuable Franchise Agreements. Without the Franchise

Agreements in place, the Debtors would not be able to label and market their hotel properties under the flags of Marriott and other name brand franchisors and would be faced with operating hotel properties without the array of benefits associated with a well-known and respected flag. A. Cash Collateral Objections

The proposed Final Cash Collateral Order provides the Adequate Protection Parties, including the Objecting Representatives, with more than adequate protections in the form of a comprehensive package that includes: Using Cash Collateral subject to a 13-Week Forecast; Comprehensive and timely reporting; 507(b) Claims; Adequate Protection Liens on Postpetition Collateral (subject to certain limitations), to the extent of diminution in value; Agreement, to the extent the business operations and restructuring costs are fully funded, to use all remaining cash to repay the Debtors prepetition secured obligations (subject to a reservation of rights); and The payment of the Representatives reasonable fees and expenses.

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Nonetheless, on the eve of the Debtors first day hearing, Midland filed objections to, among other things, the Debtors Cash Collateral Motion and Cash Management Motion (despite the fact that all of the lenders authorized the current cash management system in 2007).
9

Midland objected at that time on four primary grounds: first, that the proposed cash collateral order does not adequately protect Midland and, more specifically, that there should be a real time ability to monitor Cash Collateral usage; second, that Midlands Cash Collateral should not be commingled, but rather should be segregated and monitored pursuant to a revised protocol; third, that there should not be any inter-Debtor borrowing or lending; and fourth, that Midlands Cash Collateral should not be used to fund estate professionals in furtherance of a proposed plan of reorganization that Midland does not approve. The Court overruled Midlands objection at the first day hearing and authorized the Debtors use of Cash Collateral and of the current cash management system (with enhanced protections for the lenders as set forth in the Interim Cash Collateral Order).
10

On August 23, 2010, the Objecting Representatives each filed objections to the Cash Collateral Motion and Cash Management Motion. While each Objecting Representative couches its arguments slightly differently, the same four primary objections asserted in Midlands

See Midland Loan Services, Inc.s Special Servicer for the Fixed Rate Trustee, Objection to (1) the Motion (A) Authorizing the Debtors to (i) Use the Adequate Protection Parties Cash Collateral and (ii) Providing Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 363 and (B) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(b) and (2) Motion for Entry of an Order Authorizing the Continue Use of (I) Existing Cash Management System, as Modified Herein, (II) Existing Bank Accounts, (III) Existing Business Forms, and (IV) Certain Existing Investment Guidelines [Docket No. 36]. See Interim Order (A) Authorizing the Debtors to (i) Use the Adequate Protection Parties Cash Collateral and (ii) Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 36, and (B) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(b) [Docket No. 54]; see also Interim Order Authorizing the Continued Use of (I) Existing Cash Management System, as Modified Herein, (II) Existing Bank Accounts, (III) Existing Business Forms, and (IV) Certain Existing Investment Guidelines [Docket No. 55].

10

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original objection comprise the Objecting Representatives Objections. Collateral objections should be overruled for the reasons set forth herein.

All of the Cash

The Objecting Representatives are secured creditors, not owners or operators. The Bankruptcy Code does not bestow upon secured creditors the right to control a chapter 11 case, yet that is exactly what the Objecting Representatives are trying to do through their objections. The Objecting Representatives seek to replace the Debtors cash management systema system that has operated efficiently and effectively for six yearswith unnecessary protocols of their own. Some examples of this include: The Objecting Representatives seek so-called real-time reporting notwithstanding that the Debtors already are providing a comprehensive collection of cash-related reports (more so than is required under the Debtors 11 prepetition Loan Documents ). This objection is particularly unpersuasive considering the Objecting Representatives rights, under the Bankruptcy Code and 12 agreed to in the proposed Final Cash Collateral Order, to require the Debtors to return to Court immediately if the lenders are unsatisfied with the contents of the 13 many reports. The Objecting Representatives also object to any inter-Debtor lending. However, and to the extent any inter-Debtor lending becomes necessary during the Chapter 11 Cases, the lending Debtors have substantial protections under the Final Cash Collateral Order. Finally, the Objecting Representatives want the power to pick and choose which of the Debtors professional fees their Cash Collateral should pay for as part of the approval of the Final Cash Collateral Order. Secured creditors cannot simply limit payment of estate professionals fees and expenses to only those amounts that further the lenders agenda, while seeking all of the benefits and protections

11

The Fixed Rate Mortgage Loan Agreement, the Anaheim Mortgage Loan Agreement, the Capmark Mission Valley Loan Agreement, the Capmark Garden Grove Loan Agreement, the Capmark Ontario Loan Agreement, the Merrill Washington D.C. Loan Agreement, the Merrill Tysons Corner Loan Agreement, and the Merrill San Antonio Loan Agreement (each as defined in the Final Cash Collateral Order) are collectively defined as the Loan Documents). See also Interim Order (A) Authorizing the Debtors to (i) Use the Adequate Protection Parties Cash Collateral and (ii) Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 363, and (B) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(B) [Docket No. 54] (the Interim Cash Collateral Order). See Final Cash Collateral Order at 4.

12

13

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the process and this Court offer them. That is not how chapter 11 works. In any event, the Objecting Representatives retain all of their rights to object to fees and expenses incurred by estate professionals under the Bankruptcy Code and the interim compensation order approved by the Court, as well as to dispute the allocation of those amounts among the Tranches of Debt under the Final Cash 14 Collateral Order. It is also disturbing that after more than six weeks of postpetition dialogue with the Objecting Representatives, Midland filed, attached to its Objection, a declaration attacking the Debtors proposed inter-Debtor lending and the ability of the Floating Rate Loan properties to support their operating expenses in the near future.
15

Midland has had (and passed on) countless

opportunities to raise this issue earlier or in a less litigious manner. Additionally, the Committee objected to a handful of provisions of the Cash Collateral Motion on the basis that the Final Cash Collateral Order contains certain provisions that unreasonably prejudice the Debtors unsecured creditors. The Debtors have modified the Carve Out to address one of the Committees concerns, and the Debtors are working with all relevant parties to resolve the Committees remaining concerns. B. DIP Facilities Objections

Four essential points about the DIP Facilities are worth reiterating here. First, the proposed postpetition financing consists of two separate DIP Facilities, one offered by an affiliate of Five Mile and one by an affiliate of Lehman. Second, the funds provided by the DIP
14

See Order Authorizing the Establishment of Procedures for Interim Compensation and Reimbursement of Expenses for Professionals and Official Committee Members [Docket No. 189] (the Interim Compensation Order) (providing Midland and certain other lenders with the right to object to monthly fee applications and all parties in interest with the rights to object to interim and final fee applications). In truth, the hotels in each of the Tranches of Debt generally perform similarly to the other hotels within the enterprise. During the period from July 19 to July 31, the only postpetition period for which the Debtors have a reliable estimate, the Floating Rate Loan properties, which comprise approximately 27% of the Debtors collateral based on relative number of hotels, generated a similar percentage of the excess cash generated by the enterprise (after accounting for disbursements for operating expenses). See Declaration of Nathan Cook, Chief Financial Officer of Innkeepers USA Trust, in Support of the Debtors Cash Collateral Motion and Cash Management Motion and in Response to Objections Thereto (the Cook Declaration), filed contemporaneously herewith, 31.

15

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Facilities will be used primarily to perform the essential PIPs and to make certain other capital expenditures.
16

Third, each DIP Facility is secured by its own pool of collateral, which contains

its own distinct group of Debtor hotel properties. Fourth, each DIP Facility will fund the PIPs and certain capital expenditures for the Debtor hotel properties within its own collateral pool. In other words, there is neither cross-collateralization between the Lehman DIP Facility and the Five Mile DIP Facility, nor among the three tranches within the collateral pool securing the Five Mile DIP Facility. Both prior to the Petition Date and since the start of these Chapter 11 Cases, the Debtors and Moelis & Company, the Debtors financial advisor and investment banker, evaluated a number of possibilities for postpetition financing opportunities. Ultimately, the DIP Facilities were the most attractive options available to the Debtors when the DIP Motions were filed.
17

Significantly, the Debtors filed the DIP Motions well over a month ago, and the Debtors have yet to receive a superior offer to provide the postpetition financing that the Debtors so critically need to preserve the value of their enterprise for their many stakeholders.
18

While no party can dispute the Debtors need to complete the PIPs, as well as the Debtors efforts to secure financing from available sources, several objections have been filed. A brief summary of the DIP Objections is as follows: TriMont, the special servicer to the Floating Rate Mezzanine Loan, objects to the provisions in the Lehman DIP Order that provide that the automatic stay is modified upon the occurrence of certain termination events or events of default;

16

See Amended Declaration of Dennis Craven, Chief Financial Officer of Innkeepers USA Trust, in Support of First-Day Pleadings [Docket No. 33] (the First Day Declaration) at 11. See Declaration of William Q. Derrough in Support of the Lehman DIP Motion and the Five Mile DIP Motion and in Response to Objections Thereto (the Derrough Declaration), filed contemporaneously herewith at 18. Id. at 38.

17

18

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the Texas Taxing Authorities object to the Lehman DIP Motion to the extent the liens granted to the Lehman DIP Lenders prime existing ad valorem tax liens of the Texas Taxing Authorities without adequate protection; Wells Fargo objects to specific provisions of the Five Mile DIP Facility, pursuant to which Five Mile is extending postpetition financing in Tranche B and Tranche C of that facility to properties securing loans for which Wells Fargo is the trustee, including provisions that cross default (i) the Five Mile DIP Facility with the Lehman DIP Facility or (ii) Tranche B and Tranche C with Tranche A in the Five Mile DIP Facility; the Preferred Shareholder Committee objects to the Five Mile DIP Motion alleging (i) certain properties assets pledged under the Five Mile DIP Motion are unencumbered and/or oversecured such that these properties can provide a return to equity holders that is jeopardized by the Five Mile DIP Facility and (ii) Apollo Investment Corp. (AIC) is required to perform the PIPs that are funded by the Five Mile DIP Facility making the financing unnecessary; and the Committee objects to the provisions in both DIP Facilities that provide the DIP Lenders with priming liens and superpriority claims on the avoidance actions and proceeds thereof of the Debtors that are borrowers under the respective DIP facilities.

To be sure, the Debtors are working with the DIP Objectors, Five Mile, and Lehman in an effort to consensually resolve as many of their concerns as possible prior to the September 1 hearing on the DIP Motions. As discussed herein and with respect to the Cash Collateral, Cash Management, and DIP Motions, the Debtors submit that approval of the relief sought is amply justified in the context of these Chapter 11 Cases, and they respectfully request that the Court overrule the objections and authorize such relief.

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Reply I. The Prepetition Secured Lenders Are Adequately Protected. A. The Appropriate Legal Standard Is Adequate (Not Total) Protection.

The Bankruptcy Code requires that the Adequate Protection Parties either consent to use the Cash Collateral or, alternatively, that the Debtors provide adequate protection.
19

Given the

Objecting Representatives collective desire to thwart the Debtors restructuring efforts, it should come as no surprise that the Objecting Representatives are contesting the use of Cash Collateral. Nonetheless, the terms of the Final Cash Collateral Order adequately protect the Debtors prepetition secured lenders and, thus, should be approved. Whether a particular adequate protection package passes muster under the Bankruptcy Code is not strictly a function of whether the secured party is getting everything it wants or even all of the protections it could possibly receive for the use of Cash Collateral. Rather, the plain language of the Bankruptcy Code requires only that the provided protection be adequate.
20

The determination of adequate protection is a fact-specific inquiry.

21

The focus of the

adequate protection requirement is to preserve the secured creditors interest at the time of the

19

Pursuant to section 363(c)(2) of the Bankruptcy Code, a debtor may use cash collateral as long as (A) each entity that has an interest in such cash collateral consents; or (B) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provisions of this section. 11 U.S.C. 363(c)(2) See In re Beker Indus. Corp., 58 B.R. 725, 741 (Bankr. S.D.N.Y. 1986) (Adequate protection, not absolute protection, is the statutory standard.). See In re Mosello, 195 B.R. 277, 289 (Bankr. S.D.N.Y. 1996) (Its application is left to the vagaries of each case . . . .) (citation omitted); In re Realty Southwest Assocs., 140 B.R. 360, 366 (Bankr. S.D.N.Y. 1992) (citing Martin v. United States, 761 F.2d 472, 274 (8th Cir. 1985)). Moreover, courts should take equitable considerations into account in determining what constitutes adequate protection. See Dynaco Corp., 162 B.R. at 394 (Adequate protection will take many forms, only some of which are set forth in section 361 of the Bankruptcy Code . . . and must be determined based upon equitable considerations arising from the particular facts of each proceeding.). The focus of the adequate protection requirement is to preserve the secured creditors position at the time of the bankruptcy filing and protect the secured creditor from diminution in the value of its collateral during the reorganization process. Mosello, 195 B.R. at 288 (citation omitted); Beker, 58 B.R. at 736; see also In re Gen. Growth Props., Case No. 09-11977, 5/13/09 Tr. 151:17-20; 152:17-25-153:1-4 (Bankr. S.D.N.Y. May 13, 2009) [Docket No. 574] (secured creditor is only entitled to adequate protection, [i]t is important to observe, however, that when Congress wanted to give secured lenders more of an adequate

20

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bankruptcy filing and protect and compensate lenders for the diminution in the value of their collateral (in this case, their Cash Collateral) resulting from the Debtors use thereof during the Chapter 11 Cases.
22

In determining whether the protection offered to secured creditors is

adequate, courts balance the protection a debtor seeks to provide with the debtors need to use cash in its reorganization effort.
23

In this case, given the Debtors unquestioned need for cash to

continue operating their business and successfully reorganize, the Debtors proposed adequate protection package satisfies the applicable standard. B. The Debtors Adequate Protection Package Is More Than Adequate.

As explained in the Cash Collateral Motion and as set forth in detail in the Final Cash Collateral Order, the Debtors propose to provide the Adequate Protection Parties with, among other things, the following forms of adequate protection. First, the Debtors agree to use the Cash Collateral subject to a 13-Week Forecast that is updated monthly and subject to review by the Adequate Protection Parties. Second, subject to the Carve Out and to any liens and superpriority claims in favor of Permitted DIPs, as further protection against diminution in the value of the Adequate Protection Parties interest in the Prepetition Collateral, each of the Adequate Protection Parties shall be granted a claim in accordance with section 507(b) of the Bankruptcy Code with priority over all other administrative expense

protection, it knew how to do so, contrasting adequate protection to secured lenders generally against heightened adequate protection given to aircraft equipment lenders under section 1110 of the Bankruptcy Code). Because of the voluminous nature of the documents cited herein, they are not attached to this Reply. Copies of these documents are available on request of Debtors counsel.
22

Mosello, 195 B.R.at 288 (citation omitted); Beker, 58 B.R. at 736; see also In re WorldCom, Inc., 304 B.R. 611, 618-19 (Bankr. S.D.N.Y. 2004) (The legislative history for section 361 of the Bankruptcy Code, which sets forth how adequate protection may be provided under section 363, makes clear that the purpose of providing adequate protection is to ensure that the secured creditor receives the value for which the creditor bargained for prior to the debtors bankruptcy.). However, neither the legislative history nor the Bankruptcy Code require the Court to protect a creditor beyond what was bargained for by the parties. Id. at 619. Stein, 19 B.R. at 459.

23

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claims and unsecured claims, with recourse to the collateral securing the loans of 24 that particular Adequate Protection Party. Third, the Debtors propose to provide each Adequate Protection Party with Adequate Protection Liens to the extent allowed under the Bankruptcy Code on all of the applicable Debtors rights in respect of the Postpetition Collateral, 25 subject to the Carve Out, to liens granted in respect of Permitted DIPs, and to Prior Liens, to the extent of diminution in the value of the Adequate Protection 26 Parties interest in the Prepetition Collateral. Fourth, the Debtors agree, to the extent the business operations and restructuring costs are fully funded, all of the remaining cash will be paid to the Adequate Protection Parties or their Representatives, as applicable; provided that in the case of any payments to an Adequate Protection Party or Representative, to the extent accepted by an Adequate Protection Party, such payments to be made are subject to recharacterization, refund, disgorgement, or other treatment as may be necessary to give effect to the Application Report at such time, and as may be determined by the Court, and all parties reserve their rights with respect thereto. Fifth, it is a Termination Event under the Final Cash Collateral Order for an aggregate of more than $2,000,000 in loans from Lender Debtors to Borrower Debtors to be outstanding at any one time, and Lender Debtors are provided with significant protections. Sixth, the Debtors propose to pay the documented out-of-pocket fees and expenses of attorneys and other professional advisors retained by the Representatives.

Further, the Adequate Protection Parties are adequately protected because the Debtors intend to use the Cash Collateral to (a) preserve and enhance their business and, consequently, the value of the Adequate Protection Parties collateral and (b) pay estate advisors, ensuring the

24

Only the section 507(b) Claims of those Adequate Protection Parties that are also a Fixed Rate Lender, a Floating Rate Lender, a Capmark Mission Valley Lender, or a Merrill Tysons Corner Lender are subject to superpriority claims in favor of Permitted DIPs. Only the Adequate Protection Liens of those Adequate Protection Parties that are also a Fixed Rate Lender, a Floating Rate Lender, a Capmark Mission Valley Lender, or a Merrill Tysons Corner Lender (as each are defined in the Final Cash Collateral Order) are subject to liens granted in respect of Permitted DIPs. The DIP Lenders under the Five Mile DIP Facility are granted priming liens, but this is necessary to secure appropriate financing, which improves value for Wells Fargos benefit, among others. Further, Wells Fargo is being primed only to the extent of the funds borrowed by the particular Debtors under the relevant facilities, which is small relative to the value of the assets of each particular hotel in Tranche B and Tranche C and, in any event, is outweighed by significant benefit of the Debtors performing the PIPs to preserve valuable Franchise Agreements and otherwise improve the value of collateral.

25

26

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Debtors ability to move forward in the restructuring process. Courts have found that secured creditors are adequately protected and have authorized the use of cash collateral where the proposed continued use thereof will preserve the value of the secured creditors other collateral, with such preservation itself constituting further adequate protection.
27

In light of the foregoing,

the Debtors again submit that the adequate protection proposed herein and in the Final Cash Collateral Order is fair, reasonable, and sufficient to satisfy the requirements of section 363(c)(2) of the Bankruptcy Code. II. The Reporting Requirements in the Final Cash Collateral Order Are More Than Sufficient. Since the Petition Date, the Debtors have been providing the Representatives with a myriad of reports. Further, the reporting proposed in the Final Cash Collateral Orderreporting that appropriately balances cost and accuracy with disclosurewill be more frequent and extensive than required by the Loan Documents supporting the Debtors prepetition secured loans.
28

27

See, e.g., In re Salem Plaza Assoc., 135 B.R. 753, 758 (Bankr. S.D.N.Y. 1992) (holding that debtors use of cash collateral from shopping center to pay operating expenses, thereby preserv[ing] the base that generates the income stream, provided adequate protection to the secured creditor); Fed. Natl Mortg. Assn v. Dacon Bolingbrook Assocs. Ltd. Pship, 153 B.R. 204 (N.D. Ill. 1993) ([T]he required adequate protection of [r]ents is satisfied to the extent the Debtor reinvests the rents in the operation and maintenance of the property because the value of the secured creditors interest in its collateral will thereby be increased.); In re 499 W. Warren St. Assocs., Ltd. Pship., 142 B.R. 53, 58 (Bankr. N.D.N.Y. 1992) (allowing the use of cash collateral to maintain property); McCombs Props. VI, Ltd. v. First Tex. SAvs. Assn (In re McCombs Props. VI, Ltd.), 88 B.R. 261, 267 (Bankr. C.D. Cal. 1988) (holding that rents could be spent to make repairs or renovations that would increase rent flow even without equity cushion); In re Western Real Estate Fund, Inc., 83 B.R. 52, 54 (Bankr. W.D. Okla. 1988) (allowing expenditures of postpetition rent revenues for upkeep); see also In re Gen. Growth Props., Case No. 09-11977, 5/13/09 Tr. 150:3-14 (Bankr. S.D.N.Y. May 13, 2009) [Docket No. 574] (court found replacement liens and other adequate protection was sufficient in addition to rents being used to maintain and preserve property). The Fixed Rate Mortgage Loan Agreement, the Anaheim Mortgage Loan Agreement, the Capmark Mission Valley Loan Agreement, the Capmark Garden Grove Loan Agreement, the Capmark Ontario Loan Agreement, the Merrill Washington D.C. Loan Agreement, the Merrill Tysons Corner Loan Agreement, and the Merrill San Antonio Loan Agreement (each as defined in the Final Cash Collateral Order) are collectively defined as the Loan Documents).

28

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A.

The Final Cash Collateral Order Provides Sufficient Reporting.

As described in the Cook Declaration, the Debtors are required under the Loan Documents (and intend to continue to the extent practicable) to provide three types of reports related to the use of cash proceeds and receipts. First, the Debtors provide an annual budget to the Representatives of various 29 Tranches of Debt. Second, the Debtors intend to provide either monthly or quarterly profit and loss statements for each hotel serving as collateral to that loan to the Representatives. Third, on a quarterly basis, the Debtors provide quarterly and year-to-date operating statements for each calendar quarter, a comparison of budgeted income and expenses and actual income and expenses for each property, along with a detailed explanation of any variances of ten percent or more, and a calculation of the Debtors annual debt service coverage ratio for the immediately preceding 12 32 month period.
30 31

As discussed by Dennis Craven, the former Chief Financial Officer of Innkeepers USA Trust, at the Debtors first day hearing, as explained in the Cook Declaration, and as encompassed in the Final Cash Collateral Order, the Debtors propose three primary forms of reporting to the Adequate Protection Parties regarding the use of Cash Collateralreporting that

29

See Fixed Rate Mortgage Loan Agreement at pp. 65-66; see also Anaheim Mortgage Loan Agreement at p. 22; Capmark Ontario Loan Agreement at p. 22; Capmark Mission Valley Loan Agreement at p. 22; Capmark Garden Grove Loan Agreement at p. 22; Merrill Washington D.C. Loan Agreement at p. 38; Merrill Tysons Corner Loan Agreement at p. 38; Merrill San Antonio Loan Agreement at p. 38. See Anaheim Mortgage Loan Agreement at p. 39; see also Capmark Ontario Loan Agreement at p. 40; Capmark Mission Valley Loan Agreement at p. 40; Capmark Garden Grove Loan Agreement at p. 40. See Fixed Rate Mortgage Loan Agreement at p. 65; see also Merrill Washington D.C. Loan Agreement at p. 37-38; Merrill Tysons Corner Loan Agreement at pp. 37-38; Merrill San Antonio Loan Agreement at p. 37-38. See Fixed Rate Mortgage Loan Agreement at p. 65; see also Anaheim Mortgage Loan Agreement at p. 39 (requiring the reporting referenced in this sentence on a monthly basis but without a debt service coverage ratio calculation requirement); Capmark Ontario Loan Agreement at p. 40 (same); Capmark Mission Valley Loan Agreement at p. 22 (same); Capmark Garden Grove Loan Agreement at p. 40 (same); Merrill Washington D.C. Loan Agreement at pp. 37-38; but see Merrill Tysons Corner Loan Agreement at pp. 37-38 (explanation of variances between budgeted and actual income and expenses on the quarterly statement nor debt service coverage ratio calculation explicitly required); Merrill San Antonio Loan Agreement at pp. 37-38 (same).

30

31

32

15
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provides frequent and substantial information, above and beyond what is required of the Debtors under the Loan Documents. Attached as Exhibit B to the Cook Declaration is a chart displaying the frequency and variety of reporting that the Debtors have committed to provide the Adequate Protection Parties under the Final Cash Collateral Order. First, the Debtors will provide a rolling thirteen-week consolidated cash flow forecast (a 13-Week Forecast), the form of which is attached as Exhibit A to the Cook Declaration (this is the initial 13-Week Forecast, which was attached to the Interim Cash Collateral Order; the updated 13-Week Forecast is due on 33 September 1st and will be provided on time). This 13-Week Forecast will be updated monthly during the course of these Chapter 11 Cases to provide the Adequate Protection Parties with a medium-term cash flow forecast on a 34 consolidated basis. At the end of each month, the Debtors will also provide a report showing a comparison of actual receipts and disbursements from such 35 period forecasted in the applicable 13-Week Forecast (a Variance Report). In addition, the Debtors have committed to provide requested back-up details related to the 13-Week Forecast and to work with the Adequate Protection Parties 36 to answer any concerns they may have about any 13-Week Forecast. Notably, the Debtors believe that they will generate more cash flow than initially projected in the first 13-Week Forecast. Second, the Debtors will provide a flash report (the Flash Report) on a 37 twice-monthly basis. The Flash Reports provide initial reporting on the use of Cash Collateral for each Tranche of Debt and are based on what the Debtors can accurately identify at the time. While not requested by the objecting parties and not included in the Interim Cash Collateral Order, the Debtors will modify the contents of the Flash Reports to include cash receipts for each Tranche of Debt for the relevant period of the report. This additional reporting will enable the Adequate Protection Parties to gain further insight into the cash generated in each of the Tranches of Debt, as well as allow them to make a more informed determination of the likelihood of a particular tranche being a borrower in practically real-time. The Final Cash Collateral Order also provides that the Adequate Protection Parties have the opportunity to reasonably sample the

33 34 35 36 37

Final Cash Collateral Order at 6.d.(i). Id. Id. Id. Final Cash Collateral Order at 6.f.(ii).

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allocations relevant to their respective Tranche of Debt as contained in the Flash 38 Reports. Third, 45 days after the end of each month, the Debtors will provide a final application report (the Application Report) containing a reconciliation of receipts and disbursements, and final allocation of same to the appropriate 39 Tranche of Debt with a determination of net cash available. This report will provide a full and final allocation of disbursements to the relevant Tranches of Debt. The Requested Real Time Reporting Would Be Unduly Burdensome.

B.

Alternatively, certain of the Objecting Representatives real time proposal of imposing weekly cash-flow forecasts is unduly burdensome and restrictive, likely inaccurate for reasons beyond the Debtors control, and subject to significant and uncontrollable variance. The Debtors have firsthand knowledge of the implications of such a proposal. As described in the Cook Declaration, under the Debtors short-term lockbox arrangement with Midland leading up to the Petition Date, the Debtors provided to Midland draw requests on average twice each week based on the Debtors estimated cash requirements.
40

The lockbox arrangement with Midland placed

substantial burdens on the Debtors and increased their administrative costs to run their enterprise.
41

First, the procedure altered the accounting functions of the Debtors existing cash Second, the lockbox arrangement

management structure, which was established in 2007.

required the Debtors to bifurcate the properties collateralizing the Fixed Rate Loan from the Debtors historic consolidated cash system.
42

As a result, the Debtors were forced to operate

under two different cash management systems, which placed substantial burdens on the

38 39 40 41 42

Id. Final Cash Collateral Order at 6.f.(iii). See Cook Declaration at 25. Id. Id.

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Debtors.

43

For example, there were instances where the Debtors would need to use the cash

generated by the hotels collateralizing the other Tranches of Debt to fund expenses of the hotels collateralizing the Fixed Rate Loan because the Midland process imposed a delay while the Debtors waited for Midland to authorize payments from the lockbox accounts.
44

In other

instances, the Debtors were forced to write separate checks to pay vendors in the ordinary course of business.
45

This short-term lockbox arrangement with Midland was undoubtedly burdensome,

but the negative effects would multiply significantly if the other Objecting Representatives requested separate systems were implemented as well.
46

In addition to requesting that this lockbox arrangement be reestablished, Midland, CWCapital, and C-III each request in their Objections that the Debtors be required to provide real time reporting on the use of Cash Collateral. This proposal would be unworkable for at least two reasons. First, real time reporting is overly burdensome and would necessarily be based on rough estimates, rather than on actual cash flows.
47

Second, such an arrangement

would divert the attention of the Debtors limited management resources and the Debtors employees from their operations and restructuring, as well as slow the process of disbursements.
48

For example, fully implementing Midlands proposed cash management system

and real time reporting protocol would require the Debtors to retrain current personnel, hire
43 44

See 7/20/10 Tr. 71:1-6 (Craven). It should be emphasized that Midland objects to the inter-Debtor borrowing concept in the Final Cash Collateral Order yet simultaneously proposes a cash management system that would segregate cash generated by the Fixed Rate Loan properties from all other Debtor propertiesa system similar to the one temporarily in place prepetition, which caused the Midland entities to be inter-Debtor borrowers. See Cook Declaration at 25. See CW Capital Objection at 9; C-III Asset Management Objection at 9. See Cook Declaration at 26. Id.

45 46 47 48

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additional personnel, and completely alter the Debtors enterprise-wide cash management system.
49

Moreover, such a cumbersome system (if even possible to implement) would divert the

attention of key management personnel from the enterprises restructuring to engage in complex cash management procedures so as to provide so-called real time reporting and segregate Midlands Cash Collateral (as well as that of CWCapital and C-III) from the Debtors Cash Management System.
50

To further complicate matters, the majority of the Debtors cash

disbursements are administered by third-party property managers, Island and Dimension. The Debtors do not have direct control over the staffing or operation of either of these organizations and operate with them through Hotel Management Agreements. The Debtors resources should not be wasted on such an arrangement where the Debtors existing Cash Management System and proposed reporting tools provide the Adequate Protection Parties with timely and sufficient information about the Debtors use of Cash Collateral. C. The Reporting Provided Under the Interim Cash Collateral Order Has Been Seamless.

On August 16, 2010, in compliance with the Interim Cash Collateral Order, the Debtors provided to the Representatives a Flash Report for the period from July 19, 2010 through July 31, 2010.
51

On August 17, 2010, FTI requested a summary of the expenditures in the August 16

Flash Report that had not yet been allocated (totaling approximately $282,000 in aggregate, or less than 6% of all expenditures reflected in the report).
52

The Debtors provided a response to

FTIs request the same day. The Debtors have received no other requests for sampling or

49 50 51 52

Id. Id. Id at 18. Id.

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clarifications of the Flash Report from any Representatives. The Debtors will also provide an updated 13-Week Forecast, a Flash Report of cash disbursements for the period August 1, 2010 through August 15, 2010, and an Application Report for the period July 19, 2010 through July 31, 2010 in advance of the September 1 hearing.
53

Finally, the reporting the Debtors propose to provide essentially includes everything the Objecting Representatives are asking for in terms of (a) reporting, but in a more reasonable format, while also balancing cost, accuracy, and disclosure, and (b) incorporating sufficient opportunity for the Adequate Protection Parties to object in the future, if necessary. As such, the Debtors assert that the reporting requirements proposed in the Final Cash Collateral Order render the requested real time reporting unnecessary, represent an efficient and more accurate alternative, and should thus be approved. III. The Debtors Current Cash Management System Should Be Approved. A. The Current Cash Management System Does Not Commingle Funds.

The Objecting Representatives argue that, if approved, the Cash Management Motion would violate prohibitions against commingling cash that appear in the Loan Documents.
54

However, the transfer of funds from a series of collection accounts into a master concentration account, as allowed by the Loan Documents, is not the commingling prohibited by the Loan Documents. Courts considering this issue have held that commingling or intermingling of funds entails the mixing or combining of funds without the ability to track the relative ownership of

53 54

Id. at 19. It appears that Midland simply wants to isolate its assets from the Debtors integrated enterprise.

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those who contributed to the combined fund.

55

Consistent with the holdings of such courts, the

Debtors Cash Management System does not commingle funds as the Cash Management System is able to track and account for the cash that each Debtor upstreams to the Master Concentration Account. Specifically, the Debtors will maintain records of all transfers within the current Cash Management System so that all transfers and transactions will be properly documented and accurate intercompany balances will be maintained.
56

These records will be

included in the reporting to be provided, as applicable, to the Adequate Protection Parties pursuant to the Final Cash Collateral Order.
57

The waterfall provisions of the Final Cash

Collateral Order further protect against any possible commingling by ensuring that revenues generated by hotels within each tranche are first used to fund hotel-level expenses, with the remainder returned to the Representatives, subject to an appropriate allocation for overhead and restructuring-related expenses. is unfounded. B. The Cash Management System Is Consistent With the Loan Documents.
58

As such, any concern related to commingling of Debtors funds

The Loan Documents and related governance materials draw the same distinction between tracking ownership and commingling. Those documents provide that the applicable property-level Debtor will not commingle its assets with those of any other Person, but then go on, in the same section, to state that the project subsidiary will not fail to maintain its assets in
55

See, e.g., Jackowski v. Seoco, Inc. Northern, No. 98-50337, 2001 WL 709485, at *2 (N.D. Ill. June 22, 2001) ([A] centralized cash management system where accounting records track the indebtedness of each entity is not the equivalent of intermingling funds.); In re Acushnet River & New Bedford Harbor Proceedings, 675 F. Supp. 22, 34 (D. Mass. 1987) (holding that without considerably more, a centralized cash management system . . . where the accounting records always reflect the indebtedness of one entity to another, is not the equivalent of intermingling funds). See Cash Management Motion at 28. See Final Cash Collateral Order at 6(f)(iii). Id. at 6(f)(1)-(6).

56 57 58

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such a manner that it will not be costly or difficult to segregate, ascertain or identify its individual assets from those of any other person.
59

If the bar against commingling prevents

the Debtors from depositing funds into a common bank account, the latter provision from that section would be meaningless. Although, as explained below, whether the Cash Management System comports with the prepetition Loan Documents is irrelevant, the Objecting Representatives Objections are incorrect nonetheless. The Debtors current Cash Management System is consistent with the terms of the Debtors Loan Documentsexcept for the few modifications that actually provide more protection for the Adequate Protection Parties. For example, section 3.1 of the Fixed Rate Mortgage Loan Agreement requires the Debtors to establish a separate lockbox account with respect to each property and to deposit all gross income from operations for such property into such lockbox upon receipt. Pursuant to section 3.1 and at the direction of the Fixed Rate Lender, the Debtors established at closing (i) a separate lockbox account for each Fixed Rate Loan property into which all cash generated by such property was deposited prepetition (collectively, the Cash Lockbox Account) and (ii) a single lockbox account, with a subaccount for each property, into which all cash receipts from credit card receivables generated by the properties collateralizing the Fixed Rate Loan were deposited (the Credit Card Lockbox Account, and together with the Cash Lockbox Account, the Lockbox Account). Each week, all cash on deposit in the Cash Lockbox Account was swept into the Credit Card Lockbox Account. The current Cash Management System is almost identical.
60

Cash revenues are being deposited into local accounts for each Debtor (much like a

Cash Lockbox Account) and then swept into a control account (much like a Credit Card Lockbox

59 60

See, e.g., Fixed Rate Mortgage Loan Agreement at p. 55; see also Fixed Rate Debtor LLC Agreement at p. 8. See Cash Management Motion at pp. 8-12.

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Account), which receives all cash receipts from credit card receivables for that loan pool directly.
61

Section 3.1(c) of the Fixed Rate Mortgage Loan Agreement provides that, unless a Cash Management Period (as defined below) is in effect, the Debtors could transfer all amounts in the Lockbox Account at their discretion. Prior to the Petition Date, the Debtors transferred all amounts in the Lockbox Account to their Master Concentration Account on a daily basis as permitted under the Fixed Rate Mortgage Loan Agreement.
62

Again, the Debtors current Cash

63

Management System is no different and complies with each of the Loan Documents. C.

The Remedies Available Under the Final Cash Collateral Order Are More Lender Friendly Than Those Under the Loan Documents.

The Bankruptcy Code and the Debtors Final Cash Collateral Order contain more remedies for the Adequate Protection Parties than the Loan Documents. First, the Adequate Protection Parties have the absolute right to seek Court intervention with respect to a Debtors use of Cash Collateral at any time and for any reason. Second, the Final Cash Collateral Order extends a broad reservation of rights to, among others, the Objecting Representatives.
64

Finally,

the Final Cash Collateral Order enumerates no less than 16 different Termination Events that could trigger the termination of the Debtors use of Cash Collateral.

61 62 63

Id. See Cash Management Motion at 13; see also Fixed Rate Mortgage Loan Agreement at 3.1. The Loan Documents for the other Tranches of Debt are similar, and discussion of the reporting requirements included therein is attached hereto as Exhibit A. See Final Cash Collateral Order at 20(a) (Notwithstanding anything herein to the contrary, the entry of this Order is without prejudice to, and does not constitute a waiver of, expressly or implicitly: (a) the applicable Representatives and Debtors right to seek any other or supplemental relief relating to the matters set forth in this Order, including the right to seek additional adequate protection (without prejudice to any other persons right to object to or otherwise oppose such additional adequate protection.).

64

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The Loan Documents, however, provide less by way of lender remedies. For example, under the Fixed Rate Mortgage Loan Agreement, the Debtors are restricted from using Cash Collateral during a Cash Management Period which commences upon the maturity date of the loan, an event of default, or the end of a calendar quarter for which the properties net operating income falls short of a defined threshold. But while the Loan Documents permitted certain prepetition lenders to control the flow of the Debtors cash (but still disburse funds to the Debtors) once a triggering event occurred, the Final Cash Collateral Order gives Adequate Protection Parties the right to terminate the use of Cash Collateral altogether (except for certain limited uses to preserve the value of the estates) or object at any time and for any reason, and reserves all of their rights in relation thereto. D.
65

Regardless of What the Loan Documents Say, the Bankruptcy Codes Authority Trumps that of a Prepetition Agreement.

Whether the Debtors proposed Cash Management System somehow violates any of the Loan Documents is ultimately not relevant because loan covenants and organizational documents cannot override the Bankruptcy Code. Prepetition contracts do not and cannot constrain the Bankruptcy Courts authority to enforce rights that the Bankruptcy Code specifically grants the Debtors. Given the Bankruptcy Codes precedence and preemptive effect, courts will not

enforce prepetition agreements purporting to interfere with a debtors rights under [the Bankruptcy Code].
66

Thus, [t]he Bankruptcy Code explicitly invalidates provisions of private

65 66

A discussion of the remedies available in the remaining Loan Documents is attached hereto as Exhibit B. MBNA Am. Bank, N.A. v. Trans World Airlines, Inc. (In re Trans World Airlines, Inc.), 275 B.R. 712, 723 (Bankr. D. Del. 2002) (hereinafter In re Trans World II); In re Trans World Airlines, Inc., 261 B.R. 103, 114 (Bankr. D. Del. 2001) (prepetition contractual provisions that would limit an entitys right to file or debtors post-filing rights under the Bankruptcy Code are not enforceable); Giaimov v. Detrano (In re Detrano), 222 B.R. 685, 689 (Bankr. E.D.N.Y. 1998), revd on other grounds, 266 B.R. 282 (E.D.N.Y. 2001) (It has long been settled law in this Circuit that waivers of bankruptcy remedies are generally against public policy and not enforceable); Shaw Steel Inc. v. Morris (In re Morris), No. 97-39268, 1998 WL 355510, at *7 (Bankr. N.D. Ill. June 30, 1998) (invalidating prepetition agreements to waive the benefits of a bankruptcy discharge); In re R.H.

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agreements which deprive the debtor of the use and benefit of property upon the filing of a bankruptcy case.
67

The same rule bars the Adequate Protection Parties from arguing that covenants in the Loan Documents override the Debtors rights under the Bankruptcy Code to use their cash. In particular, nothing in the Loan Documents could bar the Debtors from exercising their rights under section 363(c)(2) of the Bankruptcy Code to use Cash Collateral, so long as those entities interests in the Cash Collateral are adequately protected.
68

Moreover, section 541 of the

Bankruptcy Code provides that property of a debtor becomes property of the estate notwithstanding any provisions in an agreement, transfer instrument or applicable nonbankruptcy law that restricts or conditions such transfer of such interest by the debtor.
69

Like the Loan Documents, organizational documents cannot trump the purpose of and rights afforded by the Bankruptcy Code. For example, the Bankruptcy Code contemplates that a chapter 11 plan may include amendments or additions to a debtors charter to implement a plan of reorganization.
70

It is, therefore, commonplace for plans of reorganization to provide for new

Macy & Co. 170 B.R. 69, 77 (Bankr. S.D.N.Y 1994) (invalidating a provision in a prepetition contract that would have restricted a debtors rights under the Bankruptcy Code); In re Weitzen, 3 F. Supp. 698, 698 (S.D.N.Y. 1933) (contractual impairment of bankruptcy rights is unenforceable).
67

In re Pease, 195 B.R. 431, 433 (Bankr. D. Neb. 1996); see also In re Gen. Growth Props., Case No. 09-11977, 5/13/09 Tr. 151:3-16 (Bankr. S.D.N.Y. May 13, 2009) [Docket No. 574] (It is absolutely standard black letter law that covenants and conditions are inevitably breached in bankruptcy. Even agreements designed to govern actions in bankruptcy are generally unenforceable.). 11 U.S.C. 363(c)(2). 11 U.S.C. 541(c)(1). See, e.g., 11 U.S.C. 1123(a)(5)(I) (noting that a chapter 11 plan shallprovide adequate means for the plans implementation, such asamendment of the debtors charter); 11 U.S.C. 1123(a)(6) (noting that a chapter 11 plan shall provide for the inclusion in the charter of the debtor . . . a provision prohibiting the issuance of nonvoting equity securities); see also 8 Del. Code 303 (Delaware law permitting a bankruptcy court, inter alia, to alter, amend, or repeal a debtors bylaws, and to amend its certificate of incorporation).

68 69 70

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or amended organizational documents.

71

Nothing about the relief that Debtors seek here warrants

a departure from this established approach. Approval of the Debtors use of Cash Collateral and of the proposed Cash Management System, in the end, turns not on the Debtors compliance (or alleged noncompliance) with prepetition loan covenants or organizational documents but, instead, more appropriately, on the adequacy of protection provided based on applicable bankruptcy jurisprudence. E. The Objecting Representatives Cash Protocol Is Unnecessary.

As described in the Cash Management Motion, and consistent with the Final Cash Management Order, the Debtors utilized prepetition and have continued to utilize seamlessly an integrated, centralized Cash Management System similar to those utilized by other large companies to collect and transfer the funds generated by their hotel properties and disburse those funds to satisfy their obligations.
72

The Debtors have utilized their Cash Management System

since at least 2004, and it has always allowed them to work efficiently and effectively with the Debtors hotel managers, Island and Dimension.
73

The Debtors personnel, including their hotel

managers, are already familiar with the Cash Management System, and the Debtors accounting systems are designed for the existing system.
74

71

See, e.g., In re WorldCom, Inc., 2003 WL 23861928, at *48 (Bankr. S.D.N.Y. Oct. 31, 2003) (discussing provisions of the reorganization plan, including a new certificate of incorporation and by-laws); In re Federated Dept Stores, Inc., 1990 WL 120751, at *6 (S.D. Ohio July 26, 1990) (authorizing debtor to amend its certificate of incorporation in the context of obtaining credit under section 364(c)(3)); see also Solutias Fifth Amended Joint Plan of Reorganization, In re Solutia Inc., Case No. 03-17949 (S.D.N.Y. Oct. 19, 2007) [Docket No. 4256] (confirmed plan modifying organizational documents); Debtors First Amended Prepackaged Joint Plan of Reorganization, In re DJK Residential LLC, Case No. 08-10375 (S.D.N.Y. May 2, 2008) [Docket No. 486] (same); Debtors Sixth Amended Joint Plan of Reorganization, In re Calpine Corp., Case No. 05-60200 (S.D.N.Y. Dec. 19, 2007) [Docket No. 7237] (same). See Cash Management Motion at 10. See 7/20/10 Tr. 62:1-17 (Craven). See Cook Declaration at 26.

72 73 74

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Allowing the Objecting Representatives to control the Debtors cash and disburse those specific funds, to pay only those expenses that directly benefit the particular party from which the cash was generated, is inconsistent with the way the Debtors integrated, centralized Cash Management System operated prepetition and was as unworkable then as it would be now. Ultimately this proposal would hamper the Debtors with insufficient cash flow to run the Debtors business as a single enterprise that operates for the benefit of each and every one of its 72 hotels.
75

The Debtors need to be able to utilize the Cash Collateral to further the objectives

and enhance the value of the Debtors consolidated enterprise. A new, segmented cash management system would be expensive, create unnecessary administrative burdens, and be extraordinarily disruptive to the Debtors business operations. Additionally, the Bankruptcy Code recognizes the fundamental precept that debtors in possession control their assets.
76

From the standpoint of both practicality and efficiency, keeping the current

Cash Management System in place makes considerably more sense than adopting a new system as the Objecting Representatives suggest.
77

Further, the prepetition lenders were aware of the

current Cash Management System at the time the loans were extended from discussions in 2007, where the Debtors made clear to the prepetition lenders that the Debtors represented a
78

75 76

See id. at 27. See 11 U.S.C. 541(a)(1) (The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held: (1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case); see also 11 U.S.C. 1108 (Unless the court, on request of a party in interest and after notice and a hearing, orders otherwise, the trustee may operate the debtor's business.). See Cook Declaration at 27. See 7/20/10 Tr. at 61:21-62:11 (Craven).

77 78

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single enterprise and not individual properties.

79

The Objecting Representatives have been aware

of the Debtors Cash Management System for years. Last, certain of the objections argue that section 363(c)(4) of the Bankruptcy Code prohibits the Cash Collateral from being deposited into a centralized account with the cash of other Debtors and, instead, must be segregated. But the prefatory language of section 363(c)(4) and numerous courts interpreting the statute make clear that segregation of cash collateral is required only in circumstances where the Court has not otherwise authorized the debtor to use cash collateral. F.
80

Prepetition Segregation of the Cash Generated at the Fixed Rate Hotels Was Burdensome and Meant Only to Be Temporary.

While, prior to the filing of the Chapter 11 Cases, the Debtors did put into place Midlands proposed cash protocol for a short time, this was merely intended to be temporary. Instead of this being ordinary course, this was actually quite burdensome on the Debtors.
81

Dennis Craven testified at the first day hearing, in response to questioning regarding possible postpetition implementation of Midlands temporary cash protocol, that [the Midland cash

79 80

Id. at 61:24-62:11. 11 U.S.C. 363(c)(4) (Except as provided in paragraph (2) of this subsection, the trustee shall segregate and account for any cash collateral in the trustees possession, custody or control.); see In re White Plains Dev. Corp., 137 B.R. 139, 142 (Bankr. S.D.N.Y. 1992) (noting that, [u]nder the Bankruptcy Code, as applied after the Butner case, a debtor must segregate and account for any cash collateral that it does not have the consent of the creditor or authority from the court to use, sell or lease. . .); In re Northport Marina Assocs., 136 B.R. 911, 919 (Bankr. E.D.N.Y. 1992); Freightliner Market Dev. Corp. v. Silver Wheel Freightlines, Inc., 823 F.2d 362, 367 (9th Cir. 1987) (Unless the Trustee gets a court order or consent, he is obligated to segregate and account for any cash collateral in his possession, custody, or control. 11 U.S.C. 363(c)(4). On the other hand, if a debtor gets a creditors consent or a court order, the creditor loses his right to trace proceeds.); In re Four Seasons Marine & Cycle, Inc., 263 B.R. 764, 769 n.9 (Bankr. E.D. Tex. 2001) (11 U.S.C. 363(c)(4) explicitly provides that, in the absence of consent or court authorization, ... the trustee shall segregate and account for any cash collateral in the trustees possession, custody, or control.). See Midland Objection at 5; 7/20/10 Tr. 71:5-6 (Craven).

81

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protocol] is very time consuming and disruptive to the [Debtors].

82

Craven further testified that

even additional personnel would not ease the transition to a new system: It would certainly be disruptive to hire people to implement a cash management system where we have to not only hire people, train people into not only just the controls of the company but the business processes, policies and procedures of all of our hotels. Certain hotels are different, whether its a full serve, an -- or a [sic] service property and they would have to also have training on our accounting 83 systems. That would be difficult. The Debtors were required to implement this accommodation because it was short term and necessary at the time to ensure the basic survival of the enterprise. be permitted to maintain their Cash Management System. IV.
85 84

In sum, the Debtors should

The Intercompany Claims Are Appropriate and Should Be Approved. Generally, the monthly cash revenues of each of the nine Tranches of Debt exceed the

monthly cash disbursements for each Tranche of Debt. From July 19 to July 31, 2010the postpetition period for which the Debtors have accurate informationevery Tranche of Debt generated positive cash after accounting for operating and restructuring related disbursements. As Dennis Craven stated at the first day hearing, the Debtors expect that trend to continue into the foreseeable future.
86

The Debtors do not anticipate the need to conduct intercompany

borrowing over the next thirteen weeks; however, if the need for limited, temporary

82 83 84 85

See 7/20/10 Tr. 89:12-13 (Craven). Id. at 89:16-23. Id. at 90:11-12. In re Dana Corp., 379 B.R. 449 (S.D.N.Y. 2007) (one of the goals underlying voluntary reorganization under the Bankruptcy Code is assisting the debtor in obtaining a fresh start); In re Seminole Oil & Gas Corp., 1992 WL 110720 at *3 (4th Cir. 1992) (The fundamental goal of bankruptcy is to provide the debtor a fresh start free from, not only the dismembering hands of creditors, but also the tinkering of courts in the details of business decisions of reorganized concerns.); In re Case, 937 F.2d 1014, 1024 (5th Cir. 1991) (one of the principal policy goals of the Bankruptcy Code is a fresh start). See 7/20/10 Tr. 96:13 (Craven).

86

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intercompany borrowing arises, the Debtors have proposed extensive protections.

87

Yet, the

Objections express some concern that the Floating Rate Debtors are more likely to be borrowers. In fact, the Floating Rate Debtors properties perform in line with the rest of the Debtors propertiesgenerating excess cash flow (after accounting for disbursements for operating expenses) in amounts similar to what would be expected in light of the number of hotels for that Tranche of Debt as a percentage of the 72 hotels in the enterprise from July 19 to July 31.
88

As

the Cook Declaration discusses, the Greenspan Declaration, filed as an exhibit to the Midland Objection, incorrectly analyzes the Floating Rate Loan properties cash generation through the end of 2010. The implication in the Greenspan Declaration that the Floating Rate Loan

properties will have negative cash flows of $1.9 million through the end of 2010 is based on faulty assumptions and, therefore, draws incorrect conclusions.
89

In fact, when Mr. Greenspans

faulty assumptions are corrected, using Mr. Greenspans same methodology shows that the Floating Rate Loan properties will be cash flow positive through the end of the year.
90

Mr.

Greenspans flawed analysis does not support Midlands drastic cash management segregation proposal.
91

If the need for an intercompany loan arises, the issue will be timing or the fact that the Final Cash Collateral Order authorizes payments of excess cash to Adequate Protection Parties, not any companys systemic inability to generate sufficient cash. In any given month, most of the Debtors revenue is earned either immediately (cash payments) or within the few days it
87 88 89 90 91

See Cook Declaration at 30. See id. at 31. See id. at 29. Id. Id.

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takes credit card companies to provide disbursements but expenses are paid based on trade termsterms that can equate to weeks or months of lag between incurrence and accrual. This lack of synchronicity creates the need for a mechanism to allow for intercompany borrowing. A cash-positive Tranche of Debt that received cash distributions one month could face a scenario where expenses incurred in prior months are paid in future months when proceeds generated during that future month are not sufficient. In that event, the Final Cash Collateral Order provides that the Lender Debtors will receive: (i) senior secured and priming liens on and security interests in the Borrower Debtors property, junior only to the Permitted DIPs and the Carve Out; (ii) superpriority administrative expense claims; (iii) the Adequate Protection Parties right to terminate the Debtors use of Cash Collateral upon there being an aggregate total owed of more than $2 million by all Borrower Debtors (out of 72 hotel properties); and (iv) the 7% annual interest rate for the amounts borrowed for the month. Securing Intercompany Claims on a superpriority basis under sections 364(c) and (d) by senior secured, priming liens and granting Intercompany Claims super-priority status is permissible under applicable case law and consistent with the prepetition practices of the Debtors (as well as those of enterprises of similar size and operations).
93 92

Further, the priming liens for

the intercompany loans are consistent with the fact that both of the Debtors proposed DIP facilities provide the DIP Lenders with priming liens. Of course, super-priority liens and claims under these provisions will only arise against Borrower Debtors. If the hotel properties for a particular Tranche of Debt generates sufficient cash each month, as alleged by the Objecting Representatives, any such liens or claims would only be for their benefit and will never arise
92 93

This interest rate is similar to the interest rate under each of the DIP Facilities. See, e.g., In re Gen. Growth Props. Inc., Case No. 09-11977 (Bankr. S.D.N.Y. May 14, 2009) [Docket No. 527]; In re Lyondell, Case No. 09-10023 (Bankr. S.D.N.Y. Mar. 12, 2009) [Docket No. 1194].

31
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against their collateral. As discussed in the DIP Motions and in the Derrough Declaration, the only financing available to the Debtors is on a priming basis, so, if forced to procure additional DIP loans in lieu of superpriority intercompany claims, those loans would inevitably be priming in nature. The Intercompany Claims mirror their DIP financing counterpart, as well as offer the Debtors a substantially less expensive and readily available source of funding. Further, without the ability to make intercompany loans, the Debtors would need to secure nine separate standby DIP financing facilities. Because such intercompany loans are not limited to specific collateral pools, the Objecting Representatives could very well be the beneficiaries of such intercompany borrowing. And while the objections argue that the extent of an intercompany borrowing can only be determined from the Application Reports, the Debtors agreement to now incorporate revenue amounts in the Flash Reports solve such concern. In sum, lending and borrowing on an inter-tranche Debtor basis benefits the Debtors enterprise by reducing costs of capital and smoothing out natural mismatches between the timing of cash receipts and disbursements and the Debtors agreement to distribute excess cash to the lenders as set forth in the waterfall. The Debtors respectfully submit that the intercompany claims and related protections are amply justified and should be approved. V. The Debtors Should Be Permitted to Use Cash Collateral to Pay Estate Professionals Regardless of Whether the Objecting Representatives Approve the Debtors Plan. The use of Cash Collateral to pay estate professionals and the Carve Out proposed in the Final Cash Collateral Order do not deprive the Objecting Representatives of their rights with respect to fees and expenses of estate professionals. In fact, they are just part of the chapter 11

94

94

See Derrough Declaration at 37.

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process, which affords significant benefits to the Adequate Protection Parties. The process is permitting the Debtors enterprise to collectively restructure the nine Tranches of Debt, which are secured by Cash Collateral and 72 hotels in 20 different states, in a single forum. As part of the Chapter 11 Cases, the Adequate Protection Parties are afforded the rights given to secured creditors by the Bankruptcy Code, including under sections 364 and 1129 thereof. Funding estate professionals to guide the Debtors while they are under bankruptcy protection is part of that process. The Adequate Protection Parties are specifically protected with respect to the fees and expenses of estate professionals. For example, certain of the Objecting Representatives have the right to object to monthly fee applications, and all parties in interest have the right to object to interim and final fee applications.
95

Additionally, the Objecting Representatives have the right

to object to the appropriateness of a proposed allocation of professional fees among the various Tranches of Debt. The Debtors intend to propose an allocation of their enterprises overhead expenses, including the estates professional fees, in the Allocation Report.
96

Each Objecting

Representative will then have the right and opportunity to audit and challenge any Application Report and apply to the Court for resolution following a good faith effort to resolve consensually any disputes.
97

Moreover, the process for approval and payment of estate professionals fees and

the proposed Carve Out balances the Debtors need for effective representation of the estates interests during these Chapter 11 Cases with the desire of the Adequate Protection Parties to have a reasonable say in the amount of professional fees paid from their Cash Collateral by giving them opportunities to object to the propriety of the professionals fees themselves as well as the allocation across Tranches of Debt.
95 96 97

See Interim Compensation Order. See Final Cash Collateral Order at 6(f)(iii) Id.

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A.

The Debtors Ability to Pay Fees and Expenses of Estate Professionals Are Crucial to Protect the Value of the Secured Lenders Collateral.

The Debtors should be permitted to use Cash Collateral to compensate estate professionals without the Objecting Representatives having the absolute authority to limit their ability to properly perform their jobs. Although certain secured lenders may ultimately disagree with the approach taken by the Debtors and the estate professionals, the Debtors, as debtors-inpossession, generally have the right to maintain control of their businesses and administer their chapter 11 estates so long as they are doing so consistent with their fiduciary duties to maximize value for all stakeholders.
98

The estates retained professionals play an instrumental role in

chapter 11 debtors fulfillment of those duties. By assisting the Debtors as they navigate the restructuring process, their retained professionals have helped stabilize operations leading up to and throughout the Chapter 11 Cases and are working to preserve the value of the Debtors estates as a going concern. Without the involvement of professionals, a chapter 11 filing would sound the death knell for many businesses. In the case of the Debtors, a hard landing in chapter 11 without the guidance of experienced restructuring professionals would have severely jeopardized the Debtors hotel properties ability to generate Cash Collateral in the first place. Accordingly, using Cash Collateral to compensate the estates professionals for fees and expenses that are ultimately deemed necessary and appropriate enhances the value of the Objecting Representatives collateral. If the Objecting Representatives are going to be a part of this Chapter 11 process and receive its benefits, they have to share in the costs. This is true even if the Objecting Representatives directly oppose the legal positions taken by the Debtors and their professionals. As one court in this District has noted:
98

See In re Ames Dept. Stores, Inc., 115 B.R. 34, 38 (Bankr. S.D.N.Y. 1990) (noting that bankruptcy courts recognize that debtors-in-possession generally enjoy little negotiating power with a proposed lender, particularly where the lender has a pre-petition lien on cash collateral . . . [but] they permit debtors-inpossession to exercise their basic business judgment consistent with their fiduciary duties.).

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[I]t has been the uniform practice in this Court . . . to insist on a carve out . . . in a reasonable amount designed to provide for payment of the fees of debtors and the committees counsel . . . in order to preserve the adversary system. Absent such protection, the collective rights and expectations of all parties-in-interest are sorely prejudiced . . . Clauses providing for absolute control over fees . . . skew the carefully designed balance of debtor and creditor protections that Congress drew in crafting 99 Chapter 11. Carve outs are commonplace in large chapter 11 cases because they are essentially a creature of necessity. Under the Bankruptcy Code and the Interim Compensation Order, retained chapter 11 professionals are compensated months after the incurrence of their fees, which remain subject to disgorgement. As a result, for chapter 11 debtors to secure adequate representation, there must be comfort that secured creditors neither will nor can take control of an enterprises assets and leave the estate professionals fees unpaid. Carve outs solve this problem. Certain of the Objecting Representatives argue, citing to Gen. Elec. Credit Corp. v. Levin & Weintraub (In re Flagstaff Foodservice Corp.), 739 F.2d 73 (2d Cir. 1984), that a secured creditors collateral cannot be surcharged, unless there is a direct benefit to the secured creditor.
100

Flagstaff simply holds that if there is no plan confirmed in a chapter 11 case and the

estates professionals do not have a carve out, undersecured creditors will be entitled to the entire value of the estate, leaving nothing available to compensate professionals who have an

99 100

Id. See In re Flagstaff Foodservice Corp. (Flagstaff I), 739 F.2d 73 (2d Cir. 1984); Gen. Elec. Credit Corp. v. Peltz (In re Flagstaff Foodservice Corp.) (Flagstaff II), 762 F.2d 10 (2d Cir. 1985).

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administrative claim under section 503(b). the concept of a nonconsensual carve out. B.

101

Importantly, nothing in that case explicitly rejected

102

Cash Collateral May Be Used To Pay Estate Professionals So Long As Secured Creditors Are Adequately Protected.

The Debtors can use Cash Collateral to pay estate professionals valid fees and expenses, or for any purpose whatsoever, if the secured lenders interests in their collateral are adequately protected. As has been discussed at length herein, the Debtors adequate protection package is more than adequate. In Sec. Leasing Partners v. ProAlert, LLC (In re ProAlert, LLC), the Ninth Circuit Bankruptcy Appellate Panel affirmed a lower court holding that the ongoing payment of professional fees from cash collateral may be allowed under section 363(c)(2) of the Bankruptcy Code without satisfying the benefit to the creditor test under section 506(c) of the Bankruptcy Code.
103

In ProAlert, the panel ultimately determined that non-consensual use of cash collateral

to pay estate professionals fees and expenses is appropriate if the secured lenders are adequately protected.
104

ProAlert recognized that sections 363 and 506 serve distinct purposes and apply in

101

Flagstaff I is really a warning to professionals to require a carve out at the outset of the restructuring or else face the consequence that the Bankruptcy Court may not or cannot impose such a carve out after the fact. If anything, Flagstaff I supports the fact that the Debtors need a carve out to ensure their advisors can be compensated. Otherwise, if a secured lender forecloses on assets, the estates professionals are at risk of not being compensated. The Debtors take heed of that warning and have requested an appropriate carve out. See Flagstaff I, 739 F.2d at 76; but see Harvis Trien & Beck, P.C. v. Fed. Home Loan Mortg. Corp. (In re Blackwood Assocs.), 153 F.3d 61, 68 (2d Cir. 1998) (absent an agreement to the contrary, a secured creditors collateral may only be charged for administrative expenses, including attorneys fees, to the extent these expenses directly benefited that secured creditor) 314 B.R. 436 (9th Cir. B.A.P. 2004); see also In re Griswold Bldg., LLC, 420 B.R. 666, 700 (Bankr. E.D. Mich. 2009) ([i]f there is adequate protection under 363, then the debtor may use the cash collateral for expenses not directly related to the operation and maintenance of the apartment project, e.g., administration expenses, because in that situation, the secured party has no right to object. If it is adequately protected, its security interest is not jeopardized by the payment of such expenditures.) (citations omitted). See 314 B.R. at 442.

102

103

104

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different circumstances.

105

Significantly, the panel also recognized that allowing the secured

creditor to control the carve out gives them inappropriate control over the entire bankruptcy proceeding.
106

At bottom, the Debtors are entitled to the benefits afforded debtors-in-possession during the Chapter 11 process, and the Objecting Representatives cannot be permitted to unilaterally determine which administrative expenses are paid so long as their secured interests are being adequately protected. The Objecting Representatives Objections concerning the use of Cash Collateral to pay estate professionals and the Carve Out should be overruled. VI. Committee Objection to Cash Collateral Motion The Committee objected to the Cash Collateral Motion on the grounds that (a) the Adequate Protection Parties superpriority claims and priming liens should not extend to avoidance actions or their proceeds, (b) the Committees challenge period (the Challenge Period) to the entry of the Final Cash Collateral Order should be extended, and (c) the Carve Out should include Committee member expenses.

105

Id. at 441 (The requirement of adequate protection set forth in 363 balances these divergent interests by allowing the debtor to use cash collateral while ensuring that the creditor will ultimately receive the full value of that collateral.); see also In re Coventry Commons Assocs., 149 B.R. 109, 114 (Bankr. E.D. Mich. 1992) (finding that debtor is allowed to use cash collateral, including to pay for estates professionals, as long as secured creditors interest is adequately protected); In re James Wilson Assocs., 965 F.2d 160, 171 (7th Cir.1992) (permitting debtor to use cash collateral to pay attorney fees because secured creditor adequately protected); In re Ranch Partners, Ltd., 146 B.R. 833 (D. Colo. 1992) (stating that a debtor may not use cash collateral to pay reorganization-related attorney fees absent compliance with 363(c)(2)); Principal Mut. Life Ins. Co. v. Atrium Dev. Co. (In re Atrium Dev. Co.), 159 B.R. 464 (Bankr. E.D. Va. 1993) (section 363(c) permits a debtor to use cash collateral if court finds secured creditor adequately protected); In re Triplett, 87 B.R. 25, 27 (Bankr. W.D. Tex. 1988) (cash collateral may be used for the general benefit of the estate and need not be devoted exclusively to the protection of the creditor or the collateral). See ProAlert, 314 B.R. at 443. Notably, three of the four cases cited in ProAlertFlagstaff I, Flagstaff II, and In re Hotel Syracuse, Inc., 275 B.R. 679 (Bankr. N.D.N.Y. 2002)support the Debtors position, and the other caseBlackwood Assocs., 153 F.3d 69is factually inapposite as the debtors were seeking to use a consensual cash collateral order to create a priming professional fees claim against the secured creditor where no cash collateral remained. Midland Objection at 29.

106

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The Debtors have addressed this final concern with an adjustment to the Carve Out provision. The Debtors agree that it is appropriate and will include in the Carve Out a provision for these expenses. With respect to superpriority liens and claims extending to avoidance actions or their proceeds, it is important to recognize that the Adequate Protection Parties will only receive superpriority claims and priming liens to the extent of the diminution of value of their Prepetition Collateral.
107

Additionally, the inclusion of avoidance actions and the proceeds thereof in the

secured lenders adequate protection package was the result of negotiations between the Debtors and their secured lenders to secure usage of Cash Collateral. The Debtors believe that such provisions are appropriate and necessary under the circumstances, but, at the same time, do not oppose this request by the Committee so long as it does not jeopardize Lehmans consent to the Debtors use of Cash Collateral or cause the Court to determine that the Objecting Representatives are no longer adequately protected. Finally, while the Adequate Protection Parties have conditioned the use of Cash Collateral on a Challenge Period ending on October 30, 2010, the Debtors do not have an issue with extending the Challenge Period through November 30, 2010, subject to the qualifications noted above. The Debtors fully support any ongoing discussion amongst all parties in interest to resolve this objection.

107

See Final Cash Collateral Order at 6.

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VII.

Appaloosa Objection The Objection filed by Appaloosa, a party whose motivations and standing in these

Chapter 11 Cases are unclear,

108

contains two main arguments. First, Appaloosa argues that the

Representatives expenses should not be reimbursed pursuant to the Final Cash Collateral Orders waterfall provision unless they benefit the estates. are all subject to challenge.
110 109

Payments to the Representatives

Moreover, given the Debtors confidence in their near-term

operating cash flows and the Final Cash Collateral Order only permitting the Debtors to make such reimbursements from Cash Collateral after the Debtors fund an expense reserve, satisfy property level disbursements, and pay corporate overhead, the Representative reimbursements will not harm the Debtors estates.
111

Second, Appaloosa argues that Lehman should not be able to terminate Cash Collateral use based on a breach of the Debtors obligations under the Debtors proposed plan support agreement (PSA). Lehmans consent to the Debtors use of Cash Collateral and entry into the PSA were conditioned on this provision, among others. The Debtors believe that gaining Lehmans consent to use its Cash Collateral and Lehmans agreement to enter into the PSA (for the reasons explained in the PSA Reply) are of sufficient value to the Debtors to justify the inclusion of this provision.
112

The Appaloosa Objection should thus be overruled.

108

See Debtors Omnibus Reply in Support of Debtors Motion for an Order (A) Authorizing the Debtors to Assume the Plan Support Agreement and (B) Granting Further Relief and Response to Objections Thereto (the PSA Reply), filed contemporaneously herewith, at pp. 35-37 See id. at 6(f)(1). See id. at 6(f)(6). See id. at 6(f). See generally, PSA Reply.

109 110 111 112

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VIII.

TriMont Objection to the Lehman DIP Facility TriMont does not deny the Debtors need for the Lehman DIP Facility to perform the

PIPs and protect the Franchise Agreements. The TriMont Objection instead focuses solely on section 8.2(d) of the Lehman Credit Agreement, which references paragraph 13 of the Lehman DIP Order,
113

to the extent the provision provides that, upon a Termination Event or Event of

Default, the automatic stay is modified to allow Lehman to pursue its remedies against the collateral securing the Lehman DIP Facility without the need for additional Court approval, subject to the requirement that Lehman provide advance notice of such an event to the Debtors and the Committee, who can then seek relief from the Court prior to Lehman being able to exercise those remedies.
114

The Lehman DIP Credit Agreement was the result of significant negotiation between sophisticated parties, and Lehman required this provision as a condition of the Lehman DIP Facility.
115

Further, the Debtors and their advisors actively shopped for competing postpetition

financing and concluded that the Lehman DIP Facility provided the necessary financing on the most favorable terms.
116

Moreover, the vast majority of DIP lenders require provisions of this sort to assure that they can foreclose on their collateral following a default,
117

and courts in this District routinely

113

See TriMont Objection at 18 (Section 8.2(d) of the Credit Agreement provides that the automatic stay shall be vacated and modified, to allow Lehman ALI Inc. to pursue its contractual remedies against the collateral pursuant to the Lehman Credit Agreement upon the occurrence of a Termination Event or Event of Default, as defined in the Lehman Credit Agreement, without having to petition the Bankruptcy Court.) See Lehman DIP Order at 13. The Five Mile DIP Facility also contains a similar provision. See Derrough Declaration at 38; see also First Day Declaration at 13, 17. See, e.g., Five Mile DIP Order at 15.

114 115 116 117

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approve postpetition financing agreements with similar provisions.

118

The only case cited in the

119

Trimont Objection to the contrary cites no case law and is otherwise non-binding on this Court. Notably, not a single reported decision in any district has followed that case.

Nonetheless, in an effort to address TriMonts concern, the DIP Lender has agreed to include TriMont as a notice party upon the occurrence of any Termination Event or Event of Default under the Lehman DIP Facility. Such notice will enable TriMont to seek appropriate Court relief or negotiate a resolution with Lehman in the event of a Termination Event or Event of Default. With this concession, and given that the Lehman DIP Facility is conditioned upon this provision remaining in the Lehman DIP Order, the Debtors respectfully assert that the TriMont Objection should be overruled. IX. Texas Taxing Authorities Tax Objection to Lehman DIP Facility The Texas Taxing Authorities object to the Lehman DIP Motion arguing that for the Lehman DIP Facility to prime their alleged tax liens (on account of ad valorem taxes), the Debtors must provide adequate protection. As described more fully in the Lehman DIP Motion, the proceeds of the Lehman DIP Facility enhance the value of the Debtors property in amounts in excess of the claims of the DIP lender by preserving the valuable Franchise Agreements and investments in the collateral. Notwithstanding this, the Debtors are working with the Texas Taxing Authorities and the DIP Lender to resolve the Texas Taxing Authorities Objection.

118

See, e.g., In re Neff Corp., Case No. 10-12610 (Bankr. S.D.N.Y. Jun. 30, 2010) [Docket No. 207]; In re DBSD North America, Inc., Case No. 09-13061 (Bankr. S.D.N.Y. Dec. 16, 2009) [Docket No. 592]; In re The Readers Digest Assn Inc., Case No. 09-23529 (Bankr. S.D.N.Y. Oct. 6, 2009) [Docket No. 152]; In re Lear Corp., Case No. 09-14326 (Bankr. S.D.N.Y. Aug. 4, 2009) [Docket No. 282]; In re Ion Media Networks, Inc., Case No. 09-13125 (Bankr. S.D.N.Y. Jul. 6, 2009) [Docket No. 142]; In re General Growth Properties, Inc., Case No. 09-11977 (Bankr. S.D.N.Y. May 14, 2009) [Docket No. 527]; In re Chemtura Corp., Case No. 0911233 (Bankr. S.D.N.Y. Apr. 29, 2009) [Docket No. 281]; In re Tronox Inc., Case No. 09-10156 (Bankr. S.D.N.Y. Feb. 6, 2009) [Docket No. 148]. In re Colad Group, Inc., 324 B.R. 208, 224 (Bankr. W.D.N.Y. 2005).

119

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X.

Wells Fargo Objection to Five Mile DIP Facility Wells Fargo primarily objects to the cross default and certain other provisions in the Five

Mile DIP Facility, arguing that these provisions jeopardize their collateral.

120

Importantly, the

funds from Tranche B and Tranche C of the Five Mile DIP Facility will be loaned to the Debtors who are borrowers under the Wells Fargo Facility, and the proceeds will be used to perform PIPs and other value-adding improvements to the hotels owned by those Debtors. As such, the Five Mile DIP Facility directly benefits Wells Fargo.
121

The Wells Fargo Objection asserts essentially ex post criticism on a carefully negotiated and bargained for DIP financing package. This type of line-item criticism ignores the practical realities of securing postpetition financing. Likewise, Wells Fargo objects to certain other specific provisions of the Five Mile DIP Facility. But Five Mile conditioned its offer to provide the Five Mile DIP Facility on inclusion of the cross default and other provisions that Wells Fargo objects to, despite the Debtors attempts to eliminate many of them during the negotiations. At bottom, the Debtors do not have a superior competing financing offer without those provisions. The Debtors and their advisors pursued the best financing terms available, and the cross default and miscellaneous provisions to which Wells Fargo objects are a condition of the Five Mile DIP Facility. As such, the Debtors respectfully assert the Wells Fargo Objection should be overruled. XI. Preferred Shareholder Objection to the Five Mile DIP Facility A. The Five Mile DIP Facility Will Not Impair Any Unencumbered Assets.

The Preferred Shareholder Committee attacks the Debtors request to pledge certain properties as collateral to secure their obligations under the Five Mile DIP Facility, stating that
120 121

See Wells Fargo Objection at 14-17. The collateral pledged under the DIP Facilities are not cross collateralized. Five Mile DIP Order at 6.

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these properties (collectively, the Properties) are unencumbered or the mortgages on these properties are oversecured, and the Properties retain equity value for equity holders as long as they are not pledged to support the Five Mile DIP Facility.
122

The proceeds of Tranche B

(Mission Valley hotel) and Tranche C (Tysons Corner hotel) of the Five Mile DIP Facility will be used to fund the PIPs with respect to these hotels,
123

and the applicable Debtors are only

obligating themselves under the Five Mile DIP Facility to the extent of the proceeds that such Debtors are receiving thereunder. In other words, the owner of the Mission Valley hotel is only obligated for the $4.0 million extended to that Debtor, and the owner of the Tysons Corner hotel is only obligated for the $2.4 million extended to that Debtori.e., there is no crosscollateralization.
124

As such, the Debtors have reasonably exercised their business judgment in

agreeing to pledge the assets of those Debtors receiving a direct and substantial benefit from the Five Mile DIP Facility as security to Five Mile to the extent of the benefit received. B. AIC Guaranty on the PIPs

The Preferred Shareholder Committee questions the propriety of the Five Mile DIP Facility in light of AICs alleged guaranty on the PIPs.
125

If AIC is liable for anything on account

of those guarantees (a contention that is currently being litigated in New York state court), AIC is liable only to the Debtors secured prepetition lenders (i.e., Midland)and not to the Debtorswith respect to the PIPs.

122

San Diego and Tysons Corner hotels, which are pledged under the Five Mile DIP Facility, are already encumbered by substantial secured mortgage loans of approximately $47.4 million and $25.2 million, respectively, see First Day Declaration at 32, 36. Any issues regarding valuation of the Properties are for confirmation. See Preferred Shareholder Objection at 9-10; First Day Declaration at 11. See Five Mile DIP Motion at 4, 5, 25, 31, 36, 44, and 46. See Preferred Shareholder Objection at 9-10.

123 124 125

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As described in numerous pleadings, the Debtors require money now to promptly complete the PIPs as required under the terms of certain key Franchise Agreements. Unless the Debtors can access the proceeds of the Five Mile DIP Facility (and the Lehman DIP Facility) to perform the PIPs, the Debtors will risk losing the ability to continue using the widely recognized and trusted brand names adorning their hotels, threatening the viability of their enterprise as a going concern. Whatever obligations AIC may or may not have is not relevant to the Debtors immediate interests. Additionally, in the adequate assurance agreement (the Adequate Assurance Agreement) with Marriott International, Inc. (Marriott) described in the First Day Declaration and discussed at the first day hearing, the Debtors were able to secure the support of Marriott for the Debtors restructuring as well as the agreement to forebear from seeking to exercise potentially significant rights leading up to and during the Debtors Chapter 11 Cases. This agreement is conditioned upon, among other things, the Debtors agreement to (a) obtain approval of the Five Mile DIP Facility within 60 days of the Petition Date and (b) timely complete the PIPs pursuant to the schedule in the Adequate Assurance Agreement.
126

Notably,

Marriott has been vigilant in protecting its rights in these Chapter 11 Cases. The Debtors failure to perform their obligations under the PIPs would likely result in Marriott filing motions to lift the automatic stay to terminate the relevant Franchise Agreements or some other exercise of rights that could significantly impair the value of the Debtors estates.
127

126 127

See First Day Declaration at 52-57. As the Court is aware, on August 4, 2010, Marriott filed a motion requesting that the Court modify the automatic stay to enable Marriott to de-identify a hotel against which Marriott alleges defaults of PIP and quality assurance obligations. See, e.g., Marriott International, Inc. Motion for Limited Modification of the Automatic Stay to Complete De-Identification of a Single Hotel in Accordance with the Prepetition Termination of the Franchise Agreement Which Is Effective on August 30, 2010 [Docket No. 131]. The Debtors dispute the allegations and object to the relief requested therein. Nonetheless, Marriotts filing suggests what the Debtors

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XII.

Committee Objection to Both DIP Facilities The Committee objected to both the Lehman DIP Facility and the Five Mile DIP Facility

to the extent the superpriority liens and claims granted to the DIP lenders extend to avoidance actions and proceeds thereof. Courts in this District have approved liens on avoidance actions and the proceeds thereof.
128

Moreover, and most importantly, both Five Mile and Lehman have

insisted that they receive postpetition liens on the proceeds of avoidance actions as a condition of their agreement to provide the DIP Facilities. In any event, the Debtors are aware of ongoing negotiations between the Committee and the DIP Lenders to resolve this objection and support a consensual resolution.

may be forced to address if the PIPs are not addressed in accordance with the Adequate Assurance Agreement between the Debtors and Marriott.
128

See, e.g., In re Chemtura Corp., No. 09-11233 (Bankr. S.D.N.Y. Apr. 29, 2009) (approving the granting of liens on the proceeds of avoidance actions); In re Tronox Inc., No. 09-10156 (Bankr. S.D.N.Y. Feb. 9, 2009) (permitting satisfaction of various claims via avoidance action proceeds).

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Conclusion For the foregoing reasons, the Debtors respectfully request that this Court overrule any pending objections and grant the relief requested in the Cash Collateral Motion, Cash Management Motion, Lehman DIP Motion, and Five Mile DIP Motion.

New York, New York Dated: August 27, 2010

/s/ Paul M. Basta James H.M. Sprayregen, P.C. Paul M. Basta Jennifer L. Marines KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022-4611 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 and Anup Sathy, P.C. (admitted pro hac vice) Marc J. Carmel (admitted pro hac vice) KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654-3406 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel to the Debtors and Debtors in Possession

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EXHIBIT A Discussion of Cash Management Systems Compliance with Remaining Loan Documents

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Merrill Loan Documents The Washington D.C. Loan Agreement, the Tysons Corner Loan Agreement, and the San Antonio Loan Agreement (each as defined in the Final Cash Collateral Order and, collectively, the Merrill Loan Documents) each require a cash management system similar to the system required under the Fixed Rate Mortgage Loan Agreement and to the current Cash Management System.
129

Pursuant to the cash management agreement related to the Merrill Loan Documents

(the Merrill Cash Management Agreement), prior to a Trigger Event (as defined below), the Debtors are required to deposit into a lockbox account only the rents and other amounts received pursuant to the operating lease between the property owner and operating tenant. Pursuant to the Merrill Cash Management Agreement, cash in the lockbox account is to be swept daily to a cash management account controlled by the applicable prepetition lender and such cash is to be applied by that lender each month to (i) fund required reserve accounts, including a tax and insurance reserve and (ii) pay required debt service and other amounts due under the loan. Pursuant to the Merrill Cash Management Agreement, if an event of default is not in effect, any cash remaining in the cash management account following the funding of the required reserves and payment of debt service is to be transferred by the lender to an account designated by the Debtors. The Debtors current Cash Management System and the waterfall contemplated by the Final Cash Collateral Order are consistent with the provisions of the Merrill Loan Documents. Capmark Loan Documents The Anaheim Mortgage Loan Agreement, the Ontario Loan Agreement, the Mission Valley Loan Agreement, and the Garden Grove Loan Agreement (collectively, the Capmark Loan Agreements) do not require the applicable Debtor to establish and maintain an active

129

See, e.g., San Antonio Loan Agreement at 2.6.1.

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cash management system similar to that required by the Fixed Rate Mortgage Loan Agreement or the Merrill Lynch Loan Documents. The Capmark Loan Agreements do not require the applicable Debtors to establish a lockbox account and deposit all revenue generated by the mortgaged property therein. Instead, pursuant to the Capmark Loan Agreements, the applicable Debtor is required to make monthly deposits to a tax and insurance escrow fund under certain circumstances. Pursuant to each of the Capmark Loan Agreements, other than the Anaheim Mortgage Loan Agreement, the applicable Debtor is required to fund a replacement reserve account only in 2012, and even then only under certain conditions. The Anaheim Mortgage Loan Agreement requires only that the Debtors make small monthly deposits to a replacement reserve account. Thus, under the Capmark Loan Agreements, with the exception of the required replacement reserve deposits, Cash Collateral is freely transferable by such Debtors and the current Cash Management System and waterfall provisions of the Final Cash Collateral Order are consistent with each of the Capmark Loan Agreements.

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EXHIBIT B Discussion of Loan Document Remedies

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Merrill Loan Documents Absent a Trigger Event, the Debtors under the Merrill Lynch Loans are only restricted from using cash generated by the operating lease until monthly debt service has been paid and the tax and insurance and replacement reserves have been funded (the Merrill Waterfall). Pursuant to the Merrill Cash Management Agreement, if an event of default occurs or if a debt service coverage ratio is not satisfied (a Trigger Event), the Debtors must deposit all revenue generated by the property in a lockbox account. During the continuance of a Trigger Event, and, provided no event of default has occurred, the applicable lender must then transfer any excess funds in the cash management account after satisfaction of the Merrill Waterfall to an account designated by the Debtors. Capmark Loan Agreements The Capmark Loan Agreements place very limited restrictions on the Debtors use of Cash Collateral. Such restrictions are only triggered (i) with respect to the required tax and insurance escrow deposits, if the Debtors fail to timely pay required taxes and insurance premiums, and (ii) with respect to the replacement reserve fund, if, at some point in 2012, the Debtors fail certain conditions. Unlike the Fixed Rate Loan Agreement and Merrill Loan Documents, there is no trigger event that requires the Debtors to deposit all revenues generated by the properties in a lockbox or similar account under the applicable lenders control.

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