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- 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 B E F O R E: HON. SHELLEY C. CHAPMAN U.S. BANKRUPTCY JUDGE September 1, 2010 8:30 AM U.S.
Bankruptcy Court One Bowling Green New York, New York - - - - - - - - - - - - - - - - - - - - -x Debtors. INNKEEPERS USA TRUST, et al., UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK Case No. 10-13800-scc - - - - - - - - - - - - - - - - - - - - -x In the Matter of:
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VERITEXT REPORTING COMPANY www.veritext.com
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- 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 HEARING re "Lehman DIP": Debtors' Motion for Entry of an Order HEARING re "Cash Management": Debtors' Motion for the Entry of HEARING re "Cash Collateral": 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. Sections 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]
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]
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]
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- 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Transcribed By: Clara Rubin HEARING re "Morrison & Foerster Retention": Application HEARING re "Appointment of Examiner": Motion of Ad Hoc HEARING re "Plan Support Agreement": Debtors' Motion for Entry
of an Order (A) Authorizing the Debtors to Assume the Plan Support Agreement and (B) Granting Related Relief [Docket No. 15]
Committee of Preferred Shareholders for Order Directing Appointment of Examiner Pursuant to Section 1104(c)(1)-(2) of the Bankruptcy Code [Docket No. 179]
Pursuant to Sections 327(a) and 1103 of the Bankruptcy Code and Bankruptcy Rules 2014 and 2016 for Entry of an Order Authorizing the Retention and Employment of Morrison & Foerster LLP as Attorneys to the Official Committee of Unsecured Creditors Nunc Pro Tunc to July 28, 2010 [Docket No. 206]
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- 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: PAUL M. BASTA, ESQ. KIRKLAND & ELLIS LLP Attorneys for the Debtors and Debtors-in-Possession 601 Lexington Avenue New York, NY 10022 BY: ANUP SATHY, P.C., ESQ. KIRKLAND & ELLIS LLP Attorneys for the Debtors and Debtors-in-Possession 300 North LaSalle Chicago, IL 60654 BY: DANIEL T. DONOVAN, ESQ. A P P E A R A N C E S: KIRKLAND & ELLIS LLP Attorneys for the Debtors and Debtors-in-Possession 655 Fifteenth Street, N.W. Washington, DC 20005
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- 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: MICHAEL J. SAGE, ESQ. KEVIN J. O'BRIEN, ESQ. BRIAN E. GREER, ESQ. DECHERT LLP Attorneys for Lehman ALI Inc., and Michael Lascher 1095 Avenue of the Americas New York, NY 10036 BY: LAWRENCE P. GOTTESMAN, ESQ. BRYAN CAVE LLP Attorneys for LNR Partners, LLC 1290 Avenue of the Americas New York, NY 10104 BY: BRUCE R. ALTER, ESQ. ALTER, GOLDMAN & BRESCIA, LLP Attorneys for Hilton International 550 Mamoroneck Avenue Harrison, NY 10528
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- 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: LENARD M. PARKINS, ESQ. HAYNES AND BOONE, LLP Attorneys for Midland Loan Services, Inc. 1221 Avenue of the Americas 26th Floor New York, NY 10020 BY: JOHN D. PENN, ESQ. HAYNES AND BOONE, LLP Attorneys for Midland Loan Services, Inc. 201 Main Street, Suite 2200 Forth Worth, TX 76102 BY: MARTIN BIENENSTOCK, ESQ. IRENA M. GOLDSTEIN, ESQ. TIMOTHY Q. KARCHER, ESQ. DEWEY & LEBOEUF LLP Attorneys for the Ad Hoc Committee of Preferred Shareholders 1301 Avenue of the Americas New York, NY 10019
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- 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: TODD C. MEYERS, ESQ. KILPATRICK STOCKTON LLP Attorneys for TriMont Real Estate Advisors, Inc. as Special Servicer 1100 Peachtree Street, Suite 2800 Atlanta, GA 30309 BY: DAVID M. FRIEDMAN, ESQ. ADAM L. SHIFF, ESQ. DANIEL A. FLIMAN, ESQ. KASOWITZ, BENSON, TORRES & FRIEDMAN LLP Attorneys for Five Mile Capital Partners LLC 1633 Broadway New York, NY 10019 BY: PHILIP M. BRIDWELL, ESQ. MARK ELMORE, ESQ. HAYNES AND BOONE, LLP Attorneys for Midland Loan Services, Inc. 2323 Victory Avenue, Suite 700 Dallas, TX 75219
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- 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: DAVID M. NEFF, ESQ. PERKINS COIE LLP Attorneys for C-III Asset Management and CWCapital Asset Management 131 S. Dearborn Street Suite 1700 Chicago, IL 60603 BY: ANDREW J. EHRLICH, ESQ. ALAN W. KORNBERG, ESQ. PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP Attorneys for Apollo Investment Corporation 1285 Avenue of the Americas New York, NY 10019 BY: LORENZO MARINUZZI, ESQ. MORRISON & FOERSTER LLP Attorneys for the Official Committee of Unsecured Creditors 1290 Avenue of the Americas New York, NY 10104
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- 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: PAUL K. SCHWARTZBERG, ESQ. U.S. DEPARTMENT OF JUSTICE Office of the United States Trustee 33 Whitehall Street 21st Floor New York, NY 10004 BY: BOJAN GUZINA, ESQ. (TELEPHONICALLY) SIDLEY AUSTIN LLP Attorneys for Appaloosa One South Dearborn Chicago, IL 60603 BY: LEE S. ATTANASIO, ESQ. JOHN G. HUTCHINSON, ESQ. EVAN R. ZISHOLTZ, ESQ. SIDLEY AUSTIN LLP Attorneys for Appaloosa 787 Seventh Avenue New York, NY 10019
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- 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ANDREW HAYNE (TELEPHONICALLY) Interested Party; Preferred Shareholder FIVE MILE CAPITAL PARTNERS LLC BY: MICHAEL FRANCO (TELEPHONICALLY) BY: ESOPUS CREEK ADVISORS, LLC For the Ad Hoc Committee of Equity Holders LAUREN KRUEGER (TELEPHONICALLY) BY: DE SHAW Interested Party SARAH S. JOHNSON (TELEPHONICALLY) APPALOOSA MANAGEMENT BY: JAMES BOLIN (TELEPHONICALLY) BY: ALIXPARTNERS, LLC Restructuring Advisor LAURA J. EISELE (TELEPHONICALLY)
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INNKEEPERS USA TRUST, et al.

- 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 P R O C E E D I N G S (Audio begins mid-sentence) THE COURT: -- and it's going to be increasingly
challenging to keep it cool in here, and I'm only referring to temperature. So there is overflow across the hall; I know that that's not optimal. But to the extent that there are parties
who are going to be witnesses, are actually going to be speaking, versus mere observers, I really would request as a courtesy to everybody collectively that, if you have a seat and you're not going to actively participate, that you think about relinquishing it. I'm not going to throw anyone out, but it's And I am going to order people
awfully jam-packed out there.
to stand up off the air conditioners, because that'll kill us all. So, all right, that being said, here we are. Mr. Penn, I think where we left off was that you were going to get from the debtors, and I've gotten from the debtors, three pieces of paper: a thirteen-week cash forecast,
an application report, and a flash report. MR. PENN: a few questions. THE COURT: You know what, let me stop. I'm starting That's correct, Your Honor, and I did have
too quickly out of the box. All right?
Let's find out who's on the phone.
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- 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 hear it. MS. EISELE: AlixPartners. THE COURT: MS. EISELE: THE COURT: MS. JOHNSON: THE COURT: representing? (No response) THE COURT: Ms. Johnson, could you identify who you're All right, good morning, Ms. Eiesle. Good morning. Is anyone else on the phone, please? Yes, Your Honor. You have Sara Johnson. You're I'm sorry, Your Honor. Laura Eisele from please? MS. EISELE: THE COURT: Laura Eisele, AlixPartners. Ma'am, could you repeat that? We didn't Could I take appearances of folks on the phone,
All right, thank you, Ms. Johnson.
representing or on whose behalf you're appearing? MS. JOHNSON: THE COURT: I'm sorry, DE Shaw. Thank you.
Anyone else on the phone? MS. KRUEGER: Creek Advisors. THE COURT: Mr. Guzina? (No response) THE COURT: Mr. Hayne? Thank you, Ms. Krueger. Your Honor, Lauren Krueger from Esopus
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- 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 them. MR. PENN: of Midland. Actually, Your Honor -- John Penn on behalf (No response) THE COURT: (No response) THE COURT: (No response) THE COURT: (No response) THE COURT: All right, I guess it's too early for Mr. Sprayregen? Mr. Maiman? Mr. Halder?
Earlier the CourtCall operator indicated that some
people would be on listen-only lines, so it is entirely possible that they may be there but just unable to have spoken. THE COURT: MR. PENN: THE COURT: All right. Giving them the benefit of the doubt. All right. Lines are open, and I'm showing
COURTCALL OPERATOR:
you have a Sara Johnson, Lauren Krueger, Bojan Guzina, Kenneth Maiman, Andrew Hayne and Michael Bechry (ph.) on line. THE COURT: actually open? COURTCALL OPERATOR: THE COURT: Those lines are open. Operator, are you showing those lines
All right, I'm going to try it one more
time, because I want to know who's with us. Mr. Guzina?
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- 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. GUZINA: THE COURT: MR. GUZINA: THE COURT: Mr. Hayne? MR. HAYNE: THE COURT: MR. HAYNE: shareholder. THE COURT: Mr. Halder? (No response) THE COURT: (No response) THE COURT: (No response) THE COURT: All right, Operator, if there are Mr. Sprayregen? Mr. Maiman? Thank you. Yes, I'm here. All right, and who are you with, sir? Just an interested party and a preferred Good morning, Your Honor. Thank you. Who are you with, sir?
Sidley Austin. Thank you.
additional parties that come on the line, please let us know. COURTCALL OPERATOR: THE COURT: MR. PENN: Yes, ma'am.
All right, Mr. Penn. Thank you, Your Honor. Once again, John
Penn on behalf of Midland Loan Services. And continuing on the cash collateral and addressing specifically the reporting from last night, what I have done to at least simplify the process a little bit is the thirteen-week
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- 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 cash flow; I have put an Exhibit A label on. And the
application report I have labeled as Exhibit B, as in "bravo", frankly because I didn't remember where we were on the other lettering and numbering. THE COURT: MR. PENN: THE COURT: MR. PENN: THE COURT: That's Exhibit B. Got it. Wait, I'm sorry. Which is your Exhibit A?
The thirteen-week -Cash forecast. If I could approach? Okay. Oh. Okay, great. Thank you. All right.
That's the application report.
And are you also marking the flash? MR. PENN: THE COURT: MR. PENN: No, not marking the flash. All right. And just had a few questions of Mr.
Greenspan after reviewing those reports. THE COURT: Okay. Good morning. Good morning.
Mr. Greenspan. THE WITNESS:
(Witness duly sworn) THE COURT: Thank you.
FURTHER REDIRECT EXAMINATION BY MR. PENN: Q. Mr. Greenspan, would you state your name for the record,
please? A. Ronald Greenspan.
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- 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. And you testified yesterday in the cash collateral
hearing, correct? A. Q. I did. Yesterday evening, did you receive the documents that have
been marked and are before you as Exhibit A, the thirteen-week cash forecast, and Exhibit B, the application report? A. Q. Yes, we did. Did you review and have members of your staff do some
analysis on Exhibits A and B? A. Q. Yes. Did you request some additional detail from the debtors,
and was that provided? A. Q. A. Yes, it was. What information did you request and what was provided? In -- we requested was some of the schedules and
breakdowns that supported the schedules, specifically including their projections of the professional fees and the accruals. Q. If you'd turn to Exhibit A on the thirteen-week cash flow.
Describe for the Court what Exhibit A indicates to you. A. Exhibit A is their projected cash flow for the next
thirteen weeks, and what this shows is that in fact, as they made allowance for, they will be billed in an expense reserve, which expense reserve will max out in October, and that, as one would expect going into the November-December-January period, that is going to have to start being drawn down at a fairly
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- 17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 rapid rate. And so by the end of November, you know, three
months from now, that reserve, which started at four and a half million dollars at the beginning of November, will be depleted to almost half; it will have run off over two million dollars in the month of November. to 2.4 million. Q. Were you able to get any kind of indication of So the expense reserve will be down
professional fees from either Exhibit A or the additional detail that was provided? A. Q. A. Yes. What information was that? That by the time we get to the end of November, expected
professional fees will have exceeded eighteen million dollars and that, of that, less than 12 million will have been paid such that, as I had expected yesterday before I saw the detail, you'll have over 6 million dollars of accrued professional fees outstanding as of the end of November against an expense reserve. In addition, there's going to be millions of accrued payables just in the operations because it's also clear from the cash forecast that they're not paying the bills currently now, that they're building up -- the way they're building up cash is through getting the revenues but not paying the operating expenses. We don't know what the accruals are on the
operating expenses, but we do know the accruals for the
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- 18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 professional fees will exceed not -- will exceed six million just by the end of November. Q. And what would -- by the end of November, you've got a six
million dollar accrual on professional fees, and how much of a reserve? A. You have a 2.4 million dollar reserve. And this is across
all of the pools. Q. Because the thirteen-week cash flow does not break it down
by -- pool by pool, correct? A. Q. That is correct. Turning to the application report, Exhibit B, what does
that indicate to you? A. This is essentially what's -- I believe, what's basically The application report is
been described as the flash report.
the -- unlike what we just talked about, which is the forecast, this is the retrospective look, and this covers just slightly less than the first two weeks of the case, from July 19th to July 31st. And what this shows -- and this is the first time And what this shows
we've seen a breakdown across the pools.
is, as we suspected and I testified to, the expense reserve is being set up across every other pool and every other loan other than the fixed-rate loan, again, suggesting that what's likely to happen is that these other pools are in fact going to be the ones that are going to be running short of operating revenues, and the likely source of that will be the fixed-rate pools' cap
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- 19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (sic) cash collateral. Q. And the indication that that's -- the reserve is applied
across the pools, other than the fixed-rate pool, where is that shown on Exhibit B? A. Well, again, Exhibit B does not show the application of
the reserve; it simply shows the setting-up of the reserve, and that is in the line -- it's the second row of numbers where it shows expense reserve. Those negative numbers are deduction
from revenue in order to establish the cash reserve. Q. After receiving the thirteen-week forecast, the
application report and the flash report, has your opinion from yesterday changed at all? A. No, it has not. I mean, there's no source to repay the
cash collateral that's being depleted. MR. PENN: THE COURT: We'll pass the witness, Your Honor. Thank you.
FURTHER RECROSS-EXAMINATION BY MR. DONOVAN: Q. A. Q. Good morning, sir. Good morning. Let's look at Exhibit B, which is the application report. Dan Donovan for the debtors.
Do you see that, sir? A. Q. Yes, sir. And looking at the first column, Fixed-Rate Loan -THE COURT: Mr. Donovan?
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- 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. DONOVAN: THE COURT: Yes. You need to stay by the microphone so that
you can be on TV and so that you can be recorded. Q. A. Q. A. Q. -- on the fixed-rate loan, shows revenue, correct? Yes. And it shows excess cash, correct? Correct. And what do you understand the five million dollars of
excess cash for the fixed-rate loan -- how will that be applied? A. Well, my -- when you say 'how will it be applied', that
cash presumably is there and, in the future, will be used for expenses and presumably, according to the cash collateral order, if there is money in excess of reserve, will be distributed. Q. A. Q. A. Q. A. Q. And it'll be distributed to the fixed-rate loan, correct? That's what the cash collateral order calls for. Okay. And Exhibit A is done on a cash basis, correct?
That is correct. And Exhibit B is done on a cash basis, correct? That is correct. And in your Exhibit A to your second supplemental
declaration, your professional fees are done an accrual basis, when incurred, correct? A. That is correct.
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- 21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. MR. DONOVAN: THE COURT: Mr. Penn? MR. PENN: THE COURT: (No response) THE COURT: All right, thank you, Mr. Greenspan. No further questions. Anyone else? Thank you, Your Honor. All right, thank you.
(Witness excused) THE WITNESS: THE COURT: You're welcome. All right, are we done with cash
collateral, except for Mr. Sage, who I don't see in the crowd? MR. PENN: THE COURT: Yes, Your Honor. All right. So then we will at the moment And just for the record --
move on to the Lehman DIP facility.
I guess this is a point of sensitivity with me -- when I'm going to say "Lehman", we're all going to understand that I'm referring to Lehman ALI or the Lehman affiliate that's going to be the proposed DIP lender, and that I'm not referring to a Lehman debtor but -- because we're going to all call them "Lehman" and I don't want there to be any confusion in that regard. All right, so, Mr. Sathy, is this you? MR. SATHY: It is, Your Honor. Good morning, Your
Anup Sathy from Kirkland, on behalf of the debtors. Your Honor, this is the second part of our DIP
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- 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 resolved. request. The terms are very similar, and the negotiations were This
done almost on a patterned basis with the Five Mile DIP.
is the DIP that's being provided by a Lehman affiliate, Solar Finance; it's intended to fund PIPs that are Marriott PIPs, other hotel PIPs, and general-cycle renovations to the floating-pool hotels. The approximate amount of the DIP We did submit Mr.
facility is about seventeen million dollars.
Derrough's affidavit, he is here, and the same record would apply in terms of the arm's-length negotiation, the terms that were negotiated, the ability to seek additional alternative financing, and ultimately the decision by the debtors to go with the Solar financing and for part of their PIP DIP plan. This agreement has also been discussed with Marriott; it does comply with the acceptable financing condition in Article 1 of the adequate assurance agreement. that. Your Honor, with respect to the objections, there were, I believe, three principal objections. The objection of And so we're pleased with
the creditors' committee has been resolved by removing the lien on avoidance actions and proceeds, similar to what we did with the Five Mile DIP facility. That's resolved. The order will
provide for appropriate language to that effect. The objection by the Texas taxing authorities was also Your Honor, we'll be adding language to the order
clarifying that the priming liens do not prime the valid tax
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- 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 liens and that any credit bid or asset sale would be subject to the rights of the Texas taxing authorities and their liens. Your Honor, that leaves just the objection of TriMont, Your Honor, the special servicer for the holders of the mezzanine loan with respect to this particular group of properties. Your Honor, the -- I think the objection, I think, The concern is with respect to a
is pretty straightforward.
particular event of default and a remedy that Solar would have in the event of a default. We have attempted to resolve this The partial
issue in discussions with Solar and TriMont.
resolution that we were able to at least achieve is to include the TriMont group in terms of a notice party for purposes of, to the extent there is a default, that they would have the same benefits as the committee and the debtors to challenge the existence of a default. But the remedy that the lenders have
requested and that is set forth in the agreement, Your Honor, is that upon the expiration of that notice period that they have the right to exercise their remedies with respect to the collateral. It's, from our perspective, a relatively
straightforward remedy; it is also in the Five Mile facility. And, Your Honor, we cite in our papers other -numerous cases where this particular remedy, as long as there is a reasonable notice period for parties to come back here and make their positions known to Your Honor, we think, is a reasonable request. Would we have liked to have had this
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- 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Derrough? MR. MEYERS: Your Honor, Todd Meyers for TriMont. I remedy go, of course. But in the context of the entire DIP
facility, Your Honor, we would -- we believe that it's reasonable in the context of the entire facility. THE COURT: All right.
Are there any objections to the admission of Mr. Derrough's declaration? (No response) THE COURT: objection. All right, let the record reflect no
So that's in.
(Declaration of William Q. Derrough was hereby received into evidence as a Debtors' exhibit, as of this date.) THE COURT: And does anyone wish to cross-examine Mr.
do wish to cross Mr. Derrough. THE COURT: All right.
All right, Mr. Sathy, did you want to say something? MR. SATHY: I did, Your Honor. You had asked a point
yesterday with respect to the Five Mile DIP, which is whether or not -- the relationship between the PSA and -THE COURT: MR. SATHY: Right. And it's the same construction with
respect to the Lehman DIP, Your Honor. THE COURT: Okay. Good morning.
All right, so, Mr. Derrough.
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- 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. (Witness duly sworn) THE COURT: CROSS-EXAMINATION BY MR. MEYERS: Q. Good morning, Mr. Derrough. I'm Todd Meyers with Thank you.
Kilpatrick Stockton, and I represent TriMont Real Estate Advisors. A. Q. Good morning. Good morning. As I think you know, TriMont is the special
servicer for the -- what has been referred to as the floatingrate mezzanine loan, as well as the Anaheim mezzanine loan. Are you familiar with those loans? A. Q. Yes. Okay. Mr. Derrough, you signed a declaration in support
of the -- what's been referred to as the Lehman DIP, is that correct? A. Q. A. Yes. Do you have that declaration in front of you? I do not. (Pause) MR. MEYERS: THE COURT: May I approach, Your Honor? (No audible response).
Now, Mr. Derrough, the Lehman DIP permits loans to be made
to the floating-rate debtors in the amount of up to seventeen and a half million dollars, is that correct?
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- 26 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. That's correct. Are you aware of the debtors' adequate assurance agreement
with Marriott that's been entered into? A. Q. I am. Okay. And you're aware that that agreement requires the
debtors to perform certain PIP work on certain Marriotts that the debtors own, correct? A. Q. Yes. Okay. Now, not all the Marriotts that the debtors own
are -- need required PIP work under that adequate assurance agreement, correct? A. Q. I believe that's correct. Okay. And this particular loan is going to be used in
part to fund PIP work for certain of the Marriotts that are -or for the Marriotts that are covered by that agreement, correct? A. Q. That's correct. How many Marriotts are covered by that agreement and are
going to be -- the PIP work will be funded with the Lehman DIP loan? A. Q. I couldn't tell you off the top of my head right now. Okay. Would you disagree with me if I told you that there
were only three? A. Q. I can't remember right now. Okay. Have you seen the amended declaration of Dennis
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- 27 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Craven that was filed in this case on the first day? A. day. Amended -- I saw all the stuff that was filed the first If there's something recently amended, I don't think I
saw that. Q. Okay. Do you know how much of the seventeen and a half
million is going to be used for PIP work on the Marriotts, however many there are, that are required to be done under the Marriott adequate assurance agreement? UNIDENTIFIED SPEAKER: Your Honor, I would object as
this being well outside the scope of Mr. Derrough's declaration relating to the particular DIP. THE COURT: with this? MR. MEYERS: Your Honor, I'm attempting to illustrate All right, Mr. Meyers, where are you going
that this DIP is going to be used in part to fund Marriott work, but it's also being used in significant part to fund other PIP work. And so to the extent the debtors argue, as
they do in their papers, that the Marriott adequate assurance agreement is fundamental to this reorganization and it requires certain work to be done and that's being fulfilled pursuant to the DIP, so I'm trying to illustrate that only a certain portion of this DIP, a relatively small portion, is going to fund the Marriott PIP work -THE COURT: MR. MEYERS: All right --- as opposed to other PIP work.
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- 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: All right, but his declaration talks about
what the debtors did to obtain this DIP and that this DIP is the best DIP available for this particular group of debtors and the particular purposes that they're going to use it for. think you can argue that it's not being used solely for the purposes of satisfying the requirements under the Marriott adequate assurance agreement, but I think I agree that it's beyond the scope of what Mr. Derrough, in any event, seems to have any knowledge of. MR. MEYERS: THE COURT: MR. MEYERS: THE COURT: So -It --- you can -That's --- you can argue it, and I'll listen to So I
you, but I don't know that you're going to get much from him on this. MR. MEYERS: I agree; it appears that I'm not. It's
just that that was the only declaration filed in support of the Lehman DIP. If the debtors have no other evidence in support
of the Lehman DIP, then I'll cover this with argument and with documents that have been filed. THE COURT: MR. MEYERS: BY MR. MEYERS: Q. Let me just see -- Mr. Derrough, bear with me for one All right, well, that's their risk, then. Okay.
second.
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- 29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Pause) Let me just make sure, Mr. Derrough. You don't know how Do you know
much of this DIP is going to fund Marriott work. when this DIP is going to be advanced? A. Q. A.
The date on which the monies are going to be advanced? Correct. I believe the money is going to be used, you know, as is So it's going to be as needed.
needed for the PIP programs. Q.
Okay, so on day one, all of the seventeen and a half
million is -- if the Court approves this DIP, the seventeen and a half -A. Oh, did you ask me the timing of the funding? I don't
remember the specifics about the timing of the funding. Q. A. Okay. Very well.
I know that the majority of the dollars are to be used as
needed for the properties, under the PIP programs. Q. Under PIP -- when you say "the PIP programs", Marriott and
other PIP programs? A. Q. A. Q. PIPs in general; let me just call it that. Okay, but you don't know when they're going to be funded? The actual funding date? I don't know that.
And by that, you don't know when the lender, Solar, is
going to make advances to the debtor? A. Q. Not off the top of my head. Okay.
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- 30 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. MEYERS: THE COURT: That's all, Your Honor. All right. Thank you. No redirect, Your Honor.
UNIDENTIFIED SPEAKER: THE COURT: All right.
Anyone else want to ask Mr. Derrough any questions? (No response) THE COURT: All right, Mr. Meyers, all yours.
Thank you, Mr. Derrough. (Witness excused) MR. MEYERS: Your Honor, again for the record, I TriMont is a That trust holds
represent TriMont Real Estate Advisors Inc. special servicer for the SASCO 2008-C2 Trust.
the economic and beneficial interests in the mezzanine loans for both Anaheim and for the floating-rate -- for the floatingrate pool. Approximately 117 million was advanced on the floating-rate loan, and approximately 21 million was advanced on the Anaheim loan. There's been slight pay-down on the
floating-rate loan, but there's still over 110 million owed on that -- on that mezzanine loan. Now, the loan that the debtors propose to receive, the DIP loan they propose to receive from Solar, is a seventeen and a half million dollar loan that they say that they need to make certain PIPs, various improvement projects on various hotels in the floating-rate pool. There are twenty hotels in the
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- 31 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Lehman. floating-rate pool. Now, the term sheet that's filed with the
debtors' motion makes clear that only five and a half million of that will go for the required PIPs under the Marriott agreement. Another eight million will go for PIPs on nonIt could be Marriott hotels, but not
Marriot-required hotels.
the Marriott hotels that are pursuant -- that are under the adequate assurance agreement. And then another four million
dollars -- these are approximate numbers -- for what they call cycle renovations: various hotels. The loan is being made by Solar, an affiliate of This is not a new-money loan by a new lender looking This is being made as improvements, normal-cycle improvements for
to make, you know, interest and fees.
a -- by anybody's characterization, as a protective loan by the current property-level lender, Lehman. It's being done by an And I
affiliate of Lehman, but is for the benefit of Lehman.
don't think Lehman would stand up here and argue otherwise. Now, as we pointed out in our papers, Your Honor, it is important to note that the seventeen and a half million dollars that Lehman is looking to advance here and the debtors are looking to borrow was actually held in reserve for some time -- for a considerable period of time pre-petition by Lehman. Their debt as they came into this case was 220
million, but that wasn't what they were supposed to be down to. Their debt was supposed to be at 237 million, they were holding
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- 32 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 17 million dollars, and it was supposed to be advanced to make these PIPs, okay? It was for Lehman's benefit that these PIPs However, knowing
be done, and it was intended to advance it.
that the debtors were looking at a restructuring, and in fact being a critical component of that restructuring, Lehman held this money, did not put it in to make the PIPS and then, three days before the bankruptcy, they applied the money to the loan to bring it down to 220 million, and now they're looking to re-advance it, go right back up to the 237 million but get all the protections in the DIP. THE COURT: Mr. Meyer, let me ask you a question, Where did they get
because it wasn't clear from the papers. that money from in the first instance? MR. MEYERS: THE COURT: Apollo.
And do you know the terms pursuant to
which they received that money, or -- I mean, because there's an implication in what you're saying, and maybe I'm reading too much into it, but that they weren't entitled to apply the funds. And certainly the funds were set aside for But I think there's an implication in what
PIP/renovations.
you're saying that they weren't entitled to -- I mean, despite the appearances. I hear you, okay? I do not -But are you telling me that, or are you
MR. MEYERS: THE COURT:
just making the observation that the money was in that reserve
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- 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and then it was applied? MR. MEYERS: THE COURT: MR. MEYERS: Observational, Your Honor. All right. It is not -- I do not allege that they
were in violation of their loan agreement when they applied that. I believe that they were entitled to apply that upon a There was in all likelihood a default and therefore
default.
they were entitled to apply it. My point, though, is that the bargain of the parties was that they should have been at 237 million and that the money they got from Apollo to fund the PIPs, in exchange for releasing the Apollo guaranty they held, applied to the debt and then now they're re-advancing it. Okay, that's -- you
know, you -- that doesn't make this loan improper, but I think it's certainly relevant in the Court's determination of Lehman's motivations here in making this loan and what protections Lehman needs. We are not objecting -- it's a limited objection. We
are not objecting to a loan being made, whether it's by Solar or some other party that will be ahead of us. it's a priming loan. It's going to -We are not
It's a first-dollar-out loan.
objecting to a loan being made for PIP work. objecting to the remedies that Lehman seeks. that's necessary.
Okay, we are We don't think
We think they -- that it gives them undue If Your Honor
leverage and that they simply don't need it.
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- 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 tells them they can't have that remedy, they're going to make the loan anyway; and if they won't, there are a number of people who will lend 17 million dollars on a priming basis, first dollar out, with interest and fees that's secured by what we would contend is, you know, in the high 200 millions of collateral, what even the debtor acknowledged is in the high 100s of collateral. Somebody will lend 17 million dollars on a
priming basis secured by that, and they won't need automaticstay relief. THE COURT: MR. MEYERS: THE COURT: MR. MEYERS: You sure about that? It's -- Your Honor, it's common sense. Okay. And in fact, Your Honor, we're willing to If nobody will make a 17
take the risk that it's not made.
million dollar loan which everybody agrees gives dollar-fordollar value plus, that nobody will make that secured buy, what we contend again is, you know, 250, 300 million dollars' worth of collateral, what the debtors might contend is 150 to 200 million dollars collateral, without an automatic-stay relief provision, that defies logic. Okay, Your Honor, so as I've alluded to already, and as we've said in our papers, one of the remedi -- there are numerous defaults. termination events. I think there are over forty defaults or We are concerned that if any of those
occur, and in particular, and in particular, although not
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- 35 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 exclusively, the involuntary change-of-control default which would occur if we get relief from stay, which we have now sought -- Your Honor may be aware of that. filed a motion for relief from stay. THE COURT: MR. MEYERS: to it in our papers. Missed that one. Had enough to do. Your Honor, we alluded News. Yesterday, TriMont
And yesterday we did file a motion for
relief from stay, seeking to exercise our remedies as mezzanine lender on both the Anaheim mezz and the floating-rate mezz. And if that is granted, then with our rights under those documents, we would control the membership interests and therefore the property-level debtors in the floating-rate pool. That would, as we read it, trigger a default under the Lehman DIP. So if this is approved in its current form, and if we obtain stay relief, it can be a hollow victory, and here's why: If they -- if that -- once there is a default, whether it's that default or any other default or termination event, they have automatic-stay relief. Mr. Sathy said 'We've reached a That was an offer that was
resol' -- 'a partial resolution.' rejected.
I mean, I'm happy -- if they want -- any notice they
want to give is fine, but it's totally inadequate, because what it said -- it doesn't give us the right to come in here and have the stay re-imposed; it doesn't give us the right to seek an injunction. It gives us the right to come in and argue that
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- 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 there wasn't a default, particularly if we get stay relief. agree, there will have been a default. things that can occur. default. We
There are lots of other
We won't -- we will agree it's a
The debtor did this, the debtor did that and, you That's a default.
know, somebody got exclusivity terminated.
We won't be able to -- you can give me five days, you can give me -- doesn't matter how much time you give me; it's a default. So it's not a resolution, and it's unacceptable. What's going to happen if there's a default is that they are going to have the right, unless there wasn't a default that somebody proves five days later, to exercise their remedies on twenty hotels. Now, they may have seventeen and a half million
dollars of debt out, they may have five and a half million dollars of debt out. But the debtors may say to them, the way
to realize the value is to sell all the collateral, and then you pay down your debt and then you give us the cash. And then what's going to happen? relief from stay to get that cash. go buy new hotels. hotel. Okay. Lehman ALI will get
The debtors aren't going to
Or they may just go foreclose on one
But it might be a hotel that has tremendous value, but
in this market, in a fire sale, in a foreclosure, it wipes out considerable equity that ultimately would inure to the benefit of my client. So at its bottom, Your Honor, they can make the loan, but they don't need that remedy, particularly under the
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- 37 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 circumstances in which this loan is being made. need that kind of leverage. They're protected. They don't They get first
dollars out for this five and a half million, ten million, seventeen and a half million. And so if Your Honor would deny
this motion, you know, unless that remedy is eliminated, then I think you will find that we will still have a DIP loan, Marriott work can still be made, and this debtor can continue on to the next step. THE COURT: MR. MEYERS: MR. SATHY: THE COURT: MR. SATHY: THE COURT: All right. Thank you. Good morning, Your Honor. Good morning. Just very briefly. The most logical -Thank you.
Mr. Sathy, I thought yesterday you told me
that -- and just to be clear -- that it's the debtors' position and it's Lehman's position -- Solar's position, that they're not going to make the loan without this provision. MR. SATHY: THE COURT: MR. SATHY: That's correct, Your Honor. Is that correct? That is correct, Your Honor. And in many
of these agreements, there are things we like, other things we don't. We don't get to pick. But the reality, Your Honor, is
the party who's best positioned to make a priming loan is not a third party whose only interest is with respect to that loan, but the party that is actually in the capital structure, that
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- 38 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 is actually going to have the most at risk with respect to some kind of fire sale. So if we listen to Mr. Meyers, and we find some third party to lend seventeen million dollars, and we do that on a contested priming basis with Lehman, and you determine that that priming is appropriate, that party's only interest is going to be with respect to that seventeen million dollar loan. Lehman, on the other hand, has a vested interest in the next 220 million dollars of value that comes from that collateral. So the idea that they're going to somehow create
some kind of trigger, and then decide that they're going to default and then have a fire sale, only to hurt themselves -because that's what they'd be doing -- doesn't really ring to us, and it doesn't make sense. We offered to Mr. Meyers' client to make the loan. They told us they can't, structurally, whatever the reason is. We said if you want to come in and try, we'll talk to Lehman about you making the loan. And they've told us that they
couldn't do that, for whatever reason, CLO is not capable of doing that. But that offer was made, Your Honor. If the PIPs
Ultimately, the PIPs do need to get done.
don't get done, there's no question that the person who's going to be hurt is going to Mr. Meyers' client, because all parts of the Lehman facility need to get paid in full before any value can go up to his clients. So I would think this is a
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- 39 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Marriott. reasonable facility. The work needs to get done. The Marriott
agreement requires that the work get done within a period of time. We agree that some of the work is going to be for nonOf course. I think I mentioned that in our opening.
Three of them are going to be Marriott; several of them are non-Marriott. And there's a general cycle of renovation which
is going to enhance all of the hotels, all of the collateral, to the benefit of all the parties. THE COURT: MR. SATHY: THE COURT: All right. Thank you. All right. Does anyone else wish to be Thank you.
heard with respect to the Lehman DIP. MR. MEYERS: THE COURT: MR. MEYERS: Your Honor, may I briefly respond? Certainly. Your Honor, I think we can all agree that But
the debtor needs DIP financing for the floating-rate pool.
I think we can also all agree that the remedies in a DIP loan cannot be and are not boundless. They cannot write their own
ticket, and the answer is, but the debtor needs this. We agree the debtor needs it. But if the remedies, if
the rewards to the DIP lender are inappropriate and will violate the rights of other parties, the Court needs to consider that, and frankly, balance that harm to these other parties with the harm to the debtor if this loan is not made.
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- 40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 And as I said, Your Honor, it's seventeen million that they're offering up 200-plus million of security for. There's
hardly any danger that this loan won't be made, that Marriott will deflag these properties, that the debtors' estate will crumble, over the five and a half million of required Marriott PIP work or the other twelve million of PIP work they would like to do. Okay? And I think when you look at it in that
vein, it's obvious that this remedy is inappropriate. Mr. Sathy is fond of offering to me to make loans. He's fond of offering for my client to buy the properties. Okay? That's not -- the fact that my client won't doesn't mean It just means my client They're a special Okay? They're
the objection is inappropriate.
doesn't necessarily have the money to do it. servicer here; they're not Bank of America. acting in a certain capacity. have the ability to do that. THE COURT:
And in that capacity, they don't Thank you. Thank you. All right, I think
All right.
we're done on the Lehman DIP.
I'm prepared to start the next
matter now and then during a break, when I have time to go through my notes, I can give you a ruling on the Lehman DIP. Unless you want to do something else? MR. SATHY: break now -THE COURT: MR. SATHY: Sure. -- we just need to confer with some of the Judge, if it's possible to take a short
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- 41 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 parties, some of -THE COURT: Okay. All right. Then depending -- how
long of a break would you like? MR. SATHY: that would be great. THE COURT: do twenty minutes -MR. SATHY: THE COURT: Okay. -- and then if I'm in a position to give All right. You know what? Why don't we If we could get ten or fifteen minutes,
you a ruling after the twenty minutes, we'll do that and we can have that much out of the way. back at about 9:30. MR. MEYERS: MR. SATHY: THE COURT: MR. MEYERS: Your Honor? Thank you, Your Honor. Yes, Mr. Meyers? Your Honor, I apologize. We submitted a So why don't we say we come
declaration of Travis Shelhorse of TriMont. have that introduced into the record? THE COURT: MR. SATHY: THE COURT: All right. No. All right. It's in.
I would like to
Any objection?
(Declaration of Travis Shelhorse was hereby received in evidence as TriMont's Exhibit, as of this date.) THE COURT: after 9:30. All right. We'll come back on at shortly
Thank you.
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- 42 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Recess from 9:12 a.m. until 1:16 a.m.) THE COURT: So everything's all settled, right? My chambers staff is so
One housekeeping matter.
efficient, Mr. Marinuzzi, that I was to have reminded you about your retention application. And we apparently entered your
retention order during the break. MR. MARINUZZI: THE COURT: Thank you very much, Your Honor.
So there were no objections on file. No. Thank you.
MR. MARINUZZI: THE COURT:
So some of you may have seen that hit your I think also
BlackBerries, and we just wanted to let you know.
the presentment was up on your information order, and that got entered as well. MR. MARINUZZI: THE COURT: Thank you very much, Your Honor. Is there anything I need to
All right.
know before I start to talk? (No response) THE COURT: No. Okay. Why don't I give you my ruling
on the Lehman DIP, and then I think we're going to start the hearing on the plan support agreement. UNIDENTIFIED ATTORNEY: THE COURT: Okay. All right?
Very good.
Pending before the Court is the
debtors' motion seeking final approval, pursuant to Section 364 of the Bankruptcy Code, of authority to obtain post-petition loans in a principal amount not to exceed approximately
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- 43 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 seventeen and a half million dollars, from an affiliate of Lehman ALI Inc., which is designed to provide the liquidity necessary to fund PIPs and fire safety improvements on properties in the floating-rate collateral pool, and to pay certain fees and expenses. The fundamental issue before the Court is whether entry into the DIP financing arrangement reflects a reasonable exercise of the debtors' business judgment and otherwise comports with the applicable requirements of the Bankruptcy Code. As I noted earlier in the hearing, the proposed DIP
lender is not a debtor in the Lehman cases pending in this Court before Judge Peck. Preliminarily, there is no dispute on the record with respect to the requirements of Section 364(c), and I find that the debtor has satisfied the requirements of Section 364(c). The debtors underwent a substantial marketing effort to secure a DIP loan. Mr. Derrough's declaration indicates that
substantial arms'-length negotiations resulted in the terms of the Lehman DIP agreement. In addition, Mr. Derrough states
that no higher or better financing offers have materialized. Although the objector TriMont has argued that any number of parties would be willing to make the DIP loan contemplated by the Lehman DIP, there is no evidence in the record with respect to the availability of any such alternatives. By way of background, it is important to discuss the
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- 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 history of funding of PIPs for the floating-rate pool. stated in its papers that Apollo executed a capital improvements guarantee to substitute for reserves required to be paid to fund the, quote, "required capital improvements", end quote, which in this case would have been -- could have been referred to as PIPs. This guarantee was subsequently TriMont
released in exchange for Apollo's funding of reserve accounts dedicated to required capital improvements. Three days before the petition date, it is alleged, Lehman ALI applied the capital improvement fund to pay down the floating-rate debt. The debtors are now proposing -- TriMont
posits that the debtors are now proposing, in essence, that Lehman ALI lend that money back in the form of this DIP with all of the protections and rights that come with a DIP agreement in a case of this magnitude. Counsel for TriMont
confirmed on the record that these are observations as to the flow of funds, and do not constitute allegations that Lehman acted in violation of any applicable loan agreements or other controlling documents. TriMont strongly objects to the provisions in the Lehman DIP order that provide that the automatic stay is modified upon the occurrence of certain, quote, "termination events", end quote, or quote, "events of default", end quote, as set forth in Section 8.2(d) of the DIP credit agreement. Section 8.2 of the credit agreement, and paragraph 13 of the
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- 45 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 proposed order, state that the automatic stay does not apply after five business days' notice to the borrower and the bankruptcy court, of an event of default or termination event. There are a variety of events set forth in the underlying documents that might trigger this provision. The plan currently contemplated by the debtor proposes to extinguish the floating-rate mezzanine loan and would thus provide no value to the mezzanine -- to the interest in the floating-rate mezz borrower. Understandably, therefore,
TriMont is trying its best to preserve the value of the floating-rate collateral for the benefit of the Lehman mezzanine lenders. TriMont questions the debtors' business judgment in agreeing to waive the automatic stay, because it believes that Lehman has every incentive to provide the DIP loan in order to ensure that the PIPs on the floating-rate collateral are completed. TriMont also points the Court to its belief that
Lehman bootstrapped itself into the position of a DIP lender, and argues that it should not get extra protections that it would not have had as a pre-petition lender. The debtors have made some concessions to TriMont. For example, the debtors have agreed that TriMont will be a notice party, that the Court will be noticed too, in the event of any notice of an event of default or termination event. Based upon the declaration of Mr. Derrough and the
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- 46 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 record of this hearing, I find that the Lehman DIP was the result of a negotiation between sophisticated parties, and that the limitation on the automatic stay was a negotiated condition of the Lehman DIP facility, and that Lehman was not willing to provide the DIP facility without this provision. Not only is a
similar formulation of the provision in the Five Mile DIP at paragraph 15 of the order, which I approved yesterday on a largely consensual basis, but I note that this form of relief has been granted in many other cases as set forth, for example, in footnote 118 of the debtors' omnibus reply. TriMont cited
In re Colad Group Inc., 324 B.R. 208 (W.D.N.Y.), which declined to approve a similar provision. For the reasons stated, I
decline to follow the rationale of Colad Group in this case. Two other points, I think, need to be made. One --
and this is in direct response, in part, to the argument that there's now pending a motion for relief from the automatic stay. I have no intention of allowing the event of default
provisions in this DIP agreement and the stay relief provision to result in a game of gotcha that's going to allow Lehman to snatch its collateral. And I don't believe that Lehman will
attempt to do so, because I believe it has every incentive to act appropriately with respect to its collateral and in these cases generally. Secondly, I would note that the prospect of a priming fight for this DIP is unappetizing and unacceptable to say the
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- 47 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 you. least. Too much else is at risk and in flux in this case to
subject these cases to the additional uncertainties that that would entail. Accordingly, subject to the finalizing of an appropriate order and my review of it when provided, the Lehman ALI DIP is approved. (No response) THE COURT: All right. I'll wait to get a draft from Questions?
I have on my desk a draft of the Five Mile DIP, which I
have reviewed and is fine, but I think it's still open because you haven't finalized the stip. MR. BRIDWELL: That's correct, Your Honor. We
believe that should be able to get finalized during -THE COURT: All right. -- the day, perhaps at the lunch break.
MR. BRIDWELL: THE COURT:
So we will just make sure my crack
chambers' staff does not enter that until the stipulation -MR. BRIDWELL: THE COURT: Thank you, Your Honor.
-- is finalized. Thank you, Your Honor. Now, what about the notice on Has that been
MR. BRIDWELL: THE COURT:
All right.
the stip, do we have to separately notice that? put on the docket?
Because I did talk about that yesterday, I
think you have to notice that. MR. SATHY: Right. Your Honor, but that stip has been
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- 48 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 filed. THE COURT: MR. SATHY: So the stip has been filed. Yes. There may be some minor tweaks to what
MR. GOTTESMAN:
was filed late last night, Your Honor. THE COURT: All right. But not in a way that would be
MR. GOTTESMAN:
substantively prejudicial to any party in the case -THE COURT: All right. -- in our view.
MR. GOTTESMAN: THE COURT: MR. SATHY:
Okay, fair enough. And, Your Honor, we have worked through
the language with Marriott as well, who is comfortable with it. THE COURT: All right. So just let us know when
you're ready and we'll review the final provision and we'll have that all entered. MR. SATHY: THE COURT: Thank you, Your Honor. All right. Okay. The motion to assume a
plan support agreement. (Pause) MR. PARKINS: Your Honor, just some housekeeping.
First of all, if I may, we filed a motion for Mr. Phillip Bridwell last night to appear pro hac vice, he's an attorney with my firm, and he will appear today and handle the exhibit issues.
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- 49 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. PARKINS: All right. And the second issue I want to talk
about is whether the Court would be inclined to see if the parties and the Court can go through the exhibit objections that are there so we can move quickly. THE COURT: MR. PARKINS: can move -THE COURT: All right. If the debtors are okay with Sure. That will be fine. All right.
Just a suggestion to get it done, so we
that, I'm okay with that. Let me get set up here because I need to get rid of my Lehman DIP materials and get the PSA materials up here. (Pause) THE COURT: All right, folks, I'm going to ask you
again to try to move away from the air conditioners because it's really warm up here. All right. I have three binders of exhibits, so if
you want to go through them I'll all ears. (Pause) All right. identify yourself. have your names. MR. DONOVAN: Good morning, Your Honor. Daniel For the benefit of the recorder please We all know you but it helps for her to
Donovan, Kirkland & Ellis for the debtors. Judge, I'd actually disagree that we should go through
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- 50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 these. I can put them in buckets but I think it's going to
depend as I go. For example, our objection to Exhibit 5 and 6 is Mr. Greenspan's declaration. When they submit them I will raise my
objections, it's only to certain paragraphs, but I don't think we need to do that now. THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: cases not this case. THE COURT: Right. And interestingly enough, Okay. I can -- Exhibits 31 through 53 -Uh-huh. -- are plan support agreements from
apparently, I have been elevated from a participant in the Adelphia case to the presiding judge. MR. DONOVAN: THE COURT: MR. DONOVAN: Yes. Which I found very amusing. It probably would have helped during the
case, but -- from time to time. Well, Judge, obviously, just basic evidence rules, it's not relevant, it's hearsay. They can argue about this To the
case, I would suggest we focus on what's in this case.
extent a plan support agreement in Adelphia, which I'm sure you're quite familiar with, or Dana Corp., or these -- it's just not relevant, Judge. today. We're not trying to approve those
What we're trying to approve is the plan support
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- 51 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 up to 69. THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: Okay. So 64 through 68 I'd suggest we defer. Right. That's the Apollo guarantee? That's agreement before Your Honor. THE COURT: when we get to it. MR. DONOVAN: THE COURT: through 53. MR. DONOVAN: THE COURT: MR. DONOVAN: just defer that. Correct, Your Honor. Right. Exhibit 64 through 67, I'd suggest we Okay. All right. And that applies for 32 All right. I'm inclined to get to that
That's related to a Five Mile commitment
letter that Five Mile sent to Midland, it was never provided to the debtor. objection. use it. The first time we saw it, it was attached to an It may come in, the objection was depends how they
So I think we should just defer that. The document regarding to the required guarantee, I
believe that's the Apollo guarantee. THE COURT: MR. DONOVAN: Which number is that, Mr. Donovan? I'm sorry, Your Honor. I'm now moving
I believe that is, Your Honor.
subject to litigation in another court.
You heard yesterday
from the equity committee, maybe they'll tie it up but I'm not
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- 52 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 FTI. sure how it's relevant here yet at least. THE COURT: MR. DONOVAN: Okay. 72 is the same way. I believe that is a
document created by FTI. they submit it for.
So it depends how it's used and what
That may be a document we don't object to
as a demonstrative, but we were to substantive evidence. THE COURT: MR. DONOVAN: relevance. Okay, we'll see. Exhibit 73 is an Apollo 10-Q, it goes to
We'd have to see how they intend to use that. Uh-huh. Number 78, is the same way. Same. I believe that's a document created by
THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN:
I don't object to that as a demonstrative, but I don't
believe it should come into substantive evidence. And 85, the Shelhorse declaration. THE COURT: MR. DONOVAN: objection. THE COURT: MR. DONOVAN: buckets or -THE COURT: It looks like a lot, but, actually, I All right. Okay. It's the Apollo guarantee. Yeah. So it would be the same
So I think most of these either are in
think we can just handle them as they come. MR. DONOVAN: I believe that's correct, Your Honor.
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- 53 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 numerous. THE COURT: (Pause) MR. SATHY: Good morning, Your Honor. Anup Sathy from All right. Okay, Mr. Sathy.
Kirkland on behalf of the debtors. Your Honor, this is our motion to assume the plan support agreement. Your Honor, this agreement is a hard-
thought, highly negotiated agreement between the debtors and their second largest secured creditor. It's the predicate for And that's
what we hope will be an internal reorganization.
the goal of every Chapter 11 debtor, to have an internal reorganization. The benefits from the debtors' perspective are First, it allows for an equitization of over 200 Debt that's being held Your Honor, we think that
million dollars of secured debt. currently by a Chapter 11 debtor.
that's important for several reasons. First, everybody will agree that deleveraging is a critical component of the strategy that this debtor needs to embark on to reorganize. Everybody agrees on that.
Second, the debt that's being held by Lehman is the most likely to be equitized given the CMBS structures that abound with all of our other secured debt. So the need to
equitize is critical, and the likelihood of equitization will fall with the Lehman debt. By equitizing over 200 million dollars of debt we
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- 54 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 started down a path of an internal reorganization. here to tell you that it's completely done. We're not
What we're here to And part of the
tell you is that we've started down that path.
process of that Chapter 11 path is to try to build as much consensus as we can, but to deal with the people who are capable of fundamentally restructuring their debt on the timeframe that we have. As Your Honor knows, the Marriott forbearance agreements were extended over a period of time, and ended on July 19th. That was going to be our filing date, and it was
important for us to have at least the framework for a restructuring of our company when we entered into Chapter 11. Not every debtor comes into Chapter 11 with a fully baked deal, everybody on board, we're no different than virtually every other debtor in that respect, Your Honor. By equitizing a substantial amount of debt there are significant benefits to this enterprise. One, it frees up substantial cash flow that would otherwise go to pay debt service. That substantial cash flow
can be used to fund properties, to improve properties and to pay debt service to other creditors. Two, it provides substantial unencumbered assets. Lehman will be releasing its lien on twenty of the hotels. And
by doing so that gives the debtors much more flexibility with respect to additional debt they may incur, or the ability to
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- 55 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 sell assets in a strategic way. And, three, it allows for the CMBS pools, the remaining pools, to take debt. Our experience, and I believe
the testimony that you'll hear today supports it, is that the CMBS debt holders and the REMICs, themselves, prefer or are required to take debt. It's not exactly clear to us whether But
they're legally required, or that's simply what they want. it's been made clear to us, and the testimony will confirm
that, that debt is their preferred currency, in terms of -- in terms of returning to them what would be provided in a Chapter 11 plan. And then it creates -- of course, it creates an Reducing this debt will allow for an equity
equity cushion.
cushion for this Chapter 11 debtor. Your Honor, the purpose of the PSA, again, is to take the first step in this reorganization. You're going to hear a
lot today about our fiduciary duties, and you're going to hear a lot about the likelihood of this being some kind of insider transaction or subject to shopping, but this is the first step in our restructuring. And what it's intended to do is to start
that process with an entity that has agreed to become part of our restructuring by equitizing a substantial amount of debt. Now this benefit to the estate and these benefits that come from this, did not come for free. And while we had the
ability to negotiate with other parties, and we still do, what was clear to us was that Lehman was not willing to stand and
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- 56 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 wait forever while this plan was prosecuted. And so in the course of our negotiations with Lehman we worked through a number of different concessions, frankly, that the debtors had to give. We didn't like all of them and,
ultimately, we were somewhat limited in what we could give, given that there are not unencumbered assets. There's no
breakup fee, there's no -- there's no overbids, no structure like that. But what we're able to do is give them milestones.
Milestones that say that if we can -- if we confirm a plan within a specific period of time then they're supporting for that period of time. So what Lehman has agreed to do is agree to support our process, support our plan process and allow for the debtors to try to build more consensus through this first eight months of the case. Ultimately, we suggested that there be a longer period of time, they suggested that there be a shorter period of time. But, ultimately, they have agreed at this point to wait eight months to allow for this process to be undertaken. Now, during these first eight months of the case, Lehman, as you've heard from Mr. Sage, has a right to terminate cash collateral if certain milestones and certain provisions are not satisfied during the first eight months of the case. That's their only remedy under this PSA during the first eight months of the case.
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- 57 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 months. We're going to talk a little bit about more later about these additional remedies that they have if we go past eight months. But during the first eight months of the case
that's what they can do. The PSA was negotiated over a period of several There were probably twenty versions of that document There were several provisions that And
that went back and forth. we liked.
There were several provisions we didn't like.
ultimately there were several times when we were making decisions about whether to pursue the discussions with Lehman or not. And, in particular, as we started discussing some of
the -- what we're going to, I think, call the super remedies, which are the remedies that are after 240, whether or not this deal actually made sense for the debtors. At the end, Your Honor, we did conclude in our business judgment, that this transaction was favorable to the debtors' estates, and that it created that framework, and that it created, at least, the roadmap for an internal reorganization. process. It provides the platform for a continual
And we understand that other creditors are not And we're hopeful that they will
supporting this right now.
either join us or at least engage in the -- for us -- with us to have the ability to build more consensus. Your Honor, with respect to the objections, and there were a lot of objections, and we understand that. Frankly,
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- 58 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 everybody objected, it sounds like, other than Lehman. But I think when you boil down the objections they really come into basically two types of objections from our perspective. And, ultimately, I think you have to always go
back to the agreement; the PSA, the we're asking to assume as guidance. (Pause) THE COURT: MR. SATHY: All right, apologies. That's okay.
To go back to the agreement, for guidance as to what was intended by the parties, not what was written by objectors. Because, ultimately, Your Honor, the words on the page are what matters for purposes of what we're asking the Court to approve. And the intent of the parties; Lehman and the debtors, is what's important. will see -THE COURT: OPERATOR: Operator? Yes, ma'am, this is the CourtCall operator And when you start down that process you
calling to rejoin Judge Shelley Chapman court. THE COURT: This is Judge Chapman. Okay. We have some ringing on the
THE OPERATOR: THE COURT:
All right.
line, and I don't know if somebody's phone is not properly set. But we need to not have anymore interference. THE OPERATOR: Okay, thank you, Judge.
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- 59 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: (Pause) THE COURT: on listen only. All right, let's keep going. MR. SATHY: Your Honor, the objections from our All right. Operator, please put everybody Thank you.
perspective are two basic issues. The first that somehow we are impeded from pursuing other transactions. I think I've heard -- I saw the words Whatever
illusory, I saw impeded, I saw we're handcuffed.
adjective was used, and that's a theme through all the objections, and that it really focuses on our fiduciary out and Section 25. And we're going to spend a lot of time on Section That's a very important provision.
25 today, we have to.
Ultimately, Your Honor, though, as we wrote in our brief, Section 25(a) is the fiduciary out. And interestingly
enough, not a single objector cited 25(a) as a fiduciary out. THE COURT: Well, you're each -- you're telling me
about 25(a), they're telling me that keep reading and look at 25(c). MR. SATHY: THE COURT: MR. SATHY: THE COURT: Absolutely. Which we have to do. Which we will. And I presume you're going to explain to
me why 25(c) doesn't eviscerate 25(a).
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- 60 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SATHY: THE COURT: MR. SATHY: Absolutely. All right. Your Honor, 25(a) is our fiduciary out.
It's unqualified, it allows us to talk to anyone anytime about anything, period. That's the fiduciary out. That's what's
defined as the fiduciary out in 25(a). In the course of our discussions with Lehman they've became concerned that the fiduciary out would be used to change a milestone. They wanted to have the milestones in place. And
so they said you can't just use this fiduciary out to just come into court and say we don't like this deal anymore we just want to change it in our fiduciary duty. MR. BIENENSTOCK: THE COURT: Mr. Bienenstock. MR. BIENENSTOCK: Martin Bienenstock, Dewey LeBoeuf Objection, Your Honor.
Yes, Mr. -- would you identify yourself,
for the ad hoc preferred shareholders. Your Honor, he's supposed to be referring, at most, to admissible evidence. We have a document. If there's a --
something that's unclear, there may be people who can testify as to what it should mean. But for right now, for him to start
telling us what various people meant about provisions Your Honor has not ruled are ambiguous is wrong. THE COURT: All right. But Mr. Bienenstock, he's
making an opening argument.
He's giving me a preview, nothing
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- 61 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 he says is evidence. He's allowed to set the table. And then So
I have to wait to see if he delivers with what he's saying. I'm -- I hear you but I'm going to allow him to continue. MR. BIENENSTOCK:
I'm comforted this is a bench trial.
I just feel that the more he goes into things like that there's a lot of other people who will be making openings can claiming -THE COURT: Look, I'm going to give you all pretty
wide berth here because I think more is better than less in this instance. So let's just try to move forward. And I agree with your points Thank you. And he's
got to make his proof.
conceptually, but he's allowed to keep going. Okay. MR. BIENENSTOCK: MR. SATHY: Okay.
Your Honor, so 25(c) is, in essence, a Because, again, what Lehman That we can -- that
carve-out to the 25(a) provision.
had requested was very clear milestones.
the debtors would not be able to just come to Court and ask Your Honor to change a milestone because we just feel like it in our fiduciary duties that we would have more -- that we would want more time to explore whatever transaction we want. 25(a) would have otherwise let us do that. The first sentence of 25 -- the first provisions of 25(c) say that we are not allowed to use the fiduciary out to change a milestone. Everything after that qualifies that
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- 62 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 restriction. It's a carve-out to the carve-out. So if we meet
the standard below from provided, however, going forward then we can come in and ask you to change a milestone. We can still
come in -- we can still -- in other words move the 240-day remedy. That's the intention of the parties; that was what was
negotiated. THE COURT: But to trigger the carve-out you have to
have the firm alternative transaction. MR. SATHY: THE COURT: That's correct. And the firm alternative transaction
requires that Lehman be treated at least as well. MR. SATHY: THE COURT: MR. SATHY: the carve-out. That's correct. That's the plan. That's correct. That's the carve-out to That's --
In other words, for us to come back and just
ask you to change a milestone for no reason, they want to make sure that there's at least some level of protection for them, and that's the protection that they have. It is -- if we
decide that there is a plan that is worse for Lehman and better for everybody else, we can pursue that plan under 25(a), we can do that plan. We just need to do it by 240 days. That's the
structure of the way the carve-out works. In other words, we don't have a restriction on pursing an alternative plan, if we believe that that's appropriate. THE COURT: But in that hypothetical, if you were to
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- 63 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 do that under 25(a) -MR. SATHY: THE COURT: MR. SATHY: Uh-huh. -- then there's a termination event. If we're pursuing it in -- if we're
pursing an alternative transaction consistent with our fiduciary duty, not until 240 days will there be a termination right unless we violate one of the other milestones. don't file a disclosure statement or seek a disclosure statement hearing on 100 -- by 120 days then, yes, there will be a termination right. right. So, ultimately, if we start pursuing another transaction under Section 6 under the milestones 6(a)(5) that if the Court doesn't approve a disclosure statement, because we are pursuing another transaction, then they have the right to terminate. And they would terminate, and the remedy would be So Lehman would have that termination So if we
to then come in and ask Your Honor to terminate use of cash collateral or to ask for additional adequate protection in that context. So the discussion around 25(c), Your Honor, cannot be viewed outside the context of 25(a). And this is the intent of
the parties, this is what you'll hear today from Mr. Beilinson in terms of our ability to pursue other transactions. And we
believe -- and we have confirmed with Lehman that that's their understanding as well. That this is the way that the agreement
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- 64 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 should work. Your Honor, the second, I think, objection as a group, so to speak, is that somehow this is an insider transaction and that Apollo, having the right to participate in this plan somehow, is a new value plan of some sort. important to look at what the document says. If you can go to Section 6, Section 6 is the termination events under this agreement. Section 6(b) provides And, again, it's
that Lehman has not executed a definitive agreement with the sale of fifty percent of the shares for a purchase price of 107.5 million. That's the condition. This is Lehman's
condition, to terminate. terminate.
If they don't find a partner they can
If they decide to go with somebody else; Apollo,
somebody else, two parties, they can term -- and if they don't find those parties they can terminate. If they decide to take
this entire reorganization equity by themselves, and decide to waive this condition, that's fine, too, we would go forward with that transaction. agreement. And so the identity of the party from our perspective, from the contract's perspective is irrelevant. And the fact This is Lehman's right to terminate the
that there even is somebody there is not relevant as long as Lehman would be prepared to take 100 percent of the equity. And so, Your Honor, from our perspective, this was effectively like a risk mitigation strategy on Lehman's
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- 65 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 perspective. They wanted to be able to take some of their
exposure off the table and, yes, Apollo is part of that transaction, absolutely. And what you'll hear today is that from the debtors' perspectives it did make some sense to bring Apollo to that group because they knew the assets, they were likely to close, and we didn't want Lehman to be able to terminate this agreement because they were not able to find a partner. And so, Your Honor, what you'll hear today is that there are substantial benefits to the debtors' estates in pursuing this agreement, that it allows for us to consider alternatives if we believe they are corporate, purposes are for our fiduciary duties and that this is not an insider transaction and that the identity of the purchaser is not relevant to the debtors only that there be someone or that Lehman wave that condition. THE COURT: MR. PARKINS: Thank you.
Thank you. Good morning, Your Honor, my name is
Lenard Parkins from Haynes and Boone, and I represent Midland. THE COURT: MR. PARKINS: Hello, Mr. Parkins. First of all, I would like to say that
having heard the opening statement from the debtors that the debtors, neither the debtors nor Lehman, parties to the PSA, have filed a pleading saying that their document is unambiguous. Or ambiguous and therefore that gives right to
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- 66 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 bring parol evidence in with respect to anything outside the document. Now we'll raise that when they start raising that.
But I point that I out that I think they haven't raised -their own documents are ambiguous and therefore the entitlement to bring parol evidence in, it doesn't exist. It is amazing to hear having the discovery in this case that the name Apollo is so infrequently used with respect to this transaction by the debtors. denied. This motion should be
It's -- in thinking about what I was going to say
earlier this morning it was -- it sort of came to light that if Lehman wanted to go forward with this transaction quickly the debtor should've filed this plan at the beginning of the case and we should be having the disclosure statement hearing around now. If that was the issue that expedition be done rather than
seeking an intermediate step of getting the Court's imprimatur on what the plan is going to be and the direction the Court -the debtor wants to go with Lehman down the road. wanted to proceed they should've filed their plan. If they The reason
they're doing this remains quite suspect but it seems to me clearly that they want Your Honor's imprimatur to a transaction which does unanimously, except for Lehman in this case we think, violate certain tenants of law which prescribe this thing can't go forward. As counsel for the debtor said, no creditor constituency and no preferred shareholder constituency has --
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- 67 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 supports this transaction. The entire creditor body says no.
And with respect to the transaction that's a billion to the creditors and Mr. Bienenstock's constituency and the mezz lenders of some 200 million dollars say no. is fraught with problems and they say no. And what you heard this morning is this is in fact a road map to where the debtors want to go. They've tried to This transaction
structure this deal from the beginning and we have the evidence, we will put it on. at the table. From the beginning Apollo's been
Apollo has been at the table as the equity owner
to be of at least fifty percent, ending up at fifty percent and earlier on a greater percentage than fifty percent of the equity in this company. They were starting out to be a backstop party in documents prepared as this transaction morphed. It became a
backstop party to a party who was going to sign the PSA, no backstop. To a party who was going to sign a separate To later in July when
agreement with Lehman to buy the stock.
Apollo's counsel said we want to be again party to the PSA agreement, in and out, in and out deciding how to try to structure this to try best to circumvent LaSalle and the absolute priority rule and the new-value exception and they tried very hard. We have evidence that there was a meeting with Mr. Beilinson said to Lehman, here are our risks, we're going to go
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- 68 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 through this, here are our risks. new-value plan is a risk. get around LaSalle. New-value plan, sub-rows and
They were strategizing how to try to
And what they're asking this Court to do
is make LaSalle a footnote in Collier as to what the law was because I can indirectly do what LaSalle says I can't. that's not right, that's not right. And
And LaSalle shouldn't end
up as a footnote to the way new-value plans work. The fact that they've structured this as a separate deal, Your Honor will hear in the evidence, the transaction morphed. They were going to be part of the PSA. This morphed
to a separate transaction.
They morphed to this separate
transaction yet with the commitment from Lehman debtor involved to say, well we won't sell to anybody else. deal. Apollo's in this
It's been in the deal from the beginning, it's in the
deal now, it's always been in the deal. There's been -- there's e-mail traffic and discussions right up to the day that the case was filed where the debtor is asked that Lehman not terminate Apollo. this deal. They wanted Apollo in
Now, there's Apollo how does it relate to the
debtor when you have to sort of put the pieces together here. Apollo is the ultimate owner, as we know, of this company. Apollo controls the board of Innkeepers. Apollo at the board Mr. Beilinson
level, appointed Mr. Beilinson as a director. then became CRO of the company. employment contract.
Mr. Beilinson had an
In April this year, Mr. Beilinson got a
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- 69 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 million dollar extension bonus from the company owned by Apollo, controlled by Apollo. Twenty, fifteen days later there's meetings where Apollo is invited to come along with Lehman to sort of introduce this concept. Twenty-five days later there's another
meeting where the idea of the plan that is now embodied in this PSA is actually set out to Lehman on April 22nd. to go through that exactly in the evidence. We're going
And this document
morphed into the PSA and terms sheets and went and back amongst the parties. There was no doubt that Apollo, because of its
control, its relationship, its -- its position is here on account of the fact -- and that's why it's here. It's on
account of its position, all those things we talked about. It is not a stranger to the deal and the fact that Apollo is in the deal is important. the debtor says. It is not unimportant as
If this was a stranger we'd be having a much
different argument today but it is not a stranger, it is the owner of this company that controls this company. They can now
sit back because Lehman said I'm not going to bring anybody else in and watch it happen. THE COURT: MR. PARKINS: THE COURT: objecting, correct? MR. PARKINS: We would be objecting for different Let me ask you a question. Yes. If it was a stranger you would still be
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- 70 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 reasons but this object -- this rises to the level of they're asking you to approve something which is on its face an insider deal. On its face it's violating LaSalle and they want you to They say this isn't a plan hearing but
bless that today.
they're talking about what the plan's going to do. THE COURT: MR. PARKINS: Well, it's not a plan hearing. I know it's not a hearing but they
talked about what this plan's going to do, how it's going to treat creditors to the first step in the process, why are they asking for your blessing? on with it. Let them filed the plan, let's get
But they want your blessing because it gives
rights to people; it sets the course of this case to a large extent. Now, I want to go onto some other points. I know we
need to get onto the evidence but I want to talk about a couple other points with respect to the fiduciary out which we're going to hear today. This fiduciary out, as Your Honor pointed out, if there are negotiations between the debtor and anybody else with respect to a plan, that is a termination event. 6(r), it is a termination event. unless waived by Lehman. If you look at
Cash collateral terminates
If this case goes on for eight months
Your Honor is asked to bless a transaction where in eight months they get their property back. I don't know whether a Now I
plan will supersede an order if you enter an order.
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- 71 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 days? MR. PARKINS: specific performance. work. Right, right. They can come in and seek It doesn't haven't thought about that, I've been thinking about what it does but if you enter an order now that approves this deal and it takes nine months to get a plan done, some other plan, does Lehman get its property back? I don't know. It's a problem.
The issue also, Your Honor, if you look at the issue of the fiduciary out the issue of specific performance as the exclusive remedy, what survives in this transaction. If you go
through the document and read its words without interpretation because you have to start with a document no one's plead ambiguity, it doesn't work. They just reserved the rights for
a specific performance even if there's a termination event. That means Lehman can come in and seek specific performance if the document is terminated. They get their property if the
document is terminated and still get specific performance. They can compel -THE COURT: You're talking about prior to the 240
This document doesn't work.
And the fundamental question is why is the debtor
pushing this document, giving so much leverage to Lehman, letting its owner, Apollo, step into fifty percent of the equity in this case and the answer is it's because that's what Apollo wants to have happen. Now if this transaction had been a transaction where
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- 72 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 us. Lehman converted all its debt to equity, nothing wrong with that, Lehman decided to convert all its debt to equity, there's nothing wrong with that and if Apollo had some in, in a classic situation and says as part of the plan I'm going to buy fifty percent, contribute 107.5 million dollars and it goes to Lehman we would be here saying that's a new-value claim. go to market. market. That has to
That's a problem here that this has not gone to
What they've done is put it on the side and say I can
do it by the side, around my back, magic behind the door transaction, it's not the same. same, the result is the same. It is the same. It is the
And because it is the same we The rest we'll
suggest you cannot approve this transaction. leave to the evidence, Your Honor. THE COURT: All right. Thank you.
Mr. Gottesman? MR. GOTTESMAN: Thank you, Your Honor.
Your Honor, I know we have a very long day ahead of I'll be very, very brief. Lawrence Gottesman, Bryan Cave,
on behalf of two securities agent trusts specially serviced by LNR Partners. Very briefly, the notion that milestones are simply milestones is just disingenuous. The milestone is for That something is
something very, very specific to happen.
this deal -- this deal which has created a consensus in -- of opposition. That's reflected very plainly in paragraph 6(j)
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- 73 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. THE COURT: All right. Thank you, Mr. Gottesman. and (k) of the plan support agreement which provide that if another plan, essentially, is -- goes forward, that's a termination event. 6(k) provides that if this Court does
anything inconsistent with this deal, and that strikes me as extraordinarily broad language, that's a termination event. So the notion that there's a fiduciary out and the notion that the debtor and its professionals can do what you would expect to have in a case of this size and with this level of representation and that all the parties would try and reach a consensual litigation rather than litigation with a burn rate that I can't even calculate -- we'd have to call Mr. Greenspan back to do that -- just staggering -- is simply illusory. I'll leave the rest for the evidence. Thank you, Your
Mr. Friedman? MR. BASTA: THE COURT: MR. BASTA: Your Honor? Yes? Mr. Friedman is representing Five Mile and
we would like to reiterate our standing objection. THE COURT: MR. BASTA: All right. Five Mile is a certificate holder and has
no direct privity to the debtors and therefore we don't believe that Five Mile has standing in this matter. THE COURT: But they're also your DIP lender now, Mr.
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- 74 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Basta. MR. BASTA: Okay, so if -- Your Honor, if they want to
object as a DIP lender, I don't understand -- the DIP that they just got approved makes them an administrative claim; they're going to get paid out in the case. If Mr. Friedman's argument
is in his capacity that he thinks the plan support agreement in some manner deprives his ability to get repaid on the DIP, go for it. But if his argument is somehow related to the plan not
being in the best interest of the certificate holders of Midland, then he should speak to Midland and have Midland make those arguments. THE COURT: All right. Well, let me hear what he's
going to say and which hat he's wearing and I stated at an early hearing at which Mr. Friedman was not present that I believe that because of the volume of objections that have been filed there was nothing unique that was stated by Five Mile, or actually this pertains to Appaloosa as well, such that I believe that I would be required to reach the standing issue today. So that being said, Mr. Friedman, tell me what you --
tell me which hat you're wearing and then we can go from there. MR. FRIEDMAN: Your Honor, we're wearing all of our I don't As
hats but I think the DIP lender hat is dispositive.
think we need to debate the certificate holder issue today. a DIP lender, we have a contractual right to be repaid within one year.
That's -- we don't think, if the estate pursues the
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- 75 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 path it's on right now, that our -- we think there will be significant risk to our contractual rights. Honor just approved. I mean, this is a one-year DIP and they are thrusting this case absolutely in the wrong direction that will cause it, without a doubt, to be embroiled in litigation. And we think Not the The rights Your
our contractual rights will be at risk on the DIP.
right to get repaid; we think that -- we're money good at some point, even if the estates are liquidated. to get paid at maturity. But we have a right
And the way this case is being run,
particularly in the context of the PSA, we think that our contractual rights are put at risk by reason of this motion. THE COURT: what it's worth. All right. I'm going to take that for
I'm not going to reach the issue of your
standing if you were stating that you were wearing your other hat. If I gave Mr. Basta the opportunity, he would probably
try to convince me that you're not really wearing your DIP lender hat. But I don't think we have to do that with a packed
courtroom when we have a lot of other stuff to get to, so. MR. FRIEDMAN: THE COURT: Thank you.
All right? Okay. Your Honor -- and I won't take
MR. FRIEDMAN: up too much time.
What I really want to say is that I think --
there are many lawyers in this room who have represented large debtors; most of the people sitting on both sides of the table.
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- 76 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I know Your Honor has represented large debtors; I, on occasion, I'm sure less that most people, have even done that. I think all of us know in our hearts this is wrong. You don't start a case seeking court approval of an insider, unvetted, un-market-tested transaction. You just don't. It
puts the case on the wrong footing and it unnecessarily elevates the litigation that's already been brought, and will undoubtedly continue to be brought, if we're confronted with this transaction. This is an insider transaction. It is an integrated
transaction whereby fifty percent of the equity is going to be purchased by the controlling shareholder. It has not been vetted with anyone. It has no support.
In fact, the evidence is
that when the transaction was presented to Midland, which is the largest creditor in the estate, Apollo's involvement was concealed at that point. It is a transaction which we became
aware of the day before the Chapter 11 filing by a third party; not by the debtor. And I think the debtors make some noise Well,
about the fact that we went ahead with the DIP anyway.
we went ahead with the DIP anyway having found out twenty-four hours earlier that Apollo was seeking to purchase the equity, because it's a protective DIP because the properties in the Midland pool require this financing for the PIPs whether or not management has been corrupted by this process. It was in no
way a vote of confidence in the process that we learned about
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- 77 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the day before. But most importantly for today -- because you're right, Your Honor, this is not a plan confirmation hearing; it's not about the plan. The issues with the plan are many and What's it about is an
obvious, but this is not about the plan.
insider transaction that has not been market-tested, something which the debtors freely concede. need to know about today. The debtors have the burden of proof to show Your Honor not that this isn't the valid exercise of their business judgment; the business judgment test doesn't work on insider transactions. What the debtors have to establish today is that And all is And that's all we really
they have validly exercised their fiduciary duties.
clear that when you're seeking an insider transaction which is subject to heightened scrutiny you need to show that the price of the transaction is fair; you need to show that the process is fair. Well, there's no evidence at all about the validity, if you will, of the price. There's no evidence that the
transaction -- forgetting about Apollo for a minute -- there's no evidence that Lehman is getting the right amount of equity for the amount of debt that they're giving up. THE COURT: But, Mr. Friedman, do you think that they
pass -- it passes under a business judgment standard? MR. FRIEDMAN: No.
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- 78 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 scrutiny. THE COURT: All right. I mean, you're -- the way that
you phrased that indicated -- seemed to suggest that in order for me to disapprove it, I need to apply a -MR. FRIEDMAN: THE COURT: No, I think -- no.
-- entire fairness or a heightened
I just wanted to -MR. FRIEDMAN: No. I don't think you have to do that.
I do think, though, that business judgment just doesn't apply here. I do think entire fairness does apply. And we don't
have evidence of a fair price. no evidence of a fair process.
And, most importantly, we have
As Your Honor knows, Five Mile is prepared to pay more right now. We are -- we have presented Midland a irrevocable
commitment to buy this estate for more money than the transaction represents. But that's not even -- that doesn't
even matter because we're not saying that our deal is the best deal. We're just saying it's better than theirs. There could
be better deals out there and we're prepared to be outbid; we're prepared to go through a fair process. But they're not. And I,
They're not prepared to go through any process at all. frankly, don't understand it.
In the debtors' papers, they say that the PSA, and I'm quoting, is the product of "extensive two-party negotiations". And that's very disturbing because that's just not true. That's not what the evidence shows.
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- 79 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Apollo was at the table from day one. always part of these discussions. Apollo was
So much so, Your Honor, that
you will learn that the day before the bankruptcy filing, the day after the PSA was executed, Mr. Beilinson writes an e-mail to Mr. Lascher, in response to a request from Mr. Lascher -who is from Lehman -- in response to a request that the PSA be amended to provide Lehman with the right to terminate cash collateral in the event that the debtors' brief they're requiring, he says to Mr. Lascher, "I won't be amending our deal without your consent. I'm trusting that you won't Please do the same
terminate AIC in first forty-five days.
with me on this issue for this short period of time." Now, Your Honor, that tells you all you need to know about Mr. Beilinson's loyalties. He is asking Lehman to assure There's no
him, not in any document that's before the Court.
such document before the Court that even addresses this issue. But he's asking Lehman to assure him in a document -- that I assume he didn't ever expect would become public -- but to assure him that Lehman will not treat Apollo poorly. Now,
they've been saying all along, well, we don't -- we never cared about Apollo. was. We were indifferent to whoever the purchaser What they said in
That's what they said in their papers.
their e-mails, privately, not expecting to be before this Court, was, "Trust me. purchaser. Please don't terminate Apollo as the And that's all
I'm trusting you not to do that."
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- 80 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 morning. THE COURT: Good morning. Martin Bienenstock of Dewey & we really need to know, Your Honor, about the debtors' loyalties. Your Honor, I'll just close by referring Your Honor to a case that I know Your Honor is familiar with, which is the Bidermann case. It was a case I litigated several years ago. And the late Judge Brozman, I
I'm very proud of the decision.
think, said it very well when she referred to a case decided by the Second Circuit, by Judge Friendly, in which he said not only do bankruptcy cases have to be fair, but they have to appear fair. And this PSA, apart from not being fair, has The debtors don't need People can
absolutely no appearance of fairness. it.
They can file whatever plan they want.
respond.
Your Honor should not be in the business of putting Thank
the Court's imprimatur on a transaction of this nature. you. THE COURT: Bienenstock? MR. BIENENSTOCK: Thank you, Your Honor. Good All right. Thank you, Mr. Friedman.
Mr.
MR. BIENENSTOCK:
LeBoeuf, for the ad hoc preferred shareholders committee. Your Honor, we cited the Bidermann in our brief for the very proposition that was just mentioned but in a few moments, I'm going to also go through why the facts are
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- 81 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 particularly applicable here because this case is more egregious than the situation of Bidermann. But my essential
opening message to Your Honor is while this case is incredibly important both to this case and the parties in interest, principally mine, who, in the plan term sheet attached to the plan support agreement, are wiped out, zero. So I get very
little comfort -- my clients get very little comfort that this is not a confirmation. The Court is being asked to approve an
agreement, attached to which is a plan term sheet that the debtor says it's going forward with, that wipes us out. reasons -- so it's important to us as pecuniary matter. We think it's also important to the bankruptcy court system and the integrity of the process for all of the importance of this decision today, we think it's equally simple. And one of the reasons we think this is so simple is The
that all roads, whatever perspective Your Honor might take on this, lead to denial. And frankly on the papers, we think Your
Honor could deny it although I don't think that's a likely outcome at the moment but I'm going to explain why. Let's just look at the policy for the minute. will keep this brief. The legislative history to the And I
Bankruptcy Code first promotes the policy of reorganization, the continuation of jobs, the business. No one in this entire
case has submitted a pleading saying they want to shut down any hotel or board it up or demolish it. The jobs, the running of
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- 82 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the hotels, that's not an issue; that's good news. The policy
is the rehabilitation of the hotels is going to be carried out. People have different ways of doing it but no one's wiping out these buildings or the jobs. The second policy, Your Honor, is found on page 21, footnote 37 of the debtors' reply brief -- omnibus reply brief. And they cite the Second Circuit decision in Smart World Technology (sic) and they quote from it, "As fiduciary of the estate, a Chapter 11 debtor-in-possession bears burden of maximizing value of estate." Okay, what do have here? As Your
Honor will hear if the evidence did go forward but it's already in the deposition transcript of Mr. Beilinson, while the debtor retained Moelis as an investment banker, Moelis did not shop this to any outside party. March, has not shopped. What's the third public policy that Congress points our attention to in the legislative history? preserve investments of shareholders. It's to try to It's been around since April, maybe
That's what makes the
U.S. system different from the rest of the world, for the most part, where other foreign systems liquidate, we try to rehabilitate and let the shareholder stay in, not only for this company, but because that will induce people in the United States who invest in new companies. attached to the PSA wipes us out. Well here, the plan So, the reason I say all
roads -- this is the first road -- lead to denial is everyone,
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- 83 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 no matter what happens here, the hotels are going to operate. But the second two policies, maximize profit and try to preserve shareholders, Your Honor is being asked to approve an agreement to wipe us out and not to maximize, not to shop. would Your Honor grant extraordinary relief to violate two policies -- public policies that Congress says underlies Chapter 11? Okay. That's one road and it's simple. Why
Second road, Judge Brozman's decision is in this district and the Bidermann case -- sorry, Your Honor -- the Bidermann case takes on all of the debtors' reply arguments, Your Honor. They say there's a fiduciary out. Well, I point
Your Honor first, to Section 4(a)(ii) on page 5 of the agreement. "Prior to the termination date, no party will
directly or indirectly seek, solicit, negotiate, vote for, consent to, support or participate in the formulation of any plan of reorganization or other restructuring other than the plan." That's pretty plain English. If Your Honor signs the
order today, they will not, directly or indirectly, do anything to formulate a different plan. THE COURT: But they're going to point me to 25(a). They're going to --
MR. BIENENSTOCK: THE COURT:
That's what they're going to do. They're --
MR. FRIEDMAN: THE COURT:
And they have. They're going to point you to 25(a) so
MR. FRIEDMAN:
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- 84 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 before I leave 4(a)(ii), let me just say is it there for no reason? I mean, is it, like, it shouldn't be there because it I don't think so, Your Honor, because
doesn't mean anything?
25 -- as I think Your Honor pointed out earlier, 25 first requires a firm, alternative transaction. And the
transaction -- Your Honor might have misstated it a little, saying it has to treat Lehman no worse. It has to -- the
agreement in 25(c) says we'll provide Lehman with a higher and better recovery than the recovery proposed under the plan, which is attached to the term sheet. So, Lehman is now getting everything. You write down
everyone else's debt to one-to-one debt to value on the other properties. You take away Lehman's mortgage on its twenty
properties out of seventy-two but you give it a hundred percent. Now, the day after you give it to them, they can give They can do But the
themselves back the mortgage if they want.
whatever they want; they own a hundred percent.
predicament that the debtor has put us into here is that if you're giving them everything there is, how do you give something higher and better? There's no such thing. That's
why we called it a phony, other people called it a scam but it doesn't work. Also, they say that if something does happen and they are somehow exercising a fiduciary out, that that's fine. They
can go forward and get it approved, especially if it's within
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- 85 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the 240 days. It's not so fine, Your Honor, because if Your
Honor will look at Section 8(a) on page 11, "upon the occurrence of any termination event" -- and sorry to do this but a termination event includes -THE COURT: I got them. You don't have to read them. The termination event So if Your
MR. BIENENSTOCK:
Yeah, okay.
includes any order inconsistent with the plan.
Honor terminates exclusivity to let another plan go forward, that's inconsistent. THE COURT: Right. So if Your Honor would do something
MR. BIENENSTOCK:
like that or similar things, Lehman -- "Lehman may terminate this agreement and the use of its cash collateral." say the consensual use; it says the use. something different up here. It doesn't
Now, counsel said
It said they could come and apply Well, there are So does
to this Court for permission to use it.
injunctions in here against asking to change this.
Your Honor really want to issue an injunction and then -- and lets someone violating it to change it? This is on the face of the document. congratulate them. simple to follow. So first of all, this is sudden death. You commit a I don't think so.
It's plain -- I It's really
They wrote it very clearly.
termination event, there's no cash to operate twenty hotels. And sure, that's a -- somewhat of a suicide play perhaps but
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- 86 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Lehman would like to have that leverage on the -- well, if I pursue that, I'll say too much about what I'll use on cross so I'll move on. Judge Brozman was confronted with a very similar And she basically made
so-called fiduciary out clause. mincemeat of it.
Her decision is published at 203 B.R. 547 and
she writes, "There is some window dressing" -- this is at page 552. "There is some window dressing, making it look like the
sale will be tested for the so-called window shop provision allows the debtors to fulfill their fiduciary obligations by permitting due diligence to occur by others with offers exceeding the claim value of the A&M Vest Star offer. However,
the offers have to be made first, without benefit of any dialogue with the debtors or Mr. Marcel (ph.), a state of affairs which is not optimally calculated to generate the best price obtainable. This permission for due diligence by others
is small solace indeed, particularly since it is Mr. Marcel, who with his professional expertise, undoubtedly will be analyzing any competing offers should the unlikely occur and an offer be made." Well, let's compare. They also have the no-shop, no They have Mr. Beilinson
solicit, no discuss, no formulate.
who's -- he can't participate but if somehow, something materializes from the outside, without due diligence, he gets to decide if it's better. And he's already said, as Your Honor Your
will see, that he thinks what they have is the best.
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- 87 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 guilt. hat. MR. MEYERS: than that. THE COURT: Not wearing that hat. I figured it might take a little more Honor, this is why I said earlier a hearing -- a trial isn't necessary here. The agreement is in black and white. Unless
this Court is prepared to overrule Judge Brozman in her, I think, monumental effort and success in upholding the integrity of the bankruptcy system in this district and the country, it's very hard to imagine how the Court could come to any conclusion other than it cannot approve this agreement. Your Honor, frankly, I have a lot more but I think it would be unfair. it for cross. THE COURT: Mr. Bienenstock. All right. I appreciate your saving it, So unless the Court has questions, I'll save
Thank you. Mr. Meyers? I will be very brief, Your Honor. All right. With Your Honor's ruling on the DIP, we If you approve
THE COURT: MR. MEYERS: THE COURT: MR. MEYERS: took a hit, okay?
A flesh wound, if you will.
the PSA, we'll take a knife right to the heart. MR. MEYERS: THE COURT: Like the preferred shareholders -Now you're appealing to my Jewish mother Not wearing that
So that's totally not going to work.
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- 88 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. MEYERS: Your Honor, like the preferred
shareholders that Mr. Bienenstock represents, under the plan that's set forth in the PSA or contemplated by the PSA, my clients get nothing. However, unlike the preferred
shareholders, the mere approval of this PSA, in all likelihood, is going to wipe out my client even if another plan is ultimately approved. Because the super-remedy, as Mr. Sathy
called it here, is that if in 240 days this plan is not approved -THE COURT: MR. MEYERS: day fire sale. Okay? They take their collateral and go home. -- they get their collateral or a sixtyNow there is no evidence nor will there It We
be today about the value of the floating-rate collateral. might be worth 300 million; it might be worth 150 million. don't know today and we won't know today. And so Your Honor has to at least assume the possibility that there is equity for my client in that floating-rate collateral. And if that is possible, how
possibly can you approve a PSA which gives the debtor nothing more than Lehman's vote on a plan that is opposed by everybody and has almost no chance of being approved in exchange for giving up my client's ability to ever recovery on their 121 million dollar floating-rate mezzanine loan. The debtors could have simply filed a plan. the exclusive period; they could have filed a plan. They had Okay? Or,
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- 89 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 alternatively, they could have filed a motion to approve a plan support agreement that -- you know, let's assume it had the fiduciary optimist that Sathy thinks it had, a true fiduciary out, but it didn't have -- let's say it didn't have the superremedy. It was just an agreement like most PSAs that says the
debtor agrees to file a certain plan and this party to the PSA agrees to vote for it. Okay? We would all still be objecting
today, like we do at a disclosure statement hearing, saying why waste the time and money over a plan that can't ever work. Your Honor might say I agree or Your Honor might say that's plan confirmation. Okay? But that would have been the fight We file this plan; you And
if they had simply filed a simple PSA. agree to vote for it. But that's not what they did.
They filed a plan -- a
plan support agreement that had teeth in it, a remedy, that Lehman gets simply for agreeing to support this plan that will wipe out my client's ability to ever attain any value for its claim. For that reason alone, Your Honor, the PSA must be
denied and the motion must be denied. THE COURT: MR. MEYERS: THE COURT: Mr. Sage. MR. SAGE: Your Honor, the timing may not be right for All right. Thank you. Anyone else? Thank you.
this because I'm on the side of the debtor, if you will.
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- 90 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 now. THE COURT: MR. SAGE: Yes. So I'm happy to speak at the end or speak
But I just want to make a few points. We heard a lot from the objecting parties about two
themes that I think are just misplaced.
One, Mr. Friedman
spends a lot of time talking about the conversion not being at a fair price. That may be true; that may not be true. The
conversion of the debt -THE COURT: MR. SAGE: today's hearing. today. To equity. -- to all the equity, right. This isn't
That's a confirmation hearing; it's not
This Court will determine whether the debt should be Whether Lehman's getting You aren't
converted to all the equity.
underpaid, overpaid or something, that's not today. deciding that today.
You don't have to decide that today.
It's not part of their motion. The other thing that people say -THE COURT: The PSA implies a value for the equity and
it sets a level because of the other transaction, because of the AIC transaction. In other words, AIC has valued fifty
percent of the equity that's proposed to be given to Lehman at 107 1/2 half million. Right? So you can kind of back
into -- presumably, they figured out what they wanted to pay for it, right? MR. SAGE: Unquestionably --
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- 91 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 there. THE COURT: Where I'm going with this is that also in
the plan, the other debt is being given -- Midland, for example, is going from 825 to 550. So there are values
embedded in the plan and no one's asking me to approve them today and I'm not going to and I'm not even going to think about them. MR. SAGE: THE COURT: Right. But there are values floating around in
And I think some of the parties have observed that the
relative haircuts that various tranches have been asked to take don't seem to line up. That being said, everybody's got Everybody's got a
different collaterals so who knows? different basket of hotels. values in the PSA. MR. SAGE:
So I think that there are lurking
It would be nave to think that there's no
relationship between what's in the PSA and what might happen in confirmation. It would be equally presumptuous of us to think,
our side, if you will, to think that the Court would be bound by anything that's in the PSA. The Court is going to make
independent observations and determinations to confirmation. And while there's no way to say that there aren't linkages and there aren't things that aren't common themes. is going to value everything at confirmation. But this Court And the Court
might determine that the implied values were just wrong or incorrect and not binding on this Court at that time. That's
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- 92 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 how we view it. And similarly, regarding the insider transaction, the debtors' papers were excellent on this point and I'm not going to spend a lot of time on it. But from a Lehman only
perspective, it's nice to hear people say that the deal's not fair, we're getting paid too much, too little, too whatever. But the way I view this, at confirmation, if the Court approves this plan and Lehman does get one hundred percent of the equity, Lehman will then convey a portion of it to, if this deal holds, Apollo. away. It may not hold. It may be Apollo goes It may be we
It may be we sell it to somebody else.
keep it all.
But for people to spend a lot of time now saying,
aha, insider deal because you've agreed to sell it to an insider, the "you" is "me". not the debtor. The "you" is Lehman. The "you" is
And the money is not coming in to the debtor.
It's coming in to Lehman's coffers, not the debtors' coffers. So it's the new value and it's very sexy, very interesting and makes for a lot of good press. it's not the issue. The press is always here. But
The issue now and at confirmation, if we
get there, is going to be whether LaSalle is implicated by the recipient of the equity under a plan, then turning around and selling it to a third party who might be an insider. they're just wrong. I think
I think it's a nice issue but -- and it But they're wrong on that
makes for an interesting copy. point.
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- 93 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 us a lot. The only other thing I'll say and I'm not testifying to -- responding to Mr. Bienenstock's concern earlier is that the language 25, 25(a) and (c) was indeed hotly negotiated. filed a joinder that said that we join in the debtors' response. We join in that, too. We think that it's a We
complicated provision but ultimately, we think what they -- I think -- lawyers think that what they describe is accurate and that we would have liked to handcuff them up and down in a limited -- they could do, but we -THE COURT: Well, in an earlier -- there was a chart.
Somebody gave me a chart that gave me the long history of the blacklines that went back and forth. And I was interested to
see that at one point, the provision actually gave you 115 percent. And that the debtors -MR. SAGE: THE COURT: MR. SAGE: It was hotly negotiated. -- the debtors pushed back on that. We asked for a lot and they pushed back on I think if the
And we had a very hot negotiation.
Court ever wanted to find out whether Lehman and this estate were adverse, we were very adverse. shows it. And I think that change
Again, any creditor negotiating with the debtor I think where we ended There
likes to get allotted its natural.
up -- I actually don't think it's unclear, the document. may be a complicated provision.
There are three paragraphs.
But I think Mr. Sathy did a nice job of describing what it is
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- 94 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 morning. THE COURT: Yeah. Lorenzo Marinuzzi again on behalf of record -THE COURT: Good afternoon. I'm sorry. Good morning still. You're right. Good and it is what it is. THE COURT: MR. SAGE: THE COURT: All right. Thank you. All right. Anyone else? For the Thank you.
MR. MARINUZZI:
Good afternoon, Your Honor.
MR. MARINUZZI:
MR. MARINUZZI:
the official committee of unsecured creditors. Your Honor, we're here this morning standing up with what parties believe to be the bad guys on this side of the room who put together this PSA and have every intention of wiping out equity and significantly writing down debt as part of this de-leveraging process that's really geared to give the company back to Apollo. Now, the committee has a little bit of a different view here. And all parties are intended to take whatever
positions they want with respect to the restructuring of their debt. them. And parties are entitled to call bluffs as they see If they're indeed bluffs, people will figure that out This committee, though, looking at the choice of
shortly.
supporting the debtors' assumption of the PSA and reserving its
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- 95 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 hearing. rights fully in connection with the disclosure statement and plan. And this isn't a plan confirmation hearing. All rights
are reserved -- was of the view that they weren't prepared to call a bluff. They're not prepared to say that Marriott will
not react adversely if the PSA is not approved, that the Marriott transaction or the negotiated deal that's been put into place as part of the PSA won't disappear, that it won't cause a deterioration in the debtors' businesses. committee just wasn't prepared to take that risk. parties can take that risk. can certainly take that risk. But at this point, again, it's not a confirmation To the extent that the committee has a particular The Other
Parties who have nothing to lose
view for the disclosure statement or the plan based on facts known already, based on facts that are developed or discovered during its investigation. All those rights are reserved. But
for today, for purposes of this hearing, the committee does not oppose the debtors' assumption of the PSA. clarifications we've asked for. There are certain
We're told by the debtors that
we'll see them in a revised order or they'll be put on the record. In particular, dealing with what happens if a What are the respective rights and Can Lehman run into court
fiduciary out is exercised.
remedies with parties in particular.
or can Lehman simply pretend the automatic stay is not in effect? Does Lehman have to run in to court? We just want
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- 96 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 evidence? MR. DONOVAN: Dan Donovan for the debtors, Your Honor. some clarification on that so we know exactly what happens if the debtors do, in fact, exercise a fiduciary right. THE COURT: All right. Thank you, Your Honor. Okay. Anyone else?
MR. MARINUZZI: THE COURT: (No response) THE COURT:
Thank you.
All right.
So should we go with the
Just to inform you of the schedule and you can tell me how you want to proceed. THE COURT: MR. DONOVAN: Okay. We're ready to proceed with evidence.
Based on prior objections and some of the opening statements, I think the direct will be an hour and fifteen to an hour and thirty minutes. Don't know when you would want to take lunch
or a break but I just want to let you know that's my estimate at this point. THE COURT: All right. I think if your estimate is
reasonably accurate, that would put us at 1 o'clock which would be a good time, I think, to take a break. I have a feeling
this is going to go a lot longer than people are estimating, though. So why don't we just get started and if anyone needs a
break earlier, just let me know. MR. DONOVAN: Okay.
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- 97 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. DONOVAN: All right? Your Honor, at this time, the debtors
call Marc Beilinson to the stand. THE COURT: THE WITNESS: Very well. Good afternoon, Mr. Beilinson.
Good afternoon, Your Honor.
(Witness duly sworn) MR. DONOVAN: THE COURT: (Pause) MR. DONOVAN: All right. Your Honor, what I've handed May I approach, Your Honor? Please.
Your Honor are unobjected-to exhibits we may use with the witness. THE COURT: DIRECT EXAMINATION BY MR. DONOVAN: Q. A. Q. A. Q. Good morning, sir. Marc Beilinson. And what is your position with Innkeepers? I'm the chief restructuring officer. Can you pull your microphone closer, please? Thank you. Can you state your name? Okay.
Are you a member of the Innkeepers board? A. Yes. I became a member of Innkeepers board -THE COURT: Mr. Beilinson, I'm going to need you to
scoot forward or pull the microphone 'cause otherwise you won't be recorded. Thank you.
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- 98 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. THE WITNESS: Sure.
Are you a member of the Innkeepers board? I'm an independent member of the Innkeepers board up until And then I became a non-independent
the time I became the COO. member of the board. Q. A. Okay.
And when did you join the Innkeepers board?
I joined the Innkeepers board when Apollo took Innkeepers
private in 2007 and I became an independent member of the board and a member of the audit committee. Q. Okay. And before we get into, I just want to spend a Can you tell the Court your --
minute on your background.
summarize your professional background? A. Sure. I was a practicing restructuring lawyer at
Pachulski Stang Ziehl Young & Jones for about twenty-five years. Prior to being at Pachulski, for the last fifteen years
of my career, I was a partner at Buchalter Nemer in California. I stopped practicing law about three years ago. Q. And are you currently or have you been in the past a
member of other boards of directors? A. Absolutely. I was a member of the board of -- an
independent member of the board of Windham Hotels which is the largest hotel group in the country. member of their audit committee. I was also an independent
And I'm currently a member of
the -- an independent member of the board and audit committee of ARI which is a commercial -- Apollo Commercial Real Estate
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- 99 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Finance. Q. When did you become the chief restructuring officer of
Innkeepers? A. Q. In November of 2008. Okay. And can you explain to the Court how it came to be
that you became the chief restructuring officer of Innkeepers? A. Sure. I was an independent member of the board. And
prior to a board meeting in November of 2008, the management team called me and, knowing about my restructuring background, they asked if I would come in, spend a few days to make an assessment as to what the company's outlook was in a very uncertain time with a recession looming and the hotel industry in decline. So I went in to do an evaluation with management
and came to the conclusion that they were going to be hitting a cash wall and that they were going to run out of cash in December and without fairly drastic action that Innkeepers would have been in a bankruptcy case in December of 2008, potentially January of 2009. Q. Knowing that, what steps did you and the management take
in or around November 2008 going forward to address these issues? A. Well, at that time, when the board of directors found out
what my findings were that were confirmed with management, they asked me to take the role of chief restructuring officer and to seek to do an out-of-court restructuring and deal with the
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- 100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 economic uncertainty that was facing Innkeepers. We had to take very drastic action in December of 2008. We shut down all capital projects to conserve cash. We had
probably ten or twelve projects ongoing at that period of time. I entered into negotiations with Lehman Brothers to defer certain obligations that we had owing to Lehman Brothers. incorporated -- we renegotiated all our contracts. We
We entered
into negotiations with about twenty million dollars of unsecured creditors for deferrals or settlements of about twenty million dollars of unsecured claims. employees to take a five percent rollback. national contracts. We asked our We modified our
We reduced our head count.
We essentially had to take dramatic steps across an entire portfolio to deal with the fact that hotel revenues were in a fairly substantial decline based upon the recession that was hitting and actually just starting in December. So it was
really only through cooperation of Lehman and all of these other acts which stopped us from having to file bankruptcy up until now. And during that entire period of time, we were
simply trying to do an out-of-court restructuring, do our best to make our principal payments and wait for the hotel industry to recovery -- to recover. And no one anticipated that that
period of time had a decline which was basically two percent, would go down to sixteen percent and we'd lose essentially sixty million dollars of revenue and forty million dollars of
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- 101 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 EBITDA from the time that we started until the time we -- the end of 2009. So we took fairly dramatic action and continued making our payments on the fixed-rate facility. I think from the time I
got involved till the time we filed we probably kept current and paid over seventy million dollars of interest on the fixedrate loan. Q. A. Q. A. Q. And we had modified our loans with Lehman Brothers
And let me stop you there. -- in a transaction. Can you explain that, just at a high level -Sure. -- what was the modification with Lehman and when did that
happen? A. '08. Well, I started negotiating with Lehman in December of During that period of time, I deferred payments of a
number of types so that I could continue meeting my obligations and paying my fixed-rate lenders. renegotiated transaction. It resulted in a
I believe we finalized it in July.
As part of that renegotiation, there was a guaranty that Lehman Brothers had with Apollo. I went to Apollo and Lehman and I
said, listen, I need money for capital for this organization and negotiated a transaction where Apollo would put money into this estate for purposes of funding capex with regard to a floating-rate pool and Lehman, in consideration, would release the guaranty.
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- 102 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Let's focus from the time before the filing here in July Were you also
2010 all the way back to when you became CRO.
discussing negotiating with Marriott regarding the franchise? A. I was negotiating with Marriott and they were unbelievably They were willing to accept
supportive of this enterprise.
deferrals of the PIPs with an intent that we would have to get to a period where we would have a comprehensive resolution. But part of that comprehensive resolution had to deal with making this a sustainable corporate structure that they could have comfort, could pay their obligations with regard to the franchise agreements and do the capital renovations in the future. So it wasn't just a -- let's fix it today. It was --
we need to fix it for the long term for the benefit of the relationship between Innkeepers and Marriott. And I might add, it wasn't just Marriott. I mean,
obviously during this period of time, I was negotiating with Hilton, Starwood, Best Western, all of whom had deferred capital improvements that I had to deal with to maintain our relationships with those franchisors which are extremely important to this enterprise. Q. Let's focus on early this year up till March 2010. Can
you explain to the Court what led to the Marriott issuing numerous notices of default? A. Even up to March 2nd of 2010, I was negotiating and
spending a lot of time with Marriott to try to put forth a
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- 103 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 timely program that would be acceptable to them with regard to doing the capital improvements between now and the middle of 2012 and trying to show where the economics to complete really the programs in 2011 and 2012 would come from. I think they
came -- Marriott came to a conclusion in March that it was really not likely that the economy would turn around sufficiently enough to create free cash flow for purposes of funding internally those PIPs. And it didn't meet the
requirements and their desire to have a company with a sustainable capital structure with a capability of meeting its obligations not just today but ten years from today because these relationships with franchisors are a decade old and they're going to go for decades into the future. It's a very
mutually beneficial relationship between Innkeepers and the franchisors which include Marriott, Hilton and others. Q. Well, let's focus on -- can you explain to the Court the
situation once Marriott sent its default notices in March 2010? A. Sure. Once they sent the notices and in conversations
with Marriott, the default notices, I believe, had a ninety-day time frame. And I clearly recognized the value destructive of So at
that that would occur if the franchises lost their flag.
that point in time, I knew clearly that I needed to go into what was likely to be an in-court restructuring to resolve not only the Marriott issues but the funding issues with regard to the PIPs and the floating-rate pool, the PIPs and the fixed-
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- 104 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 rate pool and get in a situation where I could show Marriott that I had a sustainable capital structure with a right-sized balance sheet and longevity with regard to the capability of operating into the future. So, at that point, I really turned my focus from trying to keep the company out of bankruptcy to organizing the situation. I -- in March of 2010, I hired Kirkland & Ellis to help me with regard to the restructuring. regard to financial advisors. I hired Moelis & Company with I continued working with my
management team and the board including both AIC-related parties and the three independent members of the board in coming up with a plan that would satisfy the multitude of concerns that everybody would have. Q. And we're going to talk about the plan support agreement.
But I want to spend one moment -- based on all your work, did that lead to an agreement with Marriott, what's called the adequate assurance agreement? A. Q. Yes. Okay. And just summarizing for the Court, what is it and
what does it do for the company? A. Well, the adequate assurance agreement provides a
framework and timetable for Marriott support of a plan reorganization and an agreement with regard to a timetable for completing the PIPs which are essential to Marriott and to Innkeepers and provides a mechanism for us to move forward as
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- 105 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 partners into the future. Q. Let's move now and discuss the plan support agreement and Once
the negotiations that led to the plan support agreement.
you were facing this situation, what was the strategy you and your management team put together to restructure Innkeepers? A. Well, what I'd like to do is I'd like to sit back and say,
okay, look at all the constituencies and say what do I need to do prior to filing a bankruptcy case to best deal with all of the competing interests that we're going to be faced with. I really looked at each entity separately. Brothers had 250 million dollars of debt. So
And I said, Lehman At that point in
time, I didn't know if they controlled or didn't control the mezzanine debt behind it of 108 millions. And now I came to
realize that they had potential flexibility to equitize their position. exist. I looked at Midland and at the time Midland didn't
It was really Wachovia who was the master servicer.
And in my conversations with the master servicer, they made it clear that they didn't have the ability to negotiate any type of balance sheet restructuring. But in talking with my
advisors, I'm talking with other experts in the CNBS community. I became informed and believed then and believe now that the likelihood was they wouldn't be able to take equity or they would -- the type and form of consideration that they would rather take is a note equal to the value of their collateral. So I took that into consideration. I took into consideration
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- 106 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Marriott's need for a sustainable capital structure and future ability to meet its obligations. So my first step was to go to Lehman Brothers and say, listen, I want you to join me on a journey which includes you equitizing your secured claim. So you're wiping out 250 You're freeing up
million dollars from the balance sheet.
twenty assets which can create flexibility within the organization and also potentially serve as additional collateral to other people in the capital structure. And it
freed up twenty million dollars of EBITDA for purposes of being able to fund debt obligations of the parties, which currently exist, and obligations of the franchisors in the future. So it really did solve for creating a sustainable capital structure, right-sizing the balance sheet, creating free cash flow and helping to restructure the company. I recognized that Lehman Brothers may not want to hold a hundred percent of the equity and I suggested in our initial meeting that they may want to consider a future sale of part of the equity. And we entered into discussions as to who they
might or might not sell to. Q. Okay. Let me stop you there. When you were first coming
up with the strategy with your management team and the board, did you consider during this time, March, April, May, "shopping" the company at that time? A. The answer is no. It really wasn't a viable possibility
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- 107 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 at that point -Q. A. Why not? -- in time. Because the franchisors wanted resolution and You know, shopping
they wanted resolution quickly and timely. doesn't resolve all issues.
It would have taken a long period
of time during which point in time there are control issues, there are re-PIPing obligations. There is uncertainty as to
what the capital structure of the new enterprise would be. There are issues as to whether it's going to be more or less sustainable than a reorganized enterprise in Innkeepers. So I was really looking at my negotiations with Marriott and with other franchisors and everyone in saying, listen, I can create a sustainable capital structure if Lehman Brothers does, at some point in time, agree to equitize. And we can
solve the problem with regard to the PIP through DIP financing and connection with a well orchestrated bankruptcy case which is organized appropriately. Q. Okay. So that's what I set out to do.
And I just want to jump ahead just for a minute.
Since you signed the plan support agreement, have you considered shopping the company? A. No. I continue to consider all alternatives. And in
considering all alternatives, what I really do is I say to myself in discussing with Kirkland & Ellis and Moelis and independent members of the board is, is it a better alternative to the plan support agreement that I currently negotiated with
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- 108 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Lehman Brothers and feel committed to move forward with in an internal restructuring during the exclusivity period. And at
this point in time, no one has presented me with an alternative that I believe is better than the PSA with the Lehman, better than equitizing their secured claim. Q. And as the chief restructuring officer, where do you
believe this bankruptcy process would be if you hadn't gotten this plan support agreement you negotiated with Lehman? A. It would have been a free fall. It would have been -- I
think Marriott would have terminated all twenty-three franchises. events. place. I think it would have created value destructive
We wouldn't have been able to get the DIP financing in We wouldn't have had any kind of roadmap to a
reorganization. Q. Okay. Let's go back to the negotiations now. So you
considered this option, talked with Lehman.
When you were
thinking through this strategy or process, did you consider the interest of the other creditors? A. Q. A. Absolutely. How? I looked at Midland and I really came to the conclusion,
after thinking about it, that they wouldn't accept equity. And in fact, they clearly told me since then they wouldn't accept equity. I came to the conclusion that they would prefer the
best -- they would prefer a form of consideration to be a note
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- 109 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 equal to the highest value the Court determines with regard to their secured claim. And I assumed they would want additional
collateral and free cash flow to help service their debt so the cash flow covenants were fairly good. So I really did take that into consideration and the best means for me to provide that package to Midland was through Lehman's equitization and creation of free cash flow. Q. Okay. Let's focus on before you signed the plan support Did you reach out to
agreement, your meetings with Midland.
service the servicers in addition to midland on the fixed-rate pool to discuss restructuring issues? A. Absolutely. Wachovia was a master servicer prior to
somewhere in the middle of April, maybe April 17th, and I reached out to Wachovia and talked to them about what was going on with Marriott, the company, the inability to service debt, the need for a capital restructuring and Wachovia basically told me that they weren't in a position to have those discussions with me. At some point in time, the master
servicer sent it to special servicing when Midland got involved. As soon as they got involved, I agreed to fly to
overland Park, Kansa with my entire management team, legal advisors and financial advisors to begin the process of educating them with regard to who Innkeepers were, what they did, how it was an integrated enterprise and, quite frankly, educate them with regard to their own collateral and the
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- 110 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. situations facing both their collateral, the Marriott situation and the entire company. Q. Okay. Let me stop you there. Let's focus on -- you
should have in front of you in the packet -MR. DONOVAN: THE COURT: May I approach the witness, Your Honor? (No audible response).
You have in front of you, and Your Honor has as well, One is dated as a presentation with
Exhibits 15 and 16.
Moelis' name on it, called "Project Tavern" and the second is "Innkeepers USA Trust Presentation to Midland Loan Services". Let me just ask you preliminarily, are these documents you gave to Midland at this initial meeting in Kansas? A. Q. Yes, they are. Okay. So this meeting on April 28th, 2010 in Kansas with
Midland, who was there? A. Well, the debtors' entire management team; that was Tim
Walker, the CEO, Mark Murphy, general counsel and Dennis Craven, then-CFO and myself. And I believe we had two
participants from Kirkland & Ellis; Mr. Basta and Mr. Sathy. And with regard to Moelis, I believe we had two representatives or actually, four representatives; Mr. Derrough and three others. Q. And what -- I think you got into this a little bit. What
was the purpose of the meeting and these two presentations that were made to Midland?
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- 111 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. The purpose of the meeting, and this was four or five days
after they became our special servicer, was to try to bring them up to speed as quickly as possible with all of the events facing the hospitality industry, Innkeepers more specifically, Marriott issues and with regard to Innkeepers as a whole and their collateral, specifically. I thought it was most
important to meet with them quickly and give them as much education as quickly as possible to get them involved in this restructuring process. Q. And let's turn to Exhibit 15, which is the Project Tavern If you could turn to what is page 3,
Moelis presentation.
called "Tavern Situation Overview". A. Q. Yes. Can you tell the Court what was told to Midland regarding
this page? A. Well, on this page, I explained to them how EBITDA has
eroded dramatically, about thirty-one percent in a one-year period of time, that it was over-leveraged, that we received
default notices from Marriott and other franchisors, including Hilton, and that we had retained a professional team to consider the capital needs of the company and restructuring the debt. It clearly told them that I was already in negotiations
with Lehman and with Marriott and with other parties. Q. And you're referring to discussions with Lehman and
Marriott as reflected on page 3 that states, "have engaged with
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- 112 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Lehman and Marriott"? A. Q. Yes. During this meeting, what was -- what did Midland tell you
about the state of your business, if anything? A. Well, Midland Loan's fairly candid in the fact that they
stated that there was substantial erosion and deterioration of values in hotel properties for any transactions that occurred in 2006 and 2007. So they were clearly aware of the erosion.
They were clearly aware of the issues involving gen ones and the value of the franchise agreements with Marriott, Hilton and other franchisors. They, at that meeting, said they were
flexible to move forward, but they would not consider an AB note or equity. Q. It just wasn't in the cards. You used a few terms that
And let me just stop you there.
are -- gen one. A.
Can you just explain what that is?
A gen one is a generation of Marriott Hotels which are
free-standing pods which is the first generation of Residence Inn and just is different than an interior court or a situation where you have gen six Residence Inns. Q. Okay. And you said Midland told you at this meeting they What is an AB note?
wouldn't take an AB note. A.
An AB note is a note for part of the value of their
collateral and a B note which would be for some increase in value of collateral in the future. It -- the way I always consider it is it's like taking the
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- 113 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1111(b) election. If you take the 11(b) election, you know,
you get at the termina -- at the maturity date, the full amount of -- the full dollar amount of your claim, but it's equal to the value of their collateral on the day that they make that election. result. An AB note is really a mechanism to get to that same You get an A note for the value of the collateral, you
get a B note to deal with some potential up tide. Q. Okay. So that's what they told you. Let's move forward
in the presentation Exhibit 15 to page 5 that's entitled "Challenges". And let me ask you, can you explain the
challenges you told Midland about at this meeting that's -- as summarized on page 5? A. Again, we talked about the fact that we had seventeen time
leverage, that we didn't have sustainable debt service capabilities with regard to the current financing. We needed
substantial amounts of new capital for purposes of satisfying the PIPs with regard to all of the franchisors and we didn't have alternative means of obtaining additional financing. We
talked about the complexities of dealing with CMBS pools, so we could talk through that. And we talked about the timing
constraints that we had based upon the Marriott and Hilton default notices, with regard to certain properties. Q. Okay. Let's turn to the next page, page 6 of Exhibit 15 Can you explain to the Court
entitled "Company Objectives".
what Innkeepers told Midland about the company's objectives of
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- 114 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 a restructuring? A. Simply that we needed to move quickly to get to a right-
sized capital structure that was sustainable and to maximize and prever -- preserve the value of their assets and everybody else's assets in this integrated enterprise. Q. You told us Midland told you they didn't want an AB note.
Did Midland tell you anything else during this meeting regarding their position on a restructuring? A. At that point, it was a first meeting and I think they
said that they would be working with us toward a restructuring. Q. And did Midland tell you they were interested in taking
equity in Innkeepers? A. Q. No, they did not. Prior to signing -- well, let me just make one point clear
and we don't need to go through it. Can you summarize for the Court -- we went through the Moelis presentation. Presentation? A. What is Exhibit 16, the Innkeepers
What was that intended to convey to Midland?
It was really just to convey to Midland who Innkeepers
was, to give them some information with regard to the entire structure of Innkeepers, how it operated it hotels, what the current metrics with regard to Innkeepers and their asset base were. Q. Okay. Prior to signing the plan support agreement, did
you have additional meetings or discussions with Midland
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- 115 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 regarding a restructuring? A. Yes. I did attend some meetings and during those
meetings, they made it extremely clear that they -MR. BIENENSTOCK: right now. Your Honor, I'm going to object
I think I'm going to move to strike all this
testimony about meeting with Midland and this testimony -- this was subject to a confidentiality agreement where these were not supposed to ever come into public record. And I think I'm
going to move to strike this testimony that will have said 'at Midland and any further discussions had with midland regarding anything to do with' -THE COURT: But isn't this one of the central issues?
One of your main arguments is that there was no negotiation, there were no meetings, this was a done deal from the get-go and he's trying to establish that, in fact, there were meetings. I mean, it may well be that they were covered by a
confidentiality agreement but how can I become fully informed as to whether or not he really negotiated, without hearing about the meetings? MR. BIENENSTOCK: All right. Then I -- so you're
overruling my objection, I just want to say that we'll hear about the rest of the meetings, too. THE COURT: the meetings, too. MR. DONOVAN: Yes. Then I'm happy to hear about the rest of
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- 116 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. THE COURT: Please.
I want to focus on meetings you had with Midland or
discussions to discuss restructuring, and you were starting to answer. Can you explain to the Court the meetings or
discussions? A. Yeah. I mean, subsequent to that, I had a couple of in-
person meetings where Kevin Semon at midland were there and then a number of phone calls and their position was fairly clear; they wouldn't take equity, they wanted their collateral back -MR. BIENENSTOCK: Objection, Your Honor. We have no
problem with the existence of the meetings, but things are said in negotiation precisely because they're negotiating, not necessarily because they're the parties' real position and that could prejudice us as to how Your Honor takes it. So we object
to the substance of what was clearly negotiating a plan. THE COURT: I hear you, Mr. Bienenstock. But we
are -- we're in this quandary now because one of the main issues is whether to -- how Mr. Beilinson conducted himself and whether he conducted himself in appropriate fashion given his position, if there were fulsome negotiations with all the creditor constituencies and I don't for a minute believe that something that's said in this type of meeting necessarily comports with what the parties really are wiling to take or really willing to do.
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- 117 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 But it occurred and he's telling me that it occurred and then you or Mr. Parkins, anybody, can argue from that as they wish. But I think it's very important to have a record of
what this debtor did pre-PSA to explore other alternatives. And, you know, you all can -- on cross-examination, you know, you can have as much fun as you want, but I just want to get the basic occurrences in. MR. BIENENSTOCK: Can I take that as a ruling, then,
that this is admitted that these things were said -THE COURT: Exactly. -- not necessarily for the truth --
Exactly. -- of the position.
MR. BIENENSTOCK: THE COURT: Yes.
MR. BIENENSTOCK: MR. DONOVAN:
Thank you. I want
Your Honor, I appreciate that.
to make it that these are admissions of a party opponent as well so it is -THE COURT: MR. DONOVAN: BY MR. DONOVAN: Q. Let's proceed. Can you tell the judge and the court about I got it. -- subject to the evidence -- okay.
your discussions with Midland before you signed the PSA and after this April 28th meeting? A. They took three primary positions. One, that they would
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- 118 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 not take equity. Two, that they wanted their collateral back.
And three, that they would, as a precondition to future conversations, require marketing of the bankruptcy estate. Q. Let's take each one of those and turn -- what did it meant
o you as the chief restructuring officer when Midland told you it was not willing to take equity in a restructuring? A. It -- that was an assumption that I came to earlier. It
was really just a validation of my view that Lehman Brothers was the only party in this bankruptcy case that may have the flexibility to equitize and create the capital structure on a right-sized basis. Q. back. A. Okay. So that didn't surprise me.
Second, they said they wanted their collateral
What did that mean to you as the CRO of Innkeepers? Well, it meant to me two things. The first was that
obviously dismembering an enterprise is not a goal of any Chapter 11 restructuring, but the second thing was, I did acknowledge that that was a negotiation position and that the entire paradigm of Chapter 11 and of the PSA is creating a negotiating platform to reach consensus, which I still believe will occur. I mean, if you look at, you know, Midland's papers and they attached some type of term sheet to them, you know, they're looking at the value of paying 600 million dollars. look at it and I believe that value at this point in time is substantially less. But the truth of the matter is the parties I
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- 119 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. aren't so dramatically apart that it shouldn't result in a consensual restructuring if we simply move forward with exclusivity. Q. Let's cover the third. You said Midland told you as a
precondition to future meetings or discussions that you market the company. What did that mean to you as the CRO of Innkeepers? I think it's unfortunate anybody including myself comes to
a meeting with preconceived notions and preconditions. Obviously, I believe that the Lehman PSA is absolutely in the best interest of this bankruptcy estate and it's a bird in hand. And to, in essence, terminate that for purposes of
having negotiations with Midland would just be unacceptable. But at the same time that I said that, I had a conversation yesterday with Ron Greenspan in which we discussed having a meeting in the next couple of weeks with his client, Midland, and to talk about everything. It's similar to the
conversation I had with Al Nickerson who's a principal of Five Mile, where yesterday we agreed to sit down and chat about everything in the next couple of weeks. THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: So I --
Can I ask a question? Yes, Your Honor. I want to get a level set here. Sure. Exhibit 16 bears the date April 27th,
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- 120 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2010, so presumably the meeting occurred on that day. that color -- the full color one. Can you tell me where were you on -- in your progress and discussions with Lehman as of that point if you recall? THE WITNESS: I think it was eight or nine days into I believe it was only seven or Right,
my conversation with Lehman.
eight days before this that I met with Lehman and first discussed whether Lehman might be willing to equitize their secured claim and move forward with a restructuring. THE COURT: So did you know -- going into this
meeting, you pretty much knew that you were going to go down the equitization route with Lehman as of the time of the April 27th meeting? A. Absolutely not. I knew that I started -- I mean,
literally the beginning of that conversation occurred seven or eight days before this meeting. I knew that I was going to
start talking to Lehman about equitization, but whether I believed that it would actually result in the PSA that we have today was completely speculative. negotiations that took months -THE COURT: THE WITNESS: BY MR. DONOVAN: Q. Again, focused on before you signed the plan support All right, thank you. -- to complete. It was the very beginning of
agreement, I know you're going to have meetings in the future,
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- 121 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 but before you signed the plan support agreement, did you also have meetings with representatives of Five Mile Capital? A. Yes, I did. I had meetings with both as a prospective DIP And I also had conversations with
lender and now a DIP lender.
Five Mile on four five occasions about their interest in owning a piece of the equity of this enterprise. Q. Let's focus just for a moment on the DIP. In addition to
Five Mile, did other entities make offers to you to provide DIP financing? A. Q. A. Yes. Okay. -- made an offer to -- or put forth a term sheet with At that point in time I told Midland and The one that comes to mind is Apollo --
regarding to the DIP.
Lehman that I was just going to go out and market and take the best possible DIP on the best possible terms and it, in fact, ended up not being Apollo. Q. So you chose the Five Mile DIP rather than the Apollo
offer? A. Q. Absolutely. Let's focus on your discussion with Five Mile before you
signed the PSA regarding potential restructuring or their interest. A. Q. Can you tell the Court about those meetings?
Repeat -About those meetings or discussions regarding
restructuring with Five Mile.
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- 122 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 June. MR. DONOVAN: I think it's June -- well, seventy-five been -THE COURT: No, seventy-five days would be about midA. That they showed some interest in whether they would be
able to buy a piece of Lehman's equity that they were going to be receiving in this reorganization, so they wanted to talk abut whether they could become one of the purchasers of Lehman equity. They wanted to talk about whether we might downstream convert the DIP to equity. And they also talked about
potentially coming in to buy a hundred percent of the company. THE COURT: conversations? Q. A. What were the dates, sir? The dates probably started about the same time that What were the dates of these
Midland introduced Five Mile to me as a potential DIP lender, which probably was seventy-five days ago, Your Honor. THE COURT: Do the math for me. Tell me what date is.
Where are we, on September 1st? MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: THE WITNESS: Is it may, June -We're on September 1st today -Yeah. -- so it's mid-May? Probably mid-May would probably have
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- 123 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. days would be June. THE WITNESS: I'm really bad with calendars, Your
I think I started talking about DIP financing sixty
days before the bankruptcy case so -THE COURT: THE WITNESS: THE COURT: THE WITNESS: THE COURT: BY MR. DONOVAN: Q. And prior to executing the plan support agreement, did Okay, so --- probably --- that's mid-May, then. That's probably mid-May to June 1st. Okay.
Midland ever provide you or the debtors a written proposal or offer to purchase the company? A. No. I mean, I found out about a Five Mile-written
proposal when I read it as an attachment to somebody's declaration that was filed in this case -Q. A. Q. Yeah -Before that, I had no knowledge. Okay. We'll get to that in a little bit. So let's focus now on the negotiations of the Who were the primary
All right.
plan support agreement with Lehman.
negotiators for Innkeepers and the primary negotiators for Lehman? A. Myself, with regarding to Innkeepers and Michael Lascher
with regarding to Lehman.
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- 124 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. And did the parties have counsel and financial
advisors as well? A. We were, oftentimes, surrounded by, on my side, Kirkland &
Ellis and Moelis and on Lehman's side, Lazard and Dechert. And, of course, during these negotiations, they were conferring with their creditors' committee counsel, Milbank and Houlihan, which was a financial advisors for Lehman's creditors' committee. So there were a whole host of people involved in these negotiations. Q. Okay. Can you -- let's start at the beginning. Can you
describe Lehman's demands at the outset of the negotiations? A. I think at the outset of negotiations were fairly
contentious and Lehman didn't exactly embrace the concept of giving up their collateral and equitizing and allowing the free cash flow to be used to pay someone other's -- other people's obligations. initially. Q. A. Okay. Once we, you know, got over the hump and they were So they didn't exactly embrace this concept
interested in moving forward with some equitization they presented me with a number of proposals that included termination rights and remedies that were in large part unacceptable and overbearing which I wouldn't have agreed to and didn't agree to with regard to these debtors. So there was
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- 125 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 substantial negotiations. I think fairly early on there was an understanding that if they took this journey with Innkeepers in trying to right size the capital structure, and we couldn't get it accomplished in a rational period of time, that we would assist them with regard to their assets. Of course in the early drafts of the
proposal, you know, that -- I think the early draft said that they had the right to relief from stay and termination of exclusivity, et cetera, et cetera, if I foot-faulted within the first six days, let alone sixty days. I think we got to a point in the negotiations which, in the exercise of my bankruptcy judgment, I thought was fair, which is up until 240 days if there's a termination event -and the termination events were really hotly negotiated and fairly contentiously negotiated -- that the remedies are to terminate the PSA and terminate cash collateral. Of course
that's subject to the debtors' right -- it's subject to two things. One, there's simply the rationality which is I know
that Lehman is going to need the debtor to complete the PIPs and operate their properties so I believe there would be a rational conversation with Lehman if they sought to terminate cash collateral. Or alternatively, I had the right to come
back to court and ask for the nonconsensual use of cash collateral so I didn't see it as a disastrous event as a practicality. I thought it was a fair remedy if we violated
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- 126 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the PSA in the first 240 days. Now, at the same time, if we couldn't get the plan approved in that 240 days after, in a provision that, frankly, I don't like but I thought it was fair in the context of all of the negotiations, you know, they can either, at Innkeepers' option, get relief from stay or have a 363 sale. Is it a
provision that the debtor would like to have in this document? Of course it's not. But I believe it's completely fair in the
context of a secured party equitizing because that's very different than most situations where you see a conversion of debt to equity which is unsecured bond financing instruments converting debt to equity, not secured creditors converting debt to equity. Q. And throughout these negotiations you eventually reach an Why did Innkeepers enter into -- you
agreement with Lehman. eventually sign it.
Why did Innkeepers enter into the PSA,
Exhibit 1, that we're asking the Court approval for today? A. I believed then and I believe now that it -- by conversion
of essentially 250 million dollars of debt to equity it right-sizes the balance sheet. Number two, it unencumbers
twenty assets and I can use those assets to offer other constituents additional collateral or utilize in operating the business. It creates twenty million dollars of EBITDA which is
now freed up so that I can meet the obligations of other creditor constituencies and franchisors.
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- 127 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I forced a paradigm where I wanted to ensure that whatever the value of a collateral was, which is what secured creditors are entitled to in a bankruptcy case, they were able to receive in a real note. I wanted to ensure and I negotiated in that
Lehman would go forward with this plan even if the secured creditor, wanting the upside or future upside, could elect for the 1111(b) election. I thought that was extremely important.
I thought it put us in a position to right-size the balance sheet, create a sustainable operation, and do what debtors should do in a bankruptcy case, which is do an internal restructuring as quickly as they can and providing other secured lenders with the value of their collateral. Listen, I've been doing this for twenty-five years. understand that I'm not going to get full agreement at the beginning of a process and that we're going to have objections and dissent and people doing all sorts of things for leverage. I also know, because I've been doing this for twenty-five years, that this paradigm will result in the greatest chance for a consensual resolution of almost all of these problems prior to a plan of reorganization hearing even with regard to people who are objecting today. Q. Before we move on to the terms of the plan support I
agreement, let's talk about some of the documents that I think Mr. Parkins referred to in his opening and that the objectors cited in their briefs. During the negotiations there were
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- 128 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 various term sheets from Lehman that included Apollo as being a party to the PSA. What was your response to those term sheets
in which Lehman proposed Apollo to be a party to the plan support agreement? A. I didn't respond except -- I didn't respond in writing and
I told them that that was unacceptable, I was looking to do an internal restructuring with Lehman Brothers and that Lehman would have to convert their debt to equity. I think I received
other term sheets that were sent to me by Apollo's counsel, didn't respond to those term sheets either and told them I just wasn't interested, I'm going to convert the debt to equity. And of course I recognize that that secured creditor or party who obtains equity can in the future sell to whomever they want. And as you know, Lehman made it a condition to the PSA
that they sell fifty percent, take some of the risk off the table, to a third party, 407 million dollars. Q. What was your position with respect to Apollo and its
equity within this restructuring? A. I made it clear, I believe, in early March if not before,
I had an -Q. A. March 2010. March of 2010 I had an unbelievably uncomfortable
conversation with Apollo telling them that in my view they were out of the money and they would be receiving absolutely no consideration on account of the 250 million dollars that they
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- 129 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 were losing in their equity investment in this enterprise. I
made it clear in my first meeting with Midland that Apollo was out of the money and would be receiving nothing in this restructuring. I made it clear to Lehman that they were out of
the money and they would not receive anything in the restructuring. Q. Okay. So how did Apollo, then, get involved with Lehman
to purchase, as we understand it, fifty percent of Lehman's post-confirmation equity? A. Well, part of my sales pitch when I went to a secured
creditor and said give up your collateral, not an easy pitch to make, was 'Listen, when you take the equity you can always consider taking some of the risk off the table by selling it to a third party.' Of course there was a conversation as to
whether, you know, Apollo might be interested in doing that. And at that point in time I had had no conversations with them and told everyone the truth, which is I have no clue but it was possible. Q. And what was your reaction as the process went along and
you learned that Apollo at least was negotiating to purchase fifty percent of Lehman's equity? A. Once I understood that Lehman wanted to take 50 percent of
the equity they would receive out of this bankruptcy and transfer it to a third party, listen, I would have been happy if Lehman took 100 percent of the equity or if they sold it to
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- 130 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Apollo or another third party. involved? Was I pleased that Apollo was And I was pleased for a
The answer is absolutely.
number of reasons.
One, they had spent and lost 250 million
dollars in learning the assets and they had an intimate knowledge with regard to Innkeepers. So the extent that Apollo -- you know, one, it was showing that they had confidence in what the management has done since November of 2008 till now, so that was pleasing. Number two, I
thought to the extent that they had an interest, execution risk came down because they already had done all their due diligence if they were interested in doing so. But I made it clear to
Apollo, I made it clear to Lehman that so long as that condition in the PSA was satisfied, whether it was Apollo or another third party or if Innkeepers took 100 percent, that was my concern. THE COURT: THE WITNESS: THE COURT: Can I ask a question? Yes, please. Where did the concept -- and I don't want
you to tell me anything that one of your attorneys told you, okay? But where did the concept of giving Lehman all of the Was that -- did that originate with Lehman
equity originate?
or did that originate with you? THE WITNESS: That originated with me. I went to
Lehman and asked them to take 100 percent of the equity of the enterprise.
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- 131 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. THE COURT: Okay, thank you. and I think Mr. Sathy referred to it
And you referred --
in his opening statement which is Section 6(b) of the plan support agreement -- in that Lehman has -- one of termination events is whether Lehman executes a definitive agreement. Is
it your understanding that Innkeepers has any veto right, or is it Lehman's right whether or not to sell fifty percent or waive that condition? A. That's Lehman's right to terminate if they couldn't sell
fifty percent for a sum of money. Q. Okay. Is it your understanding if Lehman waives that and
takes 100 percent you have any way to change that under the PSA? A. Q. No. And based on your understanding of Apollo's agreement with
Lehman and this plan support agreement, would Apollo be receiving any equity -- excuse me, any economic value based on its pre-petition equity? A. Q. Absolutely not. I want to talk for a moment about one of the documents Mr.
Parkins referred to in his opening -MR. DONOVAN: the whole set. And Your Honor, I don't know if you have
It's Midland 74.
May I approach the witness? THE COURT: Sure.
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- 132 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. (Pause) And I am -- if you could focus your attention on the
page -- and it's hard to see but it's Bates numbered -- it's in the writing -- 4726. "redacted". A. Mr. Parkins referred to this in his opening statement, and And the middle of the page says
it says on these -- and the record will reflect these were notes produced by Lehman -- it says, "Risks per MB" and it goes through, it says, "LB and Apollo need to agree to the capitalization, impaired accepting class, sub rosa new-value plan, Marriott", do you see that, sir? A. Q. Yes. Okay. Did you just -Can I have some foundation? Whose notes
THE COURT: are these? MR. DONOVAN:
Well, the record will reflect they're
from Lehmans -- people at Lehmans who were at a meeting, Your Honor. THE COURT: MR. DONOVAN: Okay. It's in a deposition. These are not
notes of the debtors; they're of Lehman. THE COURT: Okay. Is there an actual person that we
know that wrote these notes? THE WITNESS: MR. DONOVAN: Yes, Your Honor. Your Honor, it would be Mr. Lascher.
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- 133 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. THE WITNESS: THE COURT: that's the case? MR. DONOVAN: THE COURT: Yes, Your Honor. Okay, thank you. Mr. Lascher, Your Honor. All right, and everybody agrees that
And did you have a meeting where you discussed risks to
the proposed plan, Lehman and Innkeepers, of the plan support agreement they were going to go down the path with? A. Yes, it was one of the continuing conversations in trying
to get Lehman to agree to the plan support agreement. Q. Okay. And why did you discuss these risks and where did
they come from? A. Well, in developing a plan support agreement and in
developing a plan, you have to look at a lot of different alternatives. And in looking at the alternatives you have to Some of those execution
look at risk of exe -- execution risk.
risks are business, some of them are legal, and some of them are appearances. And this is obviously a conversation that I
had with Michael Lascher where I said 'Listen, there are going to be a lot of potential objections and I don't think they have any viability but I want to fully disclose what people may very well say.' And evidently my prediction was fairly appropriate
and accurate. Q. Let me ask you, several of the objectors have put in their
papers that this plan support agreement is a new-value plan.
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- 134 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 moment? MR. DONOVAN: THE COURT: (Pause) MR. DONOVAN: Please. Your Honor, and Mr. Parkins, Yes, Your Honor. Okay. Do you believe, as the chief restructuring officer, that this plan support agreement is a new-value plan? A. I never believed it was a new-value plan. I mean, this is
really a basic restructuring scenario that bankruptcy lawyers have used for the twenty-five years that I've practiced. simply a debt-for-equity conversion. It's
The fact of the matter is
in a debt-for-equity conversion you never know what the person who is receiving equity is going to do with it. In this case
it became apparent some time in May and June, and I wanted to make sure that everybody was informed that Apollo was purchasing part of the restructured equity from Lehman so that there was full disclosure and everyone understood it. But the
debtor is not receiving anything from Apollo, and Apollo is receiving nothing from the debtor. Q. Okay. Let's now move and talk about the plan support
agreement. MR. DONOVAN: THE COURT: May I approach, Your Honor? Sure. Are we done with Midland 74 for the
what I handed out are demonstrative exhibits only that we're going to use to walk through.
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- 135 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Q. THE COURT: All right, thank you.
And Mr. Beilinson, whether or not you want Demonstrative 1
or 2, which are from your declaration as well, can you summarize for the Court at a high level what the plan support agreement provides? A. It provides that Lehman will give up its collateral and
become 100 percent equity owner of the debtors; that it creates 20 million dollars of free cash flow; it creates unencumbered assets; and it allows for other secured creditors to receive an actual note for the full value of their collateral; it allows them to take the 1111(b) election and it provides some distribution to general unsecured trade creditors. Of course
with all of the benefits you get a lot of the things you don't like. There were a number of termination events and milestones And
that the debtor has to meet otherwise Lehman has remedies. the remedies are, I believe, fairly normal until you hit 240 days out. Q. Okay. So we talked about that. Withdrawn. What is Lehman --
MR. DONOVAN:
Do you believe there are risks to Lehman giving up its
convert secured debt to equity? A. Oh, absolutely. There is always the risk when you give up And of
a security interest in hard operating assets to equity.
course people like to talk about equity up side, but we all know and Apollo knows in our own -- well, we all know that
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- 136 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 equity has a down side too so I believe Lehman's giving up a lot. Q. You talked about the benefits. Let's cover some of the
other terms.
And if you could turn to page 3 of the And
demonstratives, I want to talk about the fiduciary out.
first I want to ask you, what was the purpose by Innkeepers and yourself in seeking a fiduciary out in the plan support agreement? A. I always believed that I had a fiduciary out because in my
position as the CRO and being an officer of the court I'm going to be obligated to do what I think is in the right, best interests of the bankruptcy estate regardless of whether there is a memorialization in writing or not. So I initially didn't
think it needed to be in writing, but legal counsel on all sides thought that it needed to be memorialized and this is the way it ended up being memorialized after a substantial amount of negotiation. Q. Let's focus first on 25(a), and we have it in front of us
so I don't need to read it, but does 25(a) actually define the term "fiduciary out"? A. Q. Yes, it does. And as the chief restructuring officer, what was your
understanding of what 25(a) provides? A. My understanding is that it provides a complete fiduciary
out that if anytime I believe that I should in my fulfillment
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- 137 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. of my fiduciary duty move in a different direction I can do so. However, if I move in a different direction, it still allows Lehman to have certain remedies. Their remedies in the first
240 days is simply termination of a PSA and termination of cash collateral subject to my comments earlier today, I'd be negotiating with Lehman or back before this Court. If they didn't terminate the PSA on the 240th day if I didn't have another plan confirmed prior thereto, they would have what has been referred to as super remedy where I would have to choose to give them relief from the automatic-stay or otherwise sell their collateral in connection with a 363 sell. Q. And is it your understanding if Lehman actually before the
240 days terminates the PSA, they exercise that right, what happens to the super remedy? A. Q. It goes away. If you receive another offer that you believe is -MR. DONOVAN: Withdrawn.
If you receive another written offer, whether it's an
offer of plan and restructuring, who will you confer with? A. If I receive a viable offer, I'll confer with legal
counsel, I'll confer with Moelis, I'll confirm with my management team and to the extent that we should, I'll be conferring with the independent members of my board of directors. Q. Let's now move to the next, the demonstrative 4, and this
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- 138 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 has the remainder of section 25, section 25(b) and (c), it's been talked about and will be argued about later I'm sure but what I want for you to tell the Court is what's your understanding of what section 25(c) requires and provides? A. In general, it says that if I want to move forward with
another transaction that is better for Lehman that I can do so, if Lehman agrees I can do so, if Lehman doesn't agree, I would have to come to the Court and ask the Court's permission to move forward and that it was better. And to the extent I
exercised 25(c), all of the remedies went away including the super remedy, so this was a provision which took a super remedy away. Q. Do you believe section 25(c) in any way supplants what you
could do from 25(a), the fiduciary out? A. Q. Absolutely not? And just to be clear on the fiduciary out, has the debtors
received any written alternative restructuring proposals today? A. Q. No. And if you receive written alternative restructure and
proposal offers, will you consider them? A. Q. Of course. And let's just pause here for a moment because attached to
the papers of Midland, they attached a letter from Five Mile to Midland regarding a restructuring of Innkeepers. And first,
let me ask you, before you saw it as attaches and exhibit to
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- 139 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 their objection, had you received that letter? A. No, I did not. It's never been presented to me even up
until today. Q. Okay. Even though it hasn't been presented, have you
reviewed the letter? A. Q. I've done some review of it. Okay. And I know we've had a lot going on, but at least
based in your review, what's your understanding of what it provides? Midland. A. Well, it's a little premature for me to judge it since I And this is the Five Mile letter from Five Mile to
haven't been able to ask any questions about it from any of the constituents, but my general understanding is it creates a capital structure that has an additional hundred million dollars of leverage on the company. It allows a dismemberment
of the enterprise because essentially what it says is all of the secured creditors if you want to just take your collateral and we're restructuring it around just the fixed pool. And I
believe it's really an alternative to a motion for relief from stay using a different name. Having said all of those things which I acknowledge is an initial negative view, I'm very open to meeting with them, invited them to come to the meeting in the next couple of weeks to talk about it to see if we can, you know, discuss other alternatives.
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- 140 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. Let's move forward to termination events and this
is section 6 of the plan support agreement and you've already testified about it somewhat but can you explain to the Court why were you willing to agree to termination events in the plan support agreement? A. Well, every deal you ask for things and you have to give I thought that what I was receiving from Lehman was so
things.
dramatically positive in terms of an internal debtors' reorganization and it was such a cornerstone to my conversation with Marriott and other franchisors and the ability to get DIP financing, that I should provide them with rational termination provisions and remedies. And, by the way, it's not me
providing it to them, it's more of them demanding from a whole host of termination events and us negotiating them very harshly. Q. And I think we may have covered this, but let's just make
sure our record's clear, other -- before we get to the 240 days, what do you understand Lehman's remedies are if there is a termination event? A. Q. They can terminate the PSA and cash collateral. Let's talk about the termination event after 240 days
what's been discussed this morning where they can either relief from stay or 363 sale, why were you willing to agree to this remedy in the context of this plan support agreement? A. I thought that if Lehman as a secured creditor giving up
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- 141 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. MR. DONOVAN: THE COURT: If I may approach, Your Honor? Sure. Okay. Why not let you get it so I rights to encumbered assets and cash flow attributable to those encumbered assets, they went down this journey towards an internal restructuring for the benefit of everyone with us for a reasonable period of time and if we were unsuccessful, I believe that they should have the right to not have to begin a new battle. Q. In the plan support agreement, is there a breakup fee for
Lehman if a better deal comes along that you take? A. Q. There's no breakup fee. Okay. Let's talk about the approval of the plan support
agreement by Innkeepers and its board. THE COURT: MR. DONOVAN: THE COURT: Before we lead to -Yes, ma'am. -- the termination events, section 4 of
the PSA deals with the title of the support of the transaction, additional covenants, and it says that "Prior to the termination no party will", party includes the debtors, directly looking at section 4(a)(ii), I'm sorry, you're at a disadvantage because I have it and you don't. -THE WITNESS: I think I know the provision, Your
can set up my question appropriately. MR. DONOVAN: 4(a)(ii), Your Honor?
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- 142 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: Right. So, 4(a)(ii) says "Prior to the
termination no party will directly or indirectly seek, solicit, negotiate, vote for, consent to, support or participate in the formulation of any plan of reorganization or other restructuring other than the plan", meaning the plan that's the subject of PSA. And then if you jump over to the termination
section that we've been talking about, (r) on page 10 recites that "A Termination Event is the material breached by any party of any of their undertakings, representations, warranties or covenants set forth in this Agreement." So, can you meet with
Midland to discuss this letter and not trip up (r) in light of -- on light of 4(a)(ii) and maybe it's a question for your lawyers but I'm just trying to understand what everyone thinks how this works? THE WITNESS: I believe I can, Your Honor. I think
there is -- the distinction that I make is I can't go out and solicit a plan, I can't go out and market, but if an offer is presented to me, I have a fiduciary obligation to go and talk to them and consider it and review it with my attorneys, my advisors, and my board. THE COURT: THE WITNESS: But this is says, "participate". I understand what it says, Your Honor,
and it may very well be a violation of these words, but it's what I would do and I believe it's what Lehman would expect me to do. So, I do understand that it may be violative of these
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- 143 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. words but it's certainly not violative of my understanding of what Lehman would expect of me. THE COURT: BY MR. DONOVAN: Q. Let's move now to the independent directors approving the Who at Innkeepers approves a plan All right. Thank you.
plan support agreement. support agreement? A.
The independent members of the board of trustees, now for
consultation and a meeting with our outside advisors, Kirkland and Moelis. Q. Okay. And let's stop before we get into that and let's
kind of tell the Court who their independent directors are in Your Honor's sub -THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: I have pictures. We have pictures. I'm so excited. Pictures make everything better.
Let's start with, well, why don't you just walk through
and describe the independent members of the board to the Court. A. Fred Kleisner is one of the great hoteliers of our time.
He is currently the CEO of Morgan (sic) Hotel Group which owns the Hudson, the Royalton the Mondrian and some fairly cool hotels around the country. Prior to that, he was the CEO of Lincoln Motels which was the largest hotel chain in the nation. And his experience
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- 144 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 prior to that speaks for itself both at Starwood Hotels and as a senior executive at Westin Hotels. He's been on this board
since Apollo took it private in 2007 and is, quite frankly, an invaluable member. Larry Ruisi has been an independent member of the board since Apollo took this private in 2007. He has twenty years of He
experience in connection with the entertainment business.
was the CEO of Loews Cinemas and as this Court might remember, Loews Cinemas and General Cinemas and virtually all cinema companies went through Chapter 11 about a decade ago and he was at the helm of the company through the Chapter 11 process and understands the fiduciary duties attendant thereto. Prior to
Loews he was a senior executive with Sony Pictures and Tri-Star Entertainment. The third -- and also he sits on, I believe, two other public company boards of directors. Bernie Zaroff (ph.) is a lawyer with nearly thirty years of experience in a number of public and private companies where he was involved in all sorts of corporate transactions and gave advice to boards of directors with regard to their fiduciary duty and corporate obligations. Q. Okay. And what was the process with the independent board
that led up to them approving the plan support agreement? A. Well, I was having meetings with the independent members
of the board -- I shouldn't say meetings, they were update
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- 145 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. phone calls every two or three weeks starting in March when Marriott sent the termination notices, kept them fully apprised as to how the negotiations with all the various parties were going, and it led to a meeting of the full board and included a section of the meeting that was just for the independent members of the board with Moelis and Kirkland where they could ask all questions and get comfortable with the transaction that I believe needed to be approved by the independent members since Apollo was involved in the potential purchase of equity out of this -- that Lehman would receive from this restructuring. PSA. MR. DONOVAN: THE COURT: Can I have one moment, Your Honor? Certainly. So, independent members voted to approve the
And after that process, Mr. Beilinson, who voted to
approve the plan support agreement? A. Q. I believe it was the independent members of the board. Can we go back to demonstrative 3 for a moment which is It's really in response to the Court's
the fiduciary out? question.
In section 25(a), the provision starts "Notwithstanding anything to the contrary herein." What's your understanding
that that provides you as the chief restructuring officer? A. I just wanted it to be clear that I had a fiduciary out
and it didn't make a difference what was elsewhere in this
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- 146 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 document. Q. So, based on negotiations that led up to in the board
process, why in both the companies and your business judgment do you believe the plan support agreement should be approved? A. Without the plan support agreement, I would have walked It
into a Chapter proceeding that would have been a mess.
would have been a freefall with DIP financing, without an agreement with Marriott who relied on the good faith of my negotiations with Lehman which I kept them apprised of in my negotiations with Marriott in connection with adequate assurance agreement. These really were all negotiated separately but completely intertwined agreements. Without my negotiations with Lehman to
create the appropriate capital structure that was sustainable, I would never have come to my agreement with Marriott. Without
my agreement with Marriott, I would never have been able to come to my agreement with Lehman Brothers. And without the
agreement of both of them, I would never have ended up being able to get nearly seventy million dollars of DIP financing approved which is the right thing to do by this enterprise and by all the constituencies within this enterprise. So, they were all interrelated. They were all negotiated
at the same time independently of each other and quite frankly without some -- with a little bit of amazement they all came together and allowed for a very structured reorganization
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- 147 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 which, as I said earlier, I believe will end up to be much more consensual than it is today. So, without it, it would have
been a complete freefall and, quite frankly, I'm not sure exactly what I would have done. Q. Thank you, Mr. Beilinson. MR. DONOVAN: Your Honor, at this time I don't believe
it's objected to, but I would move into evidence Exhibit 14, Exhibit 1, Exhibit 15, Exhibit 16 and Exhibit 17 which is the last document of the packet. THE COURT: agreement. MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: Yes, Your Honor. 14 is Mr. Beilinson's declaration. Yes, Your Honor. 15 is Project Tavern. 16 is the All right. So, 1 is the plan support
multicolor presentation. MR. DONOVAN: as well, so -THE COURT:
Did you say 17 as well, the chart?
Yes, I believe it's on Mr. Parkins' list
All right.
Any objections? Your Honor, we'll address the
UNIDENTIFIED SPEAKER: second declaration. those exhibits.
We have no objections with respect to
I don't think we object to them. All right.
THE COURT:
(Plan support agreement was hereby received into evidence as Debtors' Exhibit 1, as of this date.)
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- 148 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Declaration of Marc Beilinson was hereby received into evidence as Debtors' Exhibit 14, as of this date.) (Moelis presentation re: Project Tavern was hereby received as Debtors' Exhibit 15, as of this date.) (Multicolor presentation was hereby received into evidence as Debtors' Exhibit 16, as of this date.) (Chart was hereby received into evidence as Debtors' Exhibit 17, as of this date.) UNIDENTIFIED SPEAKER: lot of testimony. adverse witness. THE COURT: MR. DONOVAN: All right. And, Your Honor, for the record, I'd He's already live -- given a
I'm going to cross-examine him for a moment,
like to have this marked as demons -- Debtor's Demonstrative 1 through 7. (Debtors' Demonstratives 1 through 7 were hereby marked for identification, as of this date.) THE COURT: All right.
Your estimate of time was remarkably accurate and I compliment you. MR. DONOVAN: THE COURT: Thank you, Your Honor Can I get an estimate from everyone else
about how -- I know it's hard; just trying to plan the day? UNIDENTIFIED SPEAKER: THE COURT: The rest of the day? Is that pretty much
The rest of the day?
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- 149 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 it? UNIDENTIFIED SPEAKER: two days ago we said probably -THE COURT: You said four or five hours. -- cross-examine. Right, four I think, Your Honor, I think
UNIDENTIFIED SPEAKER: or five hours. THE COURT: All right.
So, I would like to take -- is
forty-five minutes long enough for everyone to get lunch and regroup? Hesitant to take more than that because we still have So, why don't
another motion that we have to deal with today. we say 1:45 or thereabouts. Beilinson. MR. DONOVAN: All right.
Thank you, Mr.
Your Honor, may I ask a question?
How
late tonight -- is there a cutoff point? THE COURT: I have good news and bad news. Through
the generosity of the United States, we have unlimited air and space tonight. It's all been arranged. So, we're going to
stay here as long as it takes because I have a Chapter 13 calendar tomorrow and tomorrow is the forty-fifth day so I think that we need to finish today. So, subject to my staying All right. Thanks,
power, we're going to stay and finish. folks. MR. DONOVAN:
Thank you, Your Honor.
(Recess from 12:59 a.m. until 1:57 p.m.) THE COURT: Good afternoon. Please be seated. There
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- 150 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 was a rumor that Mr. Penn was missing. UNIDENTIFIED SPEAKER: exactly missing. THE COURT: being here? UNIDENTIFIED SPEAKER: THE COURT: All right. Yes. Great. Okay. But you're ready to go without him Is he missing? He's not
I know where he is.
Mr. Beilinson, you're still under oath. UNIDENTIFIED SPEAKER: Bienenstock first. THE COURT: All right. Thank you. I'm going to yield to Mr.
Mr. Bienenstock. MR. BIENENSTOCK: THE COURT: CROSS-EXAMINATION BY MR. BIENENSTOCK: Q. A. Q. Good afternoon, Mr. Beilinson. Good afternoon, Mr. Bienenstock. Hi. I represent the ad hoc committee of preferred Good afternoon, Your Honor.
Good afternoon
shareholders. Mr. Beilinson, you left the practice of law approximately three years ago, is that correct? A. Q. That's correct. And very shortly after that, if not immediately, someone
from Apollo called you to join the board of Innkeepers, is that
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- 151 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 right? A. I don't recall if it was before or after I left the
practice of law. Q. Okay, so it might have been before you even left, but you
were asked to join the board of Innkeepers, is that right? A. Q. A. Q. That's correct. And you did join the board? That's correct. And within some period of time, perhaps a year or less,
after your joining the board, you became CRO, is that correct? A. Q. A little bit more than a year. Now, your compensation, when you joined Innkeepers as
CRO -- well, first as a board member of Innkeepers, were you paid anything? A. Q. A. Yes, I was. What were you paid? I was paid board fees somewhere between 60- and maybe
80,000 dollars a year; don't really recall. Q. A. Q. A. Q. Okay. And then you became CRO, correct?
That's correct. And you got a million dollar signing bonus, right? No, that's not correct. Okay, then take me through the compensation steps at
Innkeepers. A. Sure. My initial compensation was 900,000 dollars a year
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- 152 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 plus normal benefits. There was a bonus structure that could
have awarded me a number of millions of dollars beyond that if I was successful with regard to all of the bonus criteria. Q. Okay, so you started with a 900,000 dollar salary. When
did the million dollar signing bonus come in that you referred to in your deposition? A. I got a number of bonuses both during the first year that
I was at Innkeepers, based upon certain bonus criteria that I met. And then when the contract was extended, I received two one was a million dollar bonus to sign on for another
bonuses:
year, and the second was a million dollar retention bonus so that I would stay for the balance of the year. Q. And what was the approximate amount of the bonuses you
received the first year while you had the 900,000 dollar salary? A. Q. Two million dollars. And this all arose out of Apollo calling you to join the
Innkeepers board, is that correct? A. Q. A. No. Then what did it arise out of? Management, knowing my restructuring background -- quite
frankly, I'm not sure how -- called me in November of 2008 and asked me to come out and make an assessment of what they were seeing in their projections and to see if I could make recommendations and help as a board member. So management
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- 153 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 asked me to come out. Based upon what we collectively
concluded, we went to the board of directors and gave them their findings and then -- then there was some negotiations with the board with regard to whether I was willing to serve as CRO and, in essence, come out of retirement, and I did indeed do that. Q. Management called you after Apollo had already put you on
the board of Innkeepers, is that correct? A. Yes. I was a board member on an independent basis when
management called me and, yes, Apollo did invite me to be an independent member of the board in 2007. Q. And is it fair to say that, within the bounds of the law,
you would like to do the best job you can to minimize the harm or maximize the profit that Apollo ends up accruing in this situation? A. time. Well, actually as a CRO my duty changed over the course of I would probably say, during the first period of time
that I was at Innkeepers, I believed that I could avoid a Chapter 11 and I wanted to maximize the ability to continue paying the -- everyone in the capital structure, resolve the issues with Marriott. And to the extent that equity value
could continue to remain, I wanted to pursue an alternative where Apollo as an equity owner had continued value. that changed at some point in time. Q. It didn't work out that way, right? Obviously
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- 154 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. A. At some point in time that changed, and Apollo -- you
know, my fiduciary duty changes, and Apollo was out of the money. money. I told them they were out of my money -- out of the And then I was just seeking to maximize the value of
the estate for the benefit of the constituents, which I don't believe includes out-of-the-money equity. Q. Okay, on that topic, Mr. Beilinson, you're familiar with
at least seven assets at Innkeepers that are not subject to any blanket mortgages, is that correct? A. Q. That's correct. And in the -- those assets were referred to in the Moelis
exhibit you looked at earlier as "Other", I believe, is that right? A. it. Q. A. Q. Sure. Can you point it to me, please? Unfortunately, I don't have it. UNIDENTIFIED SPEAKER: Exhibit 15, I believe. Are these the same assets that were referred to as "Other" I think we're probably talking about the same It's Exhibit 15. I believe that's correct, but I'd like to take a look at
in the PSA? ones. Q.
Okay, so those represent either seven hotels or, in one
case, a joint-venture interest, I believe, is that correct?
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- 155 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. No, I believe it's seven hotels and, in addition, a joint-
venture interest. Q. Okay. And each of those hotels in the joint-venture
interest are owned by separate legal entities, is that right? A. I believe that's probably accurate, although I don't have
a corporate chart in front of me. Q. Okay. And those legal entitles are, to your knowledge,
not liable for any of the other debt of the other Innkeepers entities, such as the blanket mortgages or the mezzanine debt, is that right? A. I'm not sure. I mean, there are other obligations that
all of these entities have to franchisors and creditors, and of all sorts of natures. Q. But you're not aware of any specific institutional debt,
mortgage debt or bond debt, that those seven entities are on the hook for, other than the mortgages on their individual properties, correct? A. No, I don't think that is correct. I believe that, at
least with regard to Anaheim, there's a twenty-one million dollar mezz piece to one of the Lehman-affiliated entities. That comes to mind. Q. Okay, but for the other six entities, you're not aware of
any other institutional bond debt or mortgage debt that they're liable for, are you? A. I don't believe so.
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- 156 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Q. Now, these seven entities, and I'll name them for you --
KPA HI Ontario LLC; KPA RIMV, LCC; KPA RIGG, LLC; KPA San Antonio, LLC; KPA Washington DC, LLC; KPA Tysons Corner Rhode Island, LLC; and KPA HS Anaheim, LLC -- these entities, other than the Anaheim entity, the first six entities I mentioned are owned by Innkeepers USA Limited Partnership, correct? A. I don't have a corporate structure in front of me, but
that probably is accurate. Q. Okay. And that Innkeepers USA Limited Partnership is in
turn owned by Innkeepers Financial Corporation, right? A. I don't have a corporate structure, but if you make that
representation it's probably accurate. MR. BIENENSTOCK: unfortunately. Could I -Well, we've got -- there's a full-color Your Honor, I only have one,
THE COURT:
one that supersedes that one, so -UNIDENTIFIED SPEAKER: 17 in that pile. A. Thank you. Mr. Bienenstock, it's Exhibit
The last exhibit. Didn't see it.
I believe that your comments are accurate. And the same would be -- the same answer would hold for
Innkeepers USA Trust in terms of it not having any institutional debt or mortgage debt liability? A. I have not looked at that specifically. I want to review
it before I --
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- 157 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. But you're not aware of any, are you? I don't believe there is any bond debt. I believe that
there's other debt and debt based upon guaranties to a lot of my franchisors, and also franchisor obligations which are embedded in many of those entities in the corporate structure. As I sit here today, I can't tell you exactly who and how much. Q. LLC? A. Yes. There is guaranty and other obligations by Okay, and the same answer would go for Grand Prix Holdings
franchisors and other parties to different entities in different ways within the parent corporate structure. Q. And some of those guaranties are being satisfied by virtue
of the debtor-in-possession loans that the Court has recently approved, correct? A. Q. A. No. None of them, or just some of them? I don't think any of the guaranties within the parents of
the structure that you were referring is being satisfied by the debtor-in-possession financing. Q. Okay. Can you tell us what those guaranties are that
you're referring to? A. Q. A. I believe -- meaning the parent structure? Yes. I believe there's a guarantee to Marriott, and there's
other guarantees that I'm just not familiar with, but none that
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- 158 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I think are being satisfied based upon the debtor-in-finan -debtor-in-possession financing. Q. You haven't today brought with you appraisals of the
equity value, if any, of the seven entities I've referred to, have you? A. We have not done any appraisals with regard to any of
those assets in the recent past. Q. Is there also joint-venture interest that is owned in this
corporate enterprise that's -- by the parent companies? A. There's only one joint venture that I'm aware of involving
a company called Gencor, with regard to one piece of property, which I believe the interest is valueless, based upon all information that I have at my disposal. Q. Now, let's get back to the compensation we were talking You're hopeful, are you not, that if you do a
about before.
good job, Apollo might refer you to other situations in the future where you could be of help, are you not? A. That is not of significance to me. I have retired
previously, and I don't have any knowledge or view with regard to what I might do in the future. do my best job. Q. A. Q. Are you retired now? No, I'm not retired now. Okay. Now, if Lehman Brothers -- I'm sorry, if Lehman I always just simply try to
ALI, I think; the Court set it out clearly this morning at the
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- 159 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 outset -- the party that you're dealing with for plan negotiation purposes, if it prevented the use of its cash collateral from being used to operate its collateral, do you think its collateral value would go up or down? A. If the collateral wasn't used and the hotels stopped
operating, the value would go down. Q. So if you had simply come into court with any PSA and
asked for permission to use Lehman's cash collateral, what you just said could well have satisfied the standard to get permission to use it, right? A. I believe that I would be successful in a nonconsensual
cash collateral argument with Lehman. Q. Now, you testified at deposition, and I believe you might
have mentioned it earlier this morning, that you turned down several deals that Lehman was proposing, one of which was having Apollo backstop the issuance of 62 percent of the equity of the reorganized debtor for 171 million dollars; do you recall that? A. I recall a proposal made by Lehman Brothers that included
a backstop, yes. Q. Are my terms correct to your recollection that it was to
pay 171 million dollars for 62.18 percent of the reorganized debtor? A. I don't know if that is accurate or not, because I turned
that down and went back to Lehman and said I'm only interested
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- 160 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 for -MR. BIENENSTOCK: actually starts on page 44. Page 45 of his deposition. Or it in a plan where they conferred a hundred percent of their debtto-equity and had no interest in that proposal. Q. Well, let me see if I can refresh your recollection. At your deposition, do you remember being asked this
(Pause).
question -MR. DONOVAN: Your Honor, objection.
I think if you're going to refresh the recollection, you should give the witness -THE COURT: I'm sorry. Here, this is going to show But I was typing --
you the limits of my multitasking ability. MR. DONOVAN: THE COURT: just happened. MR. DONOVAN: Sure. Sure. -- while that happened.
So tell me what
Mr. Bienenstock said he was going
to refresh recollection, and the way to do that is -THE COURT: MR. DONOVAN: THE COURT: He's got to show it to him first. Yeah. Exactly. I'm happy to do that. May I
MR. BIENENSTOCK: approach, Your Honor? THE COURT: MR. DONOVAN:
Please. In what part are you -- if I could ask
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- 161 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. MR. DONOVAN: (Pause) I do recall being asked that question at the deposition. Okay.
BY MR. BIENENSTOCK: Q. So did you ever figure out what value was being put on one
hundred percent of the equity of the reorganized debtor if 62.18 percent was being sold for 171 million dollars? A. I believe I've had conversations of value starting in And it's a continuing process for me. Whether
April of 2010.
I considered it in connection with a proposal that I declined, don't really recall. Q. Well, I'm not sure you understood my question. I'm
asking, when you were presented with this proposal under which Apollo would backstop the purchase of 62.18 percent of the equity for 171 million dollars, did you perform the arithmetic computation to figure out what amount of money that would mean 100 percent is worth? A. Q. I just don't recall. Okay. Are you facile enough with arithmetic, and I bet
you are, to know that if 62.18 divided by 171 would be 100 to X, and you can cross-multiply and figure out the answer, you could do that computation, could you not? A. I could probably do the computation, but I don't know what
the term sheet said in its entirety, and I don't know what the context of the arithmetic would actually be for. So I don't
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- 162 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 really know how to answer the question. Q. Well, I'm only asking you can you do the arithmetic
computation. A. Q. Yes. Okay. And would you like to do it, or would you trust me
that it comes out that if 62.18 percent of the equity's being sold for 171 million, 100 percent would be sold for 275 million and change? A. I'll accept your arithmetic but, without knowing what the
capital structure looks like, I don't know what the context is; I don't know what that would mean. Q. If you accept my arithmetic, and that's all I'm asking you
to do, there's -- 100 percent of the equity was valued under that proposal at 275 million dollars, and you turned it down, correct? A. I don't know what the balance of that proposal was. So
the answer is I know I turned down the proposal; not sure what the entire proposal was and all of the factors that led me to the conclusion that I had no interest in that proposal. I had
an interest in having Lehman convert a hundred percent of their secured claim to equity, and that's the proposal I went to Lehman with on April 22nd; that's what I believe created an appropriate and sustainable capital structure; that's what I was negotiating for. The fact that they provided me with a
number of alternative proposals that were turned down by me is
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- 163 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 a fair statement. And without seeing what the entirety of the
proposal was, it's very hard for me to tell you at this moment all of the factors that led me to the conclusion that it was unacceptable. Q. Okay, but the current PSA that you did find acceptable
values half of the reorganized equity at 107.5 million, is that correct? A. Q. No, that's not correct. Okay. What does it value 107 -- what does it value half
the equity at? A. I don't have any value for half of the equity. I don't
have a value for 100 percent of the equity, except to the extent that I was comfortable it was somewhere in the lessthan-200-million-dollar range. What you're referring to is an
amount that was negotiated between two third parties, and I wasn't involved in any material way in that negotiation over that number. Q. A. Okay. It was negotiated between Apollo and Lehman, and they're
pretty substantial entities that don't need me to tell them what the right number is. Q. Okay, Mr. Beilinson, I stand corrected. The 107.5 million
dollar number is in the separate document between Lehman and Apollo, correct? A. I understand that Apollo is purchasing 50 percent of the
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- 164 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 restructured entity from Lehman for 107 million dollars. don't know what the separate document actually says. Q. Okay, and what would that imply a hundred percent of the I
equity of the reorganized debtor is worth? A. I don't know what else more than to that negotiation, so
to me it doesn't imply anything. Q. So you wouldn't just multiply it by 2 and say if 50
percent of the equity is worth 107.5, 100 percent is worth 215? A. I think that would be way too simplistic a view as to what So, no,
transpired in negotiations between two third parties. I would not simply come to that conclusion. Q. Okay.
You're aware, are you not, that, as part of the
deal, Apollo is released from its guaranty, right? A. Q. A. I have been told that, yes. Okay. How much -I haven't been told that. Actually,
And let me clarify.
I read it in pleadings, but have absolutely no independent knowledge with regard to Apollo's guaranty with regard to Midland and what happened in negotiations with Lehman. So the
truth is I really don't know, and it's not significant to me as the CRO of this debtor. Q. A. Q. A. Do you know who Schuyler Hewes is? Absolutely. Who is that? Schuyler Hewes is a member of the board of directors of
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- 165 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Innkeepers and is also an employee of Apollo Investment Corp. or one of its affiliates. Q. A. Q. And have you read his deposition? No, I have not. Okay. Well, if he had represented that part of Apollo's
deal -MR. DONOVAN: THE COURT: Your Honor, objection. Sustained. I'll rephrase it, Your Honor.
MR. BIENENSTOCK: THE COURT: Good.
Do you have any reason to believe that, as part of
Apollo's deal with Lehman, that the PIP work it guaranteed will be covered by the reorganized entity and Apollo won't have to be out of pocket for that? MR. DONOVAN: Objection, Your Honor. Just for -- can
we get a clarification referring to the guaranty to Lehman, to Midland or some other party? here. THE COURT: That's fair. I think there's some ambiguity
Can you identify with more specificity, Mr. Bienenstock, the guaranty to which you're referring? Q. A. The guaranty to Midland. My understanding is that the guaranty is between Apollo
and Midland, and there was a litigation in the state court and that it'll be resolved between them. I did recall some
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- 166 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 conversations that Lehman and Apollo may have had in connection with the guaranty, but that's the extent of my knowledge. Q. It would make sense to you, wouldn't it, that if Apollo
was buying into this reorganized entity that it would want to know that the entity would satisfy the -- its guaranty obligations for any improvements it had guarantied, wouldn't it? A. I don't know what's in Apollo's head, and they don't share
with me all of their thoughts. Q. If -- you would agree that from Lehman's point of view,
for it to equitize 238 million dollars of its mortgage debt, it would require obtaining a certain value, correct? A. Q. Could you repeat the question? I'm sorry.
You would agree, wouldn't you, that for Lehman to agree to
equitize 238 million dollars of its mortgage debt, it would have to be satisfied that it was receiving equity value, a certain amount, whatever it computed it would require for that type of transfer/conversion? A. That's not really the analysis. I did it all. The
analysis I did was that if every other secured creditor was getting a note for the value of their collateral, the hundred percent that Lehman would be getting would be all-attributable to the conversion of their secured claim to equity. So the
truth is that all other -- all secured creditors are getting all of the value that this Court determines is a value of their
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- 167 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 collateral; so, all equity attributable to the conversion of the Lehman debt. So, you know, it wouldn't seem to make a
difference to me as to whether Lehman valued it at 150 million or 200 million. Q. Well, let's pursue that for a minute, Mr. Beilinson. The
rest of the Innkeepers estate, the properties encumbered by Midland and the other properties and all, to your knowledge they're all going to have mortgage debt equal to their value, right, because you're writing down mortgage debt to the value of the collateral pools? A. Q. That's correct. Okay. And so a minute ago you said to me you were just
looking at the Lehman deal as Lehman getting the equity out of its properties because it was canceling its mortgage, converting it to equity, right? A. Q. deal? A. Lehman is getting the equity of the entire enterprise No, that's not correct. Okay, so what do you think Lehman is getting under this
underneath the secured claims -- the notes equal to the value of the secured claims of Midland and other holders of secured creditors. So they're actually going to be subordinated to
secured and unsecured creditors in the reorganized enterprise. Q. So they will control, will they not, the collateral pool
encumbered by the Midland mortgage, some forty-five properties,
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- 168 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 right? A. They will control the consolidated cash flow of an
integrated enterprise and have to comply and pay all of its debt obligations and other obligations in operating its business before there is any -- anything else. Q. I'd appreciate it if you could be more responsive to my You'll have a chance, I'm sure, on redirect later.
question.
But when Lehman gets a hundred percent of the equity, among the things it's getting is control of the forty-five properties encumbered by the Midland mortgage, is that correct? A. Well, it's not control of the properties, because it'll be It'll also be subject to mortgages;
subject to release prices.
it'll be subject to payment obligations in connection with notes. It'll be subject to a lot of obligations in connection So --
with, you know, taxes, insurance and other things. THE COURT: different way? MR. BIENENSTOCK: THE COURT: Right.
Mr. Bienenstock, can I ask the question a
If the plan gets confirmed as it
presumably is written now or as contemplated by the PSA, and putting to one side whether or not the third-party transaction with AIC or somebody else gets contemplated, Lehman would own the company, the reorganized company, right? THE WITNESS: THE COURT: That's correct. I think that's what he's trying to -- I
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- 169 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 think that's the question. mean -THE WITNESS: THE COURT: trying to obfuscate. I apologize, then, Your Honor. No, I'm not suggesting that you were I'm just -- you know, sometimes it's And that's -- that answers -- I
shortest distance between two points is a simpler question. So -- you know, and I don't want to interject myself into this conversation; I'm willing to let it play out. But in my mind,
the transaction contemplated by the PSA has two values that are implied and that I think you would have had to have thought about in the exercise of your fiduciary duty; one is the value of the Lehman collateral, because in your experience you're undoubtedly aware you can't overpay them, right? THE WITNESS: THE COURT: Absolutely. So if their collateral is only worth 150
million, you couldn't give them equity -THE WITNESS: THE COURT: Oh, absolutely, Your Honor. -- that's worth over 200 million? Okay,
so that's one valuation.
The other valuation, and I think you
back into it somewhat, under the PSA, and the 107 million dollar figure is in the PSA, that's one of the termination conditions that there's an agreement to sell to a third party for 107.5. So I think you can back into a valuation for the
equity, because the PSA sets the bar at -- 50 percent of the equity is going to be able to be sold to somebody for 107 1/2.
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- 170 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Now, Apollo has agreed to buy that. So that would imply to me
that Apollo has made a determination that, because Apollo's not going to overpay for something, that the equity's worth 215; and release the DIP and perhaps other things as well. So I don't know if there's a question in everything I just said, but I think that you're sparring back and forth with each other and dancing around this issue, and I want somebody in the course of all this to address those points. But to get back to the question that I hijacked from you, the answer is, if the plan as written and contemplated by the PSA gets approved, Lehman is going to own the reorganized debtor -- debtors? THE WITNESS: Your Honor, Lehman will own a hundred
percent, and clearly they will not be receiving more than the value of their collateral. determination. With regard to the implied value, since I don't know how the 107 million dollars was arrived by that negotiation, I tried not to imply that that has anything to do with our bankruptcy estate, until I understand it better, because there might have been other elements that were involved in that negotiation. What mattered to me was that there was a buyer Of course we did make that
that was paying Lehman 107 million dollars, because that was a condition to the PSA. I was satisfied. So, so long as that requirement was met,
Gut I just don't know how --
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- 171 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: But you independently feel that you've
made a determination that Lehman's not being overpaid with respect to the value of its collateral? THE WITNESS: THE COURT: THE WITNESS: BY MR. BIENENSTOCK Q. A. How did you do that? I worked strenuously with both legal counsel and my Yes, Your Honor. All right. Absolutely.
financial advisors to assess the value of Lehman and other pools over the course of March until now. That process is
continuing and is continuously being updated based upon new information that gets received and needs to be evaluated. I mean, I'll give you an example. The government just put
out its rates that it'll pay for extended-stay hotel rooms about a month ago, and the government is producing the rates in the hotels that are in the geographical locations where Innkeepers has hotels, somewhere between twelve and nineteen percent. To give you a sense of magnitude, that's probably,
you know, ten to fifteen percent of the entire hotel chain. So of course when I get new data which is going to show deterioration, I take that into consideration in value. Of
course the other way, which is when the economy starts looking better, you know, I take that into consideration, depending upon geographical zones, and increasing the value of the
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- 172 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 collateral of both Lehman and other pools. and-down exercise that continues. Q. Okay, Mr. Beilinson, when you say you determined that So value is an up-
Lehman is not being paid more than the amount of its mortgage debt, approximately 238 million dollars, you acknowledge, don't you, that the -- its collateral is not worth 238 million dollars, right? A. Q. Absolutely. So you are saying, however, that it may be receiving
something in respect of its unsecured deficiency claim, right? A. Q. No. You don't think there's any value it's getting beyond the
value of its collateral? A. Q. That's correct. Okay. Well, let's examine that. Your Honor, I need to object. I hate to
MR. DONOVAN:
do this, this isn't feeling right, but we have asked for discovery on valuation -THE COURT: MR. DONOVAN: THE COURT: Right. -- documents, and which were refused. I -- look, I opened this door, and maybe I And this is not a valuation hearing Where I was going was his
shouldn't have opened it.
and it's not a confirmation hearing.
thought process and his business judgment and what went into his path to get to the PSA. So I don't want to turn this into
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- 173 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 goes. BY MR. BIENENSTOCK: Q. Mr. Beilinson, among Innkeepers properties, among the a valuation hearing. You're entitled to discovery on that, you And to the extent that I
know, as and when the time comes.
caused this by opening the door, I'm going to shut the door. MR. BIENENSTOCK: It's not my intent to have
valuation, but there are other important points that go to whether he determined value and the like, not what the values are. MR. DONOVAN: Right, that's the issue. There's a
thought process, and what grew in the thought process to approve this PSA, that documentation is not provisional. THE COURT: All right, well, let's see where this
estates' properties today, are forty-five properties encumbered by the Midland mortgage, correct? A. Q. That's correct. Okay. And when the plan's confirmed, you anticipate that
those properties will be encumbered by a new mortgage in the amount of their value, correct? A. Q. Yes. Okay. Now, your -- the PSA attaches a plan term sheet
that says the new mortgage will be in the amount of 550 million dollars, correct? A. That's not correct.
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- 174 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. What is the amount? It says that Lehman has the ability to terminate the PSA
if the value is determined to be in excess of 550 million dollars. So what was important to me was utilizing my business
judgment, getting comfortable that the value was below 550, and in fact I am very comfortable that the value is less than 550 with regard to the fixed-rate pool. Q. Okay, but whatever it is, your -- one -- if the plan is
confirmed, the forty-five properties will be encumbered by a mortgage in the amount of the value this Court determines, right? A. Q. That's correct. Okay. Now, isn't it true that if forty-five properties
are encumbered by a mortgage in the amount of their value, it is still valuable; someone will still pay to take control and own those forty-five properties? A. Q. Only equity has inherent upside and downside, correct. If those forty-five properties, subject to the mortgage
and the amount of their value, were held up for sale, is there any question in your mind that there would be bidding and people would pay money to take those forty-five encumbered properties? A. Of course somebody would buy them at some price. Whether
that price is well below 500 or above 600 is an issue. Q. No, I'm not talking about buying them free and clear. I'm
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- 175 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 talking about buying them subject to the mortgage in the amount of their value. Wouldn't someone pay money to control forty-
five hotels even if they're fully encumbered? A. Q. Perhaps. Wouldn't someone pay money to control the other seven
properties even if they're fully encumbered? A. Some of them might be willing to pay a negligible amount,
but I wouldn't see anyone being able to pay anything of meaning. Q. If the value of -- let's say hypothetically the value of If
the forty-five properties is pegged at 500 million dollars. the value goes up one percent, what's the increment? one percent of 500 million? A. Q. A. Q. A. Q. I don't know. What is it? What's
Well, it's five million. Okay. You -- will you except that? I'll accept it. Okay. So someone might pay money for the possibility that
500 million dollars will go up one percent, right? A. Q. It's theoretically possible. It happens all the time, doesn't it? Isn't that real
estate? A. Q.
Isn't that the world of real estate?
Not my world of real estate, no. Okay.
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- 176 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. My world is that people who have mortgages aren't going to What they'll do
give someone an upside for negligible value.
is have them put real economic skin in the game by putting ten to twenty percent down and then have an economic upside. Q. Mr. Beilinson, what I'm trying to -- well, let's -- let me You clearly did not take any steps to
just ask you directly.
find out what someone will pay to control that block of fortyfive mortgages encumbered by a mortgage and whatever their value is? MR. DONOVAN: Your Honor, objection. I think we're
getting pretty far away from the PSA. MR. BIENENSTOCK: about, Your Honor. THE COURT: Well, I think it's a fair question. He's I think this is exactly what it's
trying to find out the process, and the process is, I think, what this hearing is about. A. The answer is no. So --
Back in April, I was focused in on
having to do seventy million doll -- financing for seventy million dollars' worth of PIPs; eliminate the potential catastrophic effect of losing flags on twenty-five or more properties; walk into a bankruptcy case with a rational plan to move forward; and come up with a deal with Marriott. That did
not leave me time to try to market for a negligible amount a control opportunity in substantially undercollateralized properties. Just didn't have time to do that.
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- 177 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Did you do this all by yourself, without any help? I had a management team up until late March, at which
point in time there was a crisis and we employed Moelis & Company, and Kirkland. Q. A. Q. A. Q. Right. And what were you paying Moelis per month? It's --
I don't recall the monthly retention. Approximately?
Approximately 150- to 200,000 dollars a month. And you don't think for that amount of money they could
have marketed blocks of property subject to mortgages in the amount of the properties' values? A. I don't believe that Midland would have agreed to allow
them to market subject to anything other than the full amount of the market, which is 825 million dollars. Since I have a
firm belief that it is overencumbered by hundreds of millions of dollars, I believe that that would have been a fruitless exercise, and it would not have been moving in the direction of ensuring a continued and viable enterprise with a capital structure that was sustainable and acceptable to Marriott, who could have created amazing value deterioration and destruction to everyone in this enterprise. Q. Mr. Beilinson, you were a very good bankruptcy lawyer Are you saying that you don't know how --
before you retired.
once you know what someone will pay for forty-five encumbered hotels, you don't know how to bring that back into the context
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- 178 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of Chapter 11 in a plan, whether prepackaged or not, to obtain that value for unsecured claimholders? A. I know how to do it, however the facts on the ground in
March, April and May of this year necessitated quick and decisive action, and the best action was negotiating for a conversion of debt to equity with Lehman, creating an appropriate capital structure, getting to financing, and eliminating a dreadful risk that was posing -- being posed upon this estate. Q. A. Q. Okay. That was my focus. So --
And that needed to be my focus. So for your reasons, you do agree that you made no attempt
to see what people would pay for any of the mortgages -- any of the hotels in Innkeepers' estate, subject to mortgages and the amount of their values, right? A. Q. I think that's fair. Okay. If Midland or the mortgagees on the six properties
that are not subject to blanket mortgages, if they disagree with the valuations that you have in the PSA, and the plan is not confirmed -- and the judge determines that the values are more than the amounts you have in the plan term sheet, the plan can't be confirmed, can it? A. Q. A. The plan can always be modified. With whose consent? It would be modified with Lehman's consent in this
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- 179 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 particular case. Q. Now, if the Court finds the values are higher than you
state in the -- or than is provided in the plan term sheet, that additional value would require additional debt service going forward, correct? A. That's correct, and I would have to be comfortable with
feasibility. Q. Right. Oh, by the way, you don't have any deal, tacit or
otherwise, to continue in the employ of Innkeepers once it's a reorganized debtor, do you ? A. Q. Absolutely not. Okay. So once this deal is done, it's totally up to the
new owners to determine how much debt and equity they will have, right? A. I believe it would be -- the initial debt structure could
be modified by equity, as in every situation. Q. Well, as a for instance, if the plan is confirmed
according to the term sheet attached to the PSA, and a hundred cents of the equity goes to Lehman, there's no covenant in the plan that prevents Lehman from reissuing a mortgage to itself in the amount of 238 million dollars, is there? A. Well, the plan's being worked on right now. That's But I
something I might have to take into consideration. appreciate the thought. Q.
Well, under what theory would you think it appropriate for
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- 180 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 you to tell future owners what kind of capital structure they should have? A. I think I need to disclose to all creditors, in connection
with the disclosure statement, what the capital structure is and what risks are inherent in that capital structure. And to
the extent there should be additional protections in it, I'll consider those. Q. Now, are you aware that the plan support agreement
provides, in a "whereas" clause, that it's in the best interest of Innkeepers' creditors and equityholders? A. Q. I don't recall, but that wouldn't surprise me. Okay, could you explain how it's in the best interests of
Innkeepers' equityholders? A. It probably should have been changed to it's in the best
interest of the Innkeepers' estate. Q. This Innkeepers' business was originally sold to Apollo
through Lehman, is that correct? A. Q. That's correct. So Lehman and Apollo both have a lot of knowledge about
this company, right? A. Q. That's correct. Any third party wanting to make a proposal to you would be
at a disadvantage as to Lehman and Apollo absent a lot due diligence that you would need to provide, right? A. That's correct.
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- 181 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. So if before someone can make you an offer they ask for
due diligence are you able to do that under the plan support agreement? A. I believe if they presented me with a viable offer that I
thought needed, in consultation with my counsel and financial advisors, to be pursued, I believe I would do that. Q. Please listen to my question. If a third party said
'Before I can make you an offer, Mr. Beilinson, I need due diligence,' are you allowed, under the plan support agreement as its proposed, to provide that due diligence? A. Probably not. Just to be clear, if someone provided me a
viable agreement that was subject to due diligence and I thought it was in my fiduciary duty to move forward with it, yes I would do so. Q. A. And what would you consider a viable agreement? I'd have to look at it and, you know, decide on a case-by-
case basis, after consultation with my counsel and my financial advisors and my management team. Q. Give me one example of what you would consider a viable
agreement. A. Q. Unconditional cash offer for in excess of plan value. So a viable agreement would be someone offering more than Is that what you're saying?
the value of the estate. A.
That is being distributed in accordance with the plan of
reorganization that I intend to file and Innkeepers intends to
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- 182 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 file. Q. Can you think of any other viable plan that you think
would entitle you to provide due diligence? A. Q. A. My answer is of course. Okay. Give me another.
There could be a number of structures that I would have to
look at, depending upon who the potential participant was, what the leverage was, what the economic consideration was going to be, how it was divided. I would be looking at literally every
factor in making an assessment as to whether the offer had sufficient viability, in consultation with my advisors and the board members, as to whether to go forward. In making that decision, of course, I'd have to be making a determination that pursuing that alternative was worth the risk of Lehman terminating the PSA and putting me in a position where I'm looking forward at a potential offer that might have some viability, might not, compared to a bird in the hand, which I believe currently is a great opportunity for this estate. THE COURT: I need to ask a question now. But under
25(c) of the PSA, though, if one of these hypothetical reorganizations comes -- restructurings comes along -THE WITNESS: THE COURT: Uh-huh. -- that is demonstratively better for, I'm
going to call it the non-Lehman debtors, okay, and by that --
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- 183 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 you said that terminology, you know who I mean, right? THE WITNESS: THE COURT: Lehman, the fixed. Yes. Everyone else in the capital structure but And that was demonstratively better than
what's in the plan but that was not better for Lehman, under 25(c) you can't exercise the carve out to the fiduciary out and ask for relief, isn't that right? THE WITNESS: I wouldn't be exercising my fiduciary
right under 25(c), I would be exercising it under 25(a) and I would essentially be subject to, in the first 240 days. THE COURT: THE WITNESS: THE COURT: THE WITNESS: Well they could terminate. Terminate cash collateral. They could terminate. And I can come before this Court and ask That's really
for the non-consensual use of cash collateral.
the only remedy in the first 240 days and then it would be an issue of seeking plan confirmation as quickly as possible prior to the 240th day. THE COURT: Sorry to interrupt you, Mr. Bienenstock. Okay.
MR. BIENENSTOCK: BY MR. BIENENSTOCK: Q.
I'm going to give you one last shot at my last question.
Can you give me a second example of a viable offer for which you would give due diligence or not? A. We're all very creative and there's -- there's a -- ask me
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- 184 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. to speculate as to what would be accepted or not is very, very difficult for me to do. I'll know it when I see it, in
consultation with my advisors. Q. Mr. Beilinson, what states are the twenty properties in
that collateralize the Lehman blanket mortgage? A. Q. A. Q. Off the top of my head I couldn't tell you which states. Name one or two. Michigan, New Jersey, Atlantic City. Okay. I think Atlantic City is still part of New Jersey
but we won't get into that. THE COURT: I need to make a disclosure; I was born
and raised in Atlantic City so move on to a different subject. MR. BIENENSTOCK: In view of that I'm going to
concentrate of Michigan and not New Jersey. THE COURT: You can keep going on Atlantic City but --
Who is your law firm in Michigan to review whether
Lehman's liens and security interests in the real property and revenues are validly perfected? A. Q. A. Q. I don't know. Is there one? I'd have to consult with my general counsel, Mark Murphy. Did you ask your general counsel to have local counsel in
each state check out whether the mortgagees in this case have valid, perfected liens that you're dealing with under the plan? Yes or no?
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- 185 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. I don't recall. Are you aware of any due diligence and report that you
received saying whether you have -- whether they have valid, perfected liens against the properties in the estate? A. My understanding is that unsecured creditors committee has
asked for a 2004 examination so that they could do an evaluation of all perfection and lien issues. And I know as a
debtor we're going to be fully cooperating with the unsecured creditors' committee examination. Obviously to the extent that they're successful that's going to -- to the extent that they find any deficiencies that may very well impact how the debtor views this plan. Q. Do you think this hearing should be adjourned, then, until
you know whether the mortgagees have valid, perfected liens against properties and revenues? A. Q. A. Absolutely not. Okay. I'm fairly comfortable, based upon discussion with legal
counsel, that all the perfection issues -- there are no perfection issues. Q. A. Well then what discussion was that? I had discussions with Skadden who was my prepetition
counsel in connection with a restructure agreement between Innkeepers and Lehman that was conducted between December of '08 and July of '09. And in connection with those discussions
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- 186 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 there was lien evaluations. Q. A. Q. By who? By Skadden. Of all of the liens in the estate or just certain ones, or
just certain liens? A. I believe at that time we were focused only on Lehman
since we were restructuring the Lehman pool of party assets. Q. So you don't have any knowledge of checking any of the
other liens for the fifty-two other properties? A. Q. A. I don't have personal knowledge, no. But you don't even know if it was done, do you? I have looked at the closing binders in 2007; there were Do I believe that Absolutely. No, I don't.
legal opinions and all sorts of documents.
it was done and all of the liens are perfected? Do I have personal knowledge as to everything? Q.
In all the cases that you filed as a debtor's attorney or
even as a creditor's attorney where you participated, Mr. Beilinson, did you ever accept the fact that there were closing binders as a substitute for checking the valid perfection of all the liens? A. Q. Not all the time. One of the items of relief that you give Lehman, what you
call the super relief, 240 days, is the ability to sell its hotels in the bankruptcy court, correct, under Section 363? A. At the debtor's option we can either give them relief from
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- 187 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. stay or seek the Court's approval of a 363 sale. Q. If they just got relief from stay and had to foreclose in
multiple state courts, wouldn't that give the debtor a lot of leverage to negotiate with them? A. Q. Absolutely and that's why I kept the alternative. You made a point that you met with certain constituents
prior to the filing, Mr. Beilinson, I think Midland, possibly - well Five Mile definitely, to negotiate the debtor-inpossession loan. You didn't reach out to the preferred
shareholders, other than Apollo, did you? A. Q. No, I did not. You don't know what type of plan they might be willing to
propose and back with money, do you? A. No, but I'm sure that you and I will have conversations in
the future. (Pause) MR. BIENENSTOCK: THE COURT: Sorry for the delay, Your Honor.
No problem. I just need to review my notes.
MR. BIENENSTOCK: THE COURT: (Pause)
No problem.
Mr. Beilinson, the fact that Apollo owns a hundred percent
of Innkeepers has been well known to Lehman and anyone else interested in the company for the last -- well, since it bought it, correct?
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- 188 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. Yes. Okay. Now if it had turned out that Lehman did not agree
to sell half an interest to Apollo under the plan term sheet attached to the PSA, nothing would have required Innkeepers to sign the PSA in the first place, would it? A. Q. I'm just having a problem understanding the question. Okay. I'll rephrase it. If after your negotiations with
Lehman, Lehman had come back to you and said here's what we'll do, we'll equitize our full mortgage, 238 million, in exchange for a hundred percent of the stock. with anyone. A. Q. I would have signed that deal. Would you have gone to the board for approval first or you We're not making deals
just would have signed it. A. I apologize, I would have taken that to -- I don't have I would have taken it to my independent I would have recommended it. I believe
independent authority. members of the board.
it would have been approved. Q. Nothing would have prevented Apollo from changing the
board to make sure it would not be approved, right? A. That is a theoretical possibility. There was no
indication, ever, by Apollo, that they were going to manipulate what Innkeepers needed to do to perform its fiduciary duties. Never an indication by Apollo. Q. Never an indication but wasn't there a tacit understanding
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- 189 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 at all times that you were supposed to come up with a deal where Apollo benefited? A. Q. No. Within the bounds of the law, wasn't it understood that
within the bounds of the law you were supposed to find a solution that gave Apollo the least pain or the most gain possible? A. Apollo has never asked me to do anything other than do the They have
right thing and fulfill your obligations.
steadfastly never asked me or sought to leverage me in any way in that regard. Q. Did it have to ask for you to know that you were expected,
within the bounds of the law, to give Apollo the best outcome possible? A. I would go back to my earlier testimony. I think there
was a period of time where I was trying to keep this an out-ofcourt restructuring and maintain the highest possibility for equity to have value and that would have been inclusive of Apollo. There was a period of time where that was no longer capable of being done and I turned to Apollo and I said I'm sorry; you're going to receive nothing on account of your prepetition debt. I'm going to do what's necessary to
eliminate value destruction and benefit this estate as much as possible.
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- 190 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 So that duty changed over time and yes I was working extremely hard for equity in December of 2008 and starting some time thereafter I started working extremely hard for the corpus of this estate. Q. You don't deny, do you, that you sent the e-mail to Mr.
Lasher at Lehman asking him to confirm that it wouldn't terminate its deal with Apollo? A. I do not deny that. MR. BIENENSTOCK: THE COURT: I pass the witness, Your Honor. We need to take a momentary
All right.
technical break because it's come to my attention that the phone is not connected. Just kidding. (Recess from 3:05 p.m. until 3:07 p.m.) THE COURT: MR. PARKINS: CROSS-EXAMINATION BY MR. PARKINS: Q. Mr. Beilinson, my name is Leonard Parkins, I represent Would you pull up, I think from your own exhibits, Do you have it there? I Go ahead. Thank you. So we have to redo this whole hour.
Midland.
this chart, I think it's Exhibit 17.
think you testified during your direct examination about the difficulty you would have in getting a secured creditor to equitize its debt, did you not? A. That's correct.
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- 191 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. Well without getting into the fact that under the
concept of the PSA Lehman will own a hundred percent of everything, as the dialogue between the Judge and Mr. Bienenstock and you occurred. As I look at this chart right now Lehman will, as a hundred percent owner of the company under the PSA, own these twenty hotels free and clear, is that correct? A. No, the estate would own twenty hotels free and clear and
equity interest of the estate would be owned by Lehman. Q. So indirectly it would own a hundred percent of these
hotels free and clear, at the confirmation of this plan if it went forward, is that correct? A. Q. No, that's not my view. Well, they're going to be unencumbered. Isn't that one of
the benefits you talked about?
There will be no more liens,
that Lehman will swap its debt for equity and there'll be no more liens on this property. A. I think I've testified that that would give me flexibility
to either utilize it to provide other collateral pools additional collateral or for other corporate purposes. It does
not mean that the equity owner can simply strip out those hotels for its own benefit. Q. Well, presently sir, though, under the plan they get to be They swap their debt for equity and Where in the PSA is there a
a hundred percent owner.
these properties are unencumbered.
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- 192 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 commitment by Lehman that these other monies would be used for any other purpose? there, Exhibit 1? A. Q. That's not in the PSA. Okay. And after confirmation Midland, I mean Innkeepers, Can you show me in the PSA, you have it
present Innkeepers, wouldn't have a say on how that money's used, is it? A. It depends what the terms of the plan say and whether it's
confirmed in that structure or not. Q. A. Q. Well I'm asking what the PSA says? It doesn't say that in the PSA. All right. Now the two million dollars of various bonuses
you got were paid in April of this year, is that correct? A. Q. That's correct. Look with me at, I think, Exhibit 15, your Exhibit 15,
it's the April 28 presentation by Moelis to Midland, discussion material. A. me. Q. Do you have Exhibit 15? Fifteen, your exhibit. It says Do you have it? The bonuses may have been paid to
Let me correct myself.
Midland discussion materials project tab on April 28, 2010, the black and white. A. Q. Thank you. Okay. And look with me at Midland exhibits; I think the
books are behind you, Exhibit 54.
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- 193 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. Okay. And I think you testified, on both direct and the first
part of cross-examination by Mr. Bienenstock, that things changed going into 2009 and your role as CRO and your fiduciary duty focused on the creditors of this estate and other constituencies and not Apollo, is that correct? A. Q. That's correct. And I take it your testimony today, as well as in your
deposition, is you became a fiduciary for every constituent, including Midland, is that correct? A. My counsel gave me a view with regard to fiduciary duty
that it is to maximize value for the enterprise and that would include Midland. Q. So the answer is yes you are a fiduciary for Midland, is
that correct? A. Q. A. Q. I don't know how to answer that question. Do you view yourself as a -I'm a fiduciary for the entire estate. Do you view yourself as a fiduciary for Midland, a
creditor of a number of debtors in which you are the CRO, yes or no? A. I think that you're one of the parties that I have a
fiduciary duty to assist. Q. When you went to visit Midland on April 28th and handed
them and discussed this Exhibit 15, you had already had a
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- 194 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 meeting with Lehman, isn't that true, on April 22nd? A. Q. That's correct. And in fact you had a prior meeting to April 22nd with
Lehman, isn't that true? A. I think I testified that I started meeting with Lehman in
December of 2008. Q. With respect to a potential restructure in the month of Once on April 22nd and once
April you met twice with Lehman.
about a week earlier, isn't that true? A. Q. I don't recall. Okay. Now look with me at our Exhibit 54. This was a
handout prepared by Moelis to Lehman for an April 22nd meeting, is that correct? A. Q. A. Q. I think I'm confused. My Exhibit 54. Your Exhibit 54? Okay. Yes, that's a -- yes. I think Exhibit --
And Exhibit 54 was prepared, at your direction, by
Moelis for this meeting with Lehman on April 22nd, is that correct? A. Q. A. Q. A. Q. That's correct. And Apollo was at that meeting to, correct? I don't recall. That meeting took place at Kirkland, is that correct? I don't recall where it took place. You don't recall whether Apollo was at that meeting?
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- 195 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. I don't recall. Do you recall whether Apollo was at a meeting the week
before -A. Q. A. I know that --- with Lehman? I recall that Apollo was at a meeting, in April, with
Lehman. Q. A. Q. A. Q. A. Q. Who invited them, sir? I'm sure I invited them. Look with me on page 12 of Exhibit 54, please. Yes. We see that illustrative valuation range, is that correct? That's correct. Okay. And for the fixed pool hotels, which are the
Midland hotels, I see a valuation of the core between 400 and 525 million dollars, is that correct? A. Q. That's not correct. Okay. What does it say? Bracketed 400 to 525, am I not
reading that right? A. That is a value of the core hotels; at this point in time
we were breaking it out between core and terminal hotels. Terminal hotels are hotels that the franchise terminates in 2021 and that, we believe, the franchises may not be continued beyond there. So the indicative value was 525 to -- I mean 425
million to 575 million dollars on a post-money basis, meaning
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- 196 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 after the hotels were fixed up and fifty million dollars were put into them. Q. All right. And the same, I take it, for the Lehman hotels There are numbers there, illustrative
and the other hotels.
values 150 to 190 for Lehman and the other hotels 125 to 175, is that correct? A. Q. That's correct. Now the high end value for Lehman doesn't equal 215 My arithmetic says that's true.
million dollars, does it? A. Q. A. Q. A. Q.
Your arithmetic is accurate. Turn with me to the next page, please. What page would that be? Page 13. Okay. I see an illustrative pro forma structure is the title of
that page, do you see it there? A. Q. Yes. I see the parent equity, Lehman/investor, ninety-five
percent, do you see that? A. Q. Yes. Was Apollo the only party that Lehman negotiated with to
be the investor, from and after this date? A. I don't know if that's accurate but I think people have
told me that's what Lehman said. Q. Did you invite any other potential investor to the meeting
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- 197 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 on September -- I mean, April 22nd, other than Apollo? A. I didn't invite Apollo as an investor to this meeting and
quite frankly I didn't give them a preview with regard to what I was handing out at this meeting. Q. A. Q. A. You didn't give Lehman a preview either, did you? I invited them because -- okay. I'm sorry; finish first. Okay. I didn't mean to interrupt.
They have members of the board of directors and And quite
they showed an interest in coming to the meeting.
frankly they had no idea what was in this presentation prior to the presentation being made and had no preview. Q. A. That was true of Lehman also, correct? That is also true of Lehman. They didn't know what was in
the presentation nor what I was going to say at the meeting. Q. Okay. So this was prepared by Innkeepers and handed out
to both Lehman and Apollo at this meeting, correct? A. This was prepared by Moelis at the direction of Innkeepers
and handed out at the meeting. Q. Okay. And it does contemplate, without having negotiated
with Lehman at this point in time, that Lehman would have an investor for ninety-five percent of the equity, isn't that true? A. Absolutely. I came to -- I came prepared to talk to them
about the fact that the ownership of the equity would give them the ability to realize on its value at any point in time,
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- 198 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 including early on. Q. Okay. And for whatever reason, just discussed, Apollo was
the only other party at this meeting, correct? A. Q. A. Members of the board were at the meeting. Okay. Who was at the meeting?
At one of the meetings, okay, I don't know which one; I
believe Schuyler Hewes and potentially Justin Korval, two members of the board, were at the meeting, who are also employees of an Apollo affiliate. Q. A. Q. A. Q. A. Q. I look at the next page, number 14, sir. Number -- page what? Fourteen, 1-4. Okay. Illustrative deal structure scenario, see that? (No audible response). And I look at the fixed-pool adjustments; it shows a Do you see it there
bracketed numbers of 250 to 425 million. on page 14? A. No, I don't see it. MR. PARKINS:
Can I approach the witness to help him
find the page, Your Honor? THE COURT: MR. PARKINS: THE WITNESS: MR. PARKINS: Yes. Thank you. It's on page 14? Page 14, yes.
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- 199 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE WITNESS: MR. PARKINS: It's page 14? Okay. Okay.
I'll be sure to straddle the wire
here so I don't step on them. THE COURT: MR. PARKINS: Sorry? I have to straddle the wire here to be
sure I don't speak on this thing here. Q. A. Q. You're with me now on page 14, correct? Yes. Okay. And we see here the adjustment to the fixed pool It would be
which is the midland collateral, is that correct? 250 to 425 million dollars, is that correct? A. Q. That's correct. Okay.
And that would be -- call it the hit, the range of
hit between 250 and 425 million dollars that you were contemplating in the context of this restructuring, correct? A. At this time it was very early on in the valuation process
which is continuing but yes, as of this time, that's what my view was. Q. Look with me on page 16 of this document. You see that? The one
proposed governance structure. A. Q. Absolutely. Okay.
It provides Lehman and investor to share control of
trust.
Two board members selected by Lehman, two board members
selected by investor, three independent board members mutually acceptable to Lehman and investor. Did I read it correctly?
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- 200 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. You did. That's exactly what the agreement between Lehman and
Apollo ended up being with respect to governance, isn't it? A. I've never read the agreement between Apollo and Lehman as Quite frankly, it just seemed to make
I've testified earlier. sense. Q. A. I'm sorry?
When I -- when we drafted those, it just seemed to make
sense. THE COURT: can I ask a clarifying question? And my
memory from this morning -MR. PARKINS: Sure.
THE COURT: -- may not be crisp but I thought this morning we had a back and forth about the state of play of the -- I'll call it the Lehman deal, the deal that's now in the PSA. THE WITNESS: THE COURT: shorthand. THE WITNESS: THE COURT: Yes. I thought your testimony was that it Yes. Before you went to Kansas to use
really wasn't formulated before you went to Kansas and I confess that at that point I hadn't looked at these exhibits but now I have an exhibit that's dated April 22nd, which -THE WITNESS: No.
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- 201 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: -- predates the trip to Kansas. So if you
could clarify that for me -THE WITNESS: THE COURT: THE WITNESS: Sure. -- I would be grateful. I formulated a proposal in my mind that
I presented to Lehman but at that point in time there was no acceptance by Lehman of any of these concepts. It was just a
beginning of a dialogue that was ongoing until, literally, the day before we filed this bankruptcy case. So this was really a
concept in my mind, having discussed it with legal counsel and Moelis that I was making as a proposal -- an initial proposal that wasn't previewed to Lehman. THE COURT: MR. PARKINS: THE COURT: MR. PARKINS: BY MR. PARKINS: Q. Look with me now on your Exhibit number 15, the April Do you have it Okay. Thank you.
I was getting there, Judge. Sorry. No.
28th, 2010 Moelis presentation for Midland. there? A. Q. Yes, I do. Okay.
Some six days after the meeting with Lehman when
the presentation was made embodying your vision or proposal, correct? A. Yes.
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- 202 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. And at that time you were a fiduciary -- acting a s
a fiduciary for Midland for is the largest creditor of the various estates, is that correct? A. Q. Yes. As a fiduciary, did you tell Midland that you had a vision
which you presented to Lehman, with Apollo present, of knocking off between 225 and 450 million dollars of their debt at that meeting? A. No, I did not. First of all, I had a confidentiality
agreement with Lehman and it was just a peppercorn of a thought that hadn't had any acceptance by Lehman yet, that I was hoping would lead to the PSA and actually did lead to the PSA today. It was a peppercorn presented to Lehman six days before this meeting. Second of all, this was the first meeting with Midland who had just became the special servicer, literally days before, and it was urgent to me to bring Midland up to speed with regard to the basic things like who is Innkeepers, what's transpired in the last two years, what your collateral base, etcetera. I believe at that meeting with Midland, Bill
Derrough, on behalf of Moelis, did tell him what his view with regard to indicative value range was and members of Midland actually said they weren't terribly surprised because they expected value deterioration -- substantial value deterioration in any assets that were purchased in 2006 and 2007.
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- 203 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. So in answer -So Moelis was there at this meeting with Midland and did
talk about indicative value ranges. Q. Moelis was there at this meeting and didn't tell them that
a few days earlier they had made a presentation for potential reorganization plan wiping out 250 to 425 million dollars of the people you're talking to debt. that -A. Q. No. -- the way you intend to behave -- behaved with respect to As a fiduciary, sir, is
being a fiduciary for my client? A. No. When we meet with Midland, we talk to Midland about
Midland's assets and we told them that that was the range that believed at the time was the value deterioration. hiding the ball. Q. We actually -There was no
Did you tell them Apollo was at the meeting which you
embraced -- made a proposal, where an investor would share fifty-fifty control of a resulting entity of the restructure? A. I was really too busy talking to them about things like
the value-destructive impacts of the Marriot termination notices and everything that needed to get done so that we could protect their corpus and maintain the value of those assets. That was the focus of my attention, not on whether there was a preliminary meeting where a peppercorn of a thought was discussed.
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- 204 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. That peppercorn grew to a deal, didn't it? Fantastically, yes. Okay. Let's talk about when you did tell Midland when That happened about three days before
that deal was maturing.
the bankruptcy filing, isn't that true? A. Q. Yes, I believe you were at the meeting. Yes. And it was only that time when you circulated a
draft of the Craven declaration that it became knowledge that you had worked out a PSA with Lehman that involved Apollo buying fifty percent of the stock. A. That's not true. I actually, at the meeting that I
believe you were in attendance at, your partner Mr. Mittman was certainly at attendance at, I informed you as to all of the facts with regard to the PSA including the fact that Apollo was going to be purchasing fifty percent of the interest. I went
through all of the deal points with you and discussed why I thought it was in the best interest of Midland and why the structure actually made sense. Because it created free and
clear assets that could potentially give you as additional collateral, it created free and clear cash flow that was for the benefit of ensuring that your note, with whatever value, could get paid and that the enterprise could continue to exist. MR. PARKINS: in response -A. It was actually a very -Your Honor, I move to strike. It's not
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- 205 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 say. A. I had a full meeting where I disclosed all of these A. Q. MR. PARKINS: to my question. THE COURT: Just let him finish his thoughts. I move to strike. It's not in response
But the first time you told Midland -MR. SCHWARTZBERG: Your Honor, I think you said let
him finish, so if you would? Q. A. Are you finished? I mean I -THE COURT: MR. PARKINS: THE COURT: MR. PARKINS: THE COURT: I mean -THE COURT: If you remember what you were going to Let him finish his thought -All right. -- if you want to ask another question -Yes. -- go ahead.
aspects including the Apollo aspects, you know, why I thought that it would -Q. A. Could you speak closer to the microphone? -- and why I thought it would be, actually, in your best
interest to begin talking about value so that we could try to come to a consensual resolution. meeting. Q. And that meeting took place on Thursday before the Monday That was all part of that
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- 206 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. Yes. filing, is that correct? A. Q. It was either Wednesday or Thursday. And between April 22nd and four days before the filing of
this bankruptcy, not a word did you give Midland who you were a fiduciary for? the PSA. A. You were working on a transaction reflected in
That's true, isn't it?
I did not disclose confidential information about our
negotiations with Lehman. Q. A. Q. But you were our fiduciary, sir, true? I believe I'm a fiduciary. Now, during this period of time, I think you testified in
direct examination that you also had discussions with Five Mile regarding a potential restructure. A. Q. That's correct. And Five Mile asked you if they could do due diligence and
you said no. THE COURT: Is there a question.
You said no, is that correct?
That's correct. Okay. And this is the same Five Mile who you negotiated a
DIP with that got approved yesterday, correct? A. Q. That's correct. Okay. So, with a person you're negotiating a DIP with
who's looking to provide financing for this company, you rejected them doing due diligence to see if they could make an
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- 207 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 acquisition offer for the company, correct? A. If Five Mile had presented me with any kind of meaningful,
viable, written offer at that point in time, I would -- and frankly still would -- bring it to my advisors and consider whether or not to move forward in further conversations with them. viable. Q. A. Q. I didn't receive anything that I considered to be I didn't receive anything that was in writing.
You didn't have a deal -Subsequent to my conversations. I'm sorry. At the time you negotiated -- were talking to
Five Mile, you didn't have a PSA in place with Lehman Brothers, did you? A. I don't believe the PSA was executed at the time I had a
number of my conversations with Five Mile. Q. Why would you require a specific agreement rather than
overture of inquiry at the time Five Mile talked because the PSA wasn't in place which would prohibit you from doing that. A. I don't believe it prohibits me from having any
conversations at this time. Q. Now with respect -- other people made overtures too to
want to do due diligence with he company and you rejected them also, didn't you? A. No one made any kind of viable effort at requesting due
diligence. Q. Now, it is true though that when you made the proposal to
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- 208 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Lehman on April 22nd, you allowed Lehman to do due diligence through Lazard with respect to the cross-pool review of the entire company, is that correct? A. Q. A. Q. Yes, it was. Okay. Is. And at the same time so Lehman could look at the deal, you
refused to let anybody else look across the pools of debt to determine whether or not they wanted to go forward with the deal even at a time when Lehman had not yet committed? A. I only began talking to Five Mile about this for three And during that period of time I
weeks prior to the petition.
was always already well on my way in my negotia -- in Innkeepers' negotiation with Lehman Brothers and I believe that was a right course of action in connection with a incredibly deteriorating situation that was going towards bankruptcy extremely quickly. Q. A. Q. Now, Moelis was hired by Innkeepers when, sir? March of 2010. And Moelis has not only a monthly fee but I think a six
million dollar success entitlement in the transaction, is that correct? A. Q. That's correct. So with he six million dollar success entitlement, you
didn't instruct Moelis, did you, to go out and shop whether
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- 209 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 there would be alternative transaction at the same time you were looking at the Lehman del, did you? A. I asked them to analyze all restructuring possibilities
and discuss them with me but I did not instruct them to shop -Q. A. You did not --- which I didn't think was appropriate given the state of
play at that point in time. Q. You did not ask them to go out and see whether
alternatives were available to the proposal of a peppercorn, as you stated, of an idea? To see whether there were alternative
proposals versus your peppercorn of an idea, is that correct? A. I discussed with them all sorts of alternatives and that To inform me as to alternatives so
was why they were retained.
that we can discuss them and determine whether they were sufficiently viable to move forward with. And we made a
determination, that was supported by the independent members of the board of Innkeepers, that the PSA was the best alternative that was currently presented. Q. But at the time of April 22nd, let's start there. Or the
week before when you had your first meeting with Lehman and Apollo present. At that point in time, before you had
fertilized or developed this peppercorn of an idea, you have not engaged Moelis to go find alternative transactions for the restructure of this company. A. That is true, isn't it? We didn't talk
We talked about alternative transactions.
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- 210 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 about marketing. Q. It is true that since the filing of the bankruptcy case,
Moelis has not taken one step to look at alternative transactions for this company, is that correct? A. There have been no alternative transactions that have
presented themselves that had any viability to either Moelis or to myself. Q. Did you instruct Moelis to go and find alternative
transactions to this deal? A. No. Simply to discuss them. THE COURT: Mr. Parkins, as you're pausing, I'm going
to try once again to get us back online on the phone. MR. PARKINS: THE COURT: MR. PARKINS: step on this. THE COURT: You're not guilty, no. Okay. All right. I didn't -- I'm not guilty. I didn't
Do you need another bottle of water, Mr. Beilinson? THE WITNESS: MR. PARKINS: we're waiting. THE COURT: MR. PARKINS: Go ahead. All right. Thanks. Thank you, Your Honor. I want to get a drink of water while
(Pause; connecting telephonically) THE COURT: All right. And this is Judge Chapman.
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- 211 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Advisors. THE COURT: Thank you, Ms. Kruger. Are there any If you you, sir. MR. BOLIN: THE COURT: MR. BOLIN: THE COURT: MS. KRUEGER: James Bolin from Appaloosa Management. Can you repeat that, sir? James Bolin from Appaloosa Management. Thank you, sir. Lauren Krueger from Esopus Creek Capital. THE COURT: Mr. Franco from Five Mile Capital. Thank I'd like to confirm who's on the line. And let me apologize We had some
for the delay in getting you back on line. technical difficulties on our end. to please identify yourselves? MR. FRANCO:
So with that, can I ask you
This is Michael Franco from Five Mile
additional parties on the line?
All right, operator.
could put it back on listen only, thank you. All right, Mr. Parkins. MR. PARKINS: BY MR. PARKINS: Q. Mr. Beilinson, the two million dollars of bonus payments Thank you.
you received in either -- whether it's April or May of 2010, do you recall those -- my questions and your answers? about those, correct? A. Excuse me? We asked
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- 212 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Q. Q. We asked about your two million dollars in bonus payments
made within two month of the filing of this bankruptcy case, correct? A. Q. Yes. Okay. Is it your understanding that the PSA contemplates
a release of any claims as part of the term sheet to the PSA held by the company against any officers and directors? A. I don't recall. To the extent that it does, it will
become up -- it will come up with -- have confirmation and it'll be handled with -- appropriately, with whatever result there is. Q. Would you look -- I'm sorry. Would you look with me,
please, at the term sheet for the plan of reorganization? A. Q. What exhibit number? It's -- I think your Exhibit number 1. And you have to
work through the document.
You have to go through the PSA
which is I think is the first document and then the term sheet is the second -- is attached to it. 1 and my Exhibit 1, too. THE COURT: Same document. THE COURT: Debtors' 1? It's Debtors' 1. Debtors' 1. So -I think it's your Exhibit
It's Debtors' --
Okay.
THE COURT: THE COURT:
I have it, Your Honor. Do you have it?
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- 213 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 second. Q. Mr. Beilinson, when was the adequate assurance agreement A. Q. he's -MR. PARKINS: THE COURT: Can I help him? -- is not there. Can I go over? I think it would be Q. PSA. Okay. Look with me on page 12 of the term sheet to the Do you have it there at the bottom? It
Plan term sheet.
says release. THE COURT: Mr. Parkins, I can see from my angle that
efficient if you helped him. MR. PARKINS: Thank you. Can I ask you to look at page 12? I think I've got you to Okay. Thanks.
page 12. A. Q. Thank you. The bottom of the page, releases? Take a look at that. I I
want to ask you a question whether -- take a look at it. want to ask you a question in a second. A. Q. I've read it now. You read it?
To the extent there's any issues with your receipt of two
million dollars from the debtors within sixty days of bankruptcy, sir, this document contemplates that you get a release, isn't that true? A. That's true. MR. PARKINS: A lot of paper here, Judge. Give me a
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- 214 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 entered into with Marriot? A. I don't think it was entered into until a few days
before -Q. A. I'm sorry. I don't think anybody can --
I don't think it was entered into until a few days before I suspect sometime in June.
the bankruptcy filing. Q. A.
You said two days before the filing? I'm sorry. Sometime in July. Your Honor, I'm sorry. I have to -- I
MR. PARKINS:
can't find it in here but I want to ask a question. THE COURT: MR. PARKINS: It's all right. Okay. I've -- my colleague Take your time.
Let me approach the witness.
has found it for me and I'll help the witness find it. THE COURT: MR. PARKINS: (Pause) THE COURT: In it's here twice? No, I don't. Which -- is -- it's Exhibit B to the PSA? D as in dog.
UNIDENTIFIED SPEAKER: THE COURT:
Can I make sure that I'm -- because I'm
looking at something that says Exhibit B, as in boy. MR. PARKINS: THE COURT: And that Exhibit B. Q. May I approach, Your Honor, just to -Yeah. Great. Oh, there's Exhibit D and -- got.
You have it, sir?
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- 215 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Q. A. Q. Yes, I do. Now, Mr. Beilinson, this document says it was made and
entered into as of June 25, 2010, is that correct? A. Q. That's correct. The first couple of lines of the document. Okay. That's
about three weeks before the PSA was signed, is that correct? A. Q. That's correct. Look with me, please, on pages 2 or 3 or if you want to
take the time -- and we can do this Your Honor; unfortunately it'll take some time -- as to what -- as to the conditions imposed in here by Marriot with respect to going forward with this adequate assurance agreement. time to read it? Q. A. Which conditions -Let's look at section 1 for example. Take some time to Do you want to take some
read it.
I don't want to ask you questions about it until you
refresh your recollection as to what it says. (Pause) Yeah, I've read -Okay. -- section 1. Now, Mr. Beilinson, as I read this section, I want you to
confer with me -- I don't see anything in here that speaks to the need for a PSA or an agreement on a restructuring as a condition of Marriot signing this adequate assurance. If there
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- 216 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. is, would you show me that language? (Pause) Would you like to repeat your question? Yes. Show me the language in here that makes this
adequate assurance agreement in any way dependant on or connect to a plan PSA. A. Q. I don't see anywhere that it does. And in fact, sir, if you look with me at section 6, the
termination of this agreement, a termination event only speaks to the issue of getting DIP financing. to do the PIPs, is that correct? A. Q. That's correct. Okay. And in fact, you were working towards getting the I hate to say this DIP
DIP to do the various PIPs at the time this agreement was singed, is that correct? A. Q. That's correct. Okay. So -- and there was no PSA done at this time with
Lehman or anybody else, correct? A. It was not executed but Marriot was getting copies of
drafts of the PSA and it was material in my negotiations with Marriot that those negotiations were moving forward. Q. A. Q. Were you a fiduciary for Marriot at the time? I was a fiduciary for the estate. Did you send my client any of the drafts going forward
with respect to restructure their debt, wiping out hundreds of
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- 217 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 millions or dollars? A. I had a confidentiality agreement with Marriot which was
leading to an agreement which would eliminate value destruction for your client. And as part of that, it was incredible
material that we were moving forward with the restructure and that would create a viable capital structure. And in
connection with those negotiations, Marriot requested and I provided copies of the PSA. They were in communication with
both myself and with Lehman Brothers to ensure that it was likely to result in a PSA that was executed which would allow for a balance sheet restructuring and a continued viability. So, it may not be mentioned in this adequate assurance agreement but it was part and parcel of every negotiation that I had with Marriot and Lehman. Q. So, but nobody thought it important enough at least to
include it in their written document that you have put before this Court. A. Correct. There was a lot of things going on around this
time frame. Q. Now, let's talk about Five Mile for a second. Five Mile
was negotiating a DIP in order to do the PIPs for the fixedasset hotels, is that correct? A. Q. Well, and two hotels outside the fixed pool. Okay. And in the context of those negotiations, you never
even told Five Mile you were negotiating with Lehman which
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- 218 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 included Apollo getting fifty percent of the company in the context of those DIP negotiations either, did you? A. No, it didn't make sense to as I stated to Midland and to
Five Mile and to Apollo that I was seeking a DIP on the best possible market terms and it had nothing to do with any plan reorganization; accordingly. Q. You just testified earlier, many times, that in an it was simply a DIP. And I conducted myself
integrated nature of getting the Marriot deal done, the DIPs done, was an integrated part of putting your restructure together yet you kept it secret from the largest creditor, you kept it secret from the DIP lender, you kept it secret from the preferred shareholders while you were acting as their fiduciary. A. Is that what my understanding is, sir?
I think that's accurate. THE COURT: Mr. Parkins, I'm going to take advantage It's ten minutes to 4. Can you give me
of your slight pause.
an estimate of where you are in your presentation, because I'm getting to the point where I'd like to offer the witness a break? MR. PARKINS: THE COURT: THE WITNESS: THE COURT: MR. PARKINS: I have probably ten minutes. Are you good for another ten minutes? Yes, Your Honor. All right. It will be ten minutes, maybe -- not
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- 219 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. much more. Q. Okay. So let me ask you. When you went to your board to
discuss the process that was going on, did you tell them you were not going to tell any other creditor constituency what was going on during the negotiation process? A. Well, I would have discussed with -- everything involving
each of the constituents, but -Q. My question, sir, is did you tell them you had no
intention of disclosing what was going on with Lehman Apollo to any other creditors of this estate that outnumber Lehman by hundreds of millions of dollars as well as the equity represented by Mr. Bienenstock as well as the mezz debt represented by other counsel here? Did you tell your board you
were not going to tell anybody about what's going on while you were acting as their fiduciaries? them? A. Q. No. So you even kept it a secret from your board that you Yes or no? Did you tell
weren't telling anybody, is that correct? A. Q. That's not correct. Now let me go back to one of the series of questions -MR. PARKINS: -- and I will be done, Your Honor.
At the time you got your two million dollar bonus in April
or may of this year, bonuses of April/May of this year, this is after a period in March where you diverted cash to a separate
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- 220 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. account away from Wachovia. A. Q. Is that correct?
Let me just clarify something. My question -- yeah, you can answer my question. If you
need a clarification, I'm sure your counsel will ask. This is after you diverted the cash, is that correct? That's crafted. None of my bonus was paid out of any
proceeds of assets of your pool. Q. A. I'm sorry? None of my bonus was paid out of any of the proceeds from
your client's assets. A. My question is, it was -- but it was paid also after
Marriott gave notice to default, is that correct? A. Q. That's correct. It was also after you went in default in payment on my Is that correct?
client's debt. A. Q.
That's also correct. It was also after you went into default on payment of the Is that correct?
Lehman debt. A.
I believe so. MR. PARKINS: THE COURT: I pass the witness, Your Honor. All right. It's eight minutes to 4. Who
is -- I take it that someone else wants to ask Mr. Beilinson some questions? MR. GOTTESMAN: Yes, Your Honor. I probably have ten,
fifteen minutes at the most, Your Honor.
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- 221 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: All right. Here's what we're going to do.
I'd like to give the witness a short break; I need a little bit of a break. Why don't we take fifteen minutes and I'm going to
ask the three of you and anybody else who wants to question the witness to get together and see if you can coordinate your areas of questioning so that we can be efficient. All right? ten minutes after 4. Mr. Beilinson, you, obviously, can't talk to anybody. All right, thank you. (Recess from 3:53 p.m. until 4:15 p.m.) THE COURT: All right. We're going to have to take We'll come back at about -- no later than
another break in a half an hour for the changing of the court reporter. Please be seated. But we can get started in the meantime. Mr. Gottesman. MR. GOTTESMAN: THE COURT: Thank you, Your Honor. All right,
You drew the short or the long straw,
depending upon your perspective. MR. GOTTESMAN: THE COURT: Intermediate.
Okay. Thank you, Your Honor.
MR. GOTTESMAN: CROSS-EXAMINATION BY MR. GOTTESMAN: Q.
Good afternoon, Mr. Beilinson.
Lawrence Gottesman, Bryan
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- 222 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cave, on behalf of two securitization trusts, specially serviced by LNR Partners. A. Q. Good afternoon. You testified earlier that you're the fiduciary for the You were
securitization trust specially serviced by Midland.
also a fiduciary with respect to the securitization trust specially serviced by LNR as well. A. Isn't that correct?
I think I'm a fiduciary to the entire enterprise and that
includes participants within it. Q. A. Q. And by participants you include creditors, I take it? Yes. And isn't it true that prior to the petition date, you
never informed LNR or the master servicer with respect to these trusts of the PSA or the plan term sheet? A. I believe I did inform them of their existence to the PSA
prior to filing, but it would have been shortly before filing. Q. And when you say inform, you informed them of the terms
and conditions including the substantial write down contemplated by the plan term sheet? A. No, because I'm not sure what the write down is with
regard to the clients that you represent at this point in time. Q. let's be more specific. The plan term sheet contemplates
that there's a bucket called "Other Secured Debt", is that correct? A. That's correct.
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- 223 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. And it contemplates that that bucket can't have notes with
a value, present value, exceeding 150 million in the aggregate. Is that correct? A. Q. That's correct. And the principal value as to the petition date for the
loans in that bucket is how much, sir? A. Q. A. Q. I believe it's 225 million dollars. Okay. So going from roughly 225 to 150?
It's in that range, off the top of my head. Okay, okay. But you never informed anyone at LNR or the
master servicer prior to the petition date of that fact, did you? A. I informed them that I believed that the value of their
collateral is substantially less with regard to some properties than the amount that we owed on them. So I was --
while -- within sixty days of the bankruptcy case, I had provided LNR with regard -- all of the P&Ls, all of the due diligence information that they requested. I talked to them
about the situation; I allowed them to visit the properties. They started dong their appraisals and we cooperated in that regard and I told them that my view was that they were undercollateralized and that the value of the property -- the value of the properties were less than the value of their debt -Q. A. Okay, but --- so I had full communication --
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- 224 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Q. -- despite -- despite the sharing of that information,
despite the fact that you had conversations with LNR as recently as a few weeks prior to the petition date and despite the fact that this peppercorn of an idea by that point had become fully baked, you were never sure -- shared the specifics of the term sheet reduction of the 225 to 150. correct? A. At that time, the peppercorn wasn't fully baked. We were Isn't that
still in substantive discussions with Lehman Brothers and no, I did not discuss it with them and no, I did not discuss it with Midland until days before we filed the bankruptcy case. Q. Now earlier in your testimony, you testified that as part
of this deal Lehman would be getting equity of the entire enterprise. A. Q. That's correct?
That's correct. Okay. And does Lehman have claims against any debtors
other than the debtors that comprise the borrowers of the floating-rate pool? A. Q. No, they do not. Okay. But they -Withdrawn.
MR. GOTTESMAN:
If I understand your earlier testimony the plan that's
contemplated by the plan support agreement and the plan term sheet contemplates that the properties and the other secured debt pool will be fully encumbered. In other words, the loans
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- 225 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 will be written down to the value but not less than the value as determined by the Court. A. Q. That's correct. Okay. But the debtor still thinks that there's a value in Is that correct?
hanging on to those properties, is that correct? A. I believe there's a value worth embedded within the
enterprise. Q. I'm trying to drill down to those specific properties and
I'll drill down even further to the five that are held by the two securitizations trusts specially serviced by LNR. Under the plan that's contemplated by the plan support agreement, what's contemplated is that those loans will be written down to a number that has a one-to-one ratio to the valuation determined by this Court. A. Q. view? A. Q. That's correct. Okay. But nonetheless, the debtor believes that it's in Isn't that That's correct. Okay. But -- and in theory, there's nothing left, in your Is that correct?
its interest to hang onto those properties. correct? A.
They believe the enterprise is worth more than the value
of each particular asset, that's correct. Q. A. Okay. Even if it's fully encumbered?
That's correct.
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- 226 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 time. THE COURT: Mr. Gottesman, thank you. Thank you. Q. Okay. You testified earlier that the two million dollars
in bonuses, one which was a stay and one which was a signing bonus, were not paid from the collateral of the fixed-rate pool. A. Q. Is that correct? That's correct. Okay. Are there any unencumbered assets in the Innkeepers
enterprise? A. Q. A. Q. A. Yes. What are those assets? There was cash. And were -- your bonuses were paid from unencumbered cash? I'm not sure exactly where my bonus would have been paid
from, except to the extent that they weren't paid from the proceeds of the Midland collateral. Q. That I know for sure.
But you don't know whether it was paid from anyone else's
collateral? A. No. MR. GOTTESMAN: I have no further questions at this
MR. GOTTESMAN: CROSS-EXAMINATION BY MR. FRIEDMAN: Q.
Mr. Beilinson, good afternoon. THE COURT: Mr. Friedman, identify -- I'm sorry; I cut
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- 227 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Capital. A. Q. Good afternoon. Mr. Beilinson, it's true, isn't it, that Lehman's not you off. MR. FRIEDMAN: David Friedman. I represent Five Mile
putting up any new money under your plan support agreement? A. They may or may not, depending upon who funds the exit And so, initially,
funding of seventy-five million dollars.
they are not putting up new money for purposes of getting the hundred percent of the equity but whether or not they're going to be a participant in the exit funding is an unknown at this point in time. Q. There's no commitment in the PSA for them to put up any
money, correct? A. Q. Correct. All right. They are an existing creditor of Innkeepers,
correct? A. Q. Correct. And you think that you can use their cash collateral
without their consent if it comes to that, correct? A. I believe I could make a case before this Court requesting
the use on a non-consensual basis and I believe that it may very well be approved under some conditions. Q. Are you aware that Lehman received Court approval in its
bankruptcy case to enter into the PSA?
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- 228 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. A. Q. A. Q. Absolutely. Okay. Do you follow those proceedings?
I was informed the Court approved their motion. What did you understand Lehman to have told Judge Peck
about the merits of the PSA to the Lehman estate? A. Q. I don't know. It's not material to me.
It's not material to you that Lehman advised Judge Peck
that the PSA was in the best interest of the Lehman estate? A. What was material to me was that Judge Peck in overseeing
the Lehman bankruptcy estate authorized Lehman for moving forward with the PSA. to me. Q. Wait. You've been doing this for twenty-five years. What That's the only thing that was material
would be the bases upon which Judge Peck would have approved Lehman entering into this transaction? A. Well, I thought it would be -MR. DONOVAN: Objection, objection.
It would be in the best interest of -THE COURT: Okay. Stop. When there's an objection
you need to -- you know this, but I'm just telling you -THE WITNESS: THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: I apologize. -- that you need to not answer so that -Thank you, Your Honor. -- counsel can state it an objection. I don't think it's a fair question to
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- 229 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. say what should Judge Peck be thinking of the rules. THE COURT: Sustained.
Do you think it's important to understand that Lehman was
representing to Judge Peck about the PSA from Lehman's standpoint? A. It was important for us to know that it was accurate, but,
beyond that, no. Q. Do you understand that Lehman has informed Judge Peck that
the PSA is in the best interest of the Lehman estate? A. Q. I believe I understood that to be the case. Okay. And if the PSA is a good deal for Lehman, doesn't
it follow that Lehman would vote for a plan that embodied the terms of the PSA? A. Q. Possibly. And if Lehman would vote for a plan that embodied the PSA,
why do we need all these concessions in favor of Lehman with regard to super-remedies and the like? A. Because I want Lehman to be bounded to move forward with
this process, to move a plan of reorganization and, you know, I think that's the only way you keep things going in the right direction. Q. Are you prepared to represent to the Court today that if
the PSA was not approved Lehman will not support a plan that embodies these terms? A. At that point in time I'm not sure what Lehman would do.
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- 230 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. Q. Sitting here today, do you have an understanding that
Lehman will not support a plan that embodies these terms unless the PSA is approved? A. I have no understanding as to what they would do if
they -- if the PSA is not approved. Q. Now let's just understand and let's do this slowly because
it's important how the fiduciary out works with regard -- in particular with regard to Lehman. There are milestones in the PSA. That's correct. Okay. One of those milestones is that a plan embodying Is that not correct?
the terms of the PSA is confirmed by Judge Chapman within 240 days, correct? A. Q. That's correct. Okay. You can only get relief from that milestone if you
comply with section 25(c), correct? A. Q. Yes. Okay. And if you don't get relief from that milestone and
you don't confirm this plan within 240 days, then Lehman will either get relief from the stay or you will sell its assets for them. A. I believe I would have to have a plan confirmed by 240
days for that outcome to occur. Q. Right. And just so it's clear. If that outcome does not
occur within 240 days, the Lehman pool is either put up for
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- 231 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 sale or you give them relief form the automatic stay? A. I just want to make sure I'm clear. If no plan is
confirmed by the plan -- whether it's Lehman or some other plan, then the remedy section applies. There is the
possibility that I don't go forward with Lehman but I go forward with another plan of reorganization and to the extent that that gets confirmed within the 240 days, indicated any super-remedy. Q. But you would need to get, in that circumstance, relief
from section 25(c), under section 25(c), correct? A. Q. A. Q. No. You would not need to get relief under -Absolutely not. -- section -- okay. Under -- in order for you to change
any of these milestones, you need relief under 25(c), don't you? A. I would not be changing a milestone. It would be -- I
would seek confirmation of an alternative plan of reorganization within 240 days and therefore I would not be needing relief from Lehman or any milestone. Q. A. Q. You have in the PSA a series of milestones. Correct? Yes. One of those milestones, I'm looking page 8, section A, "It is a milestone that there be an order
Romanette (vii):
confirming the plan consistent with the terms set forth in the
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- 232 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 okay? THE WITNESS: THE COURT: Okay. I think what he's saying -- I think what plan term sheet entered by the Bankruptcy Court no later than 240 days after the petition date." A. Q. That's correct. Okay. You need to get relief under section 25(c) to Is that not correct? Isn't that correct?
change that milestone. A.
That would be correct unless I actually propose an
alternative plan of reorganization that gets confirmed within the 240 day period of time. people -THE COURT: All right. Let me take a shot at this, I just want to make sure that
you're saying, Mr. Beilinson, is that if somebody showed up with a big pot of cash and you decided to pursue an alternative plan -- cash is easiest to talk about. You decided to pursue
an alternative plan, one of two things is going to be true and we're before the 240 days now, right? THE WITNESS: THE COURT: Right. -- this happens next week. That if that This --
plan is higher and better for Lehman, everything's good. THE WITNESS: THE COURT: That's correct. Okay? If that plan is not higher and
better for Lehman, since your prior to the 240 days, your view is that the super-remedy doesn't kick in --
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- 233 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE WITNESS: transaction -THE COURT: THE WITNESS: THE COURT: Right --- approved -But between the time that you'd pro -So long as I get the alternative
that you go live with it, in other words, propose it, disclosure statement, everything else that needs to be done, Lehman still has a termination event because you've violated the -- what I'll call the no-shop provision. And they can Isn't that
take -- they can terminate use of cash collateral. true? THE WITNESS: That's correct, Your Honor.
I was
focusing in on the super-remedy. THE COURT: THE WITNESS: Okay. They can terminate cash collateral but,
you know, at the same time I can always -THE COURT: THE WITNESS: THE COURT: trying to get at? MR. FRIEDMAN: THE WITNESS: THE COURT: BY MR. FRIEDMAN: Q. You haven't valued the equity that Lehman's getting out of Yes, thank you. I apologize, Your Honor. Okay. Okay --- come to this Court --- Mr. Friedman, isn't that what you were
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- 234 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the plan, is that fair to say? A. Q. Yes. And you have not done any work to determine what Lehman's
legal entitlement is on under a plan with regard to its distribution under a plan? A. No, I have done that work and I've looked at the value of
Lehman's collateral and made an -- made a determination that under no scenario are they getting more than they're entitled to in this Chapter 11 process and substantially less than the amount of their secured claim. Q. A. Q. Well, their secured claim is 238 million, right? That's correct. And they're getting equity that Apollo has implicitly Isn't that right?
valued at 215 million. A.
If you want to accept the Apollo valuation, that would be
correct. Q. So you have reached a conclusion that Lehman means (sic) Is that
collateral value is worth at least 215 over 238? correct? A. Q. No, that's not correct.
Well how have you reached the determination that they're
not getting paid more than they're entitled to? A. I don't believe that the value that Apollo -- I don't know
the basis of the value that Apollo was willing to pay with regard to Lehman. I don't know all of the factors involved in
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- 235 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that third-party negotiation. All I can do is make an
assessment with regard to my view and Moelis' after consultation with Moelis and management as to what we believe the value of the claim is and don't believe they're getting more than the value of the claim. Q. Is there any testimony in the record here about how much You're not testifying to
Lehman's secured claim is worth? that, are you? A. Q. A. No, I'm not.
Is anybody else here today to testify to that? No and I don't believe it's right today. I believe it
will be right at the time of plan confirmation. Q. So you cannot -- there's no evidence before this Court
today that Lehman is getting -- is not getting paid more than they're entitled to, is there? A. Only the testimony that I believe that they're not getting
more than they're entitled to. Q. A. Well -And I have testified that I do not believe they're getting
more than they're entitled to. Q. What if a third party disagrees with you? What if a third
party is of the view that you're being too generous to Lehman and punitive to the other creditors of the estate? enter this process? How do they
Isn't it the case that under those
circumstances they could never propose a plan or provide you
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- 236 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 with a scenario that's at least as favorable to Lehman? A. Well -- listen. Creditors have all sorts of rights that
they're entitled to and the debtor needs to meet the confirmation requirements of 1129 which includes not unfairly discriminating against -- amongst classes, feasibility, liquidation, value and I fully expect to the extent that I can't get consensual agreement with regard to all creditors, which I still believe will end up occurring, I fully understand that -- all those issues are going to be vetted before this Court who will make a determination -Q. Let me try to ask you a question that's more practical.
You've looked at the Five Mile transaction, those transactions, have you not? A. Q. A. Q. I've taken a little look at it, yes. I've read it.
You haven't spent much time on it, have you? No. I haven't had time during the last few days.
So from the 23rd of August until today, that's nine days,
you didn't consider it important to review a written proposal from a wealth capitalized third party that places a higher enterprise value on the estate than your plan. think that was worth your time? A. First of all, I didn't receive it. I happened to read it You didn't
in connection with an attachment to a declaration filed in opposition to this motion. ago. I've reviewed it. I didn't get it until a few days
I have already had a conversation with
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- 237 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Mr. Nickerson and said I'm happy to talk to him, you know, in the next week or two weeks. presented to me. It was never presented to me by Five Mile; it was never presented to me by Midland and when I do get it and I have an opportunity to really assess it, I'll have to appropriately, after consultation with my counsel, with my financial advisors and with my independent members of the board, as I should. It's never been presented to me. Q. Didn't you testify in your deposition that you were not But, you know, it was never
interested in receiving third-party proposals, that you wanted to stay within your exclusive period pursuing an internal reorganization plan? A. Q. A. No, I've never said that. Do you have your deposition? No, I don't. MR. DONOVAN: THE COURT: Do you have -- you have the -It's Midland 56. One second, please.
MR. FRIEDMAN:
Could you turn to page 138 of your deposition, please? MR. DONOVAN: THE COURT: It's -He doesn't have it, Mr. Friedman. All right, can I get the page online so
MR. FRIEDMAN: we can see it? THE COURT:
Yes.
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- 238 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 UNIDENTIFIED SPEAKER: MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: recollection -MR. DONOVAN: THE COURT: you're doing? MR. FRIEDMAN: THE COURT: MR. DONOVAN: No. I'm going to impeach him. Okay. -- right, Mr. Friedman? Is that what Page 138, line 8.
May I object to the extent he's -He's going to do it the right way. Okay. You're going to refresh his
Right. Objection. Improper impeachment.
UNIDENTIFIED SPEAKER: MR. FRIEDMAN: gave me an answer.
That's what I thought he said. He I
Your Honor, I asked him a question.
It's not consistent with his deposition.
have the right to put the deposition in front of him and ask him whether or not he asked -- he was asked the following questions and gave the following answers. MR. DONOVAN: Your Honor. It's not the same question and answer, Please let's do it the right way So I ask --
That's my point.
and then I don't think he'd do it. THE COURT:
Dot the Is and cross the Ts. I don't know. Maybe I haven't been
MR. FRIEDMAN:
doing this long enough, but I'm not sure what I'm supposed to do. I -- I though I knew how to do this, but I guess, you
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- 239 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 know, you learn something new every day. I just want to ask him -THE COURT: Go -I want to put this in the record.
MR. FRIEDMAN: BY MR. FRIEDMAN: Q.
Mr. Beilinson, could you please look at page 138, line 8
and tell me if you were asked the following questions and gave the following answers -MR. DONOVAN: THE COURT: MR. DONOVAN: MR. FRIEDMAN: MR. DONOVAN: Your Honor, objection. No, I think -- he's allowed to do this. Yeah, he's allowed -Of course I'm --- to do this, but that isn't the So I'd ask him --
question he asked before. THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT:
Well, I don't think there's a --- to ask the predicate question -I don't think there's a pending question. I agree. That's --
I think he's now asking --- my point. -- this question. And, Your Honor, that's inappropriate
MR. FRIEDMAN: coaching because -THE COURT:
All right?
So --
MR. FRIEDMAN:
-- that's an argument he can make.
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- 240 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: BY MR. FRIEDMAN: "Q. Did you, since the bankruptcy filing, okay, talk to third All right. Let's let him go through this.
parties, not creditors, about doing a better transaction or an alternative transaction of listening and (sic) proposal? "A. "Q. Yes. And have you offered them due diligence access in order to
make a proposal? "A. No, because none of the proposals are, in my business
judgment, better or viable or accretive as a fiduciary to this bankruptcy estate. "Q. You have experience as a bankruptcy lawyer. How do I make
proposals to acquire a company unless I get due diligence first? "A. You know, my obligation as a fiduciary is to do an The Bankruptcy Code, as you know, was
internal restructuring.
set up so that I have an exclusive period of time to negotiate within the capital structure to propose a plan that could be accepted or rejected by creditors and they have to meet the confirmation requirements set forth in 1129(a) or (b) of the Bankruptcy Code. I believe that we have an intern
restructuring that meets all the requirements of 1129, is confirmable and in the best interest of the bankruptcy estate and in my exercise of my fiduciary duty and I intend to move forward unless a transaction presents itself that I believe, as
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- 241 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. a fiduciary, is better." Q. A. Q. Is that your testimony? It is very accurate. Did you not just testify that you did not -- when I said
to you don't you believe you have a fiduciary duty to pursue an internal reorganization, wasn't your answer, "No"? A. Unless a better alternative presents itself -- maybe I
misunderstood the question, but -THE COURT: Well, you did say no.
-- my deposition testimony is accurate and how I feel
today. Q. Did Five Mile speak with you in the middle of last month
to talk about a proposal they were willing to make? A. Q. Yes, we had breakfast. And they indicated to you that they were desirous of
making a proposal that would be competitive with the Lehman proposal. A. Isn't that correct?
They believed it might be competitive, but in our
conversation there were certain aspects of it which I told them I didn't think were beneficial to the bankruptcy estate or would it result in a confirmable plan so we -- we had a full conversation, but it wasn't a fully baked proposal. Q. And I think it was your testimony earlier that they asked
for access to the data room and you declined to give them that access?
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- 242 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. Yes, I did decline. By the way, you have -- you set up a data room for a
Lehman, isn't that right? A. Yes, I gave Lehman access to the data room in -- some time
in April. Q. Some time in April. So, some time in April when you had a
peppercorn of an idea of a Lehman proposal, you were willing to make the data room available to Lehman? But no other party is
entitled to access to the data room unless they can come up with a fully drafted proposal that you, in your own wisdom, decide is better. A. Q. A. Q. A. Is that correct?
No, that's not correct. Why did -I --- Lehman get access to the data room and no other party? I was negotiating a transaction where they would be giving
up their rights as a secured party, eliminating a security interest and twenty assets, not taking advantage of the cash flow that was being provided to them from those assets for the opportunity to be an equity holder of the entire enterprise. Since it was an enterprise-based analysis, I gave them access to the entire enterprise. I do not -- if someone came to me tomorrow and had a viable alternative that made sense and that, in reviewing it with my advisors, we believed it might be a better alternative,
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- 243 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 is it possible that we would give them access to the data room? Yes, that's possible. Q. After consideration. Five Mile is the DIP lender
So just so I understand this.
that prepared in writing to put up 236 million dollars of cash equity behind this capital structure. to be a -- and, I'm sorry. And you don't view them
And they're the controlling
certificate holder of the Midland pool which is the largest creditor of the estate. And with all that, they're not Can you
entitled to access to the data room, but Lehman is? explain that for me? A. Q. A. Sure, I'd be happy to. Please.
Five Mile is just a third party who is seeking to I would have
potentially purchase equity from this enterprise. to consider all aspects of the proposal and make a
determination that would be beneficial and confirmable before I would terminate the PSA and take the risk that Lehman would walk away from a proposal that not only is advantageous for the entire enterprise, it provides your client -- or it provides Midland with a hundred percent of the value of their claim in a market note. Okay? That's exactly what the Bankruptcy Code
tells secured creditors that they're entitled to and that's what we want to give them. So if Five Mile comes to me and we discuss the proposal -and as I told you earlier in my testimony, I've already had a
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- 244 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 conversation. again. I'm happy to have the conversation with them And to
We'll fully vet it; we'll fully consider it.
the extent we think it's viable, we'll consider how to react to it. Q. Did we hear your attorney, Mr. Sathy speak earlier today
about the Lehman DIP that you thought it was beneficial to have DIP financing from somebody who's already in the capital structure because of their alignment of interest? A. Q. Yes, I did listen. Isn't that exactly the same -- isn't exactly the same
point applicable to Five Mile? A. Not really, because a Lehman DIP has the potential of
being forgiven, which would be a seventeen and a half million dollar benefit to this case if the PSA -- if the plan contemplated by the PSA is actually confirmed, it's a seventeen and a half million dollar benefit because the DIP is forgiven. That's very different. And Five Mile, in connection with the
DIP on the fixed-rate pool -- I was going to seek a market DIP. It didn't make a difference to me if Apollo, Five Mile, Appaloosa or any other person would have made that DIP. Q. You don't know what Five Mile will do with its DIP because
you haven't given them the opportunity to have access to the data room to finalize their proposal, isn't that right? You You
don't know what they'll do because you won't talk to them? only know what Lehman will do because you have a deal with
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- 245 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. them. A. I actually have already had a conversation with Five Mile.
He has shown an interest in converting their DIP to the equity in this reorganization contemplated by the PSA. So to suggest
I didn't have any material conversations with Five Mile as to their desire to end up with equity in this enterprise is just wrong. Q. Let's move on. You testified that you don't believe this That was your testimony on
is a new-value plan, right? direct -A. Q. A. Q. A. Q.
It's not a new-value plan. It's not a new-value plan. No, it is not. You are certain of that fact? Yes. Okay. So let's just talk about what a new-value plan I take it you would agree with me that if you
would be.
proposed a plan whereby Midland would take the same 300 million dollar or so haircut that you're proposing, would receive nothing on account of its deficiency claim -(Pause) I want to make sure you get this in. It's really good.
So I want to give you time -A. Can you repeat it? THE COURT: All right. Sorry about that, Mr.
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- 246 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. ice. Friedman. MR. FRIEDMAN: That's okay. That's okay. Do you need more water?
So I want you to -- I'm sorry.
I was hoping someone would give me a Diet Coke with some But -THE COURT: If that's a serious request, we can make
that happen. THE WITNESS: THE COURT: THE WITNESS: THE COURT: THE WITNESS: side of the room. THE COURT: I know. And the sun comes around. So It really is. It really is? No. I've got water. They do, okay.
Just tell him where to go.
The air conditioning is really on that
it's going to get worse. THE WITNESS: BY MR. FRIEDMAN: Q. A. Q. Okay. Yeah. Okay. So let's go back and talk about -- let's make a You're ready? We have it. Thank you.
minor modification to your proposed plan and see where that comes out. Let's keep the same treatment of Midland. Now they
take a -- as you propose, they take a multi-hundred million dollar haircut and get a note for whatever you think the value of the collateral is and get nothing for their deficiency
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- 247 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 claim. A. Q. That's what you're proposing, right?
Yes. Okay. And let's say that you were to distribute only your
plan fifty percent of the equity to Lehman and fifty percent of the equity to Apollo. Apollo would pay 107 and a half million
dollars for that equity which you would receive as the debtor and distribute as part of the plan to Lehman as well. So when
the dust settles, Apollo owns fifty percent of the equity. Lehman owns fifty percent of the equity and Lehman gets the 107 and a half million to cash. A. Q. A. Q. Are you with me?
I think I understand the hypothetical. Okay. Is that a new-value plan?
Probably. Sure, because Apollo's paying the estate 107 and a half
million and they're getting equity back, right? A. Q. Yeah. Okay. So we all agree that that's a new-value plan. So
is it your testimony that because you and your attorneys were clever enough to come up with a device by which instead of the debtor distributing the equity to Apollo for 107 and a half million, the debtor delivers all the equity to Lehman and Lehman sells it to Apollo -- sells half to Apollo for 107 and a half million. So that when the smoke settles, you had exactly You're telling
the same recovery to exactly the same people.
me that that artifice is sufficient to evade the holding of
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- 248 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LaSalle? A. Q. A. Yes. Okay. And I'm even going to go further. I wanted to make sure
that we did a debt-for-equity swap with an existing creditor. And I always acknowledge that that existing creditor can do whatever it wants to do with the equity that they receive in the restructured enterprise. Once I became aware of the fact
that that might be Apollo, I wanted to make sure that everyone had notice of it and it was fully disclosed because it could be vetted. But it doesn't change the fact that this is a debt-
for-equity swap and that Apollo isn't receiving anything on account of its claims. Q. When you said you wanted to make sure everybody had notice I mean --
of it, you were kidding, right? A. Q. No. In fact --
-- you don't really think that people got notice of this. You had proposed a
You were negotiating with Apollo.
transaction with Apollo on April 22nd and didn't tell anybody about it until two days before the filing. How do you
reconcile that with your desire to give notice to everybody? A. Well, first of all, it's not accurate. I did not propose
a transaction with Apollo on April 22nd.
And I informed
everyone when I disclosed the PSA pre-petition as to the transaction including Apollo's purchase of the equity that
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- 249 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Lehman would be receiving under the plan. Quite frankly, I
think there'd be the same objections whether it was Apollo or any other third party that Lehman could have chosen. objections would be heard. Q. On April 22nd, you're in a conference room at Kirkland & You're cover The same
Ellis to discuss the PSA -- this plan, right? point, right? A.
I don't know where I was but I had a meeting somewhere
around then. Q. A. Okay. And you're there with Apollo, correct?
I was there with two board members who were encrust in the
restructuring process that were also employees of Apollo. Q. Okay. So your testimony is that they were there solely in
their capacity as board members and not as investors in the transaction? A. Q. A. Q. Absolutely. Absolutely. Absolutely. Okay. Because they were interested in the transaction, is
that right? A. They were interested in the entire restructuring process
because they had never been in one before. Q. People -- these are people from Apollo who had never been
in a restructuring transaction before? A. That's correct.
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- 250 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Okay. They had never been in a restructuring like this before.
They were encrusted in the process. Q. A. Q. And you invited them to come along so that they would -Yes, I did. Okay. When you met with Midland six days later, did you
bring them along then? A. Q. No, I didn't. Why not? Wasn't that just as interesting to meet with the
largest secured creditor in the case? A. One was blocks from where they work and one was in Overton
Park, Kansas, a completely different situation. Q. You have a meeting on April 22nd where you are discussing
a transaction whereby there will be a third party investor buying the equity from Innkeepers, isn't that right? A. Q. No, that's not correct. Your proposal on April 22nd indicates that ninety-five Isn't
percent of the equity will be owned by Lehman/investor. that what it says? A. Q. A. Q. A. Q. That's correct. That was your idea, wasn't it? That was my idea. You worked with Moelis to prepare that, right? Yes. It's like a sixteen-page piece of paper.
You put a lot of
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- 251 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 effort into it, didn't you? A. Q. We put effort into everything we do. You contemplated that there would be an investor in this
transaction, isn't that right? A. I contemplated that if Lehman -- that if Lehman didn't
want to take or didn't want to own for a long period of time a hundred percent of the equity that they may consider selling part of their equity as a risk mitigation device to a third party. But they could have very simply said they wanted a
hundred percent and that would have been fine. But reality is that Innkeepers and its independent board believes that the transaction contemplated in the PSA is in the best interest of this bankruptcy estate. Apollo's involved. You have Apollo if
If they're not involved or if Lehman simply If they chose not to
owns a hundred percent of the equity.
have sold fifty percent to a third party, we still would have done this PSA. done the PSA. Q. But you knew on April 22nd that there was going to be an You invited Apollo into the room. And you knew by So if it was just Lehman alone, we would have
investor.
the end of that meeting that Apollo was going to be the investor that was going to purchase the equity from Lehman. A. Q. A. Not correct. You didn't know that? Absolutely not.
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- 252 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. On April 22nd, you have this meeting with Lehman That's the
and Apollo to discuss your proposal, right?
sequence -- that's the first April 22nd on that date, right? A. You can call it a proposal or you can call it my initial
thought process -Q. A. Q. Okay. -- either way. And within a week or two after your initial thought
process, you received a two million dollar bonus, isn't that correct? A. Q. A. I don't recall what the timing was. It wasn't a lot of money to you? It's a lot of money. But I don't recall if I received it
in April, May or whenever. Q. But it was -- is it fair to say it was in relatively short
proximity within this meeting and after this meeting? A. Yes. My contract had come due and people were negotiating And that was the timetable.
an extension to my contract. Q. And MR. FRIEDMAN: I'll pass the witness. Q.
Let me just clarify one last point and
I thought I heard you say earlier that one of your goals
in getting this PSA done was to obtain roughly seventy million dollars of DIP financing to deal with the PIPs, isn't that right?
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- 253 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. Meyers? THE WITNESS: THE COURT: THE WITNESS: THE COURT: Could I take a two minute break? Yes, certainly. Thank you. All right. Mr. Meyers, the witness has A. Q. That's correct. Okay. And it is true, is it not, that neither of the
Lehman DIP nor the Five Mile DIP were in any way conditioned upon approval of the PSA? A. I think that's correct. MR. FRIEDMAN: questions, Your Honor. THE COURT: All right. Thank you, Mr. Friedman. Mr. All right. Thank you. No further
requested a two minute break. (Recess from 4:54 p.m. until 4:56 p.m.) CROSS-EXAMINATION BY MR. MEYERS: (Audio starts mid-sentence) Good afternoon. As you know, I represent TriMont Real Estate Advisors Inc.
Let me just quickly refresh your recollection of where TriMont fits in the capital structure. a couple of questions, okay? And then I want to ask you just If you would take a look at
Exhibit 17, please, which should be your colored map? A. Got it.
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- 254 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. Now, you understand that my client is a special
servicer for the SASCO Securitization Trust which holds the economic and beneficial interest in the so-called Anaheim mezzanine loan and the floating-rate mezzanine loan? understand that? A. Q. Yes. Okay. And on Exhibit 17, you understand that the two Do you
yellow boxes, those two debtor entities, are our borrowers? A. Q. I believe that's accurate. Okay. I'm going to focus first on Grand Prix Mezz Do you see that yellow box?
Borrower Floating 2, LLC. A. Q. Yes. Okay.
And you understand we refer to that as the
floating-rate mezzanine loan to that -A. Q. That'll be fine. Okay. Now Grand Prix Mezz Borrower Floating 2 LLC owns
the membership interest in twenty debtor entities, correct? A. Q. I believe that's accurate. Okay. And those twenty entities are each borrowers under
what we've referred to as the floating-rate -- the floatingrate loan, is that correct? A. Q. Yes. Okay. All right. Now do you have your declaration in
front of you? (Pause)
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- 255 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Q. A. Q. Yes. All right. My questions today are going to be brief and
they really center around paragraph 30 of your declaration. Take a look at that paragraph and, in particular, the last sentence. paragraph. (Pause) I've reviewed it. Okay. Yes. All right. In the last sentence, in particular, says "But And is that statement accurate? But for context, go ahead and read the whole
unless and until that time, the debtors believe that pursuing the plan contemplated by the PSA is in the best interest of their estates." A. Q. You believe that, correct?
I do believe that. Okay. Now, the plan support agreement was entered into by
every one of the debtor entities, correct? A. Q. I believe so. Okay. And what is your understanding of the treatment of
the membership interests that Grand Prix Mezz Borrower Floating 2 LLC holds in the twenty floating-rate borrowers under the PSA? A. I think that extinguished just like ARC's equity and
trust. Q. Okay. Now let's go back to the statement we just read.
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- 256 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 right. "The debtors believe that pursuing the plan contemplated by the PSA is in the best interest of their estates." How is it in
the best interest of Grand Prix Mezz Borrower Floating 2 LLC, a party to the PSA, to have its primary and principal assets extinguished? A. All these entities are part of an integrated enterprise
that everyone knew about when the transaction occurred in 2007. And this was -- this U was formed after discussions with legal counsel with regard to compliance with fiduciary duties. And I
believe many of these entities had independent directors that were independent of the directors of the board of trustees of Innkeepers who voted to file the bankruptcy cases. Q. So it's your view that it doesn't matter whether this PSA
is in the best interest of Grand Prix Mezz Borrower 2 LLC. It's what's in the best interest of the enterprise, correct? A. I believe, essentially, that's correct. MR. MEYERS: THE COURT: That's all I have, Your Honor. All right. Thank you, Mr. Meyers. All
Does anyone else wish to cross-examine Mr. Beilinson?
(No response) THE COURT: REDIRECT EXAMINATION BY MR. DONOVAN: Q. Good afternoon, Mr. Beilinson. Dan Donovan for the All right. Redirect?
debtors.
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- 257 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I want to start first with the questions that Mr. Friedman asked you on behalf of Five Mile, the DIP lender. focused a lot on their offer. And he
And I want to ask you, has --
again, there's been a lot of talk about this offer that Five Mile has given to Midland. To date, has Five Mile presented to
you or to anyone at Innkeepers this proposal that you have? A. Q. No. When did you first see this proposal from Five Mile to
Midland? A. I saw it a few days ago when I was reading pleadings that
were filed in this case and it was attached to someone's declaration. Q. Okay. Now let's follow-up with -- Mr. Friedman asked If he tweaked the plan in
you -- he gave you a hypothetical.
certain ways and he asked you whether that would be a new-value plan. you. Well, I have my own hypothetical for you. Let me ask
If you make a small tweak to the plan and the supplement
agreement that Lehman has with Apollo and Lehman sells its fifty percent equity to some third party rather than Apollo, would that be a new-value plan? A. Q. No, it would not be. Okay. If Lehman sells its equity to Five Mile, do you
believe that would be a new-value plan? A. Q. No, that wouldn't be. Are you aware whether or not Five Mile has made any offers
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- 258 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to Lehman to purchase the fifty percent equity? A. No. But Five Mile had a conversation with me as to
whether either Lehman or Apollo would be entrusted in selling some of the post-reorganization equity to them. they had a meeting with Apollo to discuss that. Q. Now you were also asked on cross-examination about Would you consider a And I believe
potential offers you would consider.
proposal if Midland came to you and said they would convert all of their debt to equity? A. Q. Yes, I would. Okay. And would you consider that further if they agree
to that to give them access to more information? A. Q. Absolutely. Okay. To date, has Midland or any of their
representatives come to you and agreed to convert their debt to equity? A. Q. A. Q. No. In fact, they told you the opposite, correct? They told me they would not accept equity. Let's focus on your negotiations with Lehman and early on.
Early on in your negotiations with Lehman, did Lehman at one point tell you, at the beginning of your negotiations, that they wanted their collateral back? A. Q. Yes, they did. Okay. And was that actually at the April 22nd or the
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- 259 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 prior April 17th meeting that's been referred to here? A. Yes. I believe that Lehman basically asked me to throw
them the keys. Q. Okay. So before you went to Midland six days later,
Lehman had told you they wanted their collateral back as well, is that right? A. back. Q. Okay. And during this meeting on April 22nd where these They did, in fact, ask me to give them their collateral
two board members attended, at some point, were the two Apollo representatives asked to leave the meeting? A. Absolutely. They were asked to leave the meeting because
I was going to have a conversation with Lehman that I didn't think they should be part of. So it was actually me who
basically directed them to leave. Q. Let's talk about Midland for a moment. During your
negotiations with Lehman as they went along, were the debtors in default of the fixed-rate loan? the time. A. At some point in time they were in default of the fixedAnywhere -- anywhere during
rate loan. Q. And I think you testified earlier that Midland told you
that they wanted their collateral back, is that right? A. Q. That's correct. Okay. Is it fair to say that during your meetings and
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- 260 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 discussions with Midland that Midland was your most hostile creditor you were dealing with? A. I wouldn't say hostile. They were never rude. But they
were adamant that they simply wanted their collateral back until we came up with this plan with their controlling interest holder. But they were never -- they were never rude. But just
like Lehman saying that they want their collateral back and then ending up with a PSA, it doesn't surprise me that Midland would say that they want their collateral back and it would result in a consensual restructuring at some point in time. it's just a sequencing of events in a Chapter 11 case. Q. During your negotiations with Lehman and your discussions So
with Midland, did you ever have a forbearance agreement with Midland that they agreed not to take any actions to try to take the collateral back? A. Q. I don't believe so. Okay. And do you know, if you had disclosed to Midland
about this potential Lehman PSA before you had the benefit of the automatic stay, therefore could Midland exercise its remedies regarding the collateral? A. Q. Absolutely. Okay. And was that a concern you had in dealing with
Midland throughout this proceeding? A. Absolutely. I wanted to have as much of the agreements
with regard to adequate assurance, the DIP financing and
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- 261 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Lehman's PSA done prior to the time that Midland might take aggressive action that would cause a premature bankruptcy. Q. And now that you have the benefit of the automatic stay,
are you prepared to meet with Midland? A. I've always kept an open dialogue. MR. DONOVAN: THE COURT: That's all I have, Your Honor. All right. Anything further?
May I ask a couple questions? You're giving
All right, Mr. Bienenstock.
me a look, Mr. Donovan. MR. DONOVAN: No. I'm sorry. I'm looking at Mr.
Bienenstock not you, Your Honor. RECROSS-EXAMINATION BY MR. BIENENSTOCK: Q. Mr. Beilinson, if Lehman decided that it was no longer
going to sell fifty percent of the equity to Apollo and instead decided to sell it to someone else, as things stand now, Apollo could cause this plan to be withdrawn and simply direct the debtor to go forward with a different plan, couldn't it? A. I would be asking for approval of the independent And, although it's an
directors before I did anything.
interesting hypothetical, that would never happen. Q. Apollo has the power to replace all of the directors, does
it not? A. Theoretically, they do.
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- 262 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. If Midland considered a conversion of its debt to equity,
you said a few moments ago that you would consider that proposal. A. Q. Recall that?
Absolutely. Okay. How would Lehman be given something higher or
better if Midland converts its debt to equity? A. I don't know what the entire plan would say and it's not
consequential to me as to whether it is higher or better with regard to Lehman. Q. Well, there may be a disagreement between Lehman and
Innkeepers as to whether it ends up with something higher or better. So is there any guidance you can give the Court as to
how the Court is supposed to figure out whether it's higher or better? A. As I've testified before, I think I have a full spec -- in Whether or not Lehman is getting a
compliance with 25(a).
higher or better offer, they have the right to terminate cash collateral. I, as the debtor, or Innkeepers, as the debtor,
has the right to come before the Court and ask for nonconsensual use of cash collateral. THE COURT: point for a minute? No. Can we just stop and focus on this
Because in my mind, there's a lack of That's not what the agreement says. Precisely. And that's not what the order says.
clarity on this point.
MR. BIENENSTOCK: THE COURT: Okay.
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- 263 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 And I think this is an extremely point. And I'm also concerned
that -- I'm curious, frankly, how or if this was presented to Judge Peck because this deal first stops with Judge Peck for him to authorize the Lehman debtor to consent to the entry into the PSA buy with Lehman ALI. So I'm having a disconnect here
between -- and I'm not sure -- I'm not going to argue with you, Mr. Beilinson. I am just -- I have a decision to make. It's complicated. And
it's a very big and serious decision. There's a lot riding on it.
And I am reading the plain words And I
of this document, the plain words of the order.
genuinely am at a loss because that's not what it says. In the DIP motion where there's an event of default, it very clearly says five days business notice, people get to come to me, we get to have an argument about whether it's an event of default and then I rule. what Lehman's remedy is. collateral is terminated. So I don't know that this is a question for the witness because he's not supposed to be making legal arguments. But at some point, you all need to tell me what your view is. MR. BIENENSTOCK: Thank you, Judge. What I was going It doesn't say that that's
It says that the use of cash
to do was, number one, pass the witness because I think we're really into legal argument and what do the -THE COURT: I agree. -- what do the documents say. And I
MR. BIENENSTOCK:
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- 264 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 would -THE COURT: But if he has a -But since --
If he has one understanding of what it
does and people have a different understanding, I think it's important to get to the bottom of it. MR. BIENENSTOCK: But simply because I can't resist, I
would say Judge Peck approved it because it's too good to be true for his debtor, why not for -THE COURT: approved it, too. MR. BIENENSTOCK: THE COURT: Exactly. Well, if I were Judge Peck I would have
But I'm interested in the integrity of the And if crisp statements were
way this is all being presented.
made there that to the effect of here's why this is so great for Lehman, Judge Peck, and then he was given a laundry list of reasons and if, included among those was, and no worries, because it's 240 -- before the 240th day, if X, Y and Z occur, we get to terminate use of cash collateral. that's material for me to know. I mean, I think
So I just would like at some
point before we call it a night that I have some either -- if not clarity, then the parties' positions on that very specific issue. MR. BIENENSTOCK: THE COURT: Thank you, Your Honor. Thank you. All right. I
All right.
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- 265 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 think, Mr. Beilinson, you're done. testimony, sir. (Witness excused) THE WITNESS: MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: (Pause) MR. DONOVAN: Dan Donovan for the debtors, Your Honor. Thank you very much. That is -Sorry? It's simply the way I understand it. All right. All right. What's next? Thank you for your
Your Honor, we filed and the other parties have -- we just want to move into evidence for procedural purposes -THE COURT: MR. DONOVAN: Okay. -- here. And this is the deposition of I have one copy
Kevin Semon who is the Midland representative. for you that I can -THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: Midland binder? MR. DONOVAN: It should be, Your Honor. All right.
I also have additional ones. I don't think I have that -Oh, okay. -- somewhere. Sure. Is it in the Midland submission, the
It was on
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- 266 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 as well. THE COURT: MR. DONOVAN: their evidentiary case. THE COURT: All right. Mr. Donovan, don't -- we need You want to give it a Okay. Thank you. Got it. But -MR. PARKINS: Your Honor, I understand it's 63 in ours your exhibit list unless it's been withdrawn. it up, Your Honor. (Pause) THE COURT: All right. Okay. All right. Yes, I do. But I can hand
Your Honor, with that, the debtors rest
to give this a designation, though.
debtor number or shall we just call it -MR. DONOVAN: Honor, Debtors' 25. THE COURT: MR. DONOVAN: MR. PARKINS: THE COURT: MR. PARKINS: All right. Thank you. Your Honor? Yes. We just want to make sure we understand Is the point that you want Debtors' 25. No. We should. Let's make it 25, Your
the point that you want clarified.
clarified whether or not if there's a default under the PSA within the first 240 days whether the use of cash collateral is permanently terminated and we have forgone our ability to come and use it on a nonconsensual basis? Or is the point that you
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- 267 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Lehman. want clarified the interplay between 25(a) and the rest of the fiduciary -THE COURT: MR. PARKINS: THE COURT: MR. PARKINS: THE COURT: MR. PARKINS: stand, please. MR. O'BRIEN: Your Honor, Kevin O'Brien, Dechert, for No. It's the former.
Great. I want to know -Okay. Okay. Thank you. All right. What's next?
I'd like to call Mr. Lascher to the
And we, for purposes of today, represent Mr. Lascher.
We are happy to pass this witness for cross-examination to the objectors with the proviso, of course, that we be made to -THE COURT: MR. O'BRIEN: THE COURT: MR. O'BRIEN: THE COURT: Redirect. -- redirect as appropriate. All right. Thank you, Your Honor. It's almost time to say good evening.
Raise your right hand. (Witness duly sworn) THE COURT: CROSS-EXAMINATION BY MR. PARKINS: Q. A. Good afternoon, Mr. Lascher, how are you? Good, thanks. How are you? Thank you.
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- 268 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. A. Q. A. Good. Would you state your name for the record, please?
Michael Lascher. And Mr. Lascher, you are employed at Lehman? Yes. Technically, yes.
Which entity? A company called LAMCO LLC which is owned by Lehman
Brothers. Q. Okay. And what relationship does LAMCO have with respect
to the Lehman that is a signator to the PSA? A. LAMCO manages the assets of the Lehman Brothers bankruptcy
estate. Q. A. What are your duties at Lehman? I oversee all of our hotel investments in the commercial
realty area. Q. A. Q. And that includes, I take it, Innkeepers? Yes. And you were responsible for negotiating the PSA, lead
negotiator for PSA from Lehman, is that correct? A. Q. Correct. And were you also responsible as the lead negotiator for
Lehman with respect to the Apollo-Lehman agreements? A. Q. Yes. You attended a meeting, did you not, on April 22nd at
Kirkland & Ellis called by the debtors, did you not? A. Yes, I did.
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- 269 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. Q. you. A. Which one? (Pause) 54. Yes. This is a document that was handed out at the meeting at I'd ask you to look at Exhibit -- our exhibits are behind
Kirkland by Innkeepers and Moelis, is that correct? A. Q. Q. It looks like it. Okay. This wasn't -- I just noticed this is from Innkeepers not I know what I received. It looked like this.
from us. Q. Okay.
And I took your deposition ten, fifteen days ago,
correct? A. Q. Yes. Before this meeting occurred on April 22nd, you intended a
prior meeting, did you not, with Innkeepers and where Apollo was in attendance, is that correct? A. Q. A. Yes. And who was in attendance from Apollo? It was Justin Korval and Schuyler Hewes or one or the I can't remember which was at which meeting.
other of them. Q.
And in your negotiations that led up to the Apollo-Lehman Businessperson.
document, who negotiated that for Apollo? A. On the sale of the --
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- 270 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. A. Q. A. Apollo --- equity to Apollo, you're saying? The Apollo-Lehman document. It was a combination of conversations with Jim Zelter,
Schuyler Hewes and Joe Glatt. Q. So it's the same Schuyler Hewes that was at the first
meeting? A. Q. Yes. Now, subsequent to that first meeting, we have this April Was someone from Apollo at
22nd meeting at Kirkland & Ellis. that meeting? A. Q. A. I believe so.
And was Mr. Hewes at that meeting? It was he or Justin or a combination of the two. I just
can't remember. Q. Was there any other people there other than
representatives of Innkeepers, Lehman and Apollo? A. There were people from Moelis there and Dechert and
Kirkland. Q. A. Q. Okay. Yes. Now, if you look with me, please, at this exhibit -(Pause) -- page 12 -Okay. So lawyers and financial advisors?
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- 271 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. that? A. Q. Yes. Okay. These were numbers prepared and presented by -- entitled "Illustrative Valuation Ranges". You see
Moelis, is that correct? A. Q. Yes. And this is the first time you saw these numbers, is that
correct? A. Q. Yes. And if you turn to the next page, we see here on page 13
"Illustrative Pro Forma Structure Pair in Equity Lehman/Investor 95%". A. Q. Yes. And we go to the next page, we see adjustments,
fixed-pool, which is the Midland debt between 250 and 425 million dollars. A. Q. Yes, I do. Did you ever attend a meeting where Apollo was not the Do you see that?
targeted investor to buy the stock from Lehman? A. Q. No. Okay. We never talked about anyone else. And in fact, Apollo was always, in Lehman's mind,
the targeted buyer of some piece of the equity of Innkeepers, is that correct? A. Q. Yes. From and after April 22nd, this meeting, Apollo remained
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- 272 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 engaged in negotiations with respect to this transaction reflected in this proposal and an ultimate acquisition of stock that Lehman was going to get as part of a plan, is that correct? A. For the most part after this meeting, we were having
discussions with Innkeepers about the plan support agreement. But we also, in the background, were talking about selling our equi -- a piece of our equity to Apollo and talking to Apollo about that. Q. And as negotiations matured, it became an integrated You were talking with the debtors and yet, you
transaction.
were looking to lay off a piece of the equity resulting from a plan of reorganization to Apollo, is that correct? A. In my mind, the combination of the two was what I liked
about the deal, converting our equity and selling part of it. Q. A. Q. A. Q. A. And there was never any other -Our debt equity, sorry. I didn't mean to interrupt you. I was just correcting myself. -- and spoke. We were converting our debt to equity and selling part of You took a break --
it was an attractive option for us. Q. A. Q. Did you invite Apollo to the meeting on April 22nd? No. Did you invite Apollo to the meeting that took place prior
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- 273 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. to April 22nd? A. Q. No. After April 22nd, you and Apollo engaged in dialogue with
respect to the acquisition of the stock to be generated from the plan of reorganization you were discussing Midland, isn't that -- I mean, with Innkeepers, is that true? A. Q. I'm not sure I understand. After April 22nd, Lehman, you, were engaged in continuing
discussions with Apollo regarding the acquisition of some percentage of the stock you were to get under a plan with Innkeepers, correct? A. We talked with them. But the focus of most of our
discussions following that April 22nd meeting were really with the company about the conversion of our debt to equity and getting familiar with the performance of the other assets. Q. But you did have discussions with Apollo because it was
integral that you lay off fifty percent of your stock to Apollo, correct? A. Q. A. Q. It was but it was a second step. Second step for this transaction, correct? Yes. Thank you. (Pause) You have it there? Yes. Turn with me to Exhibit number 89, please.
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- 274 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Q. Okay. This is a series of e-mails setting up a meeting
for Friday, May 15 with Innkeepers, Mr. Beilinson, you and representatives from Lehman, is that correct -- and Apollo, is that correct? A. Q. A. Q. Yes. Okay. Yes. And at that meeting, you discussed these transactions, Do you recall that meeting taking place?
correct? A. Q. Yes. Look with me at Exhibit number 74, please. (Pause) Exhibit 74 is a number of pages with handwriting on
various pages, is that correct? A. Q. Yes. Okay, within, Exhibit 74, going to Bates stamp number
4726, there's a page that starts "Innkeepers meeting 5/20, then redacted". A. Q. Yes. And this page and the next page are your handwritten See that?
notes, correct? A. Q. Yes. You did attend a meeting on May 20 with Innkeepers, is
that correct? A. It looks like it from the notes.
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- 275 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. And if I look at the first line, it says "risks per MB",
MB being Mr. Beilinson? A. Q. A. Q. Yes. Okay, do you remember this meeting? I remember this conversation. Okay, and they're listed. The risks are four, "LB" -- I
take it that means Lehman Brothers -A. Q. Yes. -- "and Apollo need to agree to a capitalization." What did that mean to you? What
does that mean? A.
What the capitalization of a reorganized company would
look like. Q. Because Lehman was going to own fifty percent of the deal,
right? A. Q. A. We were -I mean, Apollo was going to own fifty percent of the deal. -- converting our debt to equity and selling half of it to
Apollo, yes. Q. Okay, "impaired accepting class". That was discussed,
correct?
I'm not going to ask you what that means because
you're not a bankruptcy lawyer, thank goodness for you. A. Q. It was discussed, I guess, yeah. Okay, however, you're not getting off on 3, "sub rosa newThat was listed by Mr. Beilinson as a risk, is
value plan". that correct?
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- 276 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. A risk that other creditors would -- might argue this
point, yeah. Q. I think you testified in your deposition that's not
phraseology you were very used to, is that correct? A. Q. That's right. First time you heard it was here, in this meeting, is that
right? A. Q. A. Q. Yeah. And then Marriott. Or at least in the context of this deal. Okay, first time raised in this deal was at this meeting,
correct, by Mr. Beilinson, correct? A. Q. I don't remember. Okay, and then you have listed number -- next is number 4
is Marriott, correct? A. Q. Yes. Okay, then if we turn the page, about -- starting three
paragraphs down, Midland's attorney will argue valuation, question mark, and then if I'm reading correctly, sub con, artificial impairment, sub rosa new-value plan. A. Q. time? A. did. Based on what it says on the other page, it looks like I I just -- it was a while ago. I don't remember. Yes, that's what it says. Did you discuss these topics with Mr. Beilinson at the
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- 277 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Q. A. Q. Did you discuss the fact that Apollo buying fifty percent
of the equity was a risk Mr. Beilinson saw, being a new-value plan? A. Q. No, he saw it as a risk that you might say it was. Okay. Look with me at Exhibit number 22, if you would,
please. THE COURT: MR. PARKINS: THE COURT: MR. PARKINS: Do you have it? Yes, I do. MR. PARKINS: Okay. Your Honor, you have it? What was the number, please, Mr. Parkins? I'm sorry, 22, Your Honor. 22. I'm sorry.
Thick notebooks. All right, I'm there. Okay.
THE COURT: MR. PARKINS:
Mr. Lascher, this is a document we talked about at your It's a document, says "illustrative terms of Do you
deposition.
proposed restructuring" with a May 25 in bracket, 2010. see it? A. Q. Yes.
Okay, I believe you testified that Lazard prepared the
substance of this, is that correct? A. Q. I think that's right. And Lazard is the financial advisor for Lehman?
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- 278 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. Yes. Lazard was involved with respect to these discussions
regarding the PSA as well as with respect to the Apollo acquisition of the debt, correct? A. Q. Yes. This is dated May 25, five days after your meeting with If you turn the page to page 2 of this
your handwritten notes.
document, at the "equity offering", we see there that as part of the plan, the company will conduct an equity offering at which the company will sell a total of 62.18 percent of its equity to a new holder, the new owner. A. Q. It says something like that. My reading must be defective, but I'm trying to be close. Correct?
Okay, going on to "backstop", it says Apollo Investment Corp., AIC, to provide a backstop to purchase 62.18 percent of the equity in the equity offering, a price of 171 million dollars in brackets, correct? A. Q. Yes. Okay, the next paragraph says as consideration for And it goes on.
providing the backstop, if AIC is not the new owner, then AIC will be paid a breakup fee for the 2.5 percent of the backstop amount or 4.275 million, the breakup fee, correct? A. Q. Yes. So it was contemplated here that likely Apollo was going
to be the new owner, by virtue of this backstop transaction,
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- 279 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. correct? A. I mean, it was contemplated that they were going to
provide a backstop. Q. Okay, and at the time of this document, May 25, Lehman
hadn't swayed from having Apollo be the ultimate buyer of the equity that it received as part of the plan, correct? A. Q. At that point, we were -- at that point, we hadn't, no. And in fact, during the entirety of the transaction, in It
negotiations up to the petition date, that never varied. was your goal to sell to Apollo? A. Well, it didn't -- I mean, it did vary. You can see
different term sheets. were backstop.
In one -- in some term sheets, there
It seems like those are the earlier versions,
and then later on, it becomes a sale to them. Q. A. Q. A. Q. But the end result, the end -The end result --- game in the red zone is the same? -- is that we ended up signing a deal with Apollo. Correct. Go with me to Exhibit 23, please. This gets easier for a while. We just
MR. PARKINS:
go in serial numbers, Your Honor. THE COURT: All right.
Okay, 23, we see here a document dated -- said
"illustrative term of the proposed restructuring, June 2nd, 2010". See that document?
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- 280 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. Yes. It looks, also, to be a Dechert draft dated 6/1/10,
correct? A. Q. Yes. If you turn with me to page 4 of this document, under the
"new equity" section, do you see that? A. Q. Yes. Again, there's going to be a plan providing for an equity
offering, correct? A. Q. Yes. And if you turn to the equity offering in the next page,
it again provides for, prior to the effective date of the plan there being an equity offering that also provides that Apollo's going to be the backstop, and again, a backstop fee, correct? A. Q. Yes. And then it says in the next paragraph, "Conditions The
preceding to Lehman's obligations under the PSA.
transaction will become binding on Lehman when Lehman, AIC, and the company execute a plan support agreement, the PSA, that incorporates the transactions set forth herein." A. Q. A. Q. That's what it says. Okay. Okay. This is a term sheet, "illustrative terms for the proposed Go with me to the next exhibit, number 24, please. Correct?
restructuring" dated June 2nd, 2010, again a Dechert draft,
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- 281 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 6/1. And if we go through this document to page 4 and 5 again,
we see similar terms as was provided in the prior exhibit, is that correct? A. Q. A. Q. In terms of the equity offering and the equity backstop -Right. -- yeah, yes. And the difference being on this document, if we look at
footnote 2, versus what was in the prior document, we see a change, do we not, in the context of footnote. Exhibit 23 and look with me at Exhibit 24. A. Q. The footnote's on the front page? Yes, footnote number 2. I believe the difference is -Look with me at
agree with me, please, if I'm correct, then on Exhibit 24, the second sentence of footnote 2 now reads, "Lehman is completing its own quantitative analysis of the value of the company and will supplement this term sheet once that analysis has been completed." A. Q. A. Q. Yes. Okay, and that was being done by Lazard, is that correct? Yes. And that was facilitated because Lazard was given access Do you see that?
to due diligence by Innkeepers, is that correct? A. Q. A. Yes. Go with me to Exhibit number 25, if you would. Okay.
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- 282 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Q. Q. Again, to page 4, "new equity". You have a different
value in here.
Shares new equity having a value of 190 to be
distributed, but the process looks very similar to the prior transaction. There would be equity offering, Apollo will again
be the backstop, there will be a breakup fee, and again, Apollo, Lehman, and the company were to sign a plan support agreement, correct? At the bottom of page 5 is "conditions precedent". Yes. If you turn with me to Exhibit 26. Okay. This is a document called "illustrative terms of proposed If you go to page 5, under "new
restructuring, June 4, 2010".
equity capitalization", again, while the numbers may change in the box, what we have here is a structure where Apollo, again, is going to be a backstop, contemplated to be the new owner, or if not the owner, it gets a breakup fee, correct? A. Q. Yes. If we go to page 6, "conditions precedent", again, the
transaction will become binding on Lehman when Lehman, Apollo, and the company execute a plan support agreement, the PSA, and incorporates the transactions set forth herein, correct? A. Q. Yes. And the last bullet point on that page 6 says, "Agreement
reached with AIC in form and substance satisfactory to Lehman,"
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- 283 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 another condition? A. Q. Yes. Go with me to Exhibit number 27, an illustrative term
sheet entitled "term sheet alternative A, illustrative terms of proposed restructuring dated June 17, 2010". A. Q. Yes. And this has on the right-hand side, "PW". That stands Do you see that?
for Paul, Weiss comments, correct? A. Q. A. Q. Yes, I believe so. Paul, Weiss represented Apollo? Yes. And if we go through this document to page 5, this
document has in the -- page 5 in the second block -- box, "AIC purchase of new equity". This was a different structure for
the transaction proposed by Apollo, correct? A. Q. Yes. And within this box, what I see, also, is that there would
be purchase of fifty percent of the shares that Lehman gets, is that correct? A. Q. Yes. The purchase price, eight-five million dollars, a ten
percent, a ten million dollar option premium, is that correct? A. Q. That's what it says, yes. Right. And it says also that AIC may consider an
additional capital commitment of up to five million dollars to
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- 284 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 fund property improvement plans in exchange for a complete release of any liability for payment or performance on any -of any PIP-related obligations, if any, of AIC, correct? A. Q. That's what it says, yes. Turning to page 6 of this document, "conditions precedent" Again, the transaction becomes binding on the parties
section.
and includes Apollo signing the PSA again, still, doesn't it? A. Q. Yes, it does. It also requires that agreement with Apollo and Lehman be
reached in form and substance satisfactory to Lehman, correct? A. Q. Yes. Go with me to the next exhibit, Exhibit 28. A term sheet
marked "term sheet alternative A".
This is a Dechert draft.
"Illustrative terms of proposed restructuring, June 22nd, 2010". A. Q. See it?
Yes. If we go to page 5 of this document, first we see "new You see
equity", then we see "AIC purchase of new equity". that on the bottom of page 5? A. Q. Yes, I do.
Basically, Lehman came back through your counsel and
drafted a term sheet that says that after confirmation of the plan but prior to the effective date, Lehman will sell its right to receive fifty percent of the shares it gets, correct? A. Yes.
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- 285 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. Going to the "conditions precedent to Lehman's
obligations", again, Lehman, Apollo, and the company were going to sign the PSA? A. Q. Yes. Okay, and this is dated June 23. This is -- this is less
than a month from when the bankruptcy was filed that Apollo was going to be party to the PSA, correct, under this draft you submitted -- you circulated, correct? A. Q. The date on the page says June 23rd. Right, which is less than a month from the July 19 filing
date, correct? A. Yes. MR. O'BRIEN: Your Honor, I have to object to One, he's
counsel's -- there are two things going on here.
reading the document, and I'm not sure why my client has to weigh in on whether he's reading correctly or not. But I think
a little more dangerously, he's also inserting his own interpretations into these documents as though those were his reactions -THE COURT: I'm not seeing that. I think he's -- I
think he's establishing a chronology.
He's walking through the I'm just
term sheets, and I don't think he's editorializing. not seeing that. I mean if you can speed up --
MR. O'BRIEN: THE COURT:
I mean, no foundation -- I'm sorry. Mr. Parkins, if you can speed it up and
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- 286 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 record. get to -- I mean, if -MR. PARKINS: almost done, anyway. THE COURT: These'll be -- I'll be -- these are I'll be through these. Right. But I think he's establishing a
certain chronology, and he's almost at the punch line, I think. So -MR. O'BRIEN: If I can just point out for the record,
briefly, no foundation has been laid that any of these drafts were ever discussed with specific people or transmitted to the debtor. THE COURT: that objection? MR. O'BRIEN: No, I just want to state it for the All right, are you really going to press
We don't' know who, if anyone, read these, who worked He's simply reading from the
on them, who gave input.
documents which we, for the most part, provided in our document production. THE COURT: All right, you provided him the documents,
so presumably these represent actual drafts that went back and forth between and among the parties. MR. O'BRIEN: MR. PARKINS: Well, we don't' know that. I mean --
I don't know that, either, but I'm going
through the documents because I think it's an important chronology to go through of the documents presented by the parties as to where --
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- 287 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to -MR. PARKINS: -- we get to some later on that have THE COURT: Well, you know, I guess that we don't have
to spend a lot of time, as we're staring at a quarter to 6, figuring out whether these technically are admissible. If
you're just going to argue about the chronology, and if you're asking Mr. Lascher to confirm his recollection of the chronology and the evolution of who the parties are to the PSA, then that's going to be the bottom line. MR. PARKINS: THE COURT: That's right, but -And we don't' have to -- I don't have
e-mail transmissions that show that people got served. THE COURT: MR. PARKINS: THE COURT: MR. O'BRIEN: THE COURT: BY MR. PARKINS: Q. A. Q. If you look with me at Exhibit number 29? Yes. This was a Dechert draft of a term sheet, alternative A, All right. Okay. All right. Sir?
I'll reserve. Okay.
"illustrative terms of proposed restructuring, dated June 29", correct? A. Q. Yes. And if we look at page 5 and page 6, with respect to
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- 288 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 distribution of new equity, the language, with respect to the sale of fifty percent of the equity to Apollo is gone, correct? A. Q. A. Q. A. In the new equity section? Yes. Is that what you're asking about? Yes. There's nothing about selling anything to Apollo in there. THE COURT: All right, now, I'm going to insert myself If
here because, unfortunately, I was a lawyer for too long.
you look very carefully at these documents, and you look at the document numbers, document numbers from one to the next, change. This document, 29, and the font is too small for me to
actually read, but after the dot, it's .2, okay? THE WITNESS: THE COURT: Yes. And it's a series of numbers. And if you
look back at most of the prior dates, with one notable exception, it's a different set of numbers. My recollection of
the way that works is that when you do new versions, the numbers get higher. And what I think this is is that this is
the second document that was generated by the Paul, Weiss firm because the first time I saw that number was on the document that said Paul, Weiss comments. So I don't know if that's the
case, but it's interesting, and I think important to know that this is part of what you folks are telling me about, the source of the change of who the signatories to the PSA were. And I
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- 289 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Weiss -THE COURT: MR. EHRLICH: Yes. -- on behalf of AIC. I would just note don't want to turn the lawyers into witnesses, but I made that observation. It caught my eye, and it happens to coincide with
the first time that AIC is not a signatory to the PSA. Sir. MR. EHRLICH: Your Honor, Andrew Ehrlich from Paul,
on an evidentiary matter for the record because I do think this is a little misleading. There is deposition testimony of an
AIC witness that a number of these earlier versions say Dechert draft, that he did not recall AIC seeing them, and I believe that the record will reflect that they are dated than the draft document ever transmitted from Paul, Weiss on behalf of Apollo. And I think that's very significant, and it's in the deposition record. THE COURT: All right, so you're saying that they
were -- that some of these drafts that Mr. Parkins has taken us through potentially never saw the light of day? MR. EHRLICH: you to it right now -MR. PARKINS: Your Honor, if there's a response, then Your Honor, Exhibit -- and I'll direct
I think you should put the deposition -THE COURT: MR. EHRLICH: Mr. Parkins, let him finish. Okay.
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- 290 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 right? this. MR. EHRLICH: Your Honor, Exhibit 14 and Exhibit 15, THE COURT: Okay. And we'll get to the bottom of
Midland's exhibits is an e-mail from Dechert to individuals at Paul, Weiss and Apollo transmitting a proposal on June 17th and a number of documents Mr. Parkins showed Mr. Lascher predate that date. And the Apollo witness testified at that deposition
that he did not recall Apollo seeing those versions of that document. I think that's significant -- it's a significant So I just rise to note that for the
omission, Your Honor. Court's background. THE COURT: MR. O'BRIEN:
All right, thank you.
That's helpful.
Your Honor, along the same lines, I
mean, these were already shown to the witness by Mr. Parkins, Exhibit 23 to 25 all had the same date but they have minor -in some cases, minor changes as between them. It's highly
unlikely all those were transmitted on the same day. THE COURT: Well, look at the -- look at the footers, I mean, they were
So it's .3, it's .4, it's .5.
multiple drafts that were produced over the -MR. O'BRIEN: So these issues should have been That's one reason why we
clarified on discovery, Your Honor. had discovery.
The foundation was not laid by Mr. Parkins. All right, well, I mean, there's
THE COURT:
sufficient uncertainty, and I'm not -- I haven't read all the
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- 291 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 out. MR. PARKINS: one of them. BY MR. PARKINS: I'm going now to Exhibit 16, which is deposition testimony -MR. PARKINS: THE COURT: All right. -- nor do I think it would have been -But I'm not going I
would it have been proper for me to do so.
to admit these into evidence without a proper foundation.
think that you're properly trying to establish a chronology -MR. PARKINS: A foundation is just a chronology of
documents that were produced that have certain headers on them as -- I'm not offering them that they were transmitted to anybody. I'm just offering that this is a set of documents They were produced.
produced with respect to this transaction. Nothing else. THE COURT: MR. PARKINS: THE COURT: MR. PARKINS: That were produced -For this. -- by lawyers. Right.
There are some here which have
transmissions, which I'm going to talk about. THE COURT: All right, but let's -- if you could
please cover the documents that actually -MR. PARKINS: THE COURT: Right. Let me know when documents actually went
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- 292 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. Which one? 16? Exhibit 16 is a cover sheet of email
Exhibit number 16.
transmissions, first from Mr. Kornberg to a group of people, and subsequent to Mr. Beilinson from Mr. Glatt at Apollo. you see that in the cover e-mail? A. Q. Yes. Okay, attached to this exhibit are two term sheets. You see that? The Do
first is a term sheet, says Lehman-AIC. A. Q. Yes, I do.
And the description of the transaction contemplates,
there, that there will be a stock purchase agreement whereby Lehman will agree to sell to AIC the right to receive fifty percent of the equity of the company that Lehman receives in connection with the plan for 107.5 million dollars. that? A. Q. Yes, I do. Okay. The next term sheet, going through this document, Do you see
is term sheet alternative A, Lehman-Innkeepers. THE COURT: MR. PARKINS: group, here. Where are you, now, Mr. Parkins? I'm on the second term sheet in this
It has a Bates -We're still in -It has a Bates -We're still in --- Bates stamp number 134 on the right.
THE COURT: MR. PARKINS: THE COURT: MR. PARKINS:
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- 293 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. THE COURT: MR. PARKINS: THE COURT: MR. PARKINS: -- still in 16, though, right? Right. Same exhibit. I'm sorry? It's in the same exhibit, number 134
Bates stamp on the bottom right. THE COURT: MR. PARKINS: Okay. Okay?
And this is a term sheet regarding the Lehman-Innkeepers
deal, correct? A. Q. A. Q. Yes. Sent by Paul, Weiss counsel, correct? That's what it says at the top. And if I go to page 5 of this document, in "conditions
precedent to Lehman's obligations PSA", we see here that transaction will become binding on Lehman when Lehman, Apollo, and the company execute a PSA, correct? A. Q. Yes, that's what it says. Okay. MR. O'BRIEN: mean to be repetitive. Your Honor, again, I object. I don't
In this particular case, there is no
indication either from the witness or the document that the witness ever received it. "CC" list. I mean -All right -Your Honor, he was a 30(b)(6) He's not on the "to" list or the
THE COURT: MR. PARKINS:
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- 294 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 representative, so he had to familiarize himself with all the documents and he was there. THE COURT: I think he's -- I think that Mr. Parkins
is using Mr. Lascher as a vehicle to establish this chronology. So technically, again, you're right. just get to the punch line. Q. Look with me, please, at the next exhibit which is Exhibit But I think we should
number 30. A. Q. Number 30? Yes. I'm going to ask you if you ever saw this document
before with the blacklined version of this document. A. Q. A. Q. I'm not a hundred percent sure. Okay. I saw a lot of drafts. All right. Go with me to Exhibit number 3, which is a
pleading filed in the Lehman Brothers case, a notice of motion. A. Q. A. Q. 38. A different -- number 3 in this book? Yes. Okay. In one of the books. And go with me to paragraph number
Is the Lehman person in charge of -- were you in charge of
the Lehman -- preparation of this pleading on behalf of Lehman to get it filed to seek approval in the Lehman bankruptcy case? A. Q. Yes. Okay. Did you review this pleading before it was filed?
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- 295 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. Yes. Okay, look with me at paragraph 38. Just the first
sentence, do you agree with that statement? A. Q. In the first sentence? Yeah, the agreement between LI and Innkeepers set forth in
the plan support agreement and the plan term sheet is one of several mutually dependent global agreements among Innkeepers and its key constituents? A. Q. Yes. Okay, and was the sale -- authority to sell fifty percent
of the stock, which was part of the hearing with respect to this motion of the stock that Lehman was going to receive to Apollo an integral part of the transaction from Lehman's point of view? A. Q. A. Q. A. Q. A. Q. From Lehman's point of view? Yes. Yes, we wanted to sell half of our investment -All right. -- for the new investment. Go with me to Exhibit number 17, please. Okay. This is an e-mail from Mr. Brian Greer at Dechert to Mr.
Glatt with a CC to a number of people including you, correct? A. Q. Yes. And Mr. Beilinson.
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- 296 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Q. Correct. Is that correct? Correct. All right, did you approve the transmission of this e-mail
with its contents, what was sent? A. Q. A. Q. I don't remember. Do you recall seeing this e-mail before? Yes, you showed it to me in my deposition. Do you take exception to what's suggested here in the
bullet points with respect to Lehman's position on or about July 14, 2010? MR. O'BRIEN: MR. PARKINS: Just the six bullet points? Yes, I'm just talking about mutual One, two,
termina -- Brian -- mutual -- six bullet points. three, four, five, six. A. Q. A. Q. A. Q. A. Q. Yes, generally. You agree that they reflected -They reflected -Okay. -- yeah, they reflected our -Right. -- perspective at that point. Correct.
So the first one says mutual termination event for forty-
five days from petition date; AIC will not be signatory to PSA. AIC or affiliate shall be purchaser, or affiliate of AIC shall
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- 297 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. counsel? MR. PARKINS: Sure. be purchaser of new equity. third-party purchaser. A. Q. A. That's right. Why is that? We had a deal with Apollo. At this point, we were happy Lehman will not consent to a
with the idea that they knew the company as well if not better than we did, and we didn't want to bring in any third parties. Q. Okay. At this point in time, I guess, based on your prior
testimony, we were reaching sort of the crescendo with respect to getting closure on the negotiations with Apollo that had started earlier in May, is that correct? A. Q. Getting close, yes. Okay, the last bullet point is the guarantee language Can you tell me the genesis of the language, if you How did this come about? Will you give him a chance to read it,
below.
know, here?
MR. O'BRIEN:
Let me just read it for a second. We were lining up DIP financing to pay for the PIPs, some
of which were obligations under the Apollo guarantee in the fixed-rate pool, and they wanted to make sure that they were -that we wouldn't get in the way of the company using that money for the purposes intended. Q. You were having discussions with Apollo about the exposure
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- 298 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 they had in their guarantee, is that correct? A. Q. Yes. And they viewed this as language that they wanted to have
included with respect to your deal with them? A. At this point, we had talked, in theory, about some -- a
concept like this, and this was language that we proposed. Q. A. Q. Go with me to Exhibit number 19, please. Yes. If we start at the earliest at the bottom, it's a series Do you have it?
of e-mail exchanges back and forth; is that correct? A. Q. Yes. The one at the bottom from Mr. Beilinson, and then we go
the first one from you, from Michael Lascher, Saturday, July 17, at 1:16 a.m., correct? A. Q. Yes. It says, "I'm sending an e-mail to Joe and Schuyler. They
should not have a consent right, even if it's only a reasonable one." A. What was this about? If I wanted to transfer my loan subject to the PSA and
this agreement, I didn't want them to have a consent right over who I could transfer it to, them being Apollo. Q. And likewise, you wanted to have a say as to who Apollo
might transfer it to, is that correct? A. Q. That's right. Did you get that in the documents?
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- 299 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. Yes. Okay, why did you want to have a say as to who Apollo
could transfer to? A. As I said before, I, at this point, thought that it was a
good idea for them to be in the deal. Q. A. Q. A. Q. Why did you think so? Because they know the company very well. On account of their ownership? Yes. The last e-mail, there is a series where you sent an eAnd your
mail to Mr. Beilinson, and Mr. Beilinson responded.
e-mail to Mr. Beilinson was, "I need the ability to transfer without any consent from AIC. Not every situation warrants
reciprocal rights, i.e., I still need a consent right (sole discretion over any transfer AIC wants to make)." sending that e-mail to Mr. Beilinson? A. Q. Yes. And is Mr. Beilinson's response above, "Okay, let's get it Recall
for you"? A. Q. Yes. Did you expect Mr. Beilinson to interdict himself with
Apollo to get those rights? A. Yeah, we were on the eve of their bankruptcy, and we And I thought Marc would be
needed to get our deal done.
incentivized to try and push in the right direction so he could
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- 300 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 get his PSA signed up -Q. A. Q. A. Q. Okay. -- or, our PSA signed up and this deal done. Exhibit number 21. Yes, I do. Okay, this is an e-mail chain with two e-mails, first from You have it there?
you, the second -- to Mr. Beilinson, and a second response. It's where you're asking living -- could Mr. Beilinson live with the ability to terminate cash collateral if you breach your obligation to Lehman in connection with restructuring. You say, "Just say yes" and you promise you won't ask for anything else until tomorrow, correct? A. Q. Correct. Okay, and up top of that is Mr. Beilinson's response,
correct? A. Q. That's right. Going to the second line of that response, it says, "I I'm trusting
won't be amending our deal without your consent.
that you won't terminate AIC in first forty-five days... please do the same with me on this issue for this short period of time." A. Q. Correct?
Yes. Do you understand to mean that he was basically saying --
basically saying keep Apollo in the deal during the first forty-five days so they get to this hearing, right?
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- 301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Yes, we have an out if we don't have someone to sell half
the company to, and sort of plug to that hole is that we have a deal signed up with Apollo to buy. Q. Go with me to Exhibit number 1, which is the plan support
agreement. A. Q. Okay. If you go to the term sheet on the plan support agreement
which is attached to it, page 12 of the term sheet? A. Q. Okay. By the way, who negotiated for Innkeepers with respect to
the PSA and the term sheet? A. Q. Marc Beilinson. Okay. Looking at paragraph number 12 -- I mean, on page
12 on the releases, I see there that a release had been agreed to as part of the term sheet which included all of the company's employees, affiliates, subsidiaries, members, agents, officers, et cetera. A. Q. A. Q. See that?
At the bottom of 12? And going on to page 13, release section. Yes. Did Mr. Beilinson negotiate this release section on behalf
of Innkeepers? A. I don't remember who specifically negotiated this one
section. Q. Okay. Go with me to section 13 of the PSA.
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- 302 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. Okay. Specific performance exclusive remedies. Let me ask you a
question.
Is it your understanding that if this document is
terminated, or if a termination event occurs, that Lehman has the right to seek specific performance in this court to compel the debtor to perform? A. Q. Is that your understanding?
If who terminates the agreement? If there's a termination event, does Lehman have the right
to seek specific performance of the contract, irrespective of a termination event? A. I can waive the termination event, if that's what you're
asking. Q. A. No, my question is -- take a look and read section 13. Okay. What's your question again? My question is -- and it relates to section 14, too -- but
my question is, if this agreement is terminated by virtue of a termination event, do you believe Lehman has the right, notwithstanding that, to come in and ask for specific performance of this contract? MR. O'BRIEN: Your Honor, Mr. Lascher's obviously I think it calls for a
having some difficulty with this. legal -THE COURT:
I have to apologize again.
We're having
an air-conditioning emergency.
See, all this stuff happens
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- 303 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that I'm not aware of. MR. PARKINS: THE COURT: Yeah, it always happens. We're sensitive if the air conditioning is
off, notwithstanding my instructions that it stay on and the assurance of them. So I apologize. We'll just --
Was there a question? MR. O'BRIEN: My objection, very simply, Your Honor,
is that this question calls for a legal conclusion. THE COURT: MR. PARKINS: And what was the question, please? My question was, your understanding,
does Lehman have the right to seek performance if this agreement is terminated. document. THE COURT: understanding is. He can testify as to what his Whether or not it has legs, so to speak, as The gentleman said he negotiated this
a matter of law, that he can't testify to. MR. PARKINS: BY MR. PARKINS: A. Q. A. Q. A. Q. A. If I terminate the document? If it's terminated. What do you mean, if it's terminated? Well, if a termination event occurs. Right. Do you have the right to seek specific -Then I -- then I have the right to terminate the Right.
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- 304 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 question. A. agreement. Q. Do you have the right to seek specific performance? Is
that your understanding or not? A. I have the right to seek specific performance if the
borrower -- or, the debtor doesn't perform. Q. A. Q. Okay. Okay. Which is what happens when the air conditioning goes off Number -- one of the provisions it Do you see that? Looking at section 14, survival --
on hot days, survival.
survives is the fiduciary duties section. A. Yes. MR. O'BRIEN: MR. PARKINS: page 13, section 14. MR. O'BRIEN: Got it.
What page are you on? I'm sorry, it's on the same page, 13 --
I see a reference to the fiduciary duty sections in
section 14. Q. Tell me your understanding how, if this document
terminates, the fiduciary duty section survives? A. Q. A. Q. I'm not really sure. Okay, well, who from Lehman would know, other than you? I don't know. Okay. MR. PARKINS: I'm sorry. Pass the witness, Your Honor. Oh, one
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- 305 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Lascher? UNIDENTIFIED SPEAKER: THE COURT: MR. DONOVAN: THE COURT: No. Q. I think your documentation with Apollo requires that there
be a definitive agreement reached by tomorrow, is that correct? A. Q. A. Q. A. Q. I think that's right. Is there such a definitive agreement in the works? It's in the works. Okay. Do you expect it to be signed tomorrow?
Not sure. Okay, thank you. MR. PARKINS: THE COURT: Pass the witness. All right, it's ten minutes after 6. Can
you folks give me some estimate of what's to come? more witnesses after Mr. Lascher? MR. PARKINS: MR. PENN: witnesses: Yes.
Are there
Yes, Your Honor.
We have two more
Mr. Greenspan and Mr. Semon. All right, your estimate -- you've now
THE COURT:
completely undermined your good estimation from this morning. So how much more time do we need with Mr. Lascher? MR. PENN: THE COURT: Does anyone else have -Does anyone else have questions to ask Mr.
Okay, thank you. No redirect at this time. All right, then it sounds like, Mr.
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- 306 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 break? UNIDENTIFIED SPEAKER: THE COURT: MR. DONOVAN: other issue? No. No dinner? in. Lascher, you're done. (Witness excused) THE COURT: short break now? UNIDENTIFIED SPEAKER: THE COURT: break now. Yes? Yes. So let's take a short All right, does it make sense to take a Thank you, sir.
All right.
Can someone give me an overall time estimate? Part of that depends on Mr. Greenspan's So if the direct comes
MR. PENN:
testimony because he has a declaration.
in on declaration, my part will be extraordinarily brief. THE COURT: MR. PENN: Okay. If there's an objection, and we have to go
through with Mr. Greenspan what we experienced this morning in the absence of a declaration, it's going to take a while. MR. DONOVAN: We're fine with the declaration coming
I do -- I just want to make a statement for the record I think you
when it starts because some of it legal opinion.
could deal with that, but I do want to make clear it's something I don't think is appropriate. THE COURT: All right, so do you folks want a dinner
Do you want a short break?
And Your Honor, can I just raise one
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- 307 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. DONOVAN: Yeah. They're going to call Mr. Semon.
Previously, Mr. Penn had sent me an e-mail saying do you need Mr. Semon here. in. We said no, we agreed to put his deposition
Happy to have him on, but I thought that was already taken So I'm hoping that would be
care of through the deposition.
short and only supplemental because we, in my understanding, at least, thought we had an agreement about the witnesses that were going to be here. MR. PENN: The question that had been asked in the So whether he
deposition was whether Mr. Semon had to come. would be here, if asked. come. coming.
And the answer was, if asked, he will
And then it followed up as, do you still insist on him By that time, it was already in the plans to be here
as well so we have some supplemental information in addition to what's in the deposition. And frankly, there's a little bit
that we'll cover that overlaps, and part of it is so that we can help show the Court where to go in the deposition. THE COURT: MR. DONOVAN: want to -THE COURT: MR. DONOVAN: not a redo. THE COURT: All right, it doesn't sound like it's that All right, so it doesn't sound -I just hope that it's supplemental and Okay. I mean, that's fine, Your Honor. I just
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- 308 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 strategy. much. you. (Recess from 6:14 p.m. until 6:35 p.m.) THE COURT: All right, folks. I have some bad news. So why don't we come back at 6:30, all right? Thank
Notwithstanding all of our efforts and arrangements, there is no air on in this building. MR. O'BRIEN: MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: That'll speed things up. Speed it up. Sorry? That'll speed it up, Your Honor. Yeah, right. It was not a purposeful
Actually, Judge Gonzalez is working on it trying to So two things. One,
get GSA back in here to turn the air on.
I invite everyone to take their jackets off.
Two, we've been
given the option of moving to Judge Gonzalez's courtroom, but I think that by the time we all move and move our stuff, it's not going to be worth it, and we have the overflow room, as well. So maybe this will motivate you to be brief, but I give you my apologies. I thought we had this taken care of. It's not the
Court's fault; it's GSA's fault. MR. PENN: THE COURT: MR. PENN: There's only so much the Court can do. I tried. Understandable. As I've told other of my
judge friends, judges have some power to make people do what they want them to do. The real power is to make them wish they
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- 309 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 had. THE COURT: Ready to go? MR. PENN: call Kevin Semon. THE COURT: All right, Mr. Semon. Welcome. You are Yes, Your Honor. At this time we would All right, please. Take your jackets off.
welcome to take your jacket off, sir.
All right.
Mr. Semon, would you raise your right hand? (Witness duly sworn) THE COURT: DIRECT EXAMINATION BY MR. PENN: Q. Mr. Semon, would you state your name for the record, Thank you.
please? A. Q. A. Q. A. Kevin Semon. And how are you employed? I am employed with Midland Loan Services. What is Midland Loan Services? Midland Loan Services is a master servicer and a special
servicer especially for CMBS securitized debt. Q. A. What is the role of a special servicer? A special servicer, his responsibilities start when there
is a default under a CMBS note, and our charge is to resolve the assets to the best interests to the trust, based on net present value.
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- 310 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. And does Midland own an interest in any of the trust
assets? A. Q. A. Q. Midland does not invest into the bonds in the CMBS trusts. So does that make Midland an independent servicer? We are completely independent. Is Midland's role governed by a pooling and servicing
agreement? A. Yes, we have a pooling and servicing agreement specific
for each trust. Q. Is one of the provisions in the pooling and service
agreement something called a servicing standard? A. Q. A. Yes, there is a concept of servicing standard in each. And what is the concept of servicing standard? Generally, what would another prudent lender do in the
same situation, and at the same time, looking at on the net present value, what would be the best interests of the trust, as a whole. Q. And why is it important to Midland to hold itself to the
servicing standard? A. We receive an indemnity if we manage in accordance to the When we sway out of those
pooling and servicing agreements.
areas, then we can be held liable for our actions. Q. Does the servicing standard have any implications on
whether you undertake a public or private process for dealing with the assets?
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- 311 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. We look as a standard to make sure that all of the assets We're looking for widely
are resolved in a market fashion.
marketed to assure that the trust is getting true market value for the assets when they're resolved. Q. A. And why is that? It's difficult. We have our opinions of values; But the true
appraisers have their opinions of value.
statement of value really comes from the market, and those bidding openly, informed in the market. Q. Does the size of the Innkeepers' loan or loans have any
impact on whether you look at a public or private disposition? A. We look at all loans in the same manner, especially in a
situation like Innkeepers, who had some potential losses at the size that they may be. We want to make sure it's fully exposed
to the market to make sure that our valuations are correct. Q. How does the potential loss in the Innkeepers situation
compare to other dollar losses in the CMBS experience? A. It is fair to share that our credit committee is probably
one of the largest lawsuits we've ever seen on a single asset. Q. As part of your job, do you look at the underlying assets
and establish a valuation on those? A. Q. Yes, we do. We look at each property one by one.
And in twenty-five words or less, describe the methodology
which you use to come about that? A. That's fine. We value properties based on their net
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- 312 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. present value. So what we're looking at is today's cash flows,
what the predicted future cash flows are and then discounting them to current paid offerings. Q. And in your deposition, did you walk through the various
steps, stages, assumptions and everything that goes into that process -A. Q. A. Q. Yes. -- of these loans? Yes, I did. Based on your evaluation, what value did you place on the
underlying assets in your deposition? A. Including the assumption that the required PIP work was
completed, our net valuation was in excess of 600 million dollars. Q. A. Q. Okay. Was there a top end of the range?
We thought 675 would probably be the top range. And is the 675 to 600 million dollar -- is that range --
is that net of the fifty plus million dollar PIP DIP? A. Q. A. Correct. Those are net figures.
And so, what would the gross figures be for that range? Accordingly, 725 to 650. (Pause) Did you hear Mr. Beilinson reference a discussion that he
said he had with you about an AB note when he came to your offices?
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- 313 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. Yes, I did. At some point did Mr. Beilinson suggest an AB note from
Midland? A. Q. Yes. In the discussion, there was a request.
And how far along in the process was Midland when that
suggestion or request was made? A. We were in the infancy of really, discussion with the law
or -- and that is definitely not a first-day discussion. Q. A. Why not? It's -- when you look at it, there are several different We
degrees of modifications and discussions for work out.
usually look at an AB note after we've explored many other alternatives first. Q. It is not a first day yes decision.
Did the meeting with Innkeepers proceed smoothly as
compared to other meetings -- financial meetings you've had with borrowers? A. Q. A. Actually, it was a difficult meeting to start with. Why is that? We -- a condition of having our meeting was that there be And our
a mutually executed pre-negotiation agreement.
understanding of this seems to be that the agreement was a planned format. It would be executed by the borrower and
significantly, most of all of the guarantors -- that some of the secondary guarantors would not sign the agreement. When
they actually showed up, the agreement was not executed and
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- 314 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 there were no signatures, especially on significant guarantors, including Apollo. Q. A. Why is a pre-negotiation agreement important to Midland? It sets forth the rules between the borrower and the
lender for discussions for selling. Q. And had the pre-negotiation agreement been negotiated in
advance of Innkeepers' arrival? A. Q. Yes. It had been discussed and negotiated for.
Did you learn anything after that meeting that affected
how -- affected your relationship and Midland's relationship with Innkeepers? A. We filed several significant events that had occurred
after that meeting, including the nonpayment of property taxes, the diversion of cash flow from accounts that were supposed to be secured and subject to cash management lockboxes. There was
payments of vendors and creditors, consultants to the borrower but we didn't get payments. Q. A. Now the credit card diversion, how did you learn of that? We learned about it through -- in the lockboxes. We were
expecting to see some significant six-figured deposits on a daily basis. And after five or six days, we had 18,000 dollars
so it was clear to us when we triggered the lockboxes, that the funds had been diverted to other solutions. Q. Was that diversion something that the loan agreement would
deal with?
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- 315 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Most definitely. How would they deal with it? It's at fault under the loan. That's collateral assigned
to the lender, who had no right to have an agreement to deposit of all of the grants and proceeds into these accounts. Q. And did that -- or did you learn about the diversion after
a payment default? A. Q. A. Q. A. Correct. You'd mentioned real estate taxes? Yes. What was the problem there? They didn't pay them in excess of 500 -- 5,250,000 dollars
of real estate taxes. Q. And what's your understanding of the relative priority of
real estate taxes versus the liens on the property that Midland services? A. Q. A. Taxes are the most senior lien priming all of us. And how did Midland deal with the taxes not being paid? We immediately provided for their payment. We advanced
monies and paid for them immediately. Q. Is Midland able to make debtor-in-possession financing
loans? A. Q. No, we are not. Faced with the reality of needing the PIP work, what did
Midland do about getting that funded?
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- 316 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. We agree the PIP work is an impairment to the collateral. It protects our collateral. We agreed
It needs to be done.
that if the borrower turned over the collateral to a receivership, that we'd immediately fund as much as necessary. And at that time, the commitment was about fifty to fifty-three million dollars. Q. And why is a receivership important in that -- one of the
steps? A. We're not allowed to make new lendings to the borrower and
by a receivership, it's protective advance. Q. Okay. But when there was no receivership, what steps did
Midland take to assist in obtaining financing? A. We had identified parties that would be willing, since we
weren't able, to fund a debtor-in-possession financing. Q. A. Q. And is that Five Mile? It's Five Mile Capital, yes. Was that a creative way of dealing with one of your CMBS
limitations? A. It is. And we're definitely looking for always creative
ways of resolving an impasse. Q. How long have you, personally, been involved in either
loan workouts or special servicing? A. Q. I've been working out loans for over twenty years. And as far as levels of authority and, you know, who the
lien officer is, who's the person at Midland that actually
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- 317 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 services this particular loan? A. Q. A. Q. A. me. Q. Okay. So, in the food chain, you're on the managers as I am assigned full responsibility for this asset. In addition to this, are there people that you supervise? Yes. I supervise a whole staff of people.
About how many are on that staff? I have twenty-six asset managers that directly report to
opposed to one of the line officers? A. Q. Correct. I am a special servicing team manager. Do
In the exhibit book before you is Exhibit number 94.
you recognize that? A. Q. A. Yes. What is it? It's a non -- it's a binding commitment for the
acquisition of Innkeepers USA Trust by Five Mile on August 29th, 2010. Q. A. Q. A. Q. A. Q. A. Did you have a role in negotiating that document? Yes. Who is the document addressed to? The document is actually addressed to Midland Services. In care of or attention? My attention. Do you recognize the signatures on that document? Yes, I do.
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- 318 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. And whose signatures are those? James G. Glasgow with Five Mile Capital and a Kevin C.
Donahue with Midland Loan Services. Q. A. And who's Mr. Donahue? Mr. Donahue is actually the head the special services
department for Midland and also a signatory for the trust. Q. Did Midland ever take steps to seek a receivership over
the properties? A. Q. A. Yes, we did. What steps were taken? We've identified several parties. We've obtained
proposals and even to the point, we prepared motions for the -to be heard by the Court for an ex parte appointment of a receiver. Q. According to your understanding, why did that not go
forward? A. We were able to get the borrowers' compliance with the They agreed to redirect funds back into the
cash management.
cash lockboxes and they'd be subject to cash management, pursuant to the loan documents. Q. And that was the cash management arrangement that existed
when the bankruptcy was filed? A. Q. When the loan was originated and the bankruptcy was filed. Was there ever a forbearance agreement negotiated between
Midland and Innkeepers?
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- 319 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 but -THE COURT: All right, it's in. A. Q. I am not aware of any. Was it -- was there ever forbearance agreement requested
by Innkeepers? A. Q. I am not aware of any. Turning back to Exhibit number 94 -- while I'm thinking
about it, during the pre-petition cash management period in the summer of this year, how many property-level expense requests for disbursements did Midland reject? A. Q. A. None. Why? Because we believe it's in the best interest to keep the Hotels without food, linens and
properties operational.
service are no longer hotels. Q. Turning back to Exhibit 94 -MR. PENN: THE COURT: MR. DONOVAN: And Your Honor, we would offer Exhibit 94. Any objection? Is this the Five Mile letter that was
not given to the debtors? MR. PENN: That was a Five Mile letter that was
provided to you at the deposition of Mr. Greenspan on Monday, the day after it was signed. MR. DONOVAN: I'm not sure it's relevant, Your Honor,
(Acquisition agreement of Innkeepers by Five Mile was hereby
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- 320 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 received into evidence as Midland Exhibit 94, as of this date.) Q. A. Why did Midland accept that letter? For several reasons. I think the most important starts
with the concept of it's subject to higher and better offers through an open bargaining process. And we believe this meets
with our concept of servicing standard of why we marketed the assets for sale. The value assigned to the subject debt is
more in line with the value that we estimate for the collateral on the low side. And then, other treatments in this -- for our
debt were acceptable to the lender. Q. Okay. Now the plan support agreement has a cap on the
amount of the claim that would be in a plan in accordance with that agreement. A. Q. A. Yes, I am. How does Exhibit 94 compare with the cap concept? Well, we're already fifty million dollars higher plus, Are you familiar with that?
there's treatment on the B notes and other collections so, an excess of sixty, seventy million dollars higher than their cap on their treatment. And most importantly, it also provides for
a reduction in the amount of our debt by paydown which also mitigates risk and loss. MR. DONOVAN: THE COURT: MR. DONOVAN: Your Honor, I object -Mr. Donovan? I object to this continuing questioning We did get -- it was handed to me
about this Five Mile offer.
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- 321 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 at the deposition. It was never presented to the debtor and I understand they filed a motion on
it's not relevant to this. this.
We'll deal with it that day but -THE COURT: MR. PENN: What's the relevance, Mr. Penn? The relevance is that in exercising
business judgment, one of the things to look at is alternative transactions. There's already testimony that there was never
an attempt to look at any kind of alternative transactions that were available, possible, might be in the market. of the alternative transactions -THE COURT: All right. And Mr. Beilinson testified This is one
that -- I don't know how I feel about this but -- that he was never -- he never "received this offer". that he never received the offer. exists. Those were his words,
Unquestionably, the offer
If he can testify that he's seen it and hasn't really So, I think it's relevant because it's out
evaluated it. there.
But he testified that he didn't receive it. MR. DONOVAN: MR. BASTA: THE COURT: MR. BASTA: I understand. Your Honor -Mr. Basta? Just in further of our objection, this --
there's a difference between receiving and offer that Five Mile made to Midland and having Five Mile and Midland say debtor, please evaluate it because the way that offer works is it's a condition that they move to terminate exclusivity. So this is
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- 322 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 not an offer that has been presented to the debtor for the debtor to consider under its fiduciary out because what they are doing through the offer, is to go to the Court directly to seek to terminate exclusivity. Therefore, it bears no
relevance whatsoever to this hearing because this debtor does not have any fiduciary implication because it has never been asked to consider the proposal. THE COURT: All right. No, I'm going to split the
baby here because I think there's merit to what Mr. Basta's saying. This is not a presentation of a binding commitment to So, I think Mr. Basta
the -- it's for, it's not to Innkeepers. has a fair point.
So that being said, are there any -- subject to that limitation -- you know, you're all free to argue the relevance or non-relevance of it but, you know, it's out there and Mr. Beilinson has testified that he never received it, hasn't really looked at it but that he's willing to talk to Midland. He did testify that he hasn't really examined it thoroughly is my recollection from many hours ago. But I'm getting some
knots so -- you know, it is what it is. MR. PENN: BY MR. PENN: Q. Just out of curiosity, Mr. Semon, at any time since either Definitely.
the prior version of this was provided in the context of the response to one of the debtors' pleadings or now, has Mr.
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- 323 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Beilinson reached out to you to talk about the offer? A. Q. A. Q. A. Q. A. Q. A. Q. A. Yes, he has. When was that? The subject offer? Yes. Never. The prior offer. Oh, the prior offer? Yes. Twice. And what was your response? We'd be glad to meet with them but we'd first need to have
conditionals -- conditions of terms, one of which being widely marketed and the other, we were concerned about the consolidation of the account. Q. Okay. And has Mr. Beilinson ever given you any indication
regarding marketing the -A. Q. No. -- comparison? MR. PENN: THE COURT: MR. DONOVAN: THE COURT: it the same? MR. DONOVAN: Yeah. It's the same, Your Honor. Your Honor, we'll pass the witness. All right. Thank you.
Your Honor, may I approach? Yes. I think I have it. Thank you. Is
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- 324 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. DONOVAN: CROSS-EXAMINATION BY MR. DONOVAN: Q. A. Q. Good evening, Mr. Semon. Hi. Okay. You're managing, for Midland, the fixed-rate pool, It's the supplement, right? It is.
correct? A. Q. Correct. Okay. And the fixed-rate pool consists of how many
hotels? A. Q. Forty-five. Okay. And those forty-five hotels, you manage them -- you
need to look at them each individually and as a whole, correct? A. Q. Correct. Okay. And you do that because each property has different
needs, requirements, challenges, so you look at them individually. But at the same time, there's an enterprise
value created by these bulk of assets, correct? A. Q. Correct. Okay. And for you, enterprise value, it's a value created
to a single holder of a whole portfolio of assets, correct? A. Q. A. Yes. And you believe the fixed-rate pool is like that, correct? Yes.
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- 325 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. It has an enterprise value. Okay, you talked about You,
valuations.
We talked about this the other day.
yourself, have calculated a valuation for the fixed-rate pool, correct? A. Q. Yes. Okay. And you did it based on net present value or
discounted cash flow? A. Q. Correct. Okay. And when you did that, you started with the Moelis
model, correct? A. I started out with the Moelis initial assumption for the
first year. Q. Okay. And in your words, what you did is you used
assumptions that were more aggressive, correct? A. I followed the assumptions as produced by FTI -- I'm sorry
not FTI, PKF. Q. But in your words, those are more aggressive than Moelis,
correct? A. Q. Yes, they were. Okay. And based on those more aggressive assumptions --
even using those more aggressive assumptions, your net present value is 600 to 650 million for the fixed-rate pool, correct? A. Q. Yes, net of the PIP one. Now, you've also gotten valuations from other parties,
correct?
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- 326 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Q. Yes. Okay. One is Eastdil Secured, correct?
Correct. Okay. And Eastdil Secured is a well-known company that
markets real estate, correct? A. Q. Yes. Okay. And they gave you a value of all of the fixed-rate
collateral, 600 million, correct? A. I don't have the exact number in front of me but it was --
it definitely started with a six. Q. Just to refresh you recollection, turn your deposition,
sir, to page 14 and read, to yourself, lines 10 to 19. A. Q. Yes. Okay. Does that refresh your recollection that the
Eastdil Secured valuation you requested for the fixed-rate pool came in in a range of about 600 million dollars? A. Q. Yes. And when we kind of cut away all of the rhetoric, it's
fair to say that Midland's objection to the plan support agreement is based on the valuation you believe that's imbedded for the fixed-rate pool of 550 million in the plan support agreement, correct? A. Q. A. It's one of the concerns. it's fair to say that's your primary concern, right? It's --
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- 327 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Q. Q. A. The valuation that you've been given? How can you say one's more -- greater than the other but
it is definitely a primary concern. Q. Okay. Even though that's one of your concerns, you
understand that even if this plan support agreement is approved, Midland retains the right to object to any future valuation in a plan, you get to object and argue it to this Court, correct? A. Correct. (Pause) It's also your under -MR. DONOVAN: Withdrawn.
You've read or reviewed the plan support agreement,
correct? A. Q. Yes. Okay. And it's your understanding that if the debtor
determines there's a viable plan that's more beneficial to the estate and then values the fixed-rate pool at more than 550 million, the debtors can exercise their fiduciary out under the plan support agreement, true? A. Q. Yes. And you agree that the plan support agreement does not
limit Midland's right in any way to argue how the fixed-rate pool should be valued in the confirmation process, true? A. True.
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- 328 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Now you mentioned, before, some pre-conditions and I
believe you said in order to meet with Mr. Beilinson, you want him to satisfy two conditions. One being that he agrees to
market the collateral and segregate cash, correct? A. Q. Correct. And do you still have those pre-condition -- two pre-
conditions today to meet with Mr. Beilinson? A. Q. Yes. Okay. So unless he agrees to market on behalf of
Innkeepers and segregate the cash, you're not willing to meet with Mr. Beilinson to talk about restructuring, true? A. Correct. THE COURT: Now I need to ask you a question. So, I
don't know if you've been here for the cash collateral hearings -THE WITNESS: THE COURT: THE WITNESS: THE COURT: Just today. -- or heard about them. Just today. All right. So we have yet to be
determined the debtors' request for use of the consolidated cash management system for use of cash collateral. So is it
your -- picking up on the question that's being asked you now about your pre-conditions, if I were to order -- if I were to approve the debtors' request for consolidated cash management system and use of cash collateral along the lines outlined by
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- 329 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the debtors, you will not meet with the debtors and discuss a restructuring? THE WITNESS: Our cash is our cash. And if Your Honor But to us, if we
chooses such, we have to follow the Court.
have the choice and if we have a say, we want our cash separated. THE COURT: I understand that and your attorneys have But I just wanted to understand
made that abundantly clear.
that in the event that I approve the consolidated cash management system and the use of cash and it does contemplate the possibility, although the hope is that it would not occur, that there is some use of cash between the tranches that you're not telling me that you're precluded from sitting down. THE WITNESS: I am not precluded but it is really not
in our best interest to negotiate where we don't have control of our own collateral. THE COURT: MR. DONOVAN: BY MR. DONOVAN: Q. Mr. Semon, let's go back to the fixed-rate pool and your Under the pooling and servicing All right. Thank you.
Thank you, Your Honor.
pooling servicing agreement.
agreement, there's what's known as a controlling certificate holder, correct? A. Q. Correct. Can you tell the Court who the controlling certificate
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- 330 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Q. holder is in the fixed-rate pool? A. Q. For the fixed-rate pool it's Five Mile Capital. And Five Mile, under that pooling and servicing agreement,
can terminate Midland with or without cause, correct? A. Q. Yes. And Midland -MR. DONOVAN: Withdrawn.
Let's talk about the operation of Innkeepers for a moment.
You agree that Midland wants the debtors to use cash collateral to continue to run its hotels, correct? A. Q. Correct. And you agree that Midland cannot service its own debt
without the PIPs, correct? A. Q. I believe the PIPs are required to improve cash flow. And in fact you believe that thing's common sense but
maintaining the franchise flags benefits the estates and Midland's collateral, correct? A. Most definitely, yes. (Pause) And the PSA contemplates de-levering the estates to some Through a conversion of debt to equity?
extent, correct? A. Q.
That's all in order. Okay. And you don't have an objection to the Innkeepers
restructuring by having certain secured debtors convert from debt to equity, do you?
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- 331 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. If it affects my collateral, I do. But apart from affecting the value of your collateral, you
don't object to that, correct? A. Q. I don't believe so. Okay. And fair to say, inferred your lawyers here, but
Midland would still be objecting to this plan support agreement whether or not Apollo agreed to purchase fifty percent of the new equity from Lehman, post-confirmation, true? A. True. MR. DONOVAN: THE COURT: Beilinson? (Laughter) MR. BEILINSON: THE COURT: REDIRECT EXAMINATION BY MR. PENN: Q. Very briefly, Mr. Semon, in this particular instance, why No. Thank you, Your Honor. All right. Thank you. Anyone else? Mr.
You're unretired.
is cash segregation so important to Midland? A. Well, I believe the cash generated from our property is
significant and proposed to be used by the -- well, the debtor to offset losses and abuses in other portfolios. So there'll
be a dilution of our cash collateral from our properties to other properties. Q. Does the diversion experience have any impact on that?
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- 332 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Yes, it does. What's the impact? Well, those are monies that could be used to retire or pay So, it's basically accrued interest that's not being
our debt. paid. Q. A. Q.
And there was about the controlling certificate holder? Yes. Does the controlling certificate holder have the authority
to direct Midland to take any particular steps in servicing the loan? A. Q. A. Q. They have the right to advise the special servicer. Do they have the right to direct what is done? No. A question also came up about deleveraging as a concept.
Are you familiar -A. Q. A. Q. Yes. -- with your answer to that question? Yes, I am. Would the remaining terms of a plan be important in
knowing whether a plan that involved deleveraging was acceptable? A. Yes. I mean, it can't just be a term all by itself. It
needs to be in concert and understood what the whole terms of the plan. MR. DONOVAN: Okay. We'll pass.
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- 333 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 yes. excused. (Witness excused) MR. PENN: THE COURT: And you can remove jacket. You can remove your jacket. You could THE COURT: (No response) THE COURT: All right. Thank you, sir. You are All right. Anyone else?
have removed your jacket the whole time. MR. SEMON: THE COURT: All right. MR. PENN: THE COURT: (Pause) We can adjust the mood with the lighting here. That's good. MR. PENN: THE COURT: I'm feeling more mellow already. All right. That helps me so I apologize And the update Down, I respect you. I'll leave it alone. Who's next? Next will be Mr. Greenspan. All right.
if it's harder to see but that helps me out. that -- I'm sorry.
The update that I got from Judge Gonzalez
is the engineer has been reached on his cell phone in New Jersey and ordered to turn around and come back to turn the air on in the building. MR. PENN: declaration -I was going to tender Mr. Greenspan's
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- 334 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. PENN: testimony. Okay. -- and then also cover some additional
Frankly, I could do it as rebuttal to -All right. -- testimony that had come in, but I don't
THE COURT: MR. PENN:
really think the Court is that interested -(Audio interference begins) THE COURT: Now I'm going to have a seizure.
Give us a moment. UNIDENTIFIED SPEAKER: misunderstood. MR. PENN: Your Honor, the first corollary to Murphy's I'm sorry, Judge, I
Law is at the worst possible time. What I was saying was, while we could wait until the parties rest and recall him as a rebuttal witness, I thought we'd go ahead and take care of everything while he was here. THE COURT: way around, isn't it? okay. That's fine. Okay. MR. PENN: DIRECT EXAMINATION BY MR. PENN: Q. Mr. Greenspan, do you have your declaration before you? Thank you, Your Honor. Let's do that. Does anyone object? I'm sorry. Mark, Dorothy, it's the other All right,
Is that good the way it is?
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- 335 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. Yes. For openers, if called to testify on direct about the
matters addressed therein, would your declaration represent your direct testimony? A. Q. Yes, it does. Now, you heard Mr. Beilinson talk along the lines of that
the agree -- or, the proposal in Exhibit number 94 involved a hundred million dollars more leverage than what is considered under the plan support agreement. general testimony? A. Q. A. Yes. Do you agree with that? No, I don't. MR. DONOVAN: this with Mr. Basta. letter again. Your Honor, objection. We just covered Are you familiar with that
They're talking about this August 29th He's a,
Wasn't -- he's not a fact witness.
quote, "expert". THE COURT: MR. DONOVAN: Sustained. Thank you.
Do you believe that the proposal by Five Mile has a
hundred million dollars more leverage? MR. DONOVAN: THE COURT: this, Mr. Penn? MR. PENN: Part of it is to explain why it's not a Same objection, Your Honor. What's -- where are you going to take
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- 336 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 less -THE COURT: MR. PENN: All right. -- on that particular topic. hundred million dollar difference as Mr. Beilinson testified to, and so we're responding directly to testimony that they brought up on their case-in-chief. THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: All right, I think that's fair. Two points, Your Honor. Yup. One is, that was brought out on cross. So it's not like I'm Okay.
We don't believe it's relevant here. offering that testimony.
And I think Mr. Beilinson's testimony And I'll represent when I
was, he's only started to review it.
deposed Mr. Greenspan, he hadn't even seen this document yet. So I think this is really just kind of getting in the mud here without kind of -- it's not relevant. THE COURT: Well, I think it's getting pretty far
afield because when we talked about this before, I think we all agreed, and I think it's clear that this letter was not received by Mr. Beilinson. was given to the debtors. proceedings. It wasn't a committed letter that It's emerged in the course of these
So I think to have extensive back and forth over
is it better, what a particular line items mean, I'm not really interested in that. MR. PENN: This is going to be twenty seconds or
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- 337 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: BY MR. PENN: A. Q. I'm sorry, I need the question again. Why do you disagree with the statement that the Five Mile I'm looking at the second hand.
proposal has a hundred million dollars more leverage? A. Because one of the terms of the plan support agreement is
that an additional seventy-five million dollars needs to be raised, and it's anticipated to be raised as debt. And I
believe for the numbers Mr. Beilinson used, he didn't account for that. He added up the debt that was going to be received
by the existing creditors and said that's a hundred million dollars less debt than would be under the Five Mile proposal. But for example, things like retain the Five Mile DIP, there's no way to do it if they don't borrow another seventy-five million dollars under the PSA. So that increases it.
And then secondly, what he's also not saying, but this all goes to his concept of what's better for the, quote, "debtor" is that the reason there's another twenty-five million dollars of debt under the Five Mile proposal is that's more money that the creditors get. Mr. Beilinson's definition of a debtor deal
is one that the existing stakeholders, the only people that are in the money right now, get less money. pay them more -But if you're going to
and Five Mile does pay them a ten percent
cash pay down -- but if you're going to pay them more by giving them more debt, Mr. Beilinson's definition is that that's an
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- 338 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. THE COURT: MR. PENN: THE COURT: MR. PENN: THE COURT: I'm sorry? This is the plan support agreement. Okay. I'm going solely to the -- I'm off of -I'm sorry. I thought we were still Q. inferior plan. THE COURT: difference. THE WITNESS: THE COURT: Um-hum, right. And whether that, in fact, comports with All right, well, that's your view of the
any analysis that Mr. Beilinson, in fact, did is not in the record. MR. PENN: THE COURT: MR. PENN: THE COURT: Okay. So, all right. That's why I'm moving on. Great.
Have you had a chance to examine the economics of how this
would affect Lehman and its recovery under the plan support agreement comparing its existing rights as a lender versus what it would receive as an owner? MR. DONOVAN: THE COURT: Objection, Your Honor. Mr. Penn, now -- but you're still going.
I mean, I thought we -- I thought we were done with this topic. MR. PENN: This is the plan support agreement, Your
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- 339 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. talking about the Five Mile letter. MR. PENN: THE COURT: No, I've -Okay. My apologies. Can we have the question
UNIDENTIFIED SPEAKER: re-asked, Your Honor? THE COURT: Sure.
Have you had a chance to examine the economic affect on
Lehman about whether it would be better or worse off under the plan support agreement plan as equity as opposed to its current status as debt? A. Q. A. Yes. What is your economic analysis? It's massively better off under the plan support agreement
than its current claim. Q. A. Why? First, its current claim, full nominal amount, is only 220
million dollars, and it's getting 215 million, at least, of value. As Your Honor's already looked at and seen, they're
getting 107.5 for half, clearly suggesting the entirety of it is worth 215 million. THE COURT: But -But the 220, but now we have to -- we're So we're going to go up to 237 and
going to add the draw-down. a half. THE WITNESS:
Correct, as I did in my declaration, I
actually went the other way and took it down to 190 -- you can
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- 340 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 number. THE WITNESS: THE COURT: Okay. They started at 220. There's going to subtract it out and figure out -- assume they got it for the DIP off the 215, or you can add it up. THE COURT: THE WITNESS: Okay. There's another 17.5 million of value But that is correct.
that they're giving up for that. THE COURT: Right, but I'm just talking about the debt
be -- when they draw down the full DIP, at their debt number, as between prepetition and the DIP, it's going to be 237 and a half, assuming it's fully drawn. THE WITNESS: THE COURT: THE WITNESS: That is -- that is correct, Your Honor. Okay. But what we have to look at is the terms The debt, they
of the existing debt and who actually owes it.
never defaulted until right before the filing on the payments on the Lehman debt. And the reason they didn't is because Their entire debt
that's essentially debt at LIBOR plus 200.
service on the Lehman debt was 5.4 million dollars for the last twelve months with it being paid down to 200 million -- I'm sorry, 220 million, which is what their non-DIP claim is, the debt service is less than 5 million dollars a year. Those
assets, last year, produced twenty million dollars of EBITDA, sixteen million dollars of net operating income, Moelis'
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- 341 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 numbers for 2010 is those assets, those twenty are going to produce eighteen million dollars. So right now, Lehman's whole
claim is not for twenty million of cash, not for eighteen million of cash. All Lehman can get is five million of cash a
year and have a claim on those twenty assets. Once they convert that note that limits them to five million a year, they are then the hundred percent owner on a straight up line of free and clear assets. They, at that
point, have the unfettered right to eighteen or twenty million dollars a year of cash if they want to distribute it out to themselves as a dividend. entities. There's no other creditors in those
And Mr. Beilinson said they're going to the bottom That's true in a conventional
of the capital stack.
enterprise, whereas here, they're going right back to the top of the capital stack with nothing intervening. And it's true
they're going to the bottom of the capital stack on all the other debtors, but today they have zero interest in that. the entities that are producing twenty million of cash that they can only get five million of today because of their note, those entities have no liabilities for any of the other liabilities of the enterprise. Consequently, what's happened And
is they're converting a note that they're stuck in at at two and a quarter percent a year, essentially, into the entirety of the upside and the enterprise and the free and clear rights to the entire cash flow of all those entities.
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- 342 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 And Mr. Beilinson, the only negative he said is everybody knows there's downside to equity. The only downside
to their equity is if those properties produce less than five million a year. But we also know that since Lehman doesn't
have a claim today on any of the other enterprises, if those properties produce less than five million a year, they're not getting paid anything more than that anyway. I mean, so they
bear the full cash flow risk today and under the plan support agreement would be entitled to about four times as much cash, just from those assets. BY MR. PENN: Q. You heard Mr. Beilinson describe -- one of the reasons to
sign the plan support agreement was to avoid a freefall bankruptcy. A. Q. Correct. Do you believe that to be a justification for the plan
support agreement? MR. DONOVAN: Objection, Your Honor. I don't think he
can say if that's a justification or not. THE COURT: can ask him his view. can ask him. A. Okay, I mean, in advising Midland, we looked at the exact He can ask -- I mean, he's an advisor. He
I don't know how relevant it is, but he
same issues, and Mr. Beilinson's argument to us and to the Court is that plan support agreement was crucial in Marriott,
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- 343 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Marriott's agreement, the ASA, was crucial to the DIP, and having the DIP and Marriott on board were crucial not to have a freefall. I agree with the latter too, that having the DIP, use the cash collateral potentially and Marriot on board is important. But they have the DIP; has no requirement at all in any of the DIPs for the PSA. And I was in the meeting with Marriott.
Marriott's ASA is not at all conditioned upon the plan support agreement. And we attended a meeting, at the request of At the meeting with the head of
Marriott, on the debtor.
franchise for North America of Marriott, Skadden Arps, Marriott's counsel, was there; the debtor was there; yes, the senior vice president of global asset management was there; and this was after the defaults on the PIP. It was after we were
retained; so it would have been in the May or June time frame. And Marriott actually gave us a slide show, gave us the presentation, and they were absolutely insistent that they were going to pull the franchises if the PIPs weren't performed and if they didn't have an absolute guarantee the PIPs were going to be performed. They did not condition it whatsoever. They
never even mentioned in a two-hour meeting that there was any financial condition of the debtor, that there was a different capital structure, same or different ownership. The one and
only condition and requirement was that PIPs be done and that they be absolutely assured of that and they start immediately.
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- 344 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. We evaluated that. There was no indication at that I don't There
time -- we didn't even know anything about a PSA.
think Marriott, frankly, knew anything about a PSA then.
was absolutely no condition upon their go-along with the ASAtype concept, and it's certainly not embodied in the ASA that there's any requirement for a PSA. Consequently, with or without the PSA, you have everything necessary not to have a freefall here: You've got your -- both
DIPs in place and you have your ASA, which is the two things that Mr. Beilinson said were necessary, none of which were dependent upon the PSA, in this form or any other form. THE COURT: Mr. Penn, I'm just going to -- in the
interest of time, Mr. Greenspan is now kind of floating into, I think, making arguments to me instead of testifying. MR. PENN: THE COURT: I understand. -- let's try to limit it. I think you said So --
One minor point in your testimony there.
that Marriott's counsel was Skadden. Mullin? A. Q. I'm sorry. I apologize.
Did you mean Sheppard
Sheppard Mullin, yes.
I'll save them the trouble of getting up. And in a meeting with Mr. Beilinson, did the discussion
turn to a topic of an A, B or C note? A. Q. Yes. When was that meeting, roughly?
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- 345 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. It would have been in the May or June time frame. What did Mr. Beilinson say about the debtors' view on
providing an A or -- an A/B note structure? A. It was a meeting at Kirkland, and we suggested an A/B/C
note structure, and Mr. Beilinson said under no circumstances would the debtor consider anything but an A note, that there was no possibility of a B note. Q. note? A. Because he believed that Midland was entitled to, as you Did he explain why the debtor would only consider an A
said, the value of the collateral and none of the future upside, notwithstanding the deficiency getting zero. MR. PENN: THE COURT: MR. DONOVAN: CROSS-EXAMINATION BY MR. DONOVAN: Q. A. Q. Nice seeing you again, Mr. Greenspan. Good evening. Now, in this case your -- FTI, your firm, was retained by Your Honor, I'll pass the witness. All right, thank you. Dan Donovan for the debtors, Your Honor.
Haynes and Boone for Midland, correct? A. Q. Correct. Okay, and you've been doing various financial advising
work for them, correct? A. Yes.
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- 346 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. Now, FTI has also been retained by Five Mile
Capital, correct? A. For the very limited purpose of reviewing the construction
disbursement mechanism involved, and the PIP budgets. Q. And in fact you were retained by Five Mile Capital or its
counsel Arnold & Porter, correct? A. Q. Correct. And FTI has not generated a valuation for the floating-
rate collateral, correct? A. We -- I did a valuation, as indicating in my declaration,
which showed, based on what Lehman is receiving from Apollo, these assets are worth 680- to 720 million dollars. But we
have not done a valuation based on our own independent assumptions. Q. Right, I think at your deposition you said "I took that
107.5 and extrapolated it to get the numbers," correct? A. Q. Correct. Okay. But you've testified as an expert before and a lot FTI hasn't done what you would present
of work goes into it.
to the judge at valuation trial for the floating-rate collateral, correct? A. Again, I wouldn't present that as my own independent
valuation, but I would present that as an absolute valuation based on the assumption that it's an arm's-length deal between Lehman and Apollo.
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- 347 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Oh, we'll get to that, but FTI has not generated its
independent valuation for the floating-rate collateral, true? A. Q. Correct. Okay. And FTI has not generated an independent valuation
for any of the seven individual hotels, as we've been calling them, correct? A. Q. Correct. And fair to say FTI does not have its own independent
valuation at this time of the fixed-rate collateral either? A. Q. Correct. And Midland has not provided to you its own valuation that
Mr. Semon and I talked about a couple minutes ago, correct? A. Q. That is correct. Okay. And Mr. Semon has not provided to you what he
talked about, the Eastdil valuation that came in at about 600 million for the fixed rate, correct? A. I don't know about the 600, but I have not seen an Eastdil
valuation. Q. With respect to the Apollo-Lehman deal, fair to say you
don't know what the basis is for the 107.5 million Apollo is paying Lehman for 50 percent of the post-confirmation equity, correct? A. By that, how they calculated it, I do not know how they
calculated it. Q. Or what else went possibly into that number. It may have
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- 348 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 wrapped up other issues as well. You're just -- you're taking
the 107.5, but you don't know how they got to 107.5, correct? A. Well, I've seen what was presented to the Lehman court and
I've seen the document, and all they're getting is half the equity in the company, which Lehman got, in exchange for the twenty hotels in the DIP, with a lien on the twenty hotels in the DIP. Q. Very briefly, only because it's open. In this Five Mile
offer you talked about when you talked with Mr. Penn, the Five Mile plan permits each creditor may take its collateral in lieu of the treatment proposed by the Five Mile Plan, correct? A. Yes. MR. DONOVAN: THE COURT: Nothing further, Your Honor. All right.
Anything more? MR. PENN: THE COURT: None, Your Honor. All right.
Thank you, Mr. Greenspan. (Witness excused) THE WITNESS: THE COURT: (No response) MR. PENN: THE COURT: We rest, Your Honor. Okay. Thank you. All right, any more witnesses?
So let's talk about moving into evidence what we need
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- 349 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 list. to move into evidence, because we didn't do that. keeping track of what the debtors offered. I was
So you want to put Why don't you
in 1 -- well, I shouldn't do your work for you. tell me what you want to put in. MR. DONOVAN: THE COURT: MR. DONOVAN: (Pause) MR. DONOVAN:
I do have a list, Your Honor. All right. If I can just have a moment.
Now, this has been over yesterday and
today, but maybe I can just read everything that's in. THE COURT: MR. DONOVAN: Sure. Okay. For the debtors, Your Honor,
Debtors' Exhibit 1 is the plan support agreement; that's been admitted. THE COURT: MR. DONOVAN: Right. Exhibits 2, 3 and 4 and 5 are all
various Nathan Cook declarations that have been admitted. Exhibit number 6 is an FTI-Midland-Innkeepers request That's been admitted. Exhibit 12 is the declaration of Mr. Derrough; that's been admitted. Exhibit 14 is the declaration of Mr. Beilinson. Exhibit 15 is -THE COURT: MR. DONOVAN: All right, but to just be precise -Oh, sure.
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- 350 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. THE COURT: of the declaration. MR. BIENENSTOCK: I wasn't aware -- when he took the It came in, Mr. Bienenstock, the balance THE COURT: approval -MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: PSA. -- of the PSA -That's -- yes, Your Honor. -- we have 1 -1. -- and then 14 -Correct. -- and 15 -Correct. Your Honor, that declaration of Mr. -- this hearing, the hearing on the
MR. BIENENSTOCK:
Beilinson, if that was the latest one, we have objections to that. Is that the one -MR. DONOVAN: I thought it was admitted earlier, Your
stand, no one offered the declaration. THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: Yeah. I did, and Mr. Park -Yeah, he did -He actually said "No objection," so --- and it came in. What's your objection,
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- 351 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in. Mr. Bienenstock? MR. BIENENSTOCK: There are several. First, it's
self-rebutting, because it says it's not -- it doesn't say it's on personal knowledge. It says "personal knowledge, or
information and belief, or records", but not the other requirements of Rule 8013, or whatever that is, Regulation -this is applicable. And there's just a lot of stuff in that
declaration, and he has no personal knowledge of -- it's never admissible. I thought I was being very attentive, but I just
don't recall it. THE COURT: I -He got -- that being offered when he
MR. BIENENSTOCK:
got on the stand, I would have jumped up, because I was ready to jump up and object to it. THE COURT: It did -- it was offered, and it did come But in closing argument
So I think the ship has sailed.
you can point me to specific paragraphs of it that you think that I should discount or disregard entirely. MR. DONOVAN: And, Your Honor, frankly, I think that's People said things, and
true with a lot of the declarations. they can go to weights and -THE COURT:
Right, but I don't remember that there was
anything said on Beilinson's. MR. DONOVAN: THE COURT: There wasn't, Your Honor. That's my --
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- 352 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 exhibits? (No response) THE COURT: All right, so those are in. MR. DONOVAN: THE COURT: There was not. That's my problem.
And I apologize if you missed it, but I have a clear recollection of that one. MR. DONOVAN: So after that, Your Honor, was 15, 16,
17, and then it was the deposition at 25 -THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: 25. -- of Mr. Semon. That's all I had -That's correct, Your Honor --- for the debtors. -- for the debtors. Are there any other objections on those
(Declaration of Marc Beilinson hereby received into Exhibit as Debtors' Exhibit 14, as of this date.) (Debtors' Exhibits 15, 16 and 17 were hereby received into Exhibit, as of this date.) (Deposition of Kevin Semon hereby received into Exhibit as Debtors' Exhibit 25, as of this date.) THE COURT: And then I think, as Midland proceeded, I
was not keeping track of what you actually wanted to offer. You went through a lot of documents but didn't really tell me
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- 353 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 clear. THE COURT: MR. DONOVAN: Okay. We have from -what you wanted to offer. much of any of them. MR. PARKINS: Your Honor, it's our position we'd like I'm not sure if you want to offer
to offer all the documents that we dealt with, subject to any objections that Mr. Donovan might want to raise. MR. DONOVAN: Do you want to walk through it? Because
there were -- we don't have many, Your Honor, but I think during the cross of Mr. Lascher it became clear that there was a big evidentiary limitation put on certain documents -THE COURT: MR. DONOVAN: Right. -- and I just want to make sure that's
Well, you could do it. I'm not trying to get in the way, Your Honor. wanted to make it clear. MR. PARKINS: May I? I think it's easier for us just I just
to say you can raise your objections and we can deal with those -MR. DONOVAN: MR. PARKINS: MR. DONOVAN: Fair enough. -- and everything else we've discussed. So, Your Honor, I believe, from
Exhibit -- this is Midland's -THE COURT: Right.
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- 354 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 come in. MR. DONOVAN: I'm moving in Midland Exhibits in now:
1 through -- I think 1 through 21 all come in, or there's no objection at least. THE COURT: Okay, I think that Mr. Parkins actually
didn't go through all of them, so -MR. DONOVAN: 21, Your Honor. THE COURT: Okay. -- if there's no objection -- so those Yeah, I said no objection on 1 through
(Midland's Exhibits 1 through 21 were hereby received into evidence, as of this date.) MR. DONOVAN: It's then 22 through 30. My
understanding is, to the extent they're in evidence, there's a limitation on them such that there's been no record that they've ever been distributed to anyone. But to the extent
there's an argument on chronology of documents produced, they can come in that way. THE COURT: MR. DONOVAN: THE COURT: All right, will they -I mean -I thought the colloquy that we had when
those were being discussed was that they weren't going to -MR. DONOVAN: THE COURT: Or they're not in this. -- they weren't going to come in until the
one that was attached to an e-mail -MR. DONOVAN: And I think that was --
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- 355 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: -- but that -That was 16. So that's already in. So I think
UNIDENTIFIED SPEAKER: MR. DONOVAN: Yeah.
22 through 30 don't come in, then, Your Honor. UNIDENTIFIED SPEAKER: THE COURT: Yeah. We joined in that objection. I mean,
I think that that's right.
there was testimony about the chronology, but my view was that you didn't need the documents to come in for me to consider that testimony. So those are not going to come in. All set, Your Honor? So then we have 31
MR. DONOVAN: through 53.
I don't understand if those have been offered. They haven't. So -- okay. They haven't even been mentioned. 54 is in. No objection. So --
THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN:
We have no
objection to the DIP -THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: 5 -I'm sorry, Your Honor? Go ahead, I'm sorry. 55, I think that's a duplicate, but we
have no objection to that. Of the witnesses who haven't -THE COURT: I think those are not duplicates. One was
the week -- one's the April 22nd and one's the April 28th. MR. DONOVAN: Right. I meant a duplicate of something
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- 356 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 we moved in, but that's fine. THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: Oh, I'm sorry. But that's fine. Okay. I have no objection to that. And then I
think these other individuals were live already, but the deposition of Schuyler Hewes from Apollo we would move in, 57. THE COURT: All right.
(Midland Exhibit 55 was hereby received into evidence, as of this date.) (Deposition of Schuyler Hewes was hereby received into evidence as Midland Exhibit 57, as of this date.) MR. DONOVAN: I believe -- and I'm now going to ones I think, then, Exhibit 74
that have been used, Your Honor.
were those handwritten notes; no objection. THE COURT: MR. DONOVAN: Right. Those have come in.
Exhibit 89 was used with Mr. Lascher; no objection. And Exhibit 94, the August 29th Midland letter has been admitted. THE COURT: MR. DONOVAN: THE COURT: MR. PARKINS: THE COURT: Okay. I believe that's it. All right. We're good?
We're good. Okay, thank you. That was very helpful.
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- 357 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 well. THE COURT: MR. MEYERS: THE COURT: Okay. Thank you, Your Honor. So it's twenty-five to 8, and my guess is It's been a long day and UNIDENTIFIED SPEAKER: THE COURT: MR. MEYERS: Shelhorse. financing. THE COURT: MR. MEYERS: Okay. I'm not sure if that's carried over to Yes. We submitted the declaration of Travis Your Honor?
That was admitted in the record on the DIP
this, but we would ask that that be admitted as well -THE COURT: MR. MEYERS: THE COURT: All right. -- for purposes of this -All right.
Any objection? MR. DONOVAN: THE COURT: No objection. All right, so that's in this record as
you want to make closing arguments. we still have a lot to do.
So I'm not going to cut off closing
argument, but I'm going to ask you that, if anybody really feels that they need to tell me something that hasn't already been said multiple times, you could make a closing argument; otherwise, I'm going to send you out for a little while and ask you to come back.
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- 358 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 possible. Your Honor, I think the record is clear in terms of the benefits to the state with respect to this transaction. You've heard from Mr. Beilinson with respect to the And I'm not interested in turning this into an endurance test. So to the extent that people are having issues
continuing, please let me know and we'll do something else. But I'm trying to accommodate the deadlines that exist in these documents. And I have a problem that's not of your creation,
but it's my Chapter 13 calendar tomorrow morning. So somebody speak on behalf of this group if people want to tell me what you want to do. MR. SATHY: Your Honor, I think we could do a -- we
could go ahead and finish up with closing arguments, I think; I think everyone would prefer that. short as possible. THE COURT: If -All right. So why don't we do that. And We'll try to keep them as
why don't we just really try to keep them as short as you can. And then I'm going to send you out for about forty-five minutes to eat and cool off, and then I'm going to issue a ruling. then at that point we'll figure out what we're going to do next. All right. Mr. Sathy, are you going to go first? MR. SATHY: Looks -- sounds like it. I will be as brief as And
Good evening, Your Honor.
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- 359 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 is. MR. SATHY: THE COURT: Yes. And I'm just going to -- because I noted equitization of Lehman's debt: It allows for the rest of the
CMBS structure to receive all of the debt capacity of the enterprise; it frees up significant amounts of cash flow. Your Honor, this decision was not taken lightly; it was taken in consultation with a series of advisors and independent board members. to this transaction. We recognize that there are costs
Your Honor, of course we do need to
confirm our plan with Lehman by 240 days (8 months); we understand that, and that is a cost of the transaction. THE COURT: All right, now, I want to go back to a
question that I raised earlier, because I think that it still remains unanswered in my mind. MR. SATHY: THE COURT: Okay. And in the course of going through the
various term sheets, and I think I'm about to refer to one that's actually not in evidence but it's when the provision caught my eye, I asked a question about the termination of cash collateral -MR. SATHY: THE COURT: MR. SATHY: THE COURT: Yes. -- prior to the 240th day. Let's go right to it. And I told you what my reading of the PSA
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- 360 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 it when it flew by in the recitation in the chronology of the term sheets. The term sheet that is Midland-27, which bears
the legend in the upper right-hand corner "PW", which I think we all agree is Paul Weiss, Comment 622, in the use-of-cashcollateral section in that term sheet, the following words appear: "Company's use of Lehman's cash collateral will
terminate immediately upon the occurrence of a Termination Event", that's a defined term, "(as defined below), including the failure of the Company to meet the Plan Milestones (as defined below)." So I still don't have an answer from you all -MR. SATHY: THE COURT: I --- about what you think that it means,
because to me the words clearly mean not come back and ask me and I get to say you're using that collateral anyway. MR. SATHY: Okay. Well, let's walk through it, then.
If Your Honor would go to section 8 of the PSA that was actually entered -THE COURT: MR. SATHY: THE COURT: (Pause) THE COURT: MR. SATHY: Got it. Okay. Section 8(a), I think this was the All right. -- executed. And we go to section --
Let me -- hold on.
section that we were focused on, and this is the document that
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- 361 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 doesn't. THE COURT: And it doesn't say that Lehman has the And I also asked the question: was executed. And, Your Honor, I -- there were lots of
versions of this PSA. THE COURT: MR. SATHY: Understood. Many of them the debtors did not even so.
And so we're going to focus on the document that was executed. And section 8(a) governed -- has the provision with respect to cash collateral, and it says that "Upon the occurrence of any of the Termination Events, set forth in 6(a) through (s)," which is the -- sort of the litany of the milestones -THE COURT: MR. SATHY: Yep. -- and the others, "Lehman may terminate What that
this Agreement and the use of its cash collateral."
means is that if there is a termination event, then Lehman's consensual use of cash collateral is terminated. And we
effectively then go right into the cash collateral order where there is a termination event, that if the PSA is terminated, then Lehman's consensual -THE COURT: MR. SATHY: But it doesn't say "consensual". I understand, Your Honor. I understand it
right to come and ask me.
What, if anything, did you tell Judge Peck that this meant? Because if that's what it means, if that's what you're telling me that it means --
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- 362 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SATHY: THE COURT: Absolutely. -- then there's no remedy for anything for
a termination event prior to the 240th day. MR. SATHY: Well, they can come -- they can elect to
terminate cash collateral, subject to the provisions of the cash collateral order that say they've got to give five days' notice, and we all come back before you. In other words,
they're not objecting to the use of cash collateral in the interim order; they didn't object. to the use pursu -THE COURT: the interim order. MR. SATHY: Absolutely, and that's the whole point of Well, they were on board when I entered And they're not objecting
this, that part of the reason they're on board is because of the existence of the PSA. If the PSA goes away, then Lehman
reserves the right to come back and ask you to not allow cash collateral or to -- for a tighter budget, or something else. But the reality is that they -I see Mr. Sage standing up. MR. SAGE: MR. SATHY: Yeah. But the reality is that they would come
back to this Court, subject to the provisions of the cash collateral order. we're giving them. THE COURT: Mr. Sage -It is not a permanent irrevocable right that
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- 363 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SAGE: THE COURT: MR. SAGE: THE COURT: MR. SAGE: Thank you. -- how are you? Great, thanks. I'm good. Good. How are you?
I'm sorry, Mr. Sathy, but I want to help. If you look at -- I agree almost with everything he said, but I think it's even easier than that. If you look at
8(a) of the plan support agreement, it does say what Mr. Sathy said it said, that upon occurrence of a termination event, we can terminate our cash collateral -- terminate the use of cash collateral. But that has to be read in tandem with the cash The order -- and maybe this isn't the
collateral order, okay?
best draftsmanship, but this came up before we had this order. But in our view, the cash collateral order, which I'm holding, and the PSA agreement and its order work together. We don't
get better rights because we have it under the PSA agreement. What I mean to say is this: If you look at the cash
collateral order, it says, in section 10(a)(xviii) -THE COURT: MR. SAGE: this purpose. THE COURT: MR. SAGE: All right. It says in 10(a)(xviii) -- so at some point I don't have it. Okay. And you don't actually need it for
you'll look at it, if you like -- that "After the entry of an
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- 364 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 order approving the Plan Support Agreement" -- so assume that just for the moment, because it doesn't matter if it doesn't happen -- "the occurrence and continuation of a Termination Event, under the Plan Support Agreement, gives rise to a Termination Event under cash collateral." If that happens, if
that happens, we'd wrap into paragraph 11 under cash collateral, which has the ordinary procedure of giving notice to the debtor, five days' notice, et cetera. What I'm -THE COURT: MR. SAGE: THE COURT: Wait. Bottom line -But wait. But then -- but the only thing
that then that we're going to argue about is whether there's been a termination event, meaning if you're in the construct of what we have in a DIP agreement, right, so there's a default, and then everybody's reserved their rights to come in and tell me that there wasn't a default, and then I get to decide whether or not there's stay relief. MR. SAGE: MR. BASTA: THE COURT: Mr. Basta. MR. BASTA: MR. SAGE: Yeah, okay. I mean, that's not -- I mean, what it says Well -Your Honor -So -- well, why don't you let him finish,
in the order is "During the five-day period after the
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- 365 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 are? Termination Declaration Date, the Debtors and the Committee shall be entitled to seek an emergency hearing with this Court, seeking a determination of whether a Termination Event has occurred and/or any other appropriate relief related to continued use of cash collateral" -THE COURT: occurred". MR. SATHY: MR. SAGE: MR. SATHY: MR. SAGE: Right. If -Right, "whether a termination event has
-- "and/or" -The ter --- "and/or any other appropriate relief
related to continued use of cash collateral on a nonconsensual basis. And the rights of objecting of all relevant parties are
reserved with respect thereto." MR. SATHY: So in other words, if they terminate the
cash coll -- if they seek to terminate the cash collateral pursuant to a PSA default, then they will -- which they have a right to do, then they will give us the notice. We'll come
back -- we'll come to the Court and say either there was a termination or there wasn't. order applies. If there wasn't, then the same
If there was a termination, then we still have
the right to ask Your Honor to enter a new order giving us the right to use cash collateral. THE COURT: But what's the scope of what the arguments
What's going to be -- what are the arguments going to be
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- 366 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 enters. in that hearing? There's a termination event -Correct. -- right? Right. And then coming into it, we all agree that
MR. SATHY: THE COURT: MR. SATHY: THE COURT:
there was a termination event. MR. SATHY: THE COURT: going to argue -MR. SATHY: It's just -- it's going to be about what Sure. Sure.
And then what's going to be the -- he's
the new adequate protection package is with respect to the -to a use of nonconsensual cash collateral, assuming we don't agree on the use of cash collateral. In other words, if the
PSA -- if this right triggers, then they're not consenting to the use of cash collateral pursuant to this order. But there could be a different order that Your Honor We might -- it might be consensual, it might not be
consensual, with respect to a new cash collateral mechanism. And that's what --we would presumably have another cash collateral hearing with respect to the use of cash collateral. In fact, they would apply to everyone, because this -- well, it would certainly apply to Lehman with respect to Lehman's use of cash collateral. THE COURT: Was this level of detail gone into with
Judge Peck at the hearing --
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- 367 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SAGE: THE COURT: MR. SAGE: THE COURT: MR. SAGE: THE COURT: MR. BASTA: Your Honor has -THE COURT: MR. BASTA: Your wrote it. I know, but Your Honor has -- no, that's No. -- on August 18th? No. All right -Definitely not. -- Mr. Basta. It just -- it's too complicated, because
what I'm saying, and I'm suggesting we fix it, because Your Honor has a concern that this provision -THE COURT: MR. BASTA: MR. SATHY: MR. BASTA: I don't want it to be a gotcha. You don't want it to be a gotcha. It's not a gotcha. But there are two parties to this
agreement, okay, Innkeepers and Lehman, and they're both telling Your Honor that that's not the way the document works. So the way we fix it in bankruptcy is that in the order approving the PSA we clarify this so that Your Honor's concern is alleviated. MR. SATHY: and to Innkeepers. This is -- it's -- it was clear to Lehman And, sure, if we had written in the words
"Lehman may terminate the consensual use of cash collateral" -THE COURT: And it's not what the order says.
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- 368 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SATHY: I understand, Your Honor, but that's -And we can fix the
really, that is what is intended by it.
order and make that point clear that what we're talking about is the consensual use of cash collateral pursuant to the proposed final order and the current interim order. that is exactly what is intended by the parties. That's --
And if there
is a termination as a result of the PSA, then Lehman is not consenting pursuant to this adequate protection package; they'll either consent to a different adequate protection package or Your Honor will enter a new order that provides them with whatever appropriate adequate protection they need so that the debtors have the use of cash collateral. THE COURT: (Pause) MR. SATHY: Your Honor, with respect to the revenues, Okay.
the debtors did not seek -- obviously they have these superremedies in place. We frankly did not have any other currency,
however, to provide Lehman with respect to their agreement. In the course of discussions with the parties in the evolution of this document, Lehman requested these remedies for any of the defaults, what we call the super-remedies. So even
if we didn't get a PSA approved, that they would have this remedy to force a sale. And through the course of that
negotiation, Your Honor, we were able to at least push the existence of these remedies until day 240 at a minimum; 270
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- 369 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 point -with respect to the effective date. The remedies themselves -- again, it's the debtors' choice with respect to whether it's a lift-say or a sale. And
without necessarily getting into the realities of what would happen, I think Mr. Bienenstock actually made a good point, which is how realistic is it to sell twenty assets in ten states, or eight states or five states, if we lift the stay. So -- if we agree to lift the stay in that context. We think that this does provide some teeth to Lehman, but we think that, in the context of what we're getting, that the benefits outweigh what the remedy actually provides. THE COURT: MR. SATHY: THE COURT: Let me ask you another question. Of course. If I were to approve it based on the
clarification about the termination event and what happens on cash collateral, and I had some back-and-forth with Mr. Beilinson about breach of the rep to not talk, participate, seek, solicit, everything that's in 4(a)(ii) -MR. SATHY: THE COURT: Correct. -- all right, and he goes out and he talks
to Midland, as he testified it's his every intention to do, Lehman can call a default and call it a termination event and they will have gotten their fees paid. MR. SATHY: They will have gotten the fees up to that
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- 370 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. SATHY: Yeah. -- paid, correct, the fees of their
advisors and the fees of the lawyers -THE COURT: MR. SATHY: THE COURT: MR. SATHY: THE COURT: Right. -- and Lazard. So -Right, so those fees --- Mr. Beilinson basically testified that,
and I think I recall it pretty clearly, that he could be in breach from the moment the ink is dry, and yet the effect of that would be to enable Lehman to terminate and they walk away with their fees. MR. SATHY: Well, but, Your Honor, when we talk about
their fees, we're talking about the fees of Dechert and the fees of Lazard -THE COURT: MR. SATHY: I understand. -- which flow through the cash collateral And so they're being paid out of
as representative expenses.
the cash collateral of Lehman, ultimately. THE COURT: MR. SATHY: THE COURT: MR. SATHY: Right, but they're still being paid. Absolutely. Right. Absolutely. So up until the point of the
termination, if -- up until the point of termination, yes, we are agreeing to pay their fees. We're agreeing to pay the fees
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- 371 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of all the representatives. Sure, there may be additional
incremental fees related to the plan support agreement that are covered, but only to the extent that that agreement is still in place. THE COURT: MR. SATHY: Okay. Your Honor, with respect to the fiduciary
out, and I guess I should -- I was going to take credit for drafting this provision, but, Your Honor, during one of the breaks, the parties conferred and Lehman has offered, and we've accepted, to delete 25(c) from the plan support agreement such that the -- because it apparently has caused -THE COURT: I don't know you can do that at 8 o'clock,
after we've been at this for almost twelve hours, in closing argument. I just don't get it. MR. SATHY: Your Honor, it happened literally in the
last break; it was the last break right before we -THE COURT: It's completely unfair to everyone else
who's been here since 8:30 this morning. MR. SAGE: THE COURT: MR. SAGE: we'd do that, okay? Your Honor? Yes, Mr. Sage. We didn't walk in today thinking at all That was not part of our game plan; it
wasn't something we'd say 'Okay, if she's concerned about it, we'll take it away.' THE COURT: That's not how it happened. I believe that.
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- 372 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 mean -THE COURT: But now these folks have to, in real time, MR. SAGE: We heard Mr. Beilinson's testimony, we
assessed what we think he's going to do, and we said to ourselves this is a paper out, it's a paper restriction, it doesn't really exist. And given the realpolitik of that
situation, and given the fact that we saw the Court was troubled by it, we decided to make that offer to the debtors. But it was not something that we had in mind, and we just thought that it would be helpful both for the debtors and for the process. Again, we don't mean to be hurtful by making an offer that we think is beneficial to the cases and to the estate. But that's, you know, the honest truth about how this developed. But -- and again, I can't emphasize enough, it was
informed greatly by the testimony that we heard. THE COURT: Well, I -- I mean, the problem that I have
is that I really feel that I have to give everybody a do-over, because we're talking about a -- frankly, a dramatically different agreement than where we started this morning, because it's only just been clarified that -MR. SAGE: But it only is better for everybody. I
mean, I'm not sure how -THE COURT: MR. SAGE: Right, but then --- anyone's rights are prejudiced. I
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- 373 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 assess all the moving parts and how the removal of 25(c) works, and I'm not smart enough to do that quickly right now. my mind, and you folks may have thought this -- may have believed this to be the case all along, it was not my impression, and it was certainly not the objectors' impression, that cash collateral termination worked that way. And I know I And in
asked the question earlier today and, you know, my fault for not getting it clarified earlier, but it wasn't until Mr. Sathy went through the exercise that you two just went through that your position was made clear. with you: And I'm going to be very honest
Whether or not that evolved during the course of the
day, I don't know, but it certainly is not consistent with the words that were written on the page. So that's good news, but we're going to have to keep going, because I frankly don't know what to do. hear from everybody. I'm going to
You know, and the deadline in the
document is your deadline, your -- and I'm looking at the two of you. It's a completely artificial deadline; that's why
we're here at 8 o'clock at night, because the first milestone is tomorrow -MR. SATHY: THE COURT: Is tomorrow. -- is in four hours. So I'm going to ask
for your guidance on what you think we ought to do. MR. SAGE: Again, I mean, the way -- and hearing that
from the Court, it would be almost better if I had not offered
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- 374 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to take it out. THE COURT: MR. SAGE: THE COURT: MR. SAGE: THE COURT: MR. SAGE: No -So -- but -But you can understand -But I don't -- but that seems perverse --- you can understand what I'm saying. I do, Your Honor, I really do. But it
seems perverse -- I mean, the alternatives analytically are to say, 'Okay, well, if it's worse to have it approved, because people weren't prepared to make that argument, then we just don't approve it.' That seems like a perverse result, because
ultimately I think it's -- it does meet people's -- some people's concerns. We are -- we do share with the debtors the
idea that this plan support agreement, among other things, may lead to consensus and it may lead to a faster case for everyone. So we are trying to take a step that alleviates
concerns and reflects what we heard from the CEO today. THE COURT: All right.
Let me -- Mr. Sathy, why don't I let you finish, and then I'll hear from Mr. Friedman, who managed to rise first. MR. SATHY: Sure. Okay. Your Honor, and I think the
realities from our perspective -- 25(a) is the key provision of the fiduciary out, whether we have 25(c) or not. We are -- it
overrides section 4 to the extent that we're taking actions consistent with our fiduciary duties, talking to creditors and
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- 375 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 my piece? THE COURT: Well, you should say your piece, and I analyzing proposals that we receive; certainly well within that fiduciary duty. So we've -- we have reached out to Five Mile, Those
to Midland as well, to see if we can have discussions. are consistent with 25(a).
They override section 4 to the Because of the
extent that there is that inconsistency.
"notwithstanding" language in 25(a), it is an overriding provision. We have the ability to do that, and we intend to do
that, Your Honor. THE COURT: MR. SATHY: THE COURT: All right. Thank you. Mr. Friedman? Is this on 25(a), or should I just say Thank you.
MR. FRIEDMAN:
would like you specifically to tell me, if you had your druthers, what you would like to do with respect to this newly revised document -- PSA. MR. FRIEDMAN: Your Honor, I think this -- you know, You know, this is not, you
this is not Let's Make a Deal.
know, put your case on, see how it goes and, if you don't like the way your evidence is going in, five minutes before closing arguments start changing the motion. You know, they asked for We
an up or down vote and up or down decision on their motion. all did a lot of work responding to their motion. saying 25(c) is gone.
Now they're I don't
I don't know what that means.
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- 376 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 know if 25(c) -- does that mean that the data room that's been closed to Five Mile for the last three months is all of a sudden open? Does that mean that the fiduciary -- the view of
fiduciary duties has changed? I mean, if they want to make another motion, if -- you know, if they can't prevail on the basis of their motion as they filed it with 25(c) in there, then they should have the opportunity at some point to make another motion on a different plan support agreement, making whatever modifications they think they need to make to address the Court's concern. But this is -- the way you do it is not, you know, at 8 o'clock at night to say 'Okay, you know, that looks like a problem, so we're going to take that out.' everybody -- the witnesses are all done. And now We're all left to
ponder what that means, how that impacts how people relate to third parties if and when they arise. So I just don't think -THE COURT: can go again. MR. SAGE: I don't want to cut off everyone else Mr. Sage, why -- let him finish, and you
saying the same thing, so -THE COURT: Okay. I just don't -- I couldn't agree more, This is just not the way you do it.
MR. FRIEDMAN: Your Honor, with you.
Again, they -- as I said, they can renew their motion on a
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- 377 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 different basis, but they can't throw terms up against the wall as closing arguments proceed, to see if any of them stick, if any of them resonate with the Court. appropriate way. That's just not an
They made a motion; it has to be decided on
the basis of the moving papers. By the way, it's a problem of their own making, because had they invited the constituencies into a room and said 'Hey, here is our plan support agreement. get your views on it. We'd like to The
We'd like to sit down with you.'
objection -- or even after all the objections were filed, they could have said 'Okay, we now see all of your objections. We
understand you have an issue with this, this, this and this. What if we took out this? What if we took out that?' That's
not what they decided to do.
They decided to go full bore into
court, get approval of this motion, this plan support agreement, without any changes at all. So now, Your Honor, they're saying 'Well, you know, the hour's growing late and, you know, midnight approaches and now let's just starting throwing changes,' and it just doesn't work that way. a procedure. THE COURT: All right. I'm sorry, I thought you were There's no due process involved in that type of
done, but you were just pausing? MR. FRIEDMAN: Well, I had some other things to say on
other issues, just -- I'll be --
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- 378 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 hearing. THE COURT: All right, why don't --- I'll take five minutes. I
Why don't we -- we're going to segment.
mean, ordinarily I would just let you keep going. MR. FRIEDMAN: THE COURT: Okay.
But since we have what I would consider a
pretty unusual development, I'm going to let Mr. Sage interrupt. Mr. Friedman, you can stand there and finish. MR. FRIEDMAN: to add one thing. Okay, great. Your Honor, I just want
I don't know what was given to Judge Peck
about the import of this section, and they got approval in front of Judge Peck, but I don't know if -- since it was a good deal for Lehman and now they're taking away something that's not a good deal for Lehman. don't know what Judge Peck -THE COURT: question -MR. FRIEDMAN: THE COURT: Yeah, I think this is -I agree. I don't -- it's a fair I don't know how it got argued. I
-- and I have not -I think it's a new ball game.
-- I have not -- I didn't attend that
I haven't looked at the record of the hearing. MR. SAGE: THE COURT: Your Honor -You know, he's down the hall from me; it's
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- 379 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 a whole different case. MR. PARKINS: THE COURT: MR. PARKINS: moment in that hearing. all. Two things. Yeah. And I apologize. One, this was not of
It wasn't discussed in that hearing at
I am not -- I have no concern whatsoever that Judge Peck
is thinking that this was the key to the hearing and that that's why he approved it. our mistake. made. It wasn't focused upon. Number 2,
We will leave it in.
We take the points that are We'll leave it in.
I don't want to create a foot fault.
We'll tell you now that it's not going to be our intention to enforce it, but it's there. And you can take that for what It's in the agreement.
it's worth, but it's not binding. Mistake.
I don't think this should become the pivot. You know, we had good intentions; perhaps they were
just -- you know, they were perhaps not well-executed.
But we
saw a provision that was causing great trouble for everyone, and thought that people would actually prefer not to have it. But we don't want to have a foot fault. We'll leave it in.
Please ignore what I said about it coming out, or what Mr. Sathy said on our behalf. And I'll tell the Court that it's
not our intention to enforce that. THE COURT: misunderstand. Look, don't -- I don't want you to
I mean, my job, the debtors' job -- I mean,
this is all about -- I think Mr. Bienenstock explained it very
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- 380 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 well almost twelve hours ago what the purpose is of our all being together here like this in a Chapter 11 case. So I don't
want you to misinterpret my reaction by suggesting that I'm not in favor of amendments, movement, developments that benefit the creditors of this estate. and -MR. SAGE: Well understood, Your Honor. I didn't -But I think there's a process issue,
we didn't mean to make it harder on anybody.
And the due
process point that Mr. Friedman made is well-taken. It's in. We don't intend to enforce it, but that's --
you know, that's given the way -- with the way it's due or not due. But it's -THE COURT: MR. SAGE: THE COURT: All right. We take that back. All right.
Mr. Ehrlich, I promised Mr. Friedman I was going to let him finish. MR. EHRLICH: briefly, Your Honor. on behalf of Apollo. before he -THE COURT: MR. EHRLICH: to go in, sort of -THE COURT: -- get a chance. I want to -Yeah, everyone's going to get a -Okay, okay. I didn't know if you wanted Okay, I just wanted to interrupt We do have some comments/closing remarks I don't know if you want to, sort of,
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- 381 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. EHRLICH: THE COURT: MR. EHRLICH: MR. FRIEDMAN: --- proponents before --- let Mr. Friedman finish. Okay. Of course, Your Honor. And I'm going
Your Honor, thank you.
to make four or five points and I'll try to make them as quickly as I can, and I think Your Honor could probably imagine what those points are. And I know, from Your Honor's comments
throughout the day, that Your Honor understands all these points, and I'll go through them just as quickly as possible. The first one, Your Honor, is simply that the process is simply a flawed process. What you heard today was, I hope,
as shocking to you as it was to me when I understood this, which is that the company had a data room set up. data room was set up. working on anything. just Lehman. I mean, a
We're not talking about people actually A data room was set up for one person:
There was a data room set up for Lehman, and
nobody else could get into that room unless and until they provided Mr. Beilinson with a written document that he, in his sole wisdom and discretion, concluded was better or may be better. I mean, I'm not even sure what standards he placed But no one else could get into a
within his own discretion. data room.
And they're asking Your Honor to approve an insider
deal that not only was -- you know, forget about market-tested. People were literally shut out of the process. You heard Mr. Beilinson testify that he discussed with
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- 382 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Five Mile a proposal and did not let them conduct any due diligence, did not let them into the data room. And you ask,
'Well, why did Five Mile make a proposal to Midland instead of to the company?' interested. Because the company said they weren't
Now, you know, maybe if it's appropriate we'll
change the letter and put the company's address on it, but they were pretty clear that they weren't interested. And so you have this catch-22 that they've imposed, which is, while there's some lip service to higher or better offers or 'I'll consider everything', but basically you have to -- in order to get into the data room, you have to make a fully-baked proposal. In order to make a fully-baked proposal,
most people need to do due diligence. THE COURT: I get it. You got it. Of course. Okay. Next
MR. FRIEDMAN: point, Your Honor. relevant meeting.
Okay, Your Honor, Apollo is at every And you can believe Mr. Beilinson say that
he was just bringing them along because he wanted to give them an education in restructuring. I think the Apollo's the
most -- one of the most sophisticated restructuring investors in the world. And he brought them along for that reason, even
though they happen to be the same people who actually negotiated the acquisition of the equity? Your Honor will see through that. The main point, Your Honor: This is just a bad deal. You know, I think
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- 383 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 its ear. Forgetting about Apollo, it just provides more harm than good to the estate. this deal. There's nothing good. You know, Lehman loves It's
They told Judge Peck they love this deal.
been approved by Judge Peck as being in the best interests of the Lehman estate. If this ever gets off the ground, they're Why are we attaching to this deal Doesn't make any
going to vote for this deal.
these Draconian remedies in favor of Lehman? sense.
Even under a business-judgment test, even if Apollo
weren't involved, why would you give Lehman these types of remedies? They're not putting in any new money. They're not
committing to a deal that anybody else likes.
I mean, to give
them these types of remedies and it -- it just doesn't -- the benefits do not in any way correlate to the burdens. You heard Mr. Beilinson really just turn LaSalle on I can -- I can't imagine that any of the judges who
decided LaSalle thought it would be so easy to get around it by simply creating this artifice, which Mr. Beilinson said. you think you can create an artifice and undo new value?' he said 'Yeah, you can.' Your Honor, at the end of the day -- and it's really all about the burden of proof. I really think that's what, you They have a 'So And
know, we would really urge Your Honor to focus on. burden of proof, all right?
Their burden is somewhere between
business judgment, which they think they have, and entire fairness, which I think every court that's ever looked at this
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- 384 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 says they have. judgment. Miserably. They can't meet the test under business
Under entire fairness, they fail miserably. You know, a horrible process, a flawed process, a
closed-out process, and a price that is demonstrably already lower than the only other person that's come forward with a proposal. So, Your Honor, I just think, on -- strictly on a matter of what's their burden and have they met it, we think, Your Honor, they've absolutely failed. THE COURT: All right. Thank you.
Thank you, Mr. Friedman. Mr. Ehrlich? For the
Who wants to go next? MR. EHRLICH:
Good evening, Your Honor.
record, Andrew Ehrlich from Paul, Weiss, Rifkind, Wharton & Garrison, on behalf of Apollo Investment Corporation. We've
tried to keep our remarks to a minimum today to preserve time, and I'll do the same right now. But I do have some brief
observations about what you heard today from AIC's perspective, that I hope will be useful to the Court's consideration of the evidence. Over the last week, I waited for my phone to ring, I waited to get an e-mail, asking me to bring a representative of Apollo to this hearing, from the objectors. And the phone
never rang and the e-mail never came and, as I sat here today, it became very clear why. We produced our e-mail from the weeks and months
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- 385 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 leading up to the PSA. We produced a witness, for hours of And if you
deposition, from Midland and the other objectors.
thought there was a kernel of evidence in that testimony from AIC and the documents from AIC to support the quite heated allegations that we heard in opening statements this morning that Apollo Investment Corporation corrupted management, that this was an inside job, don't you think we would have heard a cross of an AIC witness? those documents? Don't you think we would have seen
We didn't hear it, and we didn't see them,
because it didn't happen that way. What the sworn testimony of Mr. Hewes shows, and I want to highlight this because it's now in the record as Exhibit 57 before Your Honor, is, one, Mr. Hewes testified that he did not give direction to Innkeepers in connection with the negotiation of the terms of the PSA (page 267); that he did not give direction to Innkeepers with respect to the negotiation of the terms of the term sheet attached to the PSA (page 269); that AIC did not even see a draft of the PSA until the Friday or Saturday before it was filed with the Court on Monday, July 19th (that's page 267). Indeed, what you heard today from Mr. Lascher was that after a couple of initial meetings at which representatives of AIC were present, he then negotiated a PSA with representatives of Innkeepers, and later subsequently in negotiations with AIC over the terms of the equity deal with respect to the post-
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- 386 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 reorganization equity. And Mr. Parkins established the shocking proposition that there were a series of calls and meetings between Lehman on the one hand and AIC on the other, negotiating those terms. That doesn't mean this was an inside job, and it doesn't mean it was corrupt. It was established, as I noted, that Mr. Hewes attended a couple of the initial meetings: meeting and the previous meeting. the April 22nd
But what Mr. Hewes'
deposition testimony shows, which no one raised today, at page 83, is that he and Mr. Korval were asked to leave that meeting halfway through so that Innkeepers and Lehman could have confidential discussions, which I think is a very significant fact that's now in the record as part of Exhibit 57. And then we come to this issue of the drafts. I would
note first that the Court is being asked to approve definitive documents, not a number of drafts of uncertain providence that we never know that AIC saw. But more importantly, and in all
events, the testimony shows that's in the record. THE COURT: But you're not -- let me interrupt you.
But you're not disputing what I'm going to characterize as the fact that at certain points before the definitive documents, this was a -- the PSA was a three-party transaction, correct? MR. EHRLICH: It is certainly true that documents
drafted by Lazard and Dechert contemplated --
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- 387 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. EHRLICH: Three signatories. -- three signatories. But Mr. Hewes
testified, and this is at page 228 of his deposition, why AIC did not end up as a signatory to the PSA, and it's very clear: AIC is not a signatory because there is nothing for AIC to support. It's not contributing anything. There's no backstop. It's not -- there's It wouldn't make any
no rights offering. sense.
And that's what the undisputed sworn testimony from AIC And in fact the sworn testimony also shows
shows, Your Honor.
that all of these term sheets that were prepared by Lazard and Dechert which show, you know, AIC getting a commitment fee, a breakup fee, providing a backstop, those were never transmitted to Apollo, and Apollo didn't even know about them. You'll see in the June 17th e-mail, by the time it gets transmitted from Mr. Greer at Dechert to Mr. Glatt at Apollo, those provisions are gone, and it was a result of negotiations between Mr. Beilinson and Innkeepers' counsel and Lehman's counsel that those provisions were eliminated. The deal that was ultimately done, Your Honor, and this gets glossed over a lot, and I want to make sure the record is clear: (1) Apollo's 250 million dollar equity Apollo gets
position is getting completely wiped out, totally. nothing under the plan. not take a penny out.
(2) This is a company where Apollo did There were no dividends since the There were no
transaction in 2007 when they took it private.
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- 388 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 management services agreement. MR. FRIEDMAN: THE COURT: Your Honor, this is --
This is really --- out of nowhere. Okay. -- really far afield. Okay. Well, I would note a propos Mr.
MR. FRIEDMAN: MR. EHRLICH: THE COURT: MR. EHRLICH:
Bienenstock's points with respect to his clients that AIC holds preferred shares pari passu with his clients. And if there
were value there and that there were a legitimate basis for an objection to the PSA, I can assure you that AIC would not stand idly by and let that value go -THE COURT: MR. EHRLICH: THE COURT: But let me ask you something --- unclaimed. -- because if the transaction were to go
through as contemplated -MR. EHRLICH: THE COURT: Yes, Your Honor. -- and then AIC is going to buy half the
equity that Lehman gets for 107 1/2 million dollars, and Lehman's going to get its DIP forgiven as part of that deal and then everybody's going to get released -- right? There's
nothing that prevents Apollo and Lehman at that moment from agreeing -- from Lehman agreeing to convey the rest of their equity for a dollar. MR. EHRLICH: Right? Aside from their fiduciary duties to the
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- 389 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 company. They'll have two directors, both parties. I mean,
you know, that would be subject to, I would think, some scrutiny. I mean, it's difficult to conceive of two
sophisticated parties engaging in that kind of transaction in violation of fiduciary duties to the company. THE COURT: MR. EHRLICH: All right. Your Honor, at the discovery conference
held a month or so ago, Mr. Penn told you he needed expedited discovery of AIC because the PSA was the product of AIC's bad faith. Those were his words; I recall them very clearly. And
you may recall I told you I thought those were very serious allegations and that AIC takes them very seriously. And after discovery of Innkeepers, Lehman and AIC, the production of all of those parties' e-mails and internal documents, I think what you've seen today makes abundantly clear that there's a total disconnect between the rhetoric of the bad faith that we've heard and the reality of the transaction, which was an arm's-length negotiation between Lehman and Innkeepers with respect to this document they're being asked to approve tonight, the PSA. With respect to the actual provisions of the PSA that are the subject of debate here tonight, the fiduciary out, the remedies that Lehman may have, I think the record is clear AIC had nothing to do with those negotiations. And to say that
those are the product of some bad faith on the part of Apollo I
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- 390 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 think has no basis in the evidentiary record. reminds me when I read the briefing. It really -- it
I read these long
rhetorical statements about Apollo's alleged machinations in the preliminary statements and in the facts section. When I
got the legal argument, there was a total disconnect between the legal arguments asserted and these allegations about Apollo's conduct. And we believe that these provisions in the PSA were the product of vigorous arm's-length negotiation, the records show today, between sophisticated parties, well within the range of the debtors' business judgment, particularly given the imminent cataclysm for the entire enterprise, including the objectors here, with the looming withdrawal of Marriott and others' franchises. And for that reason, Your Honor, unless you have any other questions, we respectfully submit that you should approve the PSA. THE COURT: All right. Thank you.
Just for the record, the air is back on. UNIDENTIFIED SPEAKER: THE COURT: MR. MEYERS: Yeah, it is.
Thank you, Judge Gonzalez. Your Honor, there are some ninety debtors
that are parties to the PSA and that are movants and have asked you to approve the PSA that they've entered into. There are
lots of reasons for you to deny the motion on behalf of all of
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- 391 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the debtors. There are -- whether it's because of the cash
collateral termination, because of the fiduciary out, because of the super-remedy, which is the most concerning to us; whether it's because of the plan that has new-value elements that may be unconfirmable; whether it's the fact that it's breeding contempt rather than fostering negotiations; any of those reasons could allow you to -- or all of them in combination, could allow you to find that this motion should be denied for all of the debtors. And if that's what Your Honor does, then you can disregard the rest of my argument. But if you are inclined to
find that that -- that the PSA and approval of that motion is justified for any of the debtors, then you have to move on to the next step, Your Honor, which is to find that it is -- can be approved for each one of the debtors, and in particular, Your Honor, my two debtors, because, as Mr. Beilinson testified, my two debtors, who are parties to this agreement, get nothing. And when I asked Mr. Beilinson how that was in
the best interest of the estate, he said that, after consulting with his professionals, his duties run to the enterprise and it's in the best interest of the enterprise. Now, if you look at the response brief that was filed by Kirkland, they say at page 14, "The business judgment rule merely requires that a debtor establish that the requested assumption will benefit the estate." Okay? Now, there's --
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- 392 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 others have argued for a heightened scrutiny but, at a minimum, you do have to find benefit to the estate, okay? Now, in -- buried in a footnote in -- footnote number 44 on page 25 of that reply brief is an amazing leap that the debtors take. THE COURT: (Pause) THE COURT: MR. MEYERS: (Pause) THE COURT: MR. MEYERS: Okay. In that footnote, the debtors stand They say that "that Debtors' Okay, what page is it? Page 25, footnote 44. Wait. Let me get there.
bankruptcy law on its head.
duties run to constituents across the entire enterprise is well-accepted," and they cite two cases for that: General Growth. U.I.P. and
Now, neither of those cases addressed whether
it was in the interest -- or whether, in considering what was in the best interest of a debtor's estate, you could consider the enterprise. Each of those cases instead dealt with the
issue of whether a particular debtor's filing was in bad faith or a lack of good faith. And each of those cases found that,
in considering whether the cases could be commenced, you could consider what was in the best interests of the enterprise. In fact, in GGP, Judge Gropper held exactly contrary to what the debtors say in footnote 44. Judge Gropper said in
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- 393 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 last? the opinion, "That is not to conclude, as Movants imply, that the interests of the subsidiaries or their creditors should be sacrificed to the interests of the parents and their creditors. As further discussed below, there need be no sacrifice of fundamental rights." Judge Gropper said that the -- looking at
what's in the interests of a particular debtor is a fundamental right. right. These debtors have completely ignored that fundamental That is a far cry from, as Judge Gropper said, deciding
whether an entity could -- looking at an enterprise and deciding whether a particular entity could be in bankruptcy. Judge Gropper concluded by saying, "The point is that a judgment on an issue as sensitive and fact-specific as whether to file a Chapter 11 petition can be based in good faith on consideration of the interests of the group." That's
completely different from assumption of a contract, sale under 363, numerous things in a bankruptcy case that require an evaluation of what's in the best interests of the estate. And
when Your Honor is asked to do that, as you are today, I would urge you, if you're -- again, if you're otherwise inclined to approve this at all, that you not approve this for my debtors, because it cannot possibly be in the best interests of their estates. Thank you. THE COURT: Anyone else? All right, thank you, Mr. Meyers. Mr. Bienenstock. Saving the best for
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- 394 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. BIENENSTOCK: Your Honor. THE COURT: Good evening. I'm going to make several points as The last for sure. Good evening,
MR. BIENENSTOCK:
quickly as I can, Your Honor. Tonight, as this morning, my clients get wiped out if this plan is confirmed, and it's no joking matter. all the seriousness of a confirmation hearing. And it has
We've all been
around too long to ignore the fact of the confirmation express, et cetera, et cetera, and the limited options the Court has as time goes on. I mentioned this morning that granting this relief is unnecessary for rehabilitation and continuing jobs but does undermine profit maximization and helping investors preserve their investment. back to it. The second point I made with no explanation is that, to grant this motion, the Court really has to overrule the Bidermann decision. And I said this is a more egregious case, Since I explained that, I'm not going to go
and I just want to explain briefly why this is more egregious. In Bidermann, the debtor's shareholder, Maurice Bidermann, and its crisis manager came up with a deal whereby they would -they had a purchase contract for the reorganized debtor, subject to all kinds of no-shop clauses and other inhibitions with a fiduciary out. And Judge Brozman railed against it,
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- 395 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 first invoking Judge Friendly's (ph.) decision that Mr. Friedman mentioned earlier, and then explaining that what happened there was the CEO, who was in charge of getting the most for creditors, was negotiating to buy the company at the smallest possible price, thereby minimizing what creditors get. And the judge, Judge Brozman, also then, after saying this was a clear breach of fiduciary duty and conflict, said that business judgment routine just won't fly at all, because you're dealing with insiders and it doesn't apply to insiders. Now, why did I say that this case is worse? Bidermann, they did set up an auction. In
I think Judge Brozman
exposed the fact that it wasn't much of an auction, because of the no-shop, et cetera, et cetera. an auction. But they were going to have There's 'Do the deal.
Here, there's no auction.
Get out of Dodge.'
That's what makes it worse. You have Apollo, the
But the conflicts are the same.
hundred percent shareholder of Innkeepers, that attracted Mr. Beilinson to Innkeepers' board, paid him for that; then when he was hired by Innkeepers, got the million dollar signing bonus, the 900,000 dollar salary, the million dollar renegotiation fee, and then the next year got a couple million more. the board of Innkeepers were obviously some independent directors, but many Apollo directors, with the power all the time, and the world knew it, that if anything went in a direction they didn't like, they could just change it. And on
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- 396 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I mean, anyone dealing with Innkeepers had to know you cannot do a deal against Apollo's interests, because it just won't go forward. That doesn't have to be written down; that That's real life. That's what we
doesn't have to be spoken. know.
It's the tacit understanding Apollo's in control. So what happened here? Well, notwithstanding the
protestations of Mr. Beilinson that he didn't negotiate Apollo's deal, the fact is, he admits, he went to a meeting on the whole guaranty analysis. And in Mr. Hewes' deposition at
page 120, Your Honor will find that Mr. Schuyler Hewes understood well that Apollo was going to get out of its guaranty of the PIPs by making sure they got done with the debtors' -- presumably the debtors' money, but certainly not their money. And there are a few places in the deposition, at
page 120 and then again at page 151, where he acknowledges that this was Apollo's -- one of Apollo's goals. At page 143 you'll
see the Beilinson meeting about the guaranty analysis with all of the experts. He seemed to know a lot.
The record is absolutely bare of any evidence of Mr. Beilinson lifting a finger to say 'Gee, I bet we can use that. Apollo's on the hook for these improvements. borrow DIP money? Why should I Why
I'm so concerned about leverage.
shouldn't I just tell Midland and others "Have Apollo do it. They're on the hook"?' bankruptcy. That's why they signed up for
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- 397 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Guaranties are only -- come into use when you're in financial trouble. They didn't use them. And Apollo's unsecured claim. That would have been
subrogation claim back against the debtor: They're offering to pay 500,000 dollars. a great deal.
Apollo pays for the improvements, and there's
virtually no distribution to Apollo for that, and they don't have to borrow the DIP money. Not an iota of evidence that That's how you fulfill not setting
anything like that was ever discussed.
your fiduciary duties to a debtor's constituents:
things up; making believe 'Oh, I have nothing to do with Apollo, except they're on my board. I deal with Apollo's CEO, Oh, we talk. I go
Jim Zelter, because he's on the board too. and I ask Lehman for assurances. Apollo, are you?
You're not going to terminate
And I don't do anything that can really be This is exponentially worse than
done to improve the estate.'
Bidermann, Your Honor, in all seriousness. Now, moving on to LaSalle, and I'm not going to talk about what Your Honor and others may think. new-value arguments. We all know the
I want to go for a few seconds on what There was an office building in The bankruptcy court valued it, And
the facts of LaSalle were.
Chicago; it was a skyscraper.
I think, at 47.3 million dollars, or thereabouts anyway.
they were give -- the mortgagee was given a new note for the value. So you had one-to-one debt-to-value. Now, on its face, just using arithmetic, there was no
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- 398 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 value left. 47.3. After all, the value is 47.3; there's debt at
That didn't stop the Supreme Court from saying 'Wait a Look at the owners.
minute, there is lots of value there.
Look at the tax depreciation recaptured, the twenty million dollar tax liability they would suffer if they didn't do this.' Well, in our case, look at Apollo; look at the guaranty liability they would suffer if they didn't do that. And now let's just put on our 'This is America' hat: 'This is America. We buy fully encumbered assets,' because if
you can raise the rent a dollar a foot or raise the day rate at the hotel a couple dollars a day, your 5-, 6-, 700 million dollars hotels are now worth a billion, and you've made a lot of money. People pay to buy fully encumbered property. That
was clearly not taken into account by Mr. Beilinson who kept saying 'Well, I just looked at Lehman as it was cashing in. It's converting its debt on twenty properties and so it was entitled to that,' totally ignoring the value of the other fifty-two properties, even if they're fully encumbered, controlling fifty-two hotels with flags like Marriott, Best Western, et cetera. upside. And with all of this testimony, with the motion, with the declarations, did Your Honor know until very recently this evening that Lehman's interest rate was two and a quarter percent a year and it made all of five million dollars last That's very valuable because of the huge
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- 399 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 okay. 36 -THE COURT: 365. Whatever. They tend to use -- well, year on interest? up. And that's the debt service it was giving But I'm Why wasn't Doesn't
That mortgage was practically a liability.
raising it for a different purpose, Your Honor: this Court told?
Why weren't the rest of us told?
that put a whole new light on this? When you have a 220-whatever million dollar mortgage, returning 2 1/4 percent a year? That's like having a value of, That's not having -- you
what, 50-, 60-, 100 million dollars?
can't sell that for anything close to 228 million dollars. They benefited themselves multiple times by entering into this deal. But because this isn't a confirmation hearing and we
don't have a disclosure statement, this is just a little ol' 363 plan support agreement with a -THE COURT: 365. -- plan term sheet attached. Or
MR. BIENENSTOCK:
MR. BIENENSTOCK: 365.
The process is not supposed to work with the Court and the parties in the dark about what's really going on here. we know the real economics. Now
Now we know that Lehman probably Anyone would pay
would have paid to do this deal, not be paid.
to get out of a two and a quarter percent obligation that it has no control over.
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- 400 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 itself. Two other important policies or jurisprudence that's being violated here, Your Honor. decision of Young v. Higbee. There's the Supreme Court
That was in the mid-'90s;
granted, it's twentieth century, but they did still have a sense of fairness. And two preferred shareholders appealed a
confirmation order and they settled, and they got something for themselves. that. And the Supreme Court's ruling was 'You can't do
You have to share it with all of the preferred
shareholders in your class.' Well, what's happening here? We have Apollo, both a
preferred and a common shareholder; it got something for itself. Is it sharing it? Do the other preferred shareholders
have a right to buy in their pro rata share for 107.5 million dollars? No, unless the law has changed, and unless tonight
form is more important than substance, overruling all of the Supreme Court decisions on bankruptcy to date. You have to go back to basics. Apollo got a deal for
"And don't tell us about 'Oh, that's a separate deal And the answer very quite simply, Your Honor,
with Lehman.'"
is that deal can't exist without the plan term sheet attached to the PSA. If Lehman doesn't get its hundred percent under
this deal where it's actually upgrading itself from a two and a quarter percent interest rate, it can't agree to pay -transfer fifty percent to Apollo. So it all starts with the plan term sheet that Your
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- 401 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 at that. THE COURT: All right. Obviously there would have been a a minute. (Pause) MR. BIENENSTOCK: Your Honor, I think I have to rest Honor is being asked to approve tonight. can't get it. Is it being shared? Without that, Apollo
Is Apollo carrying out its
fiduciary duties?
Is Mr. Beilinson waiving any flag about 'Oh, I have to share the
I owe fiduciary duties to everyone. wealth'? to do. Oh, no. Not at all.
He's doing what he's expected He's doing his job, trying to
He's a good Apollo find.
put Apollo in the best position it could be put in within the bounds of the law, if the Court will allow it. And if this
Court doesn't allow it, the real problem for my client, Your Honor, is they may try to go ahead with this plan without the PSA. But we'll have to deal with that another time, because
that's not in front of Your Honor tonight. There was one comment -- I'm sorry, I just blanked for
MR. BIENENSTOCK: lot more to say.
But we don't think the answer to this is to The big
tweak the language, the termination of use of cash. issue is -THE COURT: I got it. Good night.
All right, so we have Mr. Gottesman, and
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- 402 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 brief. THE COURT: Okay. This not only has to be fair; it has It starts with a deal that was from then we're going to conclude with Mr. Penn and Mr. Parkins. And Mr. Sage is going to get last legs, I think. MR. GOTTESMAN: Your Honor, I'm going to be very, very
MR. GOTTESMAN: to look fair.
It's neither.
kept secret from every other major creditor constituency:
Midland, which has 825; from the securitization trust that my clients have, which is 160 million in aggregate. The purported
reason with respect to Midland is because we're afraid they might bring an enforcement action. I have no idea what the I know that we didn't And
reason is that we were kept in the dark.
bring an enforcement action; there's no evidence of that. in fact if we were, the fact is that secured lenders have rights.
And the fact that a creditor might actually seek to
enforce its rights has never been, in my experience, a reason for not talking to that creditor; it's just the opposite, particularly when you have a fiduciary duty to that. It continues, quite frankly, with what we saw in the last hour and a half, which is deal terms get shuffled; provisions are said to mean something completely different than the plain language would give everyone an understanding of. have spent twelve hours here for something that seems to have shifted like some amorphous jellyfish. That's not fair. It We
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- 403 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 doesn't look fair. But it's indicative. It's indicative of It's
this process, indicative of the debtors' attitude.
indicative of how the debtor treats its fiduciary duties. That's not what we should be doing. Chapter 11 process is about. That's not what the
It doesn't further any of the
process and the policies that Mr. Bienenstock has so eloquently described for the Court, and it's simply not the way it's done. Thank you very much, Your Honor. THE COURT: Mr. Parkins? MR. PARKINS: First, Your Honor, we happen to have All right. Thank you, Mr. Gottesman.
pleadings that were filed in the Lehman case, and I think it's important because Your Honor's raised issue in what has been suggested that they would just either abandon these provisions or not enforce them. Well, and I would -- I have copies here,
but they talked about the plan support agreement in their pleadings and why they wanted to go forward with it, and they talk about it. And then the only provisions they really cite
with respect to remedies upon termination are the major one about pooling of properties. This is what was presented to the
Court as the reason to do the deal. So for them to say 'We're taking it out,' well, they're not going to enforce it, they didn't really mean it, this is a predicate for -- and the discussion in the plan support agreement's not very long, but this is the predicate,
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- 404 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 one of three pages about it. available to them. And the big issue is the remedy's
So I don't know what kind of games we're
hearing tonight, but this is certainly what was presented. The other thing I want to talk about -- I've waited here -- is the issue of whether this -- we raised this early in our papers: This is a 365 or 363 deal. Okay. The law is that
if you're not bound at the time and if it's not an executory contract at the time of the petition date, you don't have an executory contract to assume. doubt about it. And the cases that were cited by the debtors, Riodizio and the other cases, if you study them, the judge found these were -- first of all, these are option cases, one with Judge Bernstein, Riodizio. And you go into the case in Delaware, Lehman was not bound; there's no
which I have trouble pronouncing, Ati -- I'll call it the Bowater case. Okay. I'll leave it at that at this late hour. Options are different.
Okay, that also was an option case.
And what's important in the Bowater case, and I think it's instructive, is the Bowater case went to the very famous case about Columbia Gas Systems ruled on by the Third Circuit, regarding executory contracts, talking about a condition and a condition that might be a duty. The difference is a duty is an A condition that
obligation for which you can seek damages.
you can't seek damages for is not a duty, which gives rise to breach and therefore does not give rise to an executory
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- 405 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 contract. And we don't have an executory contract here. There
was no obligation for which anybody could seek recourse prior to the petition. that. And the cases they have cited do not change
Both Judge Bernstein and the judge in the Bowater case
basically found that there was a contract in place with obligations owing because it was an option contract. The other thing I think very important in these cases, in Judge Bernstein's decision was the fact that -- a side note, I'll quote, "While a Court will ordinarily defer to the bankruptcy judgment of the debtor's management, the debtor's management have an interest in preventing LLC from exercising the option and diluting the personal stakes and control over the debtor. Consequently the debtor cannot rely on the
presumption of the business judgment rule to support its decision." Insider deal, business judgment -- we all know,
insider deal, business judgment rule doesn't apply. Then you go onto another case they cite in support of their proposition, LWD. LWD was a case where the court went But the LWD court
under Section 105 to approve a transaction.
was all over the issue of insider transactions requiring high scrutiny. And the Court said 105 applies here because "the
fundamental question presented to the Court with regard to the closure insurance policy is whether an important process envisioned by the Bankruptcy Code, sales under U.S.C. 363 have
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- 406 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 been subverted and the judicial process abused. The federal
courts have long been concerned with the integrity of the bankruptcy sale process. process. The question is one of substantial
Sales to fiduciaries are necessarily subjected to This is not something you just gloss over Well, we don't have 365.
higher scrutiny."
even in the context of a 365.
I think one of the most important things that happened today is something that I asked Mr. Lascher about that I didn't expect to get but I did get. And if you look at LaSalle and
you look at the article we cited by a bankruptcy judge in Las Vegas the issue there is control. you? What does ownership give
That's the issue for LaSalle, not just putting in money What does ownership give you as account of?
and going to bid.
Mr. Lascher said 'We have Apollo in this deal on account of their ownership, on account of their experience, that's why we're selling to Apollo.' That's it. That's the end. Once
they say that -- and that's what Mr. Lascher said, it's 'on account of their ownership, on account of their experience'. This is LaSalle. Judge Markell, when you study his article -- when you study that article it talks about the history of new value, the history of it. of ownership. said that. And it's control, it's ownership, the benefit That's what LaSalle talked about. Mr. Lascher
This is the end.
They're getting it because on
account of their ownership, on account of their experience and
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- 407 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 their knowledge of the debtor. And because of that I don't
think Your Honor can approve this. Without being redundant about what everybody else has said, this is an inside transaction. Apollo is getting
something on the side here which they couldn't get directly. They're getting it on account of their ownership as testified by Mr. Lascher. That's it. It's LaSalle. They're asking you Nothing's
to bless a transaction which shouldn't be approved. going to happen if it doesn't get approved.
If we have a cash
collateral fight, gee, how many of us have been in cash collateral fights? Every day, using the property, using the My guess is courts are going to
cash to maintain the property. approve that.
I'm not going to pre-judge you but courts have
approved that in my experience, to use cash collateral to maintain the property. going to happen here. The Marriott insurance agreement, as we went through in the evidence, had nothing to do with this. do with the DIP. It only had to Nothing's going to happen. Nothing's
They have the DIP, they have the Marriott If they need to go to use cash collateral But
assurance contract. that's fine.
If they want to file this plan that's fine.
to agree to remedies and to agree tonight to let Apollo get fifty percent of this deal when it's on account of their ownership, as was the testimony of Lehman, is just wrong. Last point. Why was Apollo so vigorously supporting
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- 408 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the approval of the PSA? Why? Because they get fifty percent
of the deal or else they wouldn't have to say anything. Thank you. THE COURT: All right, thank you. All right?
Mr. Sage, very briefly, please. MR. SAGE: quite eloquent.
Your Honor, Mr. Bienenstock is of course
And superficially the points that insider
deal, all those kinds of points resonate -- they tend to resonate. But I don't think what he said or others have said There's a
about our deal, about 'the deal' match the evidence.
dearth of evidence that you have seen and heard about today that show connection -- Mr. Ehrlich pointed out there really isn't -- it's not there. person crossed him. out any bad facts. He did great. Mr. Lascher testified. Only one
They all could have.
They did not bring
After he got done testifying I said great. If you look
There was nothing bad that he said.
at the series of e-mails and documents, you know, we're getting into making the salami. I will concede that some of those documents look messy, you know, they reflect interim drafts, they reflect thoughts that were gelling. We're not perfect. That happens to the lawyers.
We don't always come out with the best I submit that when we got done we They are separate.
document the first time.
came out with proper documents.
Mr. Lascher -- in fact, it really reflects how Mr.
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- 409 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Lascher viewed this deal all along. Mr. Lascher viewed two He said one, He didn't
components as being important, which he said.
equitization and two, selling part of his claim.
care whether those concepts were in one document, two, or twenty-seven documents. It's irrelevant to Lehman. It was for
the lawyers to figure it out and we figured it out. Stepping back -- and I'm not going to go on for long, I promise. Stepping back from all the rhetoric about bad faith
and insider deal which I don't think they've proven, they've just said it because Apollo happens to be there. Stepping back
from that, I think the standard and the way the Court should be looking at this is did Mr. Beilinson make the right set of moves. Did he assess the overall situation here and come up
with a plan support agreement that reflects good judgment? I think you saw, respectfully, Mr. Semon tell you, even after the Court ruled on cash collateral, that he's not interested in talking about anything other than a sale process and something else, something else that isn't really on the table. Mr. Beilinson already told you in evidence that
Marriott didn't give him that kind of time, that he needed to get into bankruptcy and get a plan on the table, get a program, you know, get PIPs going, which would have precluded him from having the kinds of conversations pre-bankruptcy that people wanted him to have had. He didn't have that kind of time. He looked at Lehman, assesses He
did what he thought was best.
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- 410 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Lehman had the capability of quickly deciding to equitize and sell, and he went down a path that he thought could work. A lot of people have talked about our claim, the amount of interest that's due on it. stuff. That is. That is confirmation
This Court has a chance to look at that at
confirmation and decide whether this is -- we're getting overpaid. I said that earlier today, it's still true. You can
say as much as you want about insiderness, this Court -- we know that getting a plan support agreement does not mean we got the plan confirmed. it's not true. Just to address a couple other quick points. fees -- we're not in it for the fees. Our We know that. We'd like it to be true but
Midland's fees are
getting paid under cash collateral and they're not in the plan support agreement. Lehman is not -- this is not about getting
our fees paid and then a quick gotcha default and then ha, ha we got the fees paid. doing. I just want to make sure I didn't -- yeah, I guess two last things. collateral. One, I don't think that things are moved on cash That's how I understood it. People were -- we That's not our game, it's not what we're
were doing, you know, cross-examination and testimony today, I understood the documents to work to always wrap into the cash collateral order. They do. And I probably should have
informed the Court as to my view during the proceeding but it
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- 411 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 fine. just didn't really -- it didn't seem to be a good time to do it and perhaps I should have. And the last thing I'll just say again, as a personal matter, I apologize to the Court for the mistake in my judgment regarding 25(c). It was a mistake. I don't --
THE COURT:
I think your motivation was absolutely
So there's no apology necessary. MR. SAGE: THE COURT: Okay, thank you very much, Your Honor. All right. It's ten minutes to 9, and I And then But
certainly have to let my staff get something to eat.
I think I should give you a decision before I release you.
we have Mr. Bienenstock's motion which was noticed for today. And in thirteen hours I have eighty-three Chapter 13 debtors to talk to. So before we adjourn for a little while, I just would
like to ask your views as to what we should do. Mr. Bienenstock? MR. BIENENSTOCK: I'm serious. I know you are, Your Honor. Instead
of kidding around, I just think as much as we want to go forward with it, it's not the right time after Your Honor is apparently going to write a very -- or prepare somehow -THE COURT: I'm going to try, but because of the
lateness of the hour -MR. BIENENSTOCK: THE COURT: Exactly.
-- and because of the press of time, I'm
not going to -- it's not going to be, you know --
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- 412 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. BIENENSTOCK: THE COURT: And --
-- a fifty-page -Well, right.
-- law review article. But whatever it is, it's incredibly
MR. BIENENSTOCK:
important and I just don't think that I would do justice to the motion, or it's frankly fair to the Court and everyone else sitting here to have Your Honor thinking about dealing with that after dealing with this decision. So what I would ask is Friday
I don't know -- tomorrow I understand it's Chapter 13.
I'm sure no one wants to be here but I would do it if the Court's here. Otherwise if you could give us a date -I'm not going to be here Friday. -- if you could give us a date -- if
THE COURT:
MR. BIENENSTOCK:
you could give us a date next week, Your Honor -- it's not something I want to do -THE COURT: Well --- but I don't think it makes sense
MR. BIENENSTOCK:
to go forward later tonight. THE COURT: Yeah. I mean, next week is possible. We
run into the Jewish holidays and I don't want to impede anybody's travel plans or other requirements in that regard. So I appreciate your flexibility, and why don't we just leave it that tomorrow we'll work out a date when I have Ms. Lee back and can look at my calendar and you know, we'll try to get it
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- 413 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 on for next week and if it doesn't happen next week we'll look for a date immediately after that, although I have a contested confirmation hearing with a couple of their colleagues on the 14th. So -- but we'll fit it in. But we do have, then -- we
also have to finish up cash management and cash collateral. So why don't we say -- why don't we adjourn? don't we come back in an hour? Why
I'll give you my decision and All right? Thank
then we can decide where we go from there. you, folks. IN UNISON: Thank you, Your Honor.
(Recess from 8:53 p.m. until 9:11 p.m.) THE COURT: with it this long. All right. Thank you all for sticking
Before the Court is the motion of the
debtors for an order authorizing the debtors to assume the plan support agreement entered into with Lehman ALI, Inc. Objections to the motion were filed by (1) Midland Loan Services, Inc.; (2) Wells Fargo Bank NA and U.S. Bank National Association as trustees for the property-level lenders; (3) the ad hoc committee of preferred shareholders; (4) TriMont Real Estate Advisors; (5) CWCapital Asset Management, LLC; (6) C-III Asset Management, LLC; (7) Five Mile Capital Partners, LLC; and (8) Appaloosa Investment, LP. Reservations of rights regarding the motion were also filed by Marriott International, Inc. and the official committee of unsecured creditors.
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- 414 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The debtors filed an omnibus reply in support of the motion along with the declaration of Mr. Mark Beilinson, the debtors' chief restructuring officer. At the hearing Mr. The objectors also
Beilinson gave additional live testimony.
presented the testimony of Mr. Ronald Greenspan, Mr. Michael Lascher, and Mr. Kevin Semon. PSA supports a plan term sheet that provides, among other things, for Lehman to receive in satisfaction of its secured mortgage claims of approximately 238 million in floating mortgage loan debt, comprised of 220 in pre-petition debt and an anticipated 17.5 million in DIP financing, 100 percent of the issued and outstanding new shares of common stock to be issued by the reorganized debtors. The new shares
will include all equity in all ninety-two of the debtors, notwithstanding that Lehman currently is secured by collateral of only twenty of the debtors. Under the plan term sheet, the remaining propertylevel secured lenders would receive new secured notes with a value that is not less than the value of the collateral securing their pre-petition debt. The plan dictated by the PSA proposes to assign a value to those secured notes providing Midland, for example, with a 550 million dollar note on account of its approximately 825 million dollar secured claim. Section 6 of the PSA sets forth a list of, quote,
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- 415 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 "termination events", end quote, which include, among other things: (1) the debtors' failure to meet any of the plan
milestones set forth in the PSA; (2) Lehman's failure to execute a definitive agreement with respect to the sale of fifty percent of its newly received shares for a price of at least 107.5 million dollars; (3) the filing of any motion to
approve a disclosure statement or plan that incorporates a pro forma capital structure or any other terms inconsistent with the terms and conditions set for in the plan term sheet; and (4) the material breach by any party of any of their undertakings, representations, warranties or covenants set forth in the PSA. Upon the occurrence of any of the termination events, even those outside the debtors' control, such as Lehman's failure to consummate the so-called new equity sale transaction not later than 270 days after the petition date, Lehman may terminate the PSA and the consensual use of its cash collateral. Further, upon the occurrence of select termination events, PSA forces the debtors to choose between (a) immediate stay relief in favor of Lehman which would permit it to exercise any and all remedies with respect to the floating-rate collateral without further court approval, or (b) a 363 sale of the floating-rate collateral at which Lehman would have the right to credit bid the unpaid balance of its floating-rate
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- 416 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 mortgage. The parties disagree on whether the debtors' decision to assume the PSA should be evaluated under the business judgment standard or the heightened scrutiny standard which closely examines transactions involving insiders. It appears
to me that the heightened scrutiny or entire fairness standard, such as that employed by the Bidermann court may indeed apply in this situation. I need not, however, decide which standard
is applicable here because I believe that the debtors have failed to meet their burden for assumption of the PSA under either heightened scrutiny or the less stringent business judgment test. In applying heightened scrutiny courts are concerned with the integrity and entire fairness of the transaction at issue. Typically, examining whether the process and price of a
proposed transaction not only appear fair but are fair and whether fiduciary duties were properly taken into consideration. The business judgment rule's presumption shields corporate decision makers and decisions from judicial second guessing only when the following elements are present: (1) a
business decision; (2) disinterestedness; (3) due care; (4) good faith; and (5) according to some courts and commentators, no abuse of discretion or waste of corporate assets. My decision will encompass the components of both
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- 417 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 standards. First, the negotiations surrounding the PSA
preclude me from finding that it was a disinterested business transaction. Indeed, it is clear from the evidence presented
that even as early as April 2010 Apollo, the holder of 100 percent of the equity in debtor Grand Prix Holdings LLC and the debtors' ultimate parent, was always intended to receive equity as part of the transaction, either directly as a backstop party or through a side deal with Lehman negotiated just before the petition date. Apollo also appears to have been directly and
inextricably involved in the negotiations and concept of the plan related transactions from the time the deal, as described by Mr. Beilinson, was a peppercorn. I also cannot conclude that the PSA was entered into with due care. And I note that the due care prong is also
directly related to the fair process inquiry of the entire fairness test. As one objector has pointed out, the
transaction not only has to be fair but it has to look fair as well. The testimony of Mr. Beilinson that the deal embodied in
the plan term sheet was not shopped in the market prior to signing the PSA nor did Mr. Beilinson have any intention of shopping it or disclosing to the other secured parties that the potential Lehman deal was on the table during the pre-petition period. It is troubling that when Mr. Beilinson and his team
met with Midland on April 28th they neglected to disclose the potential Lehman deal that had been outlined at a meeting with
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- 418 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Lehman and Apollo the prior week for which Lehman would receive the equity in all of the debtors, including those securing Midland's debt, and would sell a portion of this equity to a so-called investor. The debtors did not run any marketing process, and in fact Moelis, the debtors' investment banker, was told not to pursue other bidders or transactions. While the debtors state
that they communicated with both Midland and Five Mile during the pre-petition period. It does not appear that Innkeepers
has contacted any potential investors outside the capital structure or meaningfully interacted with their secured creditors regarding plan proposals. Section 5(c) of the PSA specifically prohibits such negotiations by providing that neither party to the PSA shall directly or indirectly seek, solicit, negotiate, support or engage in any discussions relating to or enter into any agreements related to any restructuring or plan of reorganization other than as set forth in the plan term sheet. Section 4(a)(2) contains a similar restriction, stating that prior to the termination date no party will directly or indirectly seek, solicit, negotiate, vote for, consent to, support or participate in the formulation of any plan of reorganization or other restructuring other than the plan. When asked whether he believed the debtors could
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- 419 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 provide due diligence materials to Five Mile without violating Section 4(a)(2) of the PSA, Mr. Beilin (sic) stated, quote, "probably not", although he suggested that the fiduciary out in Section 25(a) of the PSA would protect his conduct because of the, quote, "notwithstanding anything to the contrary" opening language. point. Mr. Beilinson's testimony was not credible on this
Indeed, when questioned by the Court Mr. Beilinson
acknowledged that even participating in discussions with Five Mile, on which he now asserts he is ready to embark, may well constitute a termination event under the PSA. Moreover, it is not clear to me whether the debtors have fully analyzed the value of the floating-rate mortgage vis-a-vis the value of the new shares Lehman and Apollo will receive. The question goes directly to the fair price prong of Mr. Beilinson has stated that he has
the entire fairness test.
not valued the value of the shares Lehman will receive, only that he believes that Lehman is not getting more than it is entitled to. He didn't perform an evaluation, nor did he
direct his advisors to do so. No value has been ascribed to the new equity other than the 150 million to 190 million estimate contained in the April 22, 2010 presentation prepared by Moelis. Indeed,
notwithstanding that valuation, arguably the imputed value of the new equity would appear to be at least 215 million dollars based on the price Apollo has agreed to pay to purchase fifty
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- 420 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 percent of the equity. In light of the substantial limitations in the PSA and the debtors' ability to engage in discussions regarding a restructuring with any of their other major creditors, I cannot conclude that the debtors exercised due care in electing to move forward with the current plan term sheet and the proposed valuation implied therein. The testimony of Mr. Beilinson on
these points reveals that Lehman wielded great power in the negotiations and Mr. Beilinson seems to have succumbed to virtually all of their demands. With respect to the PSA and the proposed plan it is difficult to understand what the rush is. approved. The DIPs are now The
The hotels are generally performing well.
relationship with Marriott is on track.
In fact, Mr. Beilinson
testified that the need to secure the DIPs and the Marriott agreement, two inter-related transactions, was one key reason why the debtors entered into the PSA. As each of those
agreements has been executed and the Marriott adequate assurance agreement was in fact only tied to the DIP agreements and not dependent on the PSA, this justification vanishes. The only dark cloud in an otherwise pretty sunny picture -- and it is a large dark cloud -- is that 1.2 billion dollars in secured debt is extremely unhappy with the proposed plan. They deserve more of a process than what has been The debtors have not set forth
provided thus far.
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- 421 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 justification as to why and at this very early stage in the cases the debtors need to lock themselves into the proposed plan prior to either: (a) seeking higher and better offers
which may benefit the entire creditor constituency in these cases, or as Mr. Meyers correctly observed, each of the debtors in these cases, or (b) at a minimum negotiating with their existing creditors regarding a restructuring transaction. While the debtors state in their reply that they are aware of no potential alternative that would provide creditors with richer recoveries, it does not appear from the evidence presented that they have canvassed the possible alternatives at this point. Despite the debtors' failure to shop for alternatives, attached to the Midland objection filed on August 23rd is a restructuring proposal submitted by Five Mile which Mr. Beilinson states he has not yet received or had a chance to really review. It strains credulity to believe that Mr.
Beilinson has not really reviewed this proposal or would stand on ceremony and take the position that he has not received it. This is not an appropriate position for a fiduciary of these estates. Next I find that the debtors have not shown that they acted in good faith in (1) making the decision to enter into the PSA, and (2) providing transparency to their creditors. The good faith inquiry is relevant to both the heightened
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- 422 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 scrutiny and business judgment standards. Virtually all of the
other parties-in-interest in the debtors' capital structure aside from Lehman complain of having been shut out of the process. And even those parties who wanted to make a
restructuring proposal were denied access to a data room that was set up by the debtors for Lehman's use only. The intention for Apollo to end up with half of the debtors' equity which has been on the table since April has been, at best, downplayed and, at worst, obfuscated from parties-in-interest. For example, the debtors' largest
creditor, Midland, was not informed about the agreement to transfer fifty percent of the new equity to Apollo until just a few days before the petition date. Yet e-mail correspondence
introduced into evidence clearly reflect Mr. Beilinson's knowledge that Apollo's role in the related transactions was essential; Lehman wanted Apollo in the deal and Mr. Beilinson knew it. Nor did the debtors share the specifics of the plan
term sheet, including the proposed write-downs of the secured loans in the non-Lehman tranche with the other secured creditors. Due at least in part to the lack of transparency in the process, the proposed PSA has spurred extensive discovery requests and a motion for an examiner. One objector has, in my
view, correctly argued that the PSA created contempt rather than fostering negotiations. This is not what a Chapter 11 is
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- 423 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 supposed to be about. To the contrary, a number of the
objectors point out that a debtor's exclusive period was intended by Congress to provide for an opportunity for the debtor to negotiate with its constituents and reach a consensual plan, a successful plan. And others cite to cases in this district for the proposition that exclusivity should not be employed as a tactical device to put pressure on parties to yield to a plan they consider unsatisfactory. The PSA has had such an effect
on the debtors' estates by tying all parties to a plan which lacks support from nearly the entire capital structure and preventing the debtors from negotiating in good faith with their numerous constituents who will eventually be required to vote on a plan. Finally, I will look at the alleged benefit to the debtors' estates in assumption of the PSA and whether the debtors have complied with their fiduciary duties in pursuing the proposed plan transaction thus far. The general standard under Section 365, which certain of the objectors argue is not applicable here, requires me to determine whether the assumption of the agreement at issue would be a good business decision based on a review of the totality of the circumstances. Here the PSA affords minimal
benefit to the debtors and there is little basis for me to conclude it is beneficial or appropriate for the estates of the
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- 424 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 debtors, in particular the nonfloating-rate debtors. The debtors assert that by equitizing Lehman's over 200 million dollars in secured debt this confers a benefit on the estate by: (1) creating substantial unencumbered assets,
and (2) freeing up substantial cash flow that would otherwise go to pay debt service. In this matter, they assert,
equitization of Lehman's debt would thus allow for the remaining CMBS pools of secured debt to take debt. I do not
believe, however, that the alleged advantages conferred by the equitization outweigh giving Lehman the amount of power over these cases that the PSA confers. The broad termination events contained in the PSA permit Lehman to walk away and terminate the consensual use of its cash collateral upon the occurrence of a laundry list of different events, even in a variety of situations over which the debtors have no control. In exchange for Lehman's support, the debtors have agreed, (1) to refrain from seeking competitive proposals which could maximize the value of these estates; (2) reimburse Lehman's costs, and in certain instances, consent to a lifting of the stay to allow Lehman to exercise its remedies without further court approval. The debtors argue that up until the 240th day after the petition date, in the case of a breach, Lehman's only remedies are to terminate consensual use of cash collateral or
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- 425 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to seek enforcement of the PSA. If the termination events
merely triggered the loss of Lehman's support for the proposed restructuring this would be typical of many plan support agreements approved in this district. Because, however, such
events also trigger a termination of the consensual use of Lehman's cash collateral, and in certain instances a lifting of the stay, they cannot be sustained. Simply put, to allow
Lehman to wield that much power over the fate of these cases is unacceptable. Lehman's eleventh hour assurance that it will
not exercise a right to terminate in certain instances is of little comfort, nor do I believe it changes the result here dictated. Finally, and of paramount importance, I believe that the so-called fiduciary out, as written, is flawed. It
prohibits the debtors from taking actions consistent with their fiduciary obligations. Fiduciaries owe duties of care and
loyalty and courts have held that these duties apply with equal or greater force in the context of a sale of assets. Even
without Section 25(c), the fact that the debtors agree to this provision causes me to question the debtors' honest interest in exercising due care. In a bankruptcy case, it is Bankruptcy 101 that the debtor and its board of directors owe fiduciary duties to the debtors' creditors to maximize the value of the estate and each of the estates in a multi-debtor case. As Judge Gerber held in
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- 426 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Adelphia, in a case with multiple debtors the debtors as fiduciaries have duties to refrain from favoring or appearing to favor one or another of their estates and its creditors over another. The debtors have not done so here. While the debtors focus on the, quote, "fiduciary out", unquote, contained in Section 25(a) of the PSA which provides that the company or its directors or officers shall be entitled to take any action or refrain from taking any action, including a decision to terminate the PSA that such person determines in good faith is consistent with its or their fiduciary obligations under applicable law. The debtors
repeatedly seem to ignore the effect of Section 25(c) on this provision. Section 25(c) of the PSA is an exception to the fiduciary out set forth in Section 25(a), and as asserted by nearly all of the objectors, it curtails its effectiveness and prohibits the debtors and their directors and officers from fully complying with their fiduciary duties. It provides that
the fiduciary out shall not apply and cannot be used to, quote, "annul, modify, amend, or otherwise alter", end quote, any of the plan milestones set forth in the PSA unless the debtors are doing so in pursuit of an alternative transaction that will provide Lehman with a higher and better recovery than that proposed under the plan contemplated by the PSA. While the debtors argue that Section 25(c) provides
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- 427 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 only that the fiduciary out cannot be used to amend certain plan milestones unilaterally, this is a restriction that I cannot approve, given that it ties the debtors to the proposed plan unless Lehman, a creditor, receives a better recovery. am aware of no other court-approved plan support agreement which contains such a provision. Further, I believe that Section 25(c) prevents the debtors from electing to fully exercise their fiduciary duties to maximize the value to each of the debtors' estates, particularly the seventy-two of ninety-two debtors who do not count Lehman as one of their creditors. In fact, Mr. Beilinson testified today that he has not permitted other parties aside from Lehman to conduct due diligence, despite the fact that he acknowledged that he has fiduciary duties not solely to the Lehman tranche of debt but to all of the debtors' creditors. The Court's heard no evidence that the debtors believe that discussing a plan other than the PSA or that providing due diligence access to other parties in compliance with their fiduciary duties would not trigger a termination event under the PSA. As the debtors have not articulated a sufficient business justification for entry into the PSA I cannot grant their motion to assume it. I do not believe this is a case I
where as smaller group of out-of-the-money constituents is
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- 428 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 opposing the debtors' motion in an effort to extract holdup value from those constituents that are in the money. Instead -- and I am repeating myself but this point is important. Unlike most plan support agreements the PSA only
locks up approximately 200 million of the total 1.4 billion in secured debt in these cases, the support of only one creditor among the critical mass of creditors needed to support a successful restructuring in these cases. After today, without the burden of the restrictions imposed by the PSA, the debtors will have wide birth to fulfill their fiduciary duties to conduct a plan process which maximizes value for all of the estates and treats the various tranches of debt with greater neutrality. And here again I will invoke Adelphia and its substantial teachings regarding the fine art of being a debtor with multiple separate tranches of debt secured by separate collateral pools. There's a level of neutrality required. I
do not believe the process leading to the PSA reflects the more even-handed approach required in this case. To be sure, the debtors do not have to be paralyzed in an attempt to make everyone happy. If they believe the plan
underlying the PSA is a good confirmable plan, they can and should file it and prosecute it. It will either survive
attacks vis-a-vis valuation, new value, substantive consolidation, and whatever else the creditor body asserts, or
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- 429 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 it will not. And if Lehman still wants to support the plan it
is free to do so. Okay, it's 10:37. As we discussed -- I can't remember
what day it was, some time ago we discussed the possibility that I would not approve the PSA, so that has come to pass. Mr. Sage filed a pleading in which he asserted that he may, in that eventuality, have an objection to the cash collateral usage. So we're at that juncture now. And but for
that I'm ready to rule on cash management and cash collateral. But I bet you, you guys want to go home as much as I do. we have to figure out what the process is going forward. Now, before Mr. Sage -- before I let you speak, Mr. Bienenstock, the examiner motion. I had a chance to confer But
with my chambers staff and, for better or worse, the next two weeks are really jammed. And there's a new judge being sworn
in on Tuesday -- on -- so I have to make room and go and participate in that. 11 o'clock on Tuesday. Your Honor, that would be fine, but
MR. BIENENSTOCK:
I was requested in the recess by the debtor as a key person -THE COURT: Speak into the microphone, please. I'm sorry.
Come over here. We would like to do that, and I The debtor asked me if it
MR. BIENENSTOCK:
appreciate the Court working us in.
could be the following week because of the availability of a
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- 430 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 key person on their side. And I need to speak to my clients in
view of this ruling, et cetera. THE COURT: Okay. So if it's okay with the Court if we
MR. BIENENSTOCK:
could do it early the following week, not on a Monday, that would be -THE COURT: Yeah. -- good.
You've got to talk to the Kirkland guys
because they've got me pretty locked up that week. MR. BIENENSTOCK: accommodate them. THE COURT: Yeah, the week of the 13th I have NEFT Well, they should be -- this is to
confirmation hearings and then I've got another Chapter 13 calendar. starts. And then it's -- the Friday is the night Yom Kippur So that week just doesn't work. I don't know -- you
know, I don't know what else to say. MR. BIENENSTOCK: THE COURT: (Pause) MR. BIENENSTOCK: Your Honor, would it be okay if Mr. Sure. Could we have a moment, Your Honor?
Basta and I reported to the Court tomorrow? THE COURT: Sure. Thank you.
No problem.
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- 431 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. BIENENSTOCK: THE COURT: to the side. Mr. Sage? MR. SAGE: I would make a joke about having four Thank you.
All right, so we'll put the examiner off
witnesses now for the hearing, but -THE COURT: MR. SAGE: won't make it. THE COURT: MR. SAGE: No, it wouldn't be funny. No. Lehman is prepared to live with the I do, though -- I just -I would not laugh. -- that would not be a funny joke so I
terms of the cash collateral order.
I think it's important to point out that the order that was submitted -- and I'm not sure whether the Court has it anywhere handy. THE COURT: I have it in blackline form but I have not
finished reviewing it. MR. SAGE: Right. The order that was submitted has a And there is a
reservation of rights in paragraph 20.
particular sentence that's very important to Lehman because there was no debate or no objection filed by the other parties on that point so that if we ever want to come back to Your Honor and raise that point we want you to know that it mattered to us. And there's just -- it's in paragraph 20. It's, I
don't know, four or five sentences in, and it begins with the
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- 432 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 word, "Furthermore", and it essentially preserves our argument -- our right to argue at one point that the cash collateral constitutes rents that is not collateral but rather our property. And that's just not been argued. And we want
to -- one day we may come back and argue that point; we don't want the Court to say, 'Gee, I disposed of this issue.' So I
want preserve that -- I want to preserve that overtly even though it's in the form of order that's already there. THE COURT: MR. SAGE: THE COURT: All right. Thank you. Well, here's the -- I mean, I haven't told
you how I was going to rule on cash management and cash collateral -MR. SAGE: THE COURT: I understand. -- but I guess that you're all guessing But I think
that I'm going to approve it, which is correct.
Midland has spent a lot of time on this issue and I think they have the right to a decision, a reasoned decision by me. it's not quite ready yet. But So
It's pretty ready but not quite.
should we -- I don't want to bring you all back here and I don't know how long my Chapter 13 calendar is going to go tomorrow. Should we pick, say, 4 o'clock and I'll give you the And can I ask in the meantime that
decision telephonically?
you socialize that provision with the group and let me know if they are prepared to live with that?
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- 433 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 fine. MR. SAGE: THE COURT: Okay. Okay? My view, off the top of my head, is
that that is preferable to, you know, going at it with you now over whether or not those rents are property of the estate cash collateral or not. It just seems to me better left for another So do you want Because I
day, but you're free to decide something else. to dial in at 4 o'clock?
Does that work for people?
think by then my Chapter 13 calendar surely will be done. (No audible response) (Pause) THE COURT: All right, a suggestion's been made that
it would be probably better to just circulate a dial-in number instead of using CourtCall, less expensive and I won't say anything else with respect to CourtCall. I don't deny -- I
don't begrudge them the business but -- all right, so 4 o'clock tomorrow for a dial-in ruling on cash collateral and cash management. I understand that, LNR, you're done with the stip? MR. GOTTESMAN: THE COURT: Yes, Your Honor, that's correct.
All right, and I've reviewed it and it's
So in the morning when court opens again your other DIP The Lehman DIP was entered sometime I think we're adjourned. Thank you, Your Honor. Thank you.
order will be entered. during the day today. IN UNISON:
(Proceedings concluded at 10:44 PM)
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- 434 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 WITNESS Ronald Greenspan Ronald Greenspan William Derrough Marc Beilinson Marc Beilinson Marc Beilinson Marc Beilinson Marc Beilinson Marc Beilinson Marc Beilinson Marc Beilinson Michael Lascher Kevin Semon Kevin Semon Kevin Semon Ronald Greenspan Ronald Greenspan T E S T I M O N Y EXAM BY Mr. Penn Mr. Donovan Mr. Meyers Mr. Donovan Mr. Bienenstock Mr. Parkins Mr. Gottesman Mr. Friedman Mr. Meyers Mr. Donovan Mr. Bienenstock Mr. Parkins Mr. Penn Mr. Donovan Mr. Penn Mr. Penn Mr. Donovan PAGE 15 19 25 97 150 190 221 226 253 256 261 267 309 324 331 334 345 LINE 23 19 5 15 17 19 25 24 18 24 15 24 13 5 18 25 18 I N D E X
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- 435 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Midland 94 Midland Midland Midland Debtors Debtors Debtors Debtors TriMont 25 16 17 Debtors Debtors Debtors 1 14 15 PARTY Debtors NO E X H I B I T S DESCRIPTION Declaration of William Q. Derrough Plan support agreement Declaration of Marc Beilinson Moelis presentation re: Project Tavern Multicolor presentation Chart Demonstratives 1 through 7 Deposition of Kevin Semon Declaration of Travis Shelhorse 1-21 (No description provided) 55 57 (No description provided) Deposition of Schuyler Hewes Acquisition agreement of Innkeepers by Five Mile 319 354 356 356 148 352 41 147 147 148 147 147 ID. EVID. 24
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- 436 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Motion of the debtors for an order authorizing the debtors to assume the plan support agreement entered into with Lehman ALI, Inc., denied 429 5 DESCRIPTION Debtors' Motion for Entry of an Order Authorizing the Debtors to Obtain Postpetition Financing from an Affiliate of Lehman ALI Inc. on a Priming Basis, granted. R U L I N G S PAGE 36 LINE 8
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- 437 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Date: September 3, 2010 Veritext 200 Old Country Road Suite 580 Mineola, NY 11501 I, Clara Rubin, certify that the foregoing transcript is a true and accurate record of the proceedings. C E R T I F I C A T I O N
Clara Rubin
Clara Rubin
___________________________________
Digitally signed by Clara Rubin DN: cn=Clara Rubin, c=US Reason: I am the author of this document Date: 2010.09.07 09:53:30 -04'00'
AAERT Certified Electronic Transcriber (CET**D-491)
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- 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 B E F O R E: HON. SHELLEY C. CHAPMAN U.S. BANKRUPTCY JUDGE September 1, 2010 8:30 AM U.S.

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awfully jam-packed out there.

too quickly out of the box. All right?

Let's find out who's on the phone.

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All right, thank you, Ms. Johnson.

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Earlier the CourtCall operator indicated that some

All right, I'm going to try it one more

time, because I want to know who's with us. Mr. Guzina?

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Sidley Austin. Thank you.

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That's the application report.

Mr. Greenspan. THE WITNESS:

(Witness duly sworn) THE COURT: Thank you.

please? A. Ronald Greenspan.

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operating expenses, but we do know the accruals for the

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been described as the flash report.

we've seen a breakdown across the pools.

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move on to the Lehman DIP facility.

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done almost on a patterned basis with the Five Mile DIP.

facility is about seventeen million dollars.

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issue in discussions with Solar and TriMont.

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do wish to cross Mr. Derrough. THE COURT: All right.

All right, so, Mr. Derrough.

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Now, Mr. Derrough, the Lehman DIP permits loans to be made

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