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

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

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: INNKEEPERS USA TRUST, et al.,11 Debtors. ) ) ) ) ) ) ) Chapter 11 Case No. 10-13800 (SCC) Jointly Administered

DEBTORS OBJECTION TO MIDLAND LOAN SERVICES, INC.S MOTION TO RECONSIDER THE FINAL CASH COLLATERAL ORDER Innkeepers USA Trust and certain of its affiliates, as debtors and debtors in possession (collectively, the Debtors), hereby submit this objection (this Objection) to the Limited
1

The list of Debtors in these Chapter 11 Cases along with the last four digits of each Debtors federal tax identification number can be found by visiting the Debtors restructuring website at www.omnimgt.com/innkeepers or by contacting Omni Management Group, LLC at Innkeepers USA Trust c/o Omni Management Group, LLC, 16161 Ventura Boulevard, Suite C, PMB 606, Encino, California 91436. The location of the Debtors corporate headquarters and the service address for their affiliates is: c/o Innkeepers USA, 340 Royal Poinciana Way, Suite 306, Palm Beach, Florida 33480.

K&E 17729012

Motion to Reconsider Final Order Authorizing the Debtors to (I) Use the Adequate Protection Parties Cash Collateral and (II) Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 363 [Docket No. 441] (the Motion to Reconsider). In support of this Objection, the Debtors respectfully state as follows: Preliminary Statement After considerable briefing, testimony and argument, the Court approved the Debtors use of Cash Collateral pursuant to the terms of the Final Cash Collateral Order on September 2, 2010.2 The relevant facts remain unchanged since that day. But Midland still argues that the Final Cash Collateral Order should be amended to remove (a) the concept of a Carve Out and (b) the provision that provides that Avoidance Actions and the proceeds therefrom are not to be used for the payment of 507(b) Claims. The Court has already ruled twice on these issues (on an interim basis at the First Day Hearing and on a final basis on September 2nd), and the Motion to Reconsider introduces nothing new. A motion to reconsider should only be heard when there is clear error or to prevent manifest injustice. Since Midland provides no appropriate basis for the Court to reconsider its decision, the Motion to Reconsider should be denied. A. The Carve Out

Put simply, the Debtors can use Cash Collateral to fund the Carve Out, or for any other purpose set forth in the Final Cash Collateral Order, if the secured lenders interests in their
2

All capitalized terms used but otherwise not defined herein shall have the meanings set forth in the Debtors Motion for the Entry of Interim and Final Orders (A) Authorizing the Debtors to (I) Use the Adequate Protection Parties Cash Collateral and (II) Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 363, (B) to the Extent Approved in the Final Order, Granting Senior Secured, Priming Liens on Certain Postpetition Intercompany Claims, (C) to the Extent Approved in the Final Order, Granting Administrative Priority Status to Certain Postpetition Intercompany Claims, and (D) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(b) [Docket No. 13] (the Cash Collateral Motion) or the Final Order Authorizing the Debtors to (i) Use the Adequate Protection Parties Cash Collateral and (ii) Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 363, entered on September 2, 2010 [Docket No. 402] (the Final Cash Collateral Order), as applicable.

2
K&E 17729012

collateral are adequately protected. This issue has been litigated twice and the Court has ruled on a final basis. At this point in the Chapter 11 Cases, the Court has ruled that Midland is adequately protected.3 In addition to the myriad of protections proscribed under the Final Cash Collateral Order, the chapter 11 process in and of itself acts as adequate protection in that it protects Midlands collateral from diminution in value or, as Midlands own analysis of the value of its collateral in and outside of bankruptcy demonstrates, significantly enhances such value. For example, the process permits Midland to adjudicate the distribution for all of its collateral, including 45 hotels in 16 different states, in a single forum (without the need for individual state court rulings and foreclosures across the country), and to enjoy the rights given to secured creditors by the Bankruptcy Code, including the ability to procure DIP financing to complete PIPs and improve collateral valuefinancing that could not have been procured outside of bankruptcy. And, of course, Midland is seeking to advance its own chapter 11 plan. Midland cannot receive the benefits and protections this Court and the process offers but, then, object to the Carve Out because its existence does not necessarily further Midlands agenda. B. 507(b) Claims

Midland also requests that the Court reconsider the exclusion of the Debtors Avoidance Actions and their proceeds from the scope of 507(b) Claimsan issue on which the Court has heard argument and ruled. The Debtors continue to support the Courts ruling so long as the

See 9/2/2010 Tr. at 15:5-15 (In sum, I believe the multiple layers and types of reporting that the debtors have built into the system constitute sufficient adequate protection under the circumstances and I decline to modify the proposed protocol and impose additional burdens and costs on the debtors at this point in their Chapter 11 cases. I find that the debtors have sustained their burden to demonstrate that the consolidated cash management system and proposed adequate protection scheme are an appropriate exercise of their business judgment and that the lenders whose cash collateral is being used are adequately protected as contemplated by the Bankruptcy Code.).

3
K&E 17729012

exclusion of such language does not alter the Courts determination that the Adequate Protection Parties are adequately protected. Background 1. Motion. On July 19, 2010 (the Petition Date), the Debtors filed the Cash Collateral On July 20, 2010, following a contested hearing, 4 the Court approved the Cash

Collateral Motion on an interim basis.5 On August 25, 2010, the Debtors filed a supplement to the Cash Collateral Motion with a proposed form of final order attached as Exhibit A thereto.6 2. On August 27, 2010, in support of the Cash Collateral Motion and in response to

various objections,7 the Debtors filed their Cash Collateral Reply.8 In further support of the Cash Collateral Motion, the Debtors submitted, on August 27 and 30, respectively, the First Cook
4

See Midland Loan Services, Inc.s Special Servicer for the Fixed Rate Trustee, Objection to (1) the Motion (A) Authorizing the Debtors to (i) Use the Adequate Protection Parties Cash Collateral and (ii) Providing Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 363 and (B) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(b) and (2) Motion for Entry of an Order Authorizing the Continue Use of (I) Existing Cash Management System, as Modified Herein, (II) Existing Bank Accounts, (III) Existing Business Forms, and (IV) Certain Existing Investment Guidelines [Docket No. 36] (the Initial Midland Objection). See Interim Order (A) Authorizing the Debtors to (i) Use the Adequate Protection Parties Cash Collateral and (ii) Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 36, and (B) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(b) [Docket No. 54] (the Interim Cash Collateral Order); see also Interim Order Authorizing the Continued Use of (I) Existing Cash Management System, as Modified Herein, (II) Existing Bank Accounts, (III) Existing Business Forms, and (IV) Certain Existing Investment Guidelines [Docket No. 55]. See Supplement to Debtors Motion for the Entry of Final Order (A) Authorizing the Debtors to (I) Use the Adequate Protection Parties Cash Collateral and (II) Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 363, (B) to the Extent Approved in the Final Order, Granting Senior Secured, Priming Liens on Certain Postpetition Intercompany Claims, and (C) to the Extent Approved in the Final Order, Granting Administrative Priority Status to Certain Postpetition Intercompany Claims [Docket No. 310] (the Supplement to the Cash Collateral Motion). See Objection of C-III Asset Management LLC [Docket No. 254]; Objection of Wells Fargo Bank, N.A. [Docket No. 255]; Objection of CWCapital Asset Management LLC [Docket No. 257]; Amended Objection of Midland Loan Services, Inc. [Docket No. 259] (the Second Midland Objection); Objection of Appaloosa Investment L.P. I [Docket No. 279] (collectively, the Cash Collateral Objections). See Debtors Omnibus Reply in Support of the Debtors Cash Collateral Motion, Cash Management Motion, Lehman DIP Motion, and Five Mile DIP Motion, and in Response to Objections Thereto [Docket No. 337] (the Cash Collateral Reply).

4
K&E 17729012

Declaration and the Second Cook Declaration. 9 On September 1, 2010, the Debtors filed a revised proposed final cash collateral order with a comparison against the Interim Cash Collateral Order [Docket No. 370]. 3. At the August 31 and September 1, 2010 hearings on Cash Collateral (the

Hearings), the Debtors submitted the Cook Declarations as the direct testimony of Nathan Cook.10 The record reflects that the Debtors adequate protection package includes: Using the Cash Collateral subject to a 13-Week Forecast subject to monthly updates;11 Comprehensive and timely reporting;12 507(b) Claims;13 Adequate Protection Liens on Postpetition Collateral (subject to certain limitations), to the extent of diminution in value; 14

See Declaration of Nathan Cook, Chief Financial Officer of Innkeepers USA Trust, in Support of the Debtors Cash Collateral Motion and Cash Management Motion and in Response to Objections Thereto [Docket No. 338] (the First Cook Declaration); Supplemental Declaration of Nathan Cook, Chief Financial Officer of Innkeepers USA Trust, in Support of the Debtors Cash Collateral Motion and Cash Management Motion and in Response to Objections Thereto [Docket No. 350] (the Second Cook Declaration and, together with the First Cook Declaration, the Cook Declarations). See 8/31/10 Tr. 10:13-24. See 9/2/2010 Tr. at 11:18-25-12:1-3; First Cook Declaration at 10; Cash Collateral Motion at 5(e)(iv); Supplement to Cash Collateral Motion at 2(e)(iv); Cash Collateral Reply at p. 5, 12-13, 16; Final Cash Collateral Order at 6(d)(i). See 9/2/2010 Tr. at 11:18-25-12:1-3 (finding monthly variance reports, flash reports, and application reports to be part of a thoughtfully and successfully crafted cash collateral protocol); First Cook Declaration at 1012; Cash Collateral Motion at 5(e)(iv)-(v); Supplement to Cash Collateral Motion at 2(e)(v); Cash Collateral Reply at p. 5, 12-13, 15-16; Final Cash Collateral Order at 6(d)-(e). See First Cook Declaration at 30; see 9/2/2010 Tr. at 11:18-22; Cash Collateral Motion at 5(e)(iii); Supplement to Cash Collateral Motion at 2(e)(iii); Cash Collateral Reply at p. 5, 12-13; Final Cash Collateral Order at 6(c). See 9/2/2010 Tr. at 11:18-22; Cash Collateral Motion at 5(e)(ii); Supplement to Cash Collateral Motion at 2(e)(ii); Cash Collateral Reply at p. 5, 12-13; Final Cash Collateral Order at 6(b).

10 11

12

13

14

5
K&E 17729012

Agreement, to the extent the business operations and restructuring costs are fully funded, to use all remaining cash to repay the Debtors prepetition secured obligations (subject to a reservation of rights);15 and The payment of the Representatives reasonable fees and expenses.16

The record also reflects that the Debtors do not anticipate near-term intercompany borrowing17 and that the use of Cash Collateral is necessary to preserve the Debtors estates and to effectuate a successful reorganization.18 Since the Hearings, the Debtors have timely delivered a Flash Report for the period from August 16 through August 31 and an Application Report for the July 19 through July 31 period. Except for a few inquiries about the information in the reports, which the Debtors promptly responded to, there were no other issues raised by the lenders. The record is complete and has been vetted. Argument I. The Final Cash Collateral Order Should Not Be Reconsidered at This Time. 4. Following the extensive Cash Collateral Hearings, the Court, after careful

consideration of an extensive record, overruled the Cash Collateral Objections and approved the Debtors use of Cash Collateral on a final basis19 (with an explicit understanding of Midlands non-consent to the Carve Out).20 Nonetheless and without offering anything new, Midland

15

See 8/31/10 Tr. at 14:20-15:9; Cash Collateral Motion at 5(e)(vi); Supplement to Cash Collateral Motion at 2(e)(vi); Cash Collateral Reply at p. 5, 12-13; Final Cash Collateral Order at 6(f). See 8/31/10 Tr. at 14:20-15:9; Cash Collateral Motion at 5(e)(i); Supplement to Cash Collateral Motion at 2(e)(i); Cash Collateral Reply at p. 5, 12-13; Final Cash Collateral Order at 6(a). See First Cook Declaration at 30-31. See id. at 4. See Final Cash Collateral Order; see also 9/2/2010 Tr. at 15:5-15. See 9/2/2010 Tr. at 17:15-18.

16

17 18 19 20

6
K&E 17729012

requests reconsideration. To be entitled to relief, pursuant to Bankruptcy Rule 9023 21 and Federal Rule of Civil Procedure 59,22 a party must demonstrate the need to correct a clear error or prevent manifest injustice.23 As Judge Bernstein noted, [t]he rule permitting reargument must be narrowly construed to avoid repetitive arguments on issues that the court has already fully considered. Further, the parties cannot advance new facts or arguments, and may not submit affidavits or new material.24 5. The Motion to Reconsider does not allege any new evidence or manifest error of

law or fact. In making its ruling, the Court highlighted Midlands right to return to Court if the parties encounter an unresolvable adequate protection issue. No such issue exists.25 The Motion to Reconsider takes no issue with the reporting the Debtors have provided to date, alleges no diminution in value, and makes no new argument as to why the Debtors Court-approved

21

See Fed. R. Bankr. P. 9023 (Except as provided in this rule and Rule 3008, Rule 59 F.R.Civ.P. applies in cases under the Code. A motion for a new trial or to alter or amend a judgment shall be filed, and a court may on its own order a new trial, no later than 14 days after entry of judgment.) See Fed. R. Civ. P. 59(a)(1) (The Court may, on motion, grant a new trial on all or some of the issues -- and to any party -- as follows: (A) after a jury trial, for any reason for which a new trial has heretofore been granted in an action at law in federal court; or (B) after a nonjury trial, for any reason for which a rehearing has heretofore been granted in a suit in equity in federal court.) Griffin Indus., Inc. v. Petrojam, Ltd., 72 F. Supp. 2d 365, 368 (S.D.N.Y. 1999); see also In re Interbank Funding Corp., 2007 WL 2080512, *2 (Bankr. S.D.N.Y. 2007) (denying a motion for reconsideration because movant failed to demonstrate any manifest errors or injustice, newly discovered evidence or change in controlling law); In re Adelphia Business Solutions, Inc., 2002 WL 31557665, *1 (Bankr. S.D.N.Y. 2002) (denying a motion for reargument for failure to identify factual matters or decisions that the court overlooked). Newly discovered evidence pursuant to Rule 59 is evidence which was in existence at the time of trial of which the moving party was excusably ignorant. In re Crozier Bros., Inc., 60 B.R. 683, 688 (Bankr. S.D.N.Y. 1986). In re Stylesite Marketing, Inc., 2001 WL 13212, *1 (Bankr. S.D.N.Y. 2001); see also In re Jamesway Corp., 203 B.R. 543, 546 (Bankr. S.D.N.Y. 1996) (This rule is calculated to [e]nsure the finality of decisions and to prevent the practice of a losing party examining a decision and then plugging the gaps of a lost motion with additional matters.) (quoting Carolco Pictures, Inc. v. Sirota, 700 F. Supp. 169, 170 (S.D.N.Y. 1988)). See 9/2/2010 Tr. at 15:16-20 (Should Midland, LNR or any of the other objectors encounter a specific problem with reporting or any other aspect of the proposed adequate protection that cannot be resolved between the parties, such party has the right to come to this court and seek immediate relief.)

22

23

24

25

7
K&E 17729012

adequate protection package is insufficient. In sum, the Motion to Reconsider fails to meet the requirements for reconsideration pursuant to Bankruptcy Rule 9023 and should be denied for this reason alone. II. The Carve Out Is Necessary, Customary, and Appropriate. 6. The Debtors can use Cash Collateral to fund the Carve Out if the secured lenders

interests in their collateral are adequately protected.26 As has been discussed at length in prior pleadings and as the Court has already found on both an interim and a final basis, the Debtors adequate protection package is sufficient, and no new facts have been brought to light to suggest otherwise. The Carve Out remains appropriate. 7. Carve outs are commonplace in large chapter 11 cases because they are

essentially a creature of necessity. As one court in this District has noted: [I]t has been the uniform practice in this Court . . . to insist on a carve out . . . in a reasonable amount designed to provide for payment of the fees of debtors and the committees counsel . . . in order to preserve the adversary system. Absent such protection, the collective rights and expectations of all parties-in-interest are sorely prejudiced . . . .Clauses providing for absolute control over fees . . . skew the carefully designed balance of debtor and creditor protections that Congress drew in crafting Chapter 11. In re Ames Dept. Stores, Inc., 115 B.R. 34, 38 (Bankr. S.D.N.Y. 1990).

26

A law review article cited by Midland in their Motion to Reconsider summarizes the law on this point well. The article states: It will be presumed that a carve out from a post-petition lien for professional fees and expenses, to be legitimate, must be accompanied by adequate protection for an unsecured claim, rendering resort to section 506(c) unnecessary. James S. Cole, The Carve Out from Liens and Priorities to Guarantee Payment of Professional Fees in Chapter 11, 1993 DET. C.L. REV. 1501, 1503 (1993); see also In re Las Torres Development, L.L.C., 413 B.R. 687, 698 (Bankr. S.D. Tex. 2009) (Here, the Lender has made it clear that it does not consent. However, because the Debtors have met their burden of proof in establishing that the Lender is adequately protected in La Placitas [debtor] case, this Court will authorize the use of cash collateral by La Placita for the reasonable and necessary administrative expenses incurred by La Placitas estate.).

8
K&E 17729012

Under the Bankruptcy Code and the Interim Compensation Order, 27 retained chapter 11 professionals are compensated months after their fees are incurred. Their requests for

compensation and reimbursement of expenses are subject to objection when they file monthly fee statements, interim fee applications, and final fee applications.28 And until the final fee applications are approved by the Court, any payments for fees and expenses are subject to disgorgement.29 As a result, for chapter 11 fiduciaries to obtain adequate representation, there must be comfort that secured creditors neither will, nor can, take control of an enterprises assets and leave the estate professionals fees unpaid. Carve outs address this problem. 8. This Carve Out is typical and addresses five distinct amounts that the Debtors

may incur, including: (a) fees of the Clerk of the Court and the United States Trustee for the Southern District of New York (the U.S. Trustee), pursuant to 28 U.S.C. 1930(a)fees that chapter 11 debtors are required to pay and that address concerns of the U.S. Trustee;30 (b) no more than $75,000 for fees and expenses incurred by a Chapter 7 trustee if the Debtors Chapter 11 Cases are convertedamounts included at the U.S. Trustees request to ensure a Chapter 7 trustee is able to address estate liquidation issues; 31 (c) Court-allowed fees and expenses incurred by the professionals retained by the Debtors and by any official committee appointed in the Chapter 11 Cases and unpaid before the delivery of a Carve Out Trigger Noticeamounts

27

See Order Authorizing the Establishment of Procedures for Interim Compensation and Reimbursement of Expenses for Professionals and Official Committee Members [Docket No. 189] (the Interim Compensation Order). See id. at 2(c), (f) (providing Midland and certain other lenders with the right to object to monthly fee applications and all parties in interest with the rights to object to interim and final fee applications). See id. at 2(g). See Final Cash Collateral Order at 7(a)(i). See id. at 7(a)(ii).

28

29 30 31

9
K&E 17729012

Midland would have the right to object to under section 330 of the Bankruptcy Code and other applicable law;32 (d) fees and expenses incurred by the professionals retained by the Debtors and by any official committee appointed in the Chapter 11 Cases, after the delivery of a Carve Out Trigger Notice, capped at $5,500,000 and only to the extent allowed by the Courtamounts necessary to wind-down the estates or otherwise address an appropriate restructuring;33 and (e) expenses of the members of the Committee, to the extent incurred in relation to their duties as Committee members.34 9. Funding estate professionals to guide the Debtors while they are under bankruptcy

protection is just part of the chapter 11 process, which affords Midland significant benefits. These include the opportunity to adjudicate the distribution on account of all of its collateral in one court pursuant to a chapter 11 plan and to improve the value of its collateral by, among other things, procuring DIP financing unavailable outside bankruptcy to complete necessary PIPs. Not surprisingly, Midlands own analysis confirms this. A report authored by Midland analyzing the value of its collateral under different scenarios stated that disposition outside of a chapter 11 process would result in lower valuations than a chapter 11 plan. 35
32 33 34 35

See id. at 7(a)(iii); see also Interim Compensation Order at 2(c), (f). See id. at 7(a)(iv). See id. at 7(a)(v). On August 23, 2010, Kevin Semon, a Midland vice-president, authored the Request for Approval on Action or Resolution of Asset (the Report), which was included as Exhibit 3 to the deposition of Kevin Semon (the Semon Deposition). The Report includes estimates of the net present values of its collateral (Value) under six separate scenarios chosen by Mr. Semon. See Report at p. 53. The first scenario assumed a plan of reorganization consistent with the term sheet attached to the PSA, which is irrelevant at this point. Scenarios 3, 4, and 5 assumed a disposition of the collateral outside of a chapter 11 plan, and the Value of the collateral in these scenarios was significant less than the Value of Scenario 2, which provides for disposition of the collateral through a chapter 11 plan. Scenario 6 estimated the market value of the collateral of $581 million without indicating a process by which the Value was realized. In further support of the concept that maintaining the Debtors enterprise preserves Midlands collateral value, Mr. Semon stated in his deposition and confirmed at the hearing that there is an enterprise value thats created by having a bulk of assets of similar type that are managed as a whole. Semon Deposition at p. 38.

10
K&E 17729012

10.

If Midland is going to be a part of this chapter 11 process and receive its benefits,

it has to share in the costs, which will be allocated not just to the Fixed Rate Loan but to all of the tranches of debt, as appropriate. Moreover, the Debtors have the right to maintain control of their business and administer their chapter 11 estates. 36 The professionals retained by the Debtors and by any official committee appointed in the Chapter 11 Cases, by assisting the Debtors and such committee as they navigate the restructuring process and helping to preserve the Debtors going concern value, play an instrumental role in the fulfillment of those duties. Accordingly, the Carve Outby ensuring adequate representation that does not favor any individual constituencypreserves the chapter 11 process, thereby assisting the Debtors and other parties in interest in maximizing value. 11. Reiterating an identical argument made twice before, Midland cites to Gen. Elec.

Credit Corp. v. Levin & Weintraub (In re Flagstaff Foodservice Corp.), 739 F.2d 73 (2d Cir. 1984), for the proposition that a secured creditors collateral cannot be surcharged under section 506(c) unless there is a direct benefit to the secured creditor.37 Flagstaff simply holds that if there is no plan confirmed in a chapter 11 case and the estates professionals do not have a carve out, undersecured creditors will be entitled to the entire value of the estate, leaving nothing to compensate professionals with administrative claims under section 503(b). 38 Importantly,

36

See In re Ames Dept. Stores, Inc., 115 B.R. 34, 38 (Bankr. S.D.N.Y. 1990) (noting that bankruptcy courts recognize that debtors-in-possession generally enjoy little negotiating power with a proposed lender, particularly where the lender has a pre-petition lien on cash collateral . . . [but] they permit debtors-inpossession to exercise their basic business judgment consistent with their fiduciary duties.). See In re Flagstaff Foodservice Corp. (Flagstaff I), 739 F.2d 73 (2d Cir. 1984); Gen. Elec. Credit Corp. v. Peltz (In re Flagstaff Foodservice Corp.) (Flagstaff II), 762 F.2d 10 (2d Cir. 1985); see also Initial Midland Objection at 24; Second Midland Objection at 21, 29. Flagstaff I is really a warning to professionals to require a carve out at the outset of the restructuring or else face the consequence that a bankruptcy court may not or cannot impose such a carve out after the fact. If anything, Flagstaff I supports the fact that the Carve Out is appropriate to ensure that their advisors will be compensated. (continued on next page)

37

38

11
K&E 17729012

nothing in that case explicitly rejected the concept of a nonconsensual carve out.39 Further, in Sec. Leasing Partners v. ProAlert, LLC (In re ProAlert, LLC), the Ninth Circuit Bankruptcy Appellate Panel affirmed a lower court holding that the ongoing payment of professional fees from cash collateral may be allowed under section 363(c)(2) of the Bankruptcy Code without satisfying the benefit to the creditor test under section 506(c) of the Bankruptcy Code.40 In ProAlert, the panel ultimately determined that non-consensual use of cash collateral to pay estate professionals fees and expenses is appropriate if the secured lenders are adequately protected.41 ProAlert recognized that sections 363 and 506 serve distinct purposes and apply in different circumstances.42 Significantly, the panel also recognized that allowing the secured creditor to control the carve out gives them inappropriate control over the entire bankruptcy proceeding.43 12. In sum, the Debtors are entitled to the benefits afforded debtors-in-possession

during the chapter 11 process, and Midland should not be permitted to unilaterally determine

Otherwise, if a secured lender forecloses on assets, the estates professionals are at risk of not being compensated. The Debtors take heed of that warning and have requested an appropriate carve out.
39 40

See Flagstaff I, 739 F.2d at 76. 314 B.R. 436 (9th Cir. B.A.P. 2004); see also In re Griswold Bldg., LLC, 420 B.R. 666, 700 (Bankr. E.D. Mich. 2009) ([i]f there is adequate protection under 363, then the debtor may use the cash collateral for expenses not directly related to the operation and maintenance of the apartment project, e.g., administration expenses, because in that situation, the secured party has no right to object. If it is adequately protected, its security interest is not jeopardized by the payment of such expenditures.) (citations omitted). See 314 B.R. at 442. Id. at 441 (The requirement of adequate protection set forth in 363 balances these divergent interests by allowing the debtor to use cash collateral while ensuring that the creditor will ultimately receive the full value of that collateral.). Id. at 443 (As counsel for SLP recognized at oral argument, adoption of its position would give a secured creditor absolute control over the use of cash collateral in most cases, because it would be the rare case where a debtor in possession could satisfy 506(c)'s onerous burden of proving that each and every expenditure, whether for operational or nonoperational expenses, directly benefitted the secured creditor. Thus, adoption of SLP's position would make a successful reorganization subject to the good will of a debtor's secured creditors. Allowing a secured creditor such control would shift the balance carefully struck by Congress and be unduly cumbersome to implement.).

41 42

43

12
K&E 17729012

which administrative expenses are paid so long as their secured interests are being adequately protected. III. The Debtors Support the Continued Exclusion of Avoidance Actions Proceeds from the Scope of 507(b) Claims so Long as the Courts Ruling on Adequate Protection Remains Unchanged. 13. In its ruling on September 2, the Court ruled in favor of the Creditors

Committees position to exclude Avoidance Actions and their proceeds from any 507(b) Claims when the Court stated: I agree with the [Creditors] [C]ommittees position and decline to grant the superpriority claims. 9/2/2010 Tr. at 14:24-25. The Debtors continue to support the exclusion of Avoidance Actions and their proceeds from the scope of 507(b) Claims if it does not alter the Courts determination that the Debtors are providing adequate protection by the terms of the Final Cash Collateral Order. 14. Additionally, Midland argues that paragraph 21 of the Final Cash Collateral

Order, which states [n]othing herein shall impair or modify application of section 507(b) of the Bankruptcy Code in the event that the adequate protection provided to the Representatives hereunder is insufficient, conflicts with the language in paragraph 6(c), which excludes Avoidance Actions and their proceeds from the scope of 507(b) Claims. To the extent there appears to be a conflict, the provisions of paragraph 6(c) clearly govern. After hearing argument and reviewing the briefs on the issue, language was added to paragraph 6(c) at the suggestion of the Court to make clear that Avoidance Actions and their proceeds are exempted from 507(b) Claims.44 The inclusion of that provision has to be given force notwithstanding any uncertainty or conflict. If uncertainty remains, an order regarding the Motion to Reconsider can provide further clarity.
44

See 9/2/2010 Tr. at 16:14-20.

13
K&E 17729012

Conclusion 15. The Motion to Reconsider does not meet the standard for reconsideration as no

newly discovered evidence, injustice, or errors are demonstrated. The Carve Out issue has been decided, and the Carve Out is an appropriate and necessary part of the chapter 11 process. Excluding Avoidance Actions and their proceeds from the scope of 507(b) Claims remains appropriate for reasons previously argued. For these reasons and as set forth herein, the Debtors respectfully assert that the Motion to Reconsider should be denied.

14
K&E 17729012

WHEREFORE, the Debtors respectfully request that the Court deny the Motion to Reconsider in its entirety and grant such other further relief as is just and proper. New York, New York Dated: September 24, 2010 /s/ Paul M. Basta James H.M. Sprayregen, P.C. Paul M. Basta Jennifer L. Marines KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, New York 10022-4611 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 and Anup Sathy, P.C. (admitted pro hac vice) Marc J. Carmel (admitted pro hac vice) KIRKLAND & ELLIS LLP 300 North LaSalle Street Chicago, Illinois 60654-3406 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel to the Debtors and Debtors in Possession

15
K&E 17729012