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DEWEY & LEBOEUF LLP 1301 Avenue of the Americas New York, New York 10019 Telephone: 212.259.8000 Facsimile: 212.259.6333 Martin J. Bienenstock, Esq. Irena M. Goldstein, Esq. Timothy Q. Karcher, Esq.

Attorneys for Ad Hoc Committee of Preferred Shareholders

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

In re:

INNKEEPERS USA TRUST, et al.,

Debtors.

AD HOC COMMITTEE OF PREFERRED SHAREHOLDERS,

-against-

Movant,

INNKEEPERS USA TRUST, et al.,

Respondents.

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Chapter 11

Case No. 10 – 13800 (SCC)

(Jointly Administered)

REPLY OF AD HOC COMMITTEE OF PREFERRED SHAREHOLDERS TO OBJECTIONS TO MOTION FOR ORDER DIRECTING APPOINTMENT OF STATUTORY COMMITTEE OF PREFERRED SHAREHOLDERS PURSUANT TO BANKRUPTCY CODE SECTION 1102(a)(2)

TO THE HONORABLE SHELLEY C. CHAPMAN UNITED STATES BANKRUPTCY JUDGE:

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The Ad Hoc Committee of Preferred Shareholders (the “Ad Hoc Committee”) 1 in

the above-captioned chapter 11 cases of Innkeepers USA Trust (“Innkeepers”), its parent

corporation Grand Prix Holdings, LLC (“Grand Prix”) and their direct and indirect title

11 debtor subsidiaries (collectively, with Innkeepers and Grand Prix, the “Debtors”), in

further support of its Motion for an Order Directing Appointment of a Statutory

Committee of Preferred Shareholders Pursuant to Bankruptcy Code Section 1102(a)(2),

dated September 13, 2010, [Docket No. 435] (the “Motion”), hereby replies to the

objections and responses thereto filed by the following objectors (the “Objectors”) United

States Trustee (the “U.S. Trustee”) [Docket No. 453] (the “U.S. Trustee’s Objection”),

Midland Loan Services, Inc. (“Midland”) [Docket No. 477] (the “Midland Objection”),

C-III Asset Management, LLC (“C-III”) [Docket No. 483] (the “C-III Response”),

CWCapital Asset Management LLC (“CWCapital”) [Docket No. 484] (the “CWCapital

Response”), Lehman ALI Inc. (“Lehman”) [Docket No. 490] (the “Lehman Objection”),

Wells Fargo Bank, N.A. (“Wells Fargo”) [Docket No. 492] (the “Wells Fargo

Objection”), the Official Committee of Unsecured Creditors (the “UCC”) [Docket No.

493] (the “UCC Objection”), and the Debtors [Docket No. 497] (the “Debtors’

Objection”, together with the U.S. Trustee’s Objection, the Midland Objection, the C-III

Response, the CWCapital Response, the Lehman Objection, the Wells Fargo Objection,

and the UCC Objection, the “Objections”), and respectfully represents as follows:

SUMMARY OF ARGUMENT

1. The preferred shareholders’ interest in these cases appears to be $55

million, and potentially more: (a) $7.4 million is sitting in a bank account controlled by

1 The following holders of approximately 24.0% of Innkeepers’ 8% Series C Cumulative Preferred Shares comprise the Ad Hoc Committee: Brencourt Advisors, LLC; Esopus Creek Advisors, LLC; and Plainfield Special Situations Master Fund II Limited.

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Innkeepers above the corporate level where the blanket mortgagees and trade creditors

hold claims, (b) as set forth in the Declaration of Anders Maxwell (the “Maxwell

Declaration”) in support of the Motion, approximately $47.5 million in implied equity

value exists in the Unencumbered Debtors, and (c) the value of controlling all the hotels

having mortgage debt written down to their collateral values. Significantly, none of the

Debtors’ letters to the United States trustee opposing a preferred shareholders’ committee

disclosed the existence of the $7.4 million bank account.

2. Currently, only three (3) preferred shareholders have appeared in these

cases in the following circumstances: (a) the United States trustee declined to appoint a

statutory preferred shareholders’ committee, (b) the Debtor pronounced the shareholders

out of the money in its proposed chapter 11 plan, (c) the Debtor attempted to lock itself

into a plan that extinguished all preferred shareholders while providing the sole common

shareholder the right to purchase half the reorganized debtor, and (d) the statutory

creditors’ committee filed a ‘no-objection’ to the debtors’ motion to lock itself into its

proposed plan limiting all unsecured claims to a distribution of $500,000 while

extinguishing all shares.

3. Notwithstanding the undisputable record showing the Debtors, the

Debtors’ management, the Debtors’ owner, and the creditors’ committee, all support

extinguishing the preferred shareholders for nothing, the United States trustee contends

the preferred shareholders are adequately represented. Why? Because when the

preferred shareholders were at peril of being extinguished with no representation, three

(3) lone holders retained a law firm to defend against sudden death. The moral is this: if

you lack any representation, retaining an attorney to save yourself from extinction

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disqualifies you from being entitled to a statutory committee to attain adequate

representation. Put differently, if you need representation, you better not defend yourself

before months go by while the United States trustee and the court rule on your motion for

a statutory committee.

4. Notably, the Debtors and the statutory creditors’ committee have endorsed

the United States trustee’s position. So, let’s paint the picture and policy the United

States trustee is advocating: (a) it’s okay for estate resources to be used by the Debtors’

advisors to extinguish preferred shareholders while providing the common shareholder

the right to purchase half the reorganized debtor at an unsubstantiated value, (b) it’s okay

for estate resources to fund the statutory creditors’ committee to agree at the outset of the

case to limit distributions to unsecured claims to $500,000 while the committee’s

advisors will cost millions (why not just suspend further activity by the statutory

creditors’ committee and give creditors the fees saved in addition to the $500,000?), (c)

it’s okay for the estate to pay Lehman’s fees for supporting a plan that gives Lehman

more than it could receive if it enforced all its rights, but (d) it’s not okay for the estate to

pay the fees of a preferred shareholders’ committee to serve as the only entity in the case

maximizing value for unsecured claimholders and shareholders. Translation: it appears

the objectors support use of estate resources for every purpose other than to carry out

valid public policies.

ARGUMENT

A. Preferred Shareholders Have No Adequate Representation in these Chapter 11 Cases

5. The Objectors contend preferred shareholders have adequate

representation in these chapter 11 cases because the Ad Hoc Committee (i) has retained

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“well-respected and experienced restructuring counsel,” (ii) has “actively participated” in

“several court hearings” so far, and (iii) can rely upon the board of directors,

management, UCC and the secured lenders to protect the interests of preferred

shareholders. See Debtors’ Objection at 4-5; U.S. Trustee’s Objection at 9-10; UCC

Objection at 13-15. The Objectors’ flattery gets them nowhere and does not camouflage

their arguments' lack of merit. The Objectors’ reference to the UCC is a smoking gun.

As a matter of law, the UCC’s constituency is the universe of unsecured claimholders.

The UCC would violate its statutory and fiduciary duties by holding out for one penny

for preferred shareholders. The suggestion by the Objectors that the existence of the

UCC provides any representation of preferred shareholders demonstrates the Objectors

cannot show the class of preferred shareholders has any representation, let alone adequate

representation. Moreover, the facts of this case recited above prove the absence of any

representation. The Court found that the Board 2 and management “caved” in carrying out

their duties by cutting a sweetheart deal for Apollo 3 (that wiped out equity). Indeed, if

Lehman had prosecuted all its rights, it could at best have acquired twenty (20)

properties, but was gifted ownership and control of another fifty-two (52) properties and

relieved of a claim carrying a 2.25% interest rate to boot! The UCC was willing to

support a chapter 11 plan that capped unsecured recoveries at $500,000 (and wiped out

equity). The secured creditors want to propose a plan that gives control of the Debtors to

the secured creditors (and wipes out equity). How can any of these parties say that equity

2 Capitalized terms used herein, but not defined, shall have the meaning or meanings ascribed thereto in the Motion.

3 See September 1 Transcript at 420, lines 2-10 (“The testimony of Mr. Beilinson [the Debtor’s Chief Restructuring Officer] on these points reveals Lehman wielded great power in the negotiations and Mr. Beilinson seems to have succumbed to virtually all of their demands.”).

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is adequately represented when there are millions of dollars in cash not subject to these

creditors’ claims and there appears to be residual equity value in other properties not

subject to blanket mortgages?

6. The Objectors essentially ask this Court to penalize preferred shareholders

who have protected their rights by hiring experienced counsel on their own dime. The

Objectors propose a Catch-22 policy: Parties seeking appointment of a statutory

committee must refrain from hiring competent counsel to ensure that no party in interest

accuses them of being adequately represented, even though the risk of that policy is that

the parties’ rights will be extinguished. Put another way, is the Congressional mandate of

Bankruptcy Code section 1102(a)(2) carried out by a ruling that interest holders who

retain attorneys to protect themselves from extinguishment before a committee motion is

granted, are thereby disqualified from relief under section 1102(a)(2)? Absolutely not.

No single policy can more blatantly run afoul of the well-established Congressional intent

to protect shareholders in chapter 11 cases, which is set forth in the legislative history of

section 1102:

[I]t should be emphasized that investor protection is most critical when the company in which the public invested is in financial difficulties and is forced to seek relief under the bankruptcy laws. A fair and equitable reorganization, as provided in the bill, is literally the last chance to conserve for them values that corporate financial stress or insolvency have placed in jeopardy. As public investors are likely to be junior or subordinated to creditors or debtholders, it is essential for them to have legislative assurance that their interests will be protected. Such assurance should not be left to a plan negotiated by a debtor in distress and senior or institutional debtors who will have their own best interest to look after.

S. Rep. No. 989, 95th Cong., 2d Sess. 10 (1978).

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7.

The Objections cite the Ad Hoc Committee’s filing of motions,

appearance at court hearings, and taking of discovery to evidence the “active

participation” of preferred shareholders in these cases prior to the appointment of a

statutory committee. The fact that the Ad Hoc Committee had to take all of these steps in

just the first two months of these cases illuminates the critical role preferred shareholders

will play in the negotiation of a plan over the weeks and months ahead. The Debtors

concede as much and have stated that they “fully expect to build on their recent

discussions with the Preferred Shareholder Group to make progress towards a consensual

restructuring that maximizes value for all of the Debtors’ major stakeholders.” See

Debtors’ Objection at 15. The Debtors fail to explain why their negotiations with

creditors not objecting to a capped payment of $500,000 should be paid for by the estate,

while their negotiations with preferred shareholders of entities the creditors have no

claims against must be paid for by 3 lone preferred shareholders.

8. Significantly, many of the cases upon which the Objections rely argue for

the appointment of a statutory committee in connection with plan negotiations and

hearings. 4 Notably, the legislative history also supports this envisioned role of a statutory

equity committee in a chapter 11 case: “[E]quity security holders’

will be

the primary negotiating bodies for the formulation of the plan of

They

will also provide supervision of the debtor in possession and of the trustee, and will

4 See e.g., In re Beker Indus., 55 B.R. 945, 949 (Bankr. S.D.N.Y.) (appointing statutory committees

where the case “[requires] active participation

Johns-Manville Corp., 68 B.R. 155, 161 (S.D.N.Y. 1986) (refusing to appoint a statutory committee because the application came so late in the case, but noting that “[s]ince one of [a statutory committee’s] most important functions is to negotiate a reorganization plan, a committee will most effectively exercise its responsibilities at the beginning of a reorganization, prior to the formulation of

a plan.”); In re Saxon Indus., 39 B.R. 945 (Bankr. S.D.N.Y. 1984) (denying reconstitution of a statutory committee already appointed by the U.S. Trustee, but emphasizing “the primary function of committees in Chapter 11 cases is participation in the formulation of a plan of reorganization.”).

shareholders to protect their interests.”); In re

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protect their constituents’ interests.” H.R. Rep. No. 595, 95th Cong., 1st Sess. 401

(1977). The appointment of a statutory preferred shareholders’ committee in these cases

will undoubtedly ensure that preferred shareholders have a seat at the plan negotiating

table over the critical weeks and months ahead.

9. The Objections also overlook a crucial detail that courts unanimously

consider in the evaluation of statutory committee appointment: the members of the Ad

Hoc Committee do not have a fiduciary duty to the preferred shareholder class. Courts

have recognized that “[i]t is equally important to have a committee that does not merely

represent only the interests of those who invest in distressed debt or equity. An official

equity committee would take on a fiduciary duty to all current shareholders and its

compensation would be subject to the approval of the Court.” In re Oneida Ltd., No. 06-

10489, 2006 WL 1288576, at *3 (Bankr. S.D.N.Y. May 4, 2006).

10. The Objectors seek to establish a perverse “needs test” for the

appointment of a statutory committee. Only unsophisticated and unfunded investors may

apply. According to the Objectors, the large investor, with the most relevant experience,

should not be allowed to sit on the committee because it has the wherewithal to fund its

own fight. The Court should flatly reject such an approach based on the jurisprudence in

this district. See Beker, 55 B.R. at 949 (rejecting opposition to statutory committee

appointment by noting “[t]he position that some members of the class may have

resources sufficient to protect their interests is of little significance, in our

They do not have the fiduciary duty to represent their fellow security holders.”); Johns-

Manville, 68 B.R. at 159 (“Although some shareholders might have the resources to

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protect their own interests, the shareholders—in contrast to official committee

members—do not have a fiduciary duty to represent the interests of other shareholders.”).

11. The Objectors’ position also ignores purposefully financial reality as the

Objectors well know. That a holder of preferred shares can afford to retain a law firm,

has no bearing whatsoever on whether it makes any financial sense for a minority of

shareholders to bear the cost of the representation of the entire class of preferred

shareholders. Moreover, the speculative prospect of reimbursement later is no answer.

12. The appointment of a statutory preferred shareholders’ committee will

afford all preferred shareholders, not just the three holders that comprise the Ad Hoc

Committee, with the necessary protection against “the natural tendency of a debtor in

distress to pacify large creditors, with whom the debtor would expect to do business, at

the expenses of small and scattered investors.” S. Rep. No. 989, 95th Cong., 2d Sess. 10

(1978).

13. Absent a statutory preferred shareholders’ committee, preferred

shareholders cannot expect any representation, let alone adequate representation, from

these parties. The record of this case makes that doubly clear.

14. First, the Debtors’ management and Board have already tried to extinguish

preferred equity while providing the right to purchase half the reorganized debtor’s equity

to the common shareholder. By their own admission, “[t]he Debtors still believe,

nonetheless, that an enterprise-level restructuring, as opposed to a piecemeal dismantling

of the Debtors’ business, will maximize value for distribution to their stakeholders based

on their respective

.” Debtors’ Objection at 13. Without a preferred

shareholders committee protecting the rights of preferred shareholders, the Debtors will

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try to steamroll the stockholders once again, and every other party-in-interest is only

concerned with maximizing its return even at the expense of the preferred shareholders.

Indeed, the Debtors’ initial plan provided Lehman ownership of the Unencumbered

Debtors that may provide preferred shareholders with a substantial recovery.

15. The Debtors and Lehman have been predictably contrite. The Debtors

argue that they “do not believe that the mere fact that they sought to assume the PSA

demonstrates the Debtors’ inability to act in the best interests of their estates for the

benefit of all stakeholders for all time to come.” Debtors’ Objection at 13. Likewise,

Lehman argues that the “the fact that preferred shareholders may not have been directly

represented in prepetition negotiations is irrelevant” because the “litany of actions by the

Debtors that purportedly demonstrate the absence of representation of preferred

took place prior to the bankruptcy cases.” See Lehman Objection at 3.

Lehman’s argument ignores what the Debtors did postpetition. It ignores that the Debtors

opposition to the preferred shareholders' committee never mentioned to the U.S. Trustee

the bank account holding $7.4 million. It ignores that Apollo’s chief executive officer

and other Apollo officials dominate the Debtors’ Board and Apollo’s ownership

continues to provide it total control of all decisions. 5 The fact is that the Debtors and

5 Notably, the Debtors cite National R.V. Holdings, Inc., 390 B.R. 690 (Bankr. C.D. Cal.) as an example of a case where a bankruptcy court (albeit one well outside this District) declined to appoint a statutory equity committee. The Debtors fail to mention that the bankruptcy court emphasized that it reached its decision because “there are no facts to suggest that management is not aligned with non-insider equity holders,” and that “[t]he Ad Hoc Equity Committee has not presented any evidence that the Debtors’ officers or directors have either breached their fiduciary duties to the equity security holders or are incapable of properly discharging their fiduciary duties in these jointly administered cases.” Nat’l R.V. Holdings, 390 B.R. at 699. This case is clearly inapposite to the facts before this Court, and if anything, militates in favor of the appointment of a statutory preferred shareholders’ committee on the finding (as this Court did on September 1, 2010) of violations of fiduciary duties alone. Similarly, the UCC cites In re Edison Bros., 1996 WL 534853 (D. Del. Sept. 17, 1996), where the United States District Court for the District of Delaware affirmed a bankruptcy court’s denial of the appointment of an official equity committee. The District Court accepted the bankruptcy court’s finding that “there was [no] inherent conflict of loyalty between insider shareholders and non-insiders,” “there were no

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Lehman tried to wipe out preferred equity in a deal reminiscent of the evils exposed by

bankruptcy reformers in the 1930’s.

16. Despite the U.S. Trustee’s unsupported assurance that “officers and

managing employees can be depended upon to carry out the fiduciary responsibilities of a

trustee,” the Ad Hoc Committee believes the Debtors’ actions thus far in the case speak

louder than words. See U.S. Trustee’s Objection at 9 (quoting Commodity Futures

Trading Commission v. Weintraub, 471 U.S. 343, 355 (1985)). The Board approved a

Plan Support Agreement that extinguished the interests of preferred shareholders in favor

of a single controlling common shareholder—Apollo—receiving an exclusive right to

purchase half the reorganized debtors without any market testing or public auction. The

Debtors’ Chief Restructuring Officer, Mr. Beilinson, testified that Apollo has the power

to replace all of the directors, and in essence, controls the Board. See September 1

Transcript at p. 261, lines 23-25. Apollo hand-picked Mr. Beilinson to first serve on the

Debtors’ Board (on which Apollo’s CEO also serves), and later the board of Apollo’s real

estate investment trust. Put simply, there is absolutely no way current management or the

Board was looking out for the interests of anyone but themselves and Apollo. In addition

to the lack of fairness to date, the Debtors have shrouded the cases with the appearance of

lack of fairness. As aforesaid, in all their correspondence with the U.S. Trustee claiming

that the equity had no value, the Debtors, the Board, and management never told the U.S.

Trustee about $7.4 million in cash sitting at Innkeepers USA Limited Partnership

(“Innkeepers USA LP”). This $7.4 million is sitting in an account controlled by

Innkeepers USA LP -- no other party has control over the account. 6

17. Nor can the preferred shareholders expect the UCC to protect its interests.

Courts have long recognized the divergence of interests between shareholders and

unsecured claimholders in chapter 11 cases. 7 And for good reason. The UCC in these

cases has already shown that it stands (literally) at odds with preferred shareholders: by

its own admission, at the September 1, 2010 hearing, the UCC was “standing up with

what parties believe to be the bad guys [the Debtors, Lehman, and Apollo] 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.” See September 1 Transcript at p. 94, lines 13-18. When read with these

words in mind, the UCC’s statement in its Objection that it “did not support the PSA

exposes its lack of credibility. The UCC filed a pleading providing it did not object. 8

The UCC participated at the trial on the Debtors’ side. The UCC argued in support of the

Debtors’ motion. The UCC has no concern whatsoever for preferred shareholders. It

owes no duty to them and showed its willingness to cap distributions at $500,000 for

6 Revised Article 9 of the Uniform Commercial Code requires control over a bank account in order to have a security interest in such account.

7 See Pilgrim’s Pride Corp., 407 B.R. 211, 217, n. 17 (Bankr. N.D. Tex. 2009) (“[W]hen it comes to valuation and determination of future capital structure for plan purposes, their agendas are likely to be very much at odds.”); In re Saxon Indus., 29 B.R. 320, 321 (Bankr. S.D.N.Y. 1983) (stating that “the two committees are separate and distinct entities with the members of the unsecured creditors and equity creditors classes possessing variant priorities and interests with respect to their relationship with the debtor”); but see In re Williams Commc’ns Group, 281 B.R. 216, (denying the appointment of a statutory equity committee precisely because the UCC “has sufficiently aligned or parallel interest with the Shareholders to preclude the need for an additional committee.”).

8 See Reservation of Rights of the Official Committee of Unsecured Creditors in Response to Debtors’ Plan Support Agreement Motion, dated August 23, 2010 [Docket No. 264], at ¶ 17 (“The Committee is rightfully concerned the termination of the PSA could pose substantial risk to the survivability of the Debtors’ business. For this reason, the Committee does not oppose the Debtors’ motion.” (emphasis supplied)).

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unsecured claims. Clearly, this is akin to a trade committee that is more concerned with

being trade vendors tomorrow, than getting paid for yesterday’s bills. That is the trade’s

prerogative, but that objective does nothing for preferred shareholders.

18. Like the Debtors’ Board and management, and the UCC, the secured

claimholders and mortgagees in these cases do not represent the interests of preferred

shareholders either.

19. Tellingly, all of these constituencies—the Debtors’ Board and

management, the UCC, and the mortgagees—oppose the appointment of a statutory

preferred shareholders’ in these cases. Preferred shareholders clearly cannot receive

adequate representation here without their own statutory committee when every single

constituency opposes them and their opposition is funded by the estate. The Debtors’ and

UCC’s professionals are funded by the estate pursuant to the Bankruptcy Code, and the

mortgage servicers are funded by the estate by virtue of the value of the collateral which

goes to reimburse the mortgage servicers first.

20. Courts have appointed statutory equity committees solely to preserve the

appearance of integrity and fairness in the bankruptcy process, even after finding that

shareholders were “out of the money” and would receive no distributions, let alone

meaningful distributions, under the plan. In Amresco, Inc., Case No. 01-35327 (N.D.

Tex. 2001), the Bankruptcy Court appointed a statutory equity committee after finding

the debtor’s management could not adequately represent shareholders due to allegations

of prepetiton impropriety, emphasizing that “a bankruptcy case is about more than the

return to creditors and the reorganization or sale of the debtor. The bankruptcy case is

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also about the fair and equitable adjustment or elimination of claims and equity” 9 The

Amresco court further noted:

The debtor and the unsecured creditors’ committee contend that equity is out of the money even though Amresco had reported value until it filed its schedules. They argue that there’s nothing for equity to represent. But under the facts and circumstances of this case, acceptance of that position as a legitimate result of a bankruptcy process compels that equity have a formal statutory voice in assessing the correctness and appropriateness of that result. The integrity of the process dictates that the estate spend reasonable costs for equity to formally have a negotiating voice if this case could result in the elimination of hundreds of thousands of dollars in equity investments in the debtor even with the pre- petition disclosure of value. The process must not only be fair, it must seem fair. And to meet that standard under the facts and circumstances of this case, the estate must incur some reasonable administrative expenses.

Amresco Transcript, at 12-13. Does this sound familiar? The facts before this Court bear

a striking resemblance to those in Amresco, except there is evidence of real value for

preferred shareholders here. Like the Court it Amresco, this Court should uphold the

appearance of fairness for shareholders in chapter 11 cases, and ensure that they receive

adequate representation through the appointment of a statutory committee of preferred

shareholders.

B. The Debtors Are Far From “Hopelessly Insolvent” and There Is Sufficient Equity Value in the Estates to Justify Appointment of a Statutory Committee

21. The financial profit and loss statements for the Unencumbered Debtors for

the last 12 months, ending June 30, 2010, produced by the Debtors in the Ad Hoc

Committee’s discovery request, 10 indicate that six (6) Unencumbered Debtors are

9 In re Amresco, Transcript of September 7, 2001 Hearing (hereinafter “Amresco Transcript”) at 12. A copy of the Amresco Transcript is annexed hereto as Exhibit A.

10 On August 20, 2010, the Ad Hoc Committee sent a discovery request letter to counsel to the Debtors requesting “Any valuation reports, on a consolidated basis and on an individual basis for each of the

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generating positive earnings before interest, taxes, depreciation, and amortization

(“EBITDA”).

22. On September 23, 2010, the Ad Hoc Committee submitted the Maxwell

Declaration and a supporting presentation, which was prepared by Anders Maxwell of

Peter J. Solomon Company (“PJSC”). The initial assessment in the Maxwell Declaration

is based on financial performance from the last 12 months (“LTM”). The financial

performance is based on EBITDA.

23. In its report to Midland on April 28, 2010 (the “Midland Presentation”),

Moelis referenced eleven (11) benchmark lodging companies (the “Moelis Benchmark

Properties”), which Moelis deemed relevant in benchmarking the Debtor’s property-level

operating performance. PJSC used these Moelis Benchmark Properties to determine a

multiple by which to multiply LTM EBITDA for the Unencumbered Debtors to come up

with an implied equity value. Using the multiple derived from the Moelis Benchmark

Properties, PJSC determined that the implied equity value for four (4) of the

Unencumbered Debtors is $47.5 million. 11

24. In their attempt to demonstrate that the Debtors are hopelessly insolvent

with respect to the seven Unencumbered Debtors, the Debtors bundle them together and

proclaim their combined debt to be $230 million dollars “in the aggregate.” See Debtors

Objection at p.6. (emphasis supplied). The Debtors’ argument on this point is as

Seven Properties.” A copy of the discovery request letter is annexed hereto as Exhibit B. To date, the Debtors have not produced any such valuation report. As discussed below, either the Ad Hoc Committee’s advisors, PJSC, are the only party to perform an analysis of the equity value in the Unencumbered Debtors on an individual basis, or that information was deliberately withheld.

11 PJSC used a 16x multiple, which it derived from the 11 properties Moelis used as benchmark properties when the Debtors made presentations to Midland. Applying the 16x multiple to just four of the Unencumbered Debtors suggests a value of these four assets of $171.4 million, net of the $123.9 million in claims in respect of just these assets, yielding an implied residual equity value in these four assets of $47.5 million. The four properties are: Washington DC Doubletree, Tyson’s Corner Residence Inn, San Antonio Homewood Suites and Mission Valley Residence Inn.

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simplistic as it is transparent. The debts of the individual Unencumbered Debtors are not

aggregated for the purpose of determining equity value. The equity value from each

Unencumbered Debtor gets pooled at Innkeepers USA LP, but Innkeepers USA LP is not

responsible for any shortfall on the mortgages. 12

25. In other words, if any of the properties held by the Unencumbered Debtors

are worth less than the mortgage, the mortgage holder for such property will have an

unsecured claim against the individual debtor, and not have a claim against the parent

Innkeepers USA LP. The equity value moves up – but the unsatisfied claims remain at

the property level debtor.

26. The Debtors and others also argue that there is simply not sufficient

equity value to justify appointment of a statutory equity committee because any equity in

any of the Debtors (including more than $7.4 million in a bank account controlled by

Innkeepers USA LP) should be preserved to pay the administrative costs of all the

Debtors’ chapter 11 cases, including the costs of the professionals. The Debtors propose,

in essence, using equity in some of the Debtors to prop up the Debtors without equity. If

there really is no value in certain of the property level Debtors, then the Debtors should

walk away from the valueless properties below Innkeepers USA LP and upstream the

12 According to the Innkeepers USA LP schedules, the liquidated unsecured claims of Innkeepers USA LP amount to a grand total of $208,795.98. The pertinent pages of the Inkeepers USA LP Schedules are attached hereto as Exhibit C. There are unliquidated and contingent claims listed in the schedules, including Innkeepers USA LP’s obligation under a guarantee of certain obligations in connection with the Genwood Loan. That guarantee, however, as made clear by the Debtors’ equity committee objection, is not of the entire $32 million obligation but instead of limited obligations. The Debtors’ schedules also list a secured claim of $25,918,903.29 owing to LNR Partners, Inc. in connection with the $25.6 million Merrill Lynch CMBS Mortgage Loan. Because the Debtors do not make reference in any other document filed with this Court that Innkeepers USA LP is obligated on the $25.6 million CMBS loan (including the objection to the equity committee motion, the first day declaration, and the cash collateral order), the Ad Hoc Committee believes that there is a mistake in the schedules of liabilities. The Ad Hoc Committee’s advisors have placed a value of $36.9 million on the Double Tree Guest Suites (Washington, D.C.), the borrower under the $25.6 million CMBS loan.

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$7.4 million for their shareholders. 13 There is no valid reason why the preferred holders’

equity should be used to fund unprofitable debtors unless doing so creates more equity

for the preferred holders. The Debtors are ignoring their fiduciary duties if they propose

otherwise. That the Debtors must not use money available to preferred shareholders to

fund any asset having no value for shareholders is as obvious as the Debtors’ duty not to

throw money in the garbage!

27. At pages 9 and 10 of their Objection, the Debtors (a) flag a $270 million

liquidation preference held by holders of Class C Preferred Limited Partnership Units at

Innkeepers USA LP, and (b) assert that Innkeepers USA LP “may ultimately be

responsible” for administrative claims of the Debtors’ advisors. Significantly, the Class

C Preferred Limited Partnership Units are all held by Innkeepers Financial Corporation 14 ,

which is wholly-owned by its corporate parent, Innkeepers. See Debtors’ Objection at 9.

The bottom line is that those preferred shares are not owned by outsiders entitled to take

$270 million of value from the preferred shareholders at Innkeepers. Equally significant

is the fact that Innkeepers USA LP is not allowed to incur administrative claims for

advisors other than “necessary costs and expenses of preserving the estate,” pursuant to

13 A copy of the Debtors’ schedules indicating the $7.4 million in cash is annexed hereto as Exhibit C. The Debtors never informed the Court or the U.S. Trustee of the substantial cash in the Debtors’ control at the hearing on the Plan Support Agreement or in their correspondence with the US Trustee regarding the request for statutory recognition of a preferred shareholders’ committee. The Schedule was filed on or about September 1, 2010. Before the Debtors make any distribution to Lehman or anyone else from the account holding $7.4 million, the Debtors must establish whether anyone other than Innkeepers USA Limited Partnership has control of the account, what interest anyone has in the funds, other than as a potential unsecured claimholder. Although such documents have been requested by the Ad Hoc Committee, the Debtors have not provided copies of any security agreements or other documents granting a security interest in the funds. It is unlikely that such documents exist – if they did exist, the Debtors would have produced them.

14 Innkeepers Financial Corporation is wholly owned by Innkeepers (in which the members of the Ad Hoc Committee own preferred shares), and according to its schedules of liabilities has NO liquidated unsecured claims and lists only potential contingent claims under a shared services agreement and franchise agreements. A copy of the pertinent pages of the Innkeepers Financial Corporation schedules is attached hereto as Exhibit D.

NY4 4027225.3

17

Bankruptcy Code section 503(b)(1)(A). Simply put, given that Innkeepers USA LP is not

an operating company and has very little debt, if Innkeepers USA LP cannot create value

for its shareholders, it has no business incurring administrative expenses in the first place.

Notably, the Debtors fail to quantify (because they cannot) any administrative priority

and unsecured claims that would potentially diminish the preferred shareholders’ equity

value. As this Court has already witnessed in these cases, such as when the Debtors

failed to disclose that Lehman’s interest rate was 2.25%, the Debtors resort to smoke and

mirror tactics that obfuscate the facts at the expense of the fairness of the process.

28. PJSC was not able to look at the joint venture Genwood Raleigh Lessee

LLC (“Genwood”) because the Debtors have either withheld discovery on Genwood or

simply have no financial data regarding their 49% interest. In the discovery letter sent to

the Debtors on August 20, 2010, counsel to the Ad Hoc Committee requested information

from the Debtors regarding Genwood. 15 More than five (5) weeks later, the Debtors are

only now beginning to provide the requested information. Yet the Debtor’s leading

argument against solvency is that Genwood might have liabilities? Really? After hiding

the ball on Genwood, that’s what they lead with? One would think that, if it is such a

liability, they would have produced the requested information weeks ago.

29. The Maxwell Declaration indicates that “Information lacking that would

be required to perform a valuation of the Debtors’ assets includes, but is not limited to, …

15 Counsel to the Ad Hoc Committee requested, but the Debtors have not produced, the following:

Current/historical property level financial data including, but not limited to, ADR, RevPAR, occupancy rates, and capital expenditure for Genwood, including all financial projections related thereto;

Any appraisals and underwriting documentation prepared for Genwood in connection with the refinancing of the property in November 2009;

Any and all documents or reports disclosing the nature and extent of any and all indebtedness of Grand Prix Holdings LLC; Innkeepers Financial Corporation; and Innkeepers USA Limited Partnership from January 2010 to the present.

NY4 4027225.3

18

Information regarding the JV Genwood Raleigh, a 355 room hotel that appears to be of

high quality but is not included in any valuation by Moelis.” We do know that Genwood

is encumbered by a $32 million mortgage – even if the property has lost half of its value

(unlikely), the shortfall is $16 million, of which the non-debtor could potentially be

responsible for 49%.

30. All of these factors indicate that there is significant value, over and above

the costs of an equity committee, that would inure to the benefit of shareholders if they

had adequate representation in these cases.

C. The Incremental Administrative Costs of a Statutory Preferred Shareholders’ Committee Do Not Outweigh The Clear Benefits Statutory Representation Will Yield

31. The Objectors argue that the costs of a statutory preferred shareholders’

committee do not outweigh the benefits of statutory representation, see e.g., Debtors

Objection at 14; UCC Objection at 15, notwithstanding that courts have consistently held

that “cost alone cannot, and should not,

security holders of representation.” In

re McClean Indus., 70 B.R. 852, 860 (Bankr. S.D.N.Y. 1987); see also In re Enron

Corp., 279 B.R. 671, 684 (Bankr. S.D.N.Y. 2002) (“Added cost alone does not justify the

denial of appointment of an additional committee where it is warranted.”).

32. Rather than supporting the preferred shareholders’ committee, the Debtors

suggest that the Ad Hoc Committee can seek reimbursement under section 503(b)(3)(D)

of the Bankruptcy Code. Let’s get this straight: the Debtors have an unlimited budget to

extinguish shareholders, while a hand-full of investors are expected to come out of pocket

to protect the whole class of preferred shareholders based on a speculative right to

reimbursement under section 503(b)(3)(D) of the Bankruptcy Code?

Indeed, at the

conclusion of the September 1, 2010 hearing, this Court denied the Debtors’ Plan Support

NY4 4027225.3

19

Agreement on the grounds that it “could not conclude that the debtors exercised due care

in electing to move forward with the current plan term sheet and the proposed valuation

implied therein.” See September 1 Transcript at p. 420, lines 5-7. Why should the Court

permit the use of estate assets to compensate the Debtors, their counsel, and advisors for

plain malfeasance, yet prohibit the retention of professionals to assist a statutory

preferred shareholders’ committee in doing what the Debtors failed to do: maximize the

value of the estates?

33. Likewise, Midland objects to the use of its cash collateral to fund the

professionals of a statutory preferred shareholders’ committee. See Midland Objection at

4. As the Ad Hoc Committee has discussed previously in the response to Midland’s

motion to reconsider the Debtors’ cash collateral order it filed with this Court on

September 23, 2010, cash collateral can be used in these for all administrative expenses.

See Response of Ad Hoc Committee of Preferred Shareholders to Limited Motion of

Midland Loan Services, Inc. to Reconsider Final Order Authorizing Debtors to (I) Use

The Adequate Protection Parties Cash Collateral and (II) Provide Adequate Protection

to the Adequate Protection Parties, dated September 23, 2010 [Docket No. 480]. No

secured claimholder can request confirmation of a plan and also simultaneously deprive

the estate of moneys that must be paid under the plan as a matter of law. It is undisputed

that Midland has requested termination of exclusivity to propose its own plan. See

Midland Services, Inc.’s Motion to Terminate Exclusivity, dated August 30, 2010 [Docket

No. 348]. Midland cannot have it both ways: if it wants to use the bankruptcy process in

lieu of a costly foreclosure proceedings, it cannot do so while denying other parties the

statutory duties and powers entitled to them under the Bankruptcy Code.

NY4 4027225.3

20

D.

The Timing of the Application Weighs Strongly in Favor of Appointment

34. For all the criticisms the Objections raise as purported reasons to decline

the appointment of a statutory preferred shareholders’ committee, the Objections remain

conspicuously silent on the issue of timing. This comes as little surprise to the Ad Hoc

Committee, as it is undisputed that the timely application for the appointment of a

statutory preferred shareholders’ committee at this early stage of the cases will not delay

the administration of these chapter 11 cases. Notably, a significant number of the

decisions upon which the Objections rely do address the issue of timing as the

determinative factor against statutory committee appointment. 16 Put simply, unlike the

foregoing cases, this is not a situation where preferred shareholders have moved for the

appointment of a statutory committee merely to extract hold-out value from the Debtors

and impede the progress of plan confirmation. The appointment of a statutory preferred

shareholders’ committee undeniably advances the public policies Congress wrote, supra,

to underlie the appointment of statutory equity committees.

E. The Ad Hoc Committee Clearly Complies with Rule 2019

35. Both the U.S. Trustee and the Debtors assert that the Verified 2019

Statement filed by the Ad Hoc Committee on August 16, 2010 does not comply with the

disclosure requirements of Rule 2019. See Verified Statement of Ad Hoc Committee

16 See Johns-Manvile, 68 B.R. at 163, 164 (“The Manville reorganization is in its final stages, and approaching confirmation. Much of an official committee’s potential role in the reorganization has been completed. It is too late for a committee to exercise its most important function—negotiating a reorganization plan—as a reorganization plan has already been submitted to the bankruptcy

It

is clear from the record that the appointment of official committees would delay the confirmation of the Manville reorganization.”); In re Spansion, Inc., 421 B.R. 151, 164 (Bankr. D. Del. 2009) (After the conclusion of a disclosure statement hearing and just two months before the scheduled confirmation hearing, the court emphasized that, “[a]t this late time, there is little purpose to forming an official equity committee and requiring the estate to bear the associated costs.”); Williams, 281 B.R. at 223 (“Moreover, the appointment of an equity committee would clearly cause a delay in this case.”).

NY4 4027225.3

21

Preferred Shareholders Pursuant to Bankruptcy Rule 2019(a), dated August 16, 2010

[Docket No. 205]; see also U.S. Trustee’s Objection at 6-7; Debtors’ Objection at 4.

Among other things, both the U.S. Trustee and the Debtors argue that the Court should

not grant the Ad Hoc Committee’s statutory committee motion because the Ad Hoc

Committee’s Verified 2019 Statement purportedly does not meet the standard set forth in

In re Northwest Airlines Corp., 363 B.R. 701 (Bankr. S.D.N.Y. 2007).

36. The Ad Hoc Committee maintains Bankruptcy Rule 2019 does not apply

to ad hoc committees. See In re Premier International Holdings, Inc. et al., 423 B.R. 58

(Bankr. D. Del. 2010). That said, the disclosures set forth by the Ad Hoc Committee in

its Verified Statement clearly provide the holdings and names of committee members.

Indeed, the history behind Rule 2019 leaves no doubt that the drafters of the Rule wrote it

to apply to protective committees that actually control how securities are voted and did

not envision its application to ad hoc committees in modern chapter 11 cases that simply

retain one law firm to save fees on three (3) law firms. One has only to look at Rule

2019(b)(3) referring to the Court’s power “to hold invalid any authority, acceptance,

rejection, or objection given, procured, or received by an entity or committee…” The Ad

Hoc Committee has no power to accept or reject a plan, precisely because the committee

controls no securities. It also has no power to object. Rather, each of its members can

object if they desire and retain one law firm to do so. The drafting of the Rule shows it

cannot apply to an ad hoc committee having no power over any holder’s position on any

issue. In a 1937 Securities and Exchange Commission (SEC) Report, future Supreme

Court Justice William Douglas investigated the predecessor of Rule 2019, which was

adopted in response to perceived abuses in receivership proceedings that enabled large,

NY4 4027225.3

22

institutional Wall Street firms to take advantage of smaller investors. See SEC, Report on

the Study and Investigation of the Work, Activities, Personnel and Functions of

Protective and Reorganization Committees, Part I: Strategy and Techniques of Protective

and Reorganization Committees (1937). Given the role of ad hoc committees today is

markedly different from the role of protective committees in the early twentieth century,

Rule 2019 was clearly never intended to apply to ad ho committees. When applying this

historical reading to the objections of both the U.S. Trustee and the Debtors, the issue

appears nothing more than a red herring intended to shift this Court’s attention away from

the overall weakness of the objections to the statutory committee motion.

NY4 4027225.3

23

CONCLUSION

WHEREFORE the Ad Hoc Committee respectfully reiterates its request for the

appointment of a Statutory Equity Committee for the reasons set forth in its Motion and

Reply, and granting it such other and further relief as the Court deems just and proper.

Dated:

New York, NY September 28, 2010

NY4 4027225.3

DEWEY & LEBOEUF LLP

/s/ Martin J. Bienenstock

Martin J. Bienenstock, Esq. Irena M. Goldstein, Esq. Timothy Q. Karcher, Esq. 1301 Avenue of the Americas New York, New York 10019 Telephone: 212.259.8000 Facsimile: 212.259.6333

Attorneys for Ad Hoc Committee of Preferred Shareholders

24

1

2

3

4

5

6

7

8

9

10

11

12

13

1 2 3 4 5 6 7 8 9 10 11 12 13 ~ : •.

~

:

•.

.•

15

16

17

18

19

20

21

22

23

24

25

IN

RE:

AMRESCO,

IN

THE

UNITED

STATES

BANKRUPTCY

COURT

FOR

THE

NORTHERN

DALLAS

DISTRICT

DIVISION

OF

TEXAS

BK.

NO:

01-35327-SAF-11

INC.

D

U~S. BANKRUPTCY COURT NORTHERN DISTRICT OF TEXAS

F ll ED

.JAN

I 0 2002

TAWANA C. MARSHALL. CLERK

Bv-----------------

Deputy

E

B

T

0

R

CLERK Bv----------------- D e p u t y E B T 0 R * TRANSCRIPT *

*

TRANSCRIPT

*

*

*

*

*

*

OF

*

PROCEEDINGS

*

*

*

*

*

*

*

(Court's

Ruling)

ORIGINAL

BE

IT

REMEMBERED,

that

on

the

7th

day

of

September,

2001,

before

the

HONORABLE

STEVEN

FELSENTHAL,

United

States

Bankruptcy

Judge

at

Dallas,

Texas,

the

above

styled

and

numbered

cause

came

on

for

hearing,

and

the

following

constitutes

the

transcript

set

forth:

of

such

proceedings

as

hereinafter

constitutes the transcript set forth: of such proceedings as hereinafter NATIONAL COURT REPORTERS 214-651-8393

NATIONAL

COURT

REPORTERS

214-651-8393

2

1

 

*

*

*

*

*

*

*

*

*

*

2

 

THE

COURT:

Okay.

This

will

be

the

 

3

Court's

bench

ruling

on

the

motion

of

Financial

 

4

Acquisition

Partners,

L.P.,

for

the

Court

to

order

 

5

the

appointment

of

an

equity

securities

holders

 

6

committee.

The

Prescott

Group

joined

in

that

motion.

7

The

SEC

supports

the

motion.

At

the

hearing

on

 

8

September

5,

one

other

shareholder

appeared

to

9

support

the

motion.

 

The

debtors

and

the

committee

of

10

unsecured

creditors

oppose

the

motion.

 

11

 

The

Court

held

an

evidentiary

hearing

12

on

the

motion

on

September

5,

2001,

and

continued

it

13

to

completion

today.

The

determination

of

a

motion

14

under

Section

1102

 

for

the

appointment

of

an

equity

15

security

holders

committee

is

a

core

matter

over

 

16

which

this

Court

has

jurisdiction

to

enter

a

final

17

order.

 

18

 

The

Court,

on

contested

matters,

is

19

required

to

make

findings

of

facts

and

conclusions

of

20

law.

The

parties

should

understand

that

this

 

21

statement

from

the

 

bench

constitutes

the

Court's

 

22

findings

and

conclusions,

but

because

it's

a

bench

23

ruling,

the

Court

reserves

the

opportunity

to

edit

or

24

amend

or

supplement

these

findings

for

purposes

of

25

clarity

and

completeness.

 
 

NATIONAL

COURT

REPORTERS

214-651-8393

 

3

1

 

Financial

Acquisition

Partners,

L.P.,

2

which

is

known

as

FALP,

had

requested

that

the

U.S.

3

Trustee

appoint

a

committee

of

equity

security

4

holders.

The

United

States

Trustee

had

declined

to

5

do

so,

and

the

U.S.

Trustee

has

taken

no

position

on

6

this

motion,

basically

deferring

to

the

discretion

of

7

the

Court.

 

8

 

Under

Section

1102

of

the

Bankruptcy

9

Code,

request

of

a

party

in

interest,

the

Court

may

10

order

the

appointment

of

a

committee

of

equity

11

security

holders

if

necessary

to

assure

the

adequate

12

representation

of

the

equity

security

holders.

Under

13

the

statute,

the

Court

must

determine

if

a

committee

14

is

necessary

to

assure

adequate

representation

of

15

equity

security

holders,

and

if

so,

the

Court

must

 

16

further

determine

whether

to

exercise

its

discretion

17

to

order

the

appointment

of

a

committee.

 

18

 

The

Wang

case

discusses

this

at

Section

19

149

B.R.,

page

1

and

page

2.

The

Code

does

not

 

20

define

adequate

representation.

Adequate

21

representation

must

be

determined

by

the

facts

of

the

22

particular

case.

To

make

that

determination,

and

23

then

to

exercise

its

discretion,

the

Court

should

24

consider

the

following

factors:

One,

the

number

of

25

shareholders;

two,

the

complexity

of

the

case;

three,

 

NATIONAL

COURT

REPORTERS

214-651-8393

 

4

1

whether

the

cost

of

the

committee

would

significantly

2

outweigh

the

concerns

for

adequate

representation;

 

3

four,

the

solvency

of

the

debtor;

five,

the

ability

4

or

the

appearance

of

the

management

shareholders

to

5

represent

the

non-management

shareholders;

six,

the

6

integrity

of

the

bankruptcy

process;

seven,

the

7

Congressional

intent

to

protect

public

shareholders

8

by

providing

for

a

negotiating

body

for

shareholders

9

for

the

formulation

of

a

plan;

and

eight,

the

impact

10

on

the

reorganization

process.

 

11

 

These

guidelines

and

factors

have

been

12

enunciated

in

a

series

of

cases

that

include

the

Wang

13

case,

the

Beker

Industries

Case

at

55

B.R.

945,

the

14

Edison

Brothers

case

out

of

Delaware

which

apparently

15

is

available

only

on

Westlaw

and

Lexis,

and

the

16

Imperial

Distributing

case,

another

Delaware

case

17

which

apparently

has

not

been

published.

The

 

18

memorandum

order

was

filed

May

15th,

2001.

And

also

19

Colliers

discusses

some

of

these

factors.

20

 

Amresco

had

publicly

traded

common

 

21

shares

of

stock,

about

2.6

million

shares.

At

the

22

time

of

the

bankruptcy

petition,

there

were

about

23

2,500

holders

of

record,

and

actually

that

number

may

24

date

from

March

31,

2001,

but

there

are

approximately

25

2,500

holders

of

record.

There

were

about

12,000

 

NATIONAL

COURT

REPORTERS

214-651-8393

 

5

1

beneficial

owners.

I

believe

 

the

officers

and

 

2

directors

held

about

5

percent

of

the

stock,

and

the

3

trading

of

the

stock

was

indeed

delisted

in

July.

4

 

The

case

has

been

designated

as

a

5

complex

Chapter

11

case

for

purposes

of

the

6

procedures

adopted

by

this

Court.

But

neither

the

7

debt

structure

nor

the

equity

 

structure

is

especially

8

or

unusually

complicated.

It

is

a

large

case,

but

9

it's

not

a

mega-case.

However,

the

debtor

does

10

conduct

its

business

through

a

multi-level

subsidiary

11

structure

with

two

non-debtor

subsidiaries

operating

12

at

a

profit;

and,

therefore,

the

Court

considers

the

13

case

complex

because

of

the

size

of

the

assets

and

14

the

amount

of

the

debt

that

had

been

publicly

traded,

15

the

public

trading

of

the

stock

and

the

structure

of

16

the

business,

but

not

because

 

of

the

structure

of

the

17

debt

or

the

equity

alone.

18

 

The

management

shareholders

may

 

19

generally

perform

their

fiduciary

duties,

but

they

20

cannot

adequately

represent

the

interests

of

21

nonmanagement

shareholders.

 

With

the

filing

of

the

22

petition,

the

debtors

filed

a

motion

to

sell

its

 

23

assets

and

those

of

its

subsidiaries

to

NCS.

The

24

sale

proposal

holds

a

prospect

of

employment

for

25

management

that

may

be

more

lucrative

than

any

 
 

NATIONAL

COURT

REPORTERS

214-651-8393

 

6

1

returns

that

they

may

receive

on

the

stock.

While

2

they

may

legitimately

believe

and

they

may

ultimately

3

establish

in

the

case

that

the

sale

will

be

in

the

4

best

interest

of

the

estate,

they

cannot

advocate

a

5

plan

on

behalf

of

the

shareholders.

 

6

Mr.

Brown,

the

debtor's

CEO,

 

7

Mr.

Robbins,

the

debtor's

financial

advisor,

and

8

Mr.

Cleveland,· the

creditors'

committee's

financial

9

advisor,

all

testified

that

the

debtor

was

insolvent

10

on

the

petition

date.

 

Adjusting

book

values

as

of

11

June

30,

2001,

for

market

factors

and

a

fair

market

12

value

basis,

the

testimony

was

that

the

debtor

is

13

insolvent

by

a

range

of

between

$97

million

and

$250

14

million.

At

the

NCS

sale

proposal

values,

15

Mr.

Cleveland

is

projecting

a

return

to

unsecured

16

creditors

of

somewhere

between

34

to

41

cents

on

the

17

dollar

which

would

leave

no

prospect

for

a

18

shareholder

recovery

unless

the

debtor's

assets

could

19

be

sold

for

an

additional

approximately

$200

million.

20

But

all

three

of

those

witnesses

recognized

and

hoped

21

that

the

NCS

offer

was

a

floor,

and

that

the

sale

22

process

would

generate

more

than

is

currently

on

the

23

table.

 

24

FALP

did

not

present

contradictory

25

evidence,

but

 

contended

that

it

would

be

 

NATIONAL

COURT

REPORTERS

214-651-8393

 

7

1

premature

to

adjudicate

asset

value

and

thereby

 

2

affect

the

sales