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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.

Case No. 10 – 13800 (SCC)

(Jointly Administered)

SUPPLEMENTAL REPLY OF AD HOC COMMITTEE OF PREFERRED SHAREHOLDERS TO OBJECTIONS TO MOTION FOR ORDER DIRECTING APPOINTMENT OF EXAMINER PURSUANT TO SECTION 1104(c)(1)-(2) OF THE BANKRUPTCY CODE

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

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

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

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corporation Grand Prix Holdings, LLC (“Grand Prix”) and their direct and indirect title 11 debtor

subsidiaries (collectively, with Innkeepers and Grand Prix, the “Debtors”), files this

supplemental reply in further support of its Motion, dated August 11, 2010, for an Order

Directing Appointment of an Examiner Pursuant to Section 1104(c)(1)-(2) of the Bankruptcy

Code [Docket No. 179] (the “Motion”), and in further reply to the limited and other objections

and responses thereto filed by Midland Loan Services, Inc. (“Midland”) [Docket No. 253] (the

“Midland Response”), Wells Fargo Bank, N.A. (“Wells Fargo”) [Docket No. 282] (the “Wells

Fargo Joinder”), the Official Committee of Unsecured Creditors (the “UCC”) [Docket No. 263]

(the “UCC Objection”), the United States Trustee (the “US Trustee”) [Docket No. 268] (the “US

Trustee’s Response”), Lehman ALI, Inc. (“Lehman”) [Docket No. 270] (the “Lehman

Objection”), Apollo Investment Corporation (“Apollo,” and together with the UCC, Lehman,

and the Debtors, the “Objectors”) [Docket No. 277] (the “Apollo Objection”), and the Debtors

[Docket No. 285] (the “Debtors’ Objection”, together with the UCC Objection, the Lehman

Objection and the Apollo Objection, the “Objections”), and respectfully represents a follows:

Supplemental Reply

1. In the Motion, the Ad Hoc Committee alerted the Court to the Debtors’

“tricks and shenanigans” in connection with their efforts to give the company to Lehman and

Apollo Investment Corp. (“Apollo”) in violation of applicable Supreme Court jurisprudence, and

that creditors and preferred shareholders deserve an investigation and a public report of, among

other things, such antics. The Objectors opposed the Motion on the grounds that (a) the Debtors

and their relationship with Apollo are the subject of other investigations; (b) the Ad Hoc

Committee’s concerns are properly addressed in connection with plan confirmation; and (c) the

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appointment of an examiner is not mandatory because there are not $5 million of uncontingent,

liquidated, unsecured claims against the Debtors’ estates.

2. Those Objections were meritless when lodged, and are even more

disingenuous now in light of what the Court learned during the September 1, 2010 hearing (the

“September 1 Hearing”) on the Debtors’ motion to assume the Plan Support Agreement, namely,

that virtually all of the Ad Hoc Committee’s assertions in the Motion concerning the Debtors’

malfeasance were on the mark. Notably:

Prior to filing for bankruptcy, the Debtors and their ultimate common equity owner, Apollo, engineered a transaction that would allow Apollo and a single chosen creditor, Lehman, to retain or obtain equity interests in the Debtors while Lehman received more than it could receive if it enforced all of its rights under its loan agreements and the preferred shareholders were being extinguished without any process to maximize value or even to determine of value of the seven assets not subject to a blanket mortgage.

The Debtors made no efforts to market test or even value their assets before requesting authority to assume a plan support agreement objected to by every significant secured claimholder as well as the Ad Hoc Committee.

The Debtors prevented other parties interested in sponsoring a Plan for the Debtors from conducting due diligence, thereby precluding an alternative proposal.

The Debtors did not disclose in their first-day motions and other documents filed with the Court a holding company held a bank account having $7.4 million which company was subject to only de minimis liabilities.

The Debtors borrowed money to satisfy obligations to improve certain of the Debtors’ properties, by saddling other Debtors’ properties with liens securing the new money while Apollo is separately liable for the improvements pursuant to a written guaranty.

3. This Court held 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

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implied therein.” The Court further found that the Debtors were not “even handed” in their

approach and, instead, favored the Lehman/Apollo arrangement over other alternatives. 1

4. Notwithstanding the Court’s denial of the motion to assume the Plan

Support Agreement, the Debtors’ tactics have not changed. For example, in their objection to the

Ad Hoc Committee’s request for a statutory preferred shareholders’ committee, the Debtors

contend there is no value in the seven hotel properties not subject to blanket mortgages because

any value above the mortgage liens on such properties would be trapped at Innkeepers USA

Limited Partnership (“Innkeepers USA LP”). See Debtors’ Objection to Statutory Preferred

Shareholders’ Committee Motion, dated September 24, 2010, at 9-10 [Docket No. 285] (the

“Debtors’ Statutory Committee Objection”). According to the Debtors, Innkeepers USA LP has

secured and unsecured creditors in excess of the $7.4 million of cash it is holding, and even such

claims are satisfied in full, the Class C Preferred Limited Partnership Units (“Class C Units”) in

Innkeepers USA LP are entitled to the first $270 million as a liquidation preference. Id.; see also

Schedules of Assets and Liabilities for Innkeepers USA Limited Partnership, attached as Exhibit

C to the Reply of Ad Hoc Committee of Preferred Shareholders to Objections to Motion for

Order Directing Appointment of Statutory Committee of Preferred Shareholders, dated

September 28, 2010 [Docket No. 513] (the “Statutory Committee Reply”).

5. First, according to the Innkeepers USA LP schedules, the liquidated

unsecured claims of Innkeepers USA LP amount to a grand total of $208,795.98. See Schedules

of Assets and Liabilities for Innkeepers USA Limited Partnership, attached as Exhibit C to the

Statutory Committee Reply. There are unliquidated and contingent claims listed in the

schedules, including Innkeepers USA LP’s obligation under a guarantee of certain obligations in

1 See September 1 Transcript at 420, lines 5-7; 428, line 19.

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connection with the Genwood Loan. Id. That guarantee, however, as made clear by the Debtors’

Statutory Committee Objection (at page 10), is not of the entire $32 million obligation but

instead of limited obligations. 2 Second, and more importantly, according to information

provided by the Debtors, the Class C Units are held by Innkeepers Financial Corporation

(“IFC”). See Debtors’ Statutory Committee Objection, at 9. IFC 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. See Schedules of Assets and

Liabilities of Innkeepers Financial Corporation, attached as Exhibit D to the Statutory

Committee Reply.

6. In other words, the Debtors, in an effort to deprive adequate representation

for preferred shareholders, have once again obfuscated the value of the preferred shares. The

Debtors’ clear attempt to mislead parties as to the true nature of the Debtors’ assets and

liabilities, coupled with the fact that the Debtors made no effort prior to the Ad Hoc Committee’s

requesting appointment of a statutory committee to market test the value of their assets, whether

in whole or in part, demonstrate further why appointment of an examiner under Bankruptcy

Code section 1104(c)(1) is in the best interests of the estate.

7. There is further evidence that appointment of an examiner is mandatory

under Bankruptcy Code section 1104(c)(2). In this regard, the September 1, 2010 hearing

revealed that the Company has in excess of $5 million of fixed, liquidated unsecured debts.

2 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. See Exhibit C of Statutory Committee Reply. 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. Someone, like an equity committee or an examiner, obviously needs to get to the bottom of what the Debtors’ assets and liabilities are. In any event, 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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Indeed, the Debtors’ chief restructuring officer, Mr. Beilinson, testified that the collateral

securing Lehman’s obligations is “absolutely” not worth $238 million, which would leave a

sizeable deficiency claim. See September 1 Transcript at 172, lines 3-8. Further, Mr. Beilinson

testified that Midland was “overencumbered by hundreds of millions of dollars.” See September

1 Transcript at 177, lines 12-16.

8. The Objectors had previously argued that deficiency claims should not

count because they are contingent until fixed by this Court. See Debtors’ Examiner Motion

Objection, dated August 23, 2010, at 4 [Docket No. 285]; Official Committee of Unsecured

Creditors’ Objection, dated August 23, 2010, at ¶ 33 [Docket No. 263]. The Objectors should

not be allowed to rely upon that tortured logic now that the Debtors own chief restructuring

officer testified under oath that there are likely “hundreds of millions of dollars” of deficiency

claims. Because there are clearly unsecured debts in excess of $5 million, appointment of an

examiner is mandatory under Bankruptcy Code section 1104(c)(2).

9. The Ad Hoc Committee therefore reiterates its requests the appointment of

an examiner to conduct an investigation of the Debtors, Apollo, and their respective directors and

senior officers, in respect of, among other things, the following issues:

The potential avoidance of all direct and indirect transfers from Innkeepers and/or its subsidiaries to Apollo or Apollo affiliates;

Prepetition acts and omissions from and after July 1, 2009 in respect of the Debtors’ officers and directors, and the officers and directors of the Debtors’ other direct and indirect subsidiaries impacting their respective fiduciary duties of care, loyalty, and good faith to Innkeepers;

Postpetition acts and omissions from and after July 19, 2010 in respect of Innkeepers’ officers and directors, and the officers and directors of Innkeepers’ other direct and indirect subsidiaries impacting their respective fiduciary duties of care, loyalty, and good faith to Innkeepers;

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Whether Apollo, Lehman, or any other party caused the Company to take any steps to advantage Apollo, Lehman, or any other party at the expense of other creditors and preferred shareholders;

The communications and negotiations that led to the Debtors’ failed Plan Support Agreement;

Whether and how the Company and Apollo created self-imposed emergencies by causing properties not encumbered by Lehman’s mortgage to default unnecessarily;

The purpose and necessity of debtor-in-possession financing on all the hotels, especially the DIP collateralized by the equity of the Residence Inn San Diego and the Residence Inn Tysons;

Exploration of the Company’s franchising relationship with Marriott, and whether the Company entered into any agreements with Marriott merely to fulfill a guarantee by Apollo;

Whether Apollo’s 2007 purchase of the Company constitutes a fraudulent conveyance;

The nature and extent of the relationships between and among Lehman, Apollo, and the Debtors;

How value can be maximized for preferred shareholders and unsecured claimholders;

Valuation of Debtors, including, but not limited to, the March 31, 2010 valuation referenced in Apollo’s Form 10K filed on May 26, 2010, and any valuation of the Debtors that Lehman may have performed in connection with its own chapter 11 cases;

The Debtors’ failure to timely disclose to the US Trustee and this Court the $7.4 million in cash held at Innkeepers USA LP, while arguing that there was no value for preferred shareholders; and

The Debtors’ failure to market test any of their properties before agreeing to the onerous and harmful terms of the PSA.

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CONCLUSION

WHEREFORE the Ad Hoc Committee respectfully reiterates its request for the

appointment of an Examiner to investigate the issues 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

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DEWEY & LEBOEUF LLP

/s/ Martin J. Bienstock

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

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