James H.M. Sprayregen, P.C. Paul M.

Basta 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. Marc J. Carmel (admitted pro hac vice) KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654-3406 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel to the Debtors and Debtors in Possession UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: INNKEEPERS USA TRUST, et al.,1 Debtors. ) ) ) ) ) ) ) Chapter 11 Case No. 10-13800 (SCC) Jointly Administered

OBJECTION OF THE DEBTORS TO BEST WESTERNS MOTION FOR ORDER LIMITING TIME WITHIN WHICH DEBTOR MUST ASSUME OR REJECT EXECUTORY CONTRACT1 Innkeepers USA Trust and certain of its affiliates, as debtors and debtors in possession (collectively, the Debtors), file this objection (this Objection) to Best Western International Inc.s (Best Western) Motion for Order Limiting Time Within Which Debtor Must Assume or

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.

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Reject Executory Contract [Docket No. 162] (the Motion). In support of this Objection, the Debtors respectfully state as follows: Preliminary Statement The Motion prematurely seeks to compel the Debtors to assume or reject that certain Membership Application and Agreement by and among Grand Prix Fixed Floating Lessee, LLC (Grand Prix Lessee) and Grand Prix IHM, Inc. and Best Western, dated as of June 5, 2007 (the Membership Agreement). The Membership Agreement governs, among other things, the use of Best Westerns name, trademarks, service marks, and identification symbols in connection with the Debtors hotel located in West Palm Beach, Florida (the West Palm Beach Hotel), which serves as collateral for the Floating Rate Mortgage Loan Agreement (as defined in the First Day Declaration).2 The Debtors currently are in the process of reviewing and assessing their more than 1,000 contracts to determine the full consequences of assumption or rejection within the context of and taking into consideration the totality of circumstances with respect to the Chapter 11 Cases.3 Consideration of assumption or rejection of the Membership Agreement takes on even greater importance as rejection of the Membership Agreement at this time would put at risk the Debtors use of cash collateral and their access to debtor-in-possession financing. In addition, assumption of the Membership Agreement could subject the Debtors to potentially substantial cure costs, which, if it is later determined that the Membership Agreement

Additional information regarding the Debtors business, capital structure, and the circumstances leading to the Chapter 11 Cases is contained in the Amended Declaration of Dennis Craven, Chief Financial Officer of Innkeepers USA Trust, in Support of First-Day Pleadings [Docket No. 33, as supplemented by Docket No. 516] (collectively, the First Day Declaration). Each of the Debtors filed a list of its executory contracts and unexpired leases with their Schedules of Assets and Liabilities and Statements of Financial Affairs on or about September 1, 2010.

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is not beneficial to the Debtors reorganization, would unduly burden the Debtors estates. And, granting the Motion could incentivize numerous other contract counterparties to file motions seeking similar relief further burdening the Chapter 11 Cases. By contrast, Best Western has not articulated any harm that will be caused if the Debtors are afforded the time provided by the Bankruptcy Code for evaluation of executory contracts. Therefore, Best Westerns Motion fails to show that cause exists to deprive the Debtors of their statutorily-provided breathing room at this early stage in the Chapter 11 Cases (as defined below). Argument I. The Debtors Should Be Afforded Breathing Space and Should Not Be Compelled to Assume or Reject the Membership Agreement. 1. Section 365(d)(2) entitles the Debtors are entitled to make their decision to

assume or reject an executory contract at any time before the confirmation of a plan. 11 U.S.C. 365(d)(2). The Bankruptcy Code provides that a court on the request of any party to [an executory] contract . . . may order the [debtor] to determine within a specified period of time whether to assume or reject such contract. Id. (emphasis added). And courts exercise this discretion only if it is justified by the facts and circumstances of the case. See In re Adelphia Commcns Corp., 291 B.R. 283, 292 (Bankr. S.D.N.Y. 2003); In re Enron Corp., 279 B.R. 695, 702 (Bankr. S.D.N.Y. 2002); Theatre Holding Corp. v. Mauro, 681 F.2d 102, 105 (2d Cir. 1982). However, given the critical importance to debtors of the statutory ability to evaluate and then assume or reject executory contracts throughout their cases, courts rarely force a debtor into assuming or rejecting a contract. In re Kmart Corp., 290 B.R. 614, 620 (Bankr. N.D. Ill. 2003). 2. Courts in the Second Circuit have agreed that it is the clear policy of the

Bankruptcy Code to provide a debtor with breathing space following the filing of a bankruptcy petition, continuing until the confirmation of a plan, in which to assume or reject an executory 3
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contract. Enron, 279 B.R. at 702. As described in detail below, in the context of the Debtors chapter 11 cases (the Chapter 11 Cases), there is no support to stray from the clear policy of the Bankruptcy Code and compel assumption or rejection of the Membership Agreement as proposed by Best Western. Much of the Debtors time following the commencement of the Chapter 11 Cases has been devoted to exigent, significant matters to stabilize operations and address cash and financing issues, among other issues. As a result of this work, however, the Debtors are still reviewing and analyzing their contracts. Forcing the Debtors to make a decision before completion of the plan process would require the Debtors to either assume a contract and incur costs associated therewith that might ultimately be to the detriment of the estates or reject the contract thereby losing a potential valuable asset. II. Best Western Has Not Established Any, Much Less Sufficient, Reason to Shorten the Time Period to Assume or Reject the Membership Agreement. 3. The burden is on Best Western to establish a compelling reason to shorten the

timeframe otherwise available to the Debtors. In re Dana Corp., 350 B.R. 144, 147 (Bankr. S.D.N.Y. 2006) (citing In re Republic Techs. Intl, LLC, 267 B.R. 548, 554 (Bankr. N.D. Ohio 2001)). In determining whether a compelling reason exists to shorten the assumption or rejection time period, courts consider, among other things: (a) (b) (c) (d) (e) (f) whether the debtor has had sufficient time to appraise their financial situation and the potential value of the assets in formulating a plan; whether exclusivity had terminated; the importance of the contract to the debtors business and reorganization; the nature of the interests at stake; whether the action to be taken is so in derogation of Congresss scheme that the court may be said to be arbitrary; the purpose of chapter 11, which is to permit successful rehabilitation of debtors; 4
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(g) (h) (i) (j) (k) (l)

the balance of hurt to the contract counterparties; the good to be achieved; the debtors failure or ability to satisfy postpetition obligations; the damage that the contract counterparty will suffer beyond the compensation available under the Bankruptcy Code; the safeguards afforded to the contract counterparties; and whether there is a need for judicial determination as to whether an executory contract exists.

See Adelphia, 291 B.R. at 293; Enron, 279 B.R. at 702 (adopting the standards used by the Second Circuit in Theatre Holding Corp., 681 F.2d at 105-06 and S. St. Seaport Ltd. Pship v. Burger Boys, Inc. (In re Burger Boys, Inc.), 94 F.3d 755, 761 (2d Cir. 1996)); In re Teligent, Inc., 268 B.R. 723, 738 (Bankr. S.D.N.Y. 2001). Here, the relevant factors strongly favor preserving the Debtors right to make their assumption or rejection decision related to the Membership Agreement on the normal statutory timetable when the decision is properly considered in the context of the overall Chapter 11 Cases. A. 4. The Debtors Have Not Had Sufficient Time to Appraise Their Financial Situation and Potential Value of Their Assets in Formulating a Plan. With respect to factors (a) and (b) above, Courts have recognized that the

complexities of large reorganizations, including the sheer number of agreements and the competing demands placed upon a debtors personnel, mitigate against requiring debtors in such cases to make quick determinations about their executory contracts. See, e.g., Enron, 279 B.R. at 703 (factors indicated that debtor had not yet been afforded a reasonable time to decide whether to assume or reject agreement where bankruptcy cases were large and complex, involved thousands of executory contracts, and debtor had not yet made determinations concerning whether to assume or reject contracts). The Chapter 11 Cases are no different. Still within the

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initial 120-day exclusivity period, within which only the Debtors can file a chapter 11 plan, the Debtors are working diligently to develop and implement a plan process to maximize consensus amongst its many constituencies and ensure a successful emergence from chapter 11. See Debtors Status Report [Docket No. 528]. 5. As part of the Debtors plan process, they will analyze their financial situation and

operational needs. The short period that has elapsed since the commencement of the Chapter 11 Cases simply has not been sufficient, however, for the Debtors to have made a conclusive decision on the Membership Agreement (or all of the other contracts utilized in the Debtors business). B. 6. The Membership Agreement Is Important to the Debtors Business and Reorganization. The Membership Agreement is integral to the operation of the West Palm Beach The Membership

Hotel, thus factors (c)-(f) above weigh heavily in the Debtors favor.

Agreement governs, among other things, the use of Best Westerns marks in connection with the West Palm Beach Hotel. The hotel currently utilizes the Best Western mark in its operations (enabling it to call itself a Best Western hotel) and makes use of the Best Western reservation system. Following rejection of the Membership Agreement, the Debtors likely would be forced to incur significant costs associated with reflagging the West Palm Beach Hotel with another franchisor. However, the Debtors would also incur significant cure costs in connection with assumption of the Membership Agreement, and, thus, assumption at this time could be detrimental to the Debtors estates if it is later determined that rejection of the Membership Agreement is appropriate. 7. The Membership Agreement must also be evaluated together with a number of

related factors influencing the restructuring of the Debtors business and plan process. Indeed, in 6
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analyzing whether to accelerate a debtors assumption/rejection decision, courts often emphasize the effect on the rehabilitative purpose of chapter 11 and Congress intent to provide debtors ample latitude to assume or reject contracts under section 365 (subject to certain exceptions) before plan confirmation. See In re G-I Holdings, Inc., 308 B.R. 196, 213 (Bankr. D.N.J. 2004) (denying creditors request for the court to compel the debtor to assume or reject where, among other things, compelling the debtor would not promote or advance a successful rehabilitation until other elements of a plan were negotiated); see also McLean Indus., Inc. v. Med. Lab. Automation, Inc. (In re Mclean Indus., Inc.), 96 B.R. 440, 449 (Bankr. S.D.N.Y. 1989) (Early assumption is often not in the best interests of the estate since it can force premature decisions which could later jeopardize a successful reorganization process.). 8. Shortening the timeframe for the Debtors to assume or reject the Membership

Agreement will undermine the rehabilitative purpose of chapter 11. For example, a termination of the Membership Agreement resulting from a rejection of the agreement is a termination event and would cause an event of default under each of the Debtors final cash collateral order4 and the Debtors postpetition financing agreements, respectively.5 9.
4

Moreover, if approved, motions like that of Best Western are likely to have an

See 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, at Para. 10(a)(ix) (termination of the Membership Agreement constitutes a termination event, unless waived by the lenders) [Docket No. 402] (the Final Cash Collateral Order). See Senior Secured Super Priority Debtor-in-Possession Loan Agreement by and among certain Debtors, as borrowers, and Solar Finance Inc., as lender (as amended, modified, or supplemented, the Lehman DIP Agreement), at Section 8.1(a)(xxii) [Docket No. 200] (an event of default would occur if the Debtors terminate, cancel, or allow to expire the Membership Agreement without the Lehman DIP Agreement lenders consent); Final Order Authorizing the Debtors to Obtain Postpetition Senior Secured Super-Priority Debtor-InPossession Financing From Five Mile Capital II Pooling International LLC Pursuant to 11 U.S.C. 105, 361, 362, 364(c), 364(d) and 364(e), Ex. 1 [Docket No. 400] (as amended, modified, or supplemented, the Five Mile DIP Agreement and together with the Lehman DIP Agreement, the DIP Agreements), at Section 6.1(f) (an event of default would occur if the Debtors default under Section 8.1(a)(xxii) of the Lehman DIP Agreement).

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unintended ripple effect in the Chapter 11 Cases. The Debtors have over 1,000 contracts to review, including more than 70 franchise agreements, and granting the Motion could incentivize numerous other contract counterparties to file motions seeking similar relief. Creating a situation in which the Debtors would be forced to defend a multitude of motions like Best Westernsa motion without any legal or factual supportwould create an unnecessary distraction that could severely hamper the Debtors reorganization efforts. C. 10. Balancing the Harm Between Best Western and the Debtors Weighs Heavily in Favor of Denying the Motion. Best Western fails to establish that it will suffer any harm or that it has a

compelling interest for granting the relief it seeks. Accordingly, factors (g)-(k) above also weigh in the Debtors favor. Indeed, Best Westerns Motion simply states that: by reason of Debtors bankruptcy filing and imposition of the automatic stay, Best Western is unable to enforce the terms and conditions of the Membership Agreement and the Rules and Regulations, or to protect its Best Western trademarks, service marks, logos and membership marks from use by Debtor, or to assure the traveling public of receiving the high quality of service and lodging the public has come to expect from Best Western affiliated hotels. Motion, at 3. This concern is no different or more compelling than that of any of the Debtors other prepetition contract counterparties and franchisors. 11. The Debtors have been performing in accordance with the Membership

Agreement postpetition.6 Moreover, they have demonstrated, in the form of access to cash collateral, adequate liquidity to meet any postpetition payment obligations that may arise under the Membership Agreement.7 As has been recognized in this District, when a debtor keeps

Best Western has not filed a motion seeking payment of administrative claims associated with the Debtors performance under the Membership Agreement and has not alleged in its Motion any failure of the Debtors to meet their obligations thereunder. See Final Order Authorizing the Debtors to (i) Use the Adequate Protection Parties Cash Collateral and (ii)
(continued on next page)

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current with postpetition obligations, the resultant absence of harm to an obligee to an executory contract belies a need to require a debtor to assume or reject prior to confirmation. In re Beker Indus. Corp., 64 B.R. 890, 898 (Bankr. S.D.N.Y. 1986); In re O-Jay Foods, Inc., 110 B.R. 895, 898 (Bankr. D. Minn. 1989) (As long as Debtor and the Trustee continue to perform obligations under the lease, Debtors actual assumption or rejection of the lease may be deferred until its decision is embodied in a plan.); see also Dana, 350 B.R. at 147; In re WheelingPittsburgh Steel Corp., 54 B.R. 385, 389 (Bankr. W.D. Pa. 1985). 12. At bottom, Best Western is no different than any other contract counterparty.

Best Western has not alleged any relevant good from an early assumption or rejection (nor any harm resulting from a later decision), while the relief sought in the Motion could materially hinder the Debtors restructuring. To the extent Best Western simply is attempting to receive payment on account of its potential prepetition claims, Best Western cannot satisfy its burden. See Adelphia, 291 B.R. at 296. 13. By contrast, the harm to the Debtors if the Motion is granted is clear: in addition

to putting at risk the Debtors access to cash collateral and debtor-in-possession financing, at far too early a juncture in the Chapter 11 Cases, the Debtors will be deprived of the critically important and highly valuable right under section 365 to review the Membership Agreement in the context of the overall Chapter 11 Cases and in the course of assessing their restructuring options. Additionally, approval of Best Westerns Motion will be an invitation to counterparties to the more than 1,000 contracts with the Debtors to seek similar relief, which would harm the Debtors ability to restructure.
Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 363, at Para. 10(a)(ix) (termination of the Membership Agreement constitutes a termination event, unless waived by the lenders) [Docket No. 402].

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WHEREFORE, the Debtors respectfully request that the Court deny the Motion in its entirety and grant such other relief as is just and proper. New York, New York Dated: October 15, 2010 /s/ Paul M. Basta James H.M. Sprayregen, P.C. Paul M. Basta 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. Marc J. Carmel (admitted pro hac vice) KIRKLAND & ELLIS LLP 300 North LaSalle Chicago, Illinois 60654-3406 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel to the Debtors and Debtors in Possession

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