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.,11 Debtors. ) ) ) ) ) ) ) Chapter 11 Case No. 10-13800 (SCC) Jointly Administered

DEBTORS OMNIBUS LIMITED OBJECTION TO CERTIFICATEHOLDERS STANDING REQUESTS Innkeepers USA Trust and certain of its affiliates, as debtors and debtors in possession (collectively, the Debtors), hereby submit this omnibus limited objection (the Objection) to

The list of Debtors in these chapter 11 cases (the 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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the motions2 filed by (I) the trustees (collectively, the Trustees) for the following two real estate mortgage investment conduits (each, a REMIC): (A) Wells Fargo Bank, N.A., as trustee for the registered holders of Credit Suisse First Boston Mortgage Securities Corp. Commercial Mortgage Pass-Through Certificates, Series 2007-C1; and (B) U.S. Bank National Association, as successor to LaSalle Bank N.A., as trustee for the registered holders of ML-CFC Commercial Mortgage Trust 2006, Commercial Mortgage Pass-Through Certificates, Series 2006-4; and (II) the following five investment funds that hold certificates issued by two other REMIC trusts (collectively, the Certificateholders and, together with the Trustees, the Movants): (A) LNR Securities Holdings, LLC; (B) Appaloosa Investment L.P. I; (C) Palomino Fund Ltd.; (D) Thoroughbred Fund L.P.; and (E) Thoroughbred Master Ltd.3 In support of this Objection, the Debtors respectfully state as follows: Preliminary Statement 1. The Debtors respectfully request that the Court deny the Standing Motions to the

extent the Movants request (a) a determination that the Certificateholders have standing to appear in these Chapter 11 Cases as parties in interest under section 1109(b) of title 11 of the United States Code (the Bankruptcy Code) based upon their certificated interests in the C-6 and/or C-7 Trusts (as defined below) and (b) permission to intervene in the Chapter 11 Cases pursuant to Rule 2018 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy
2

See Motion of Trusts and LNR Securities Holdings, LLC Seeking Judicial Determination of Party in Interest Status Under Section 1109(b) of the Bankruptcy Code, or in the Alternative Granting Intervention in These Bankruptcy Cases Pursuant to Federal Rule of Bankruptcy 2018, filed by LNR Securities Holdings, LLC (LNR) on January 25, 2011 [Docket No. 857] (the LNR/Trust Standing Motion); Memorandum of Law of Appaloosa Investment L.P. I, Palomino Fund Ltd., Thoroughbred Fund L.P., and Thoroughbred Master Ltd. in Support of their Status as Parties in Interest Entitled to Standing, filed by Appaloosa Investment L.P. I, Palomino Fund Ltd., Thoroughbred Fund L.P., and Thoroughbred Master Ltd. (collectively, Appaloosa) on January 25, 2011 [Docket No. 858] (the Appaloosa Standing Motion and, together with the LNR/Trust Standing Motion, the Standing Motions). To be clear, the Certificateholders hold certificates in the C-6 and C-7 Trusts (as defined below). The Trustees are associated with REMIC trusts other than the C-6 and C-7 Trusts.

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Rules).4 As described in detail below, section 1109(b) does not provide a basis for granting party in interest status to the Certificateholders, and the Certificateholders fail to cite any controlling authority to support their assertion. Additionally, the Certificateholders fail to satisfy either factor courts typically consider when determining whether intervention is warranted under Bankruptcy Rule 2018. 2. First, regarding standing, the Certificateholders do not hold claims against, or

interests in, the Debtors estates and therefore do not qualify (at least not in their capacity as certificateholders) for party in interest status under section 1109(b). Rather, the Certificateholders interests in the outcome of these Chapter 11 Cases originate from their investments in REMICs into which the lenders under the Debtors $825 million Fixed Rate Mortgage Loan (the Fixed Rate Loan) sold the Fixed Rate Loan. 3. Described summarily, REMICs are investment vehicles that hold commercial and

residential mortgages in trust and issue securities representing beneficial interests in these trusts to investors in the secondary mortgage market. Each of the two REMICs that the

Certificateholders hold certificates innamely, the C-6 and C-7 Trustshold $412.7 million of the Fixed Rate Loan, as well as more than an additional $5 billion combined in other mortgage loans and commercial mortgage-backed securities (CMBS) unrelated to these Chapter 11

The Debtors do not dispute that the Trustees have standing with respect to issues related to the secured claims held by Trustees on behalf of the two applicable REMICs, which are not the C-6 and C-7 Trusts. Likewise, the Debtors do not dispute that Appaloosa has standing: (a) with respect to issues related to the Debtors debtor-inpossession financing, in its capacity as a holder of approximately $10 million in claims under that certain $53 million Senior Secured Super-Priority Debtor-in-Possession Credit Agreement, dated September 1, 2010, among the Debtors, as borrowers, and Five Mile Capital II Pooling International LLC, as administrative agent for itself and the other lenders thereto (the Five Mile DIP Loan) (of which only approximately $15 million has been drawn); and (b) with respect to issues affecting the Debtors preferred shareholders, in its capacity as a holder of 100 of the approximately 5.8 million outstanding Innkeepers USA Trust 8% Series C Cumulative Preferred Shares. The Debtors respectfully submit, however, that the Court should consider any positions taken by Appaloosa in these capacities rather than the interests Appaloosa holds as a Certificateholder.

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Cases. The C-6 and C-7 Trusts hold a combined approximately 278 loans and have issued approximately 50 unique classes of certificates. 4. REMICS are governed by pooling and servicing agreements (the Servicing

Agreements) that govern in extensive detail the duties of the servicers that are responsible for administering the loans and allocating cash flows to different classes of certificateholders. These Servicing Agreements are intended to protect not only the REMIC status and resulting tax treatment of the trust, but also to balance the sometimes-conflicting interests of the various classes of certificateholders, as well as those of the issuer(s), servicer(s), and others. 5. Generally, Servicing Agreements provide that, upon an event of default under a

mortgage loan held by the REMIC, such mortgage loan is transferred to and administered by a special servicer appointed to represent the interests of the Certificateholders with respect to that loan. Pursuant to the terms of the Servicing Agreements that govern the Fixed Rate Loan, Midland Loan Services (Midland) was named special servicer of the Fixed Rate Loan prior to the filing of these Chapter 11 Cases.5 By purchasing the certificates and continuing to hold them throughout Midlands appointment as special servicer, each Certificateholder agreed to allow Midland to administer and service the Fixed Rate Loan in the Certificateholders collective best interests, including, where appropriate, to exercise remedies on the Certificateholders behalf. 6. Through their Standing Motions, the Certificateholders now seek to circumvent

the express provisions of the governing C-6 Servicing Agreement so they may object to the Debtors restructuring strategy and assume a prominent seat at the bargaining table in these
5

Pursuant to a Co-Lender Agreement (defined below), the C-6 Servicing Agreement is the applicable Servicing Agreement for the entire Fixed Rate Loan, and Midland, as special servicer for the C-6 Trust, is therefor the special servicer for the entire Fixed Rate Loan. As the Court is aware, LNR, the special servicer for the C-7 Trust, has initiated an adversary proceeding, now before this Court, seeking relief requiring CRES Investment No. II, LP (CRES) to terminate Midland and appoint LNR as special servicer for the Fixed Rate Loan. See LNR Partners, LLC v. CRES Investment No. II, LP, No. 10-04237 (Bankr. S.D.N.Y. 2010) (the Adversary Proceeding).

4
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Chapter 11 Cases in their capacity as Certificateholders. In support of the Standing Motions, the Certificateholders primarily rely upon section 1109(b) and Judge Pecks recent willingness to hear argument from certificateholders in the context of a cash collateral dispute and an intraREMIC adversary proceeding in In re Extended Stay Inc., No. 09-13764 (Bankr. S.D.N.Y. 2009). The issue of whether certificateholders are parties in interest in chapter 11 cases was not briefed, much less decided, in Extended Stay. 7. Second, the Certificateholders should not be allowed to intervene in these Chapter

11 Cases pursuant to Bankruptcy Rule 2018. The two factors courts typically consider when determining whether intervention is warranted are: (a) whether the proposed intervenors

interests are adequately represented by a party already in the case; and (b) whether intervention would result in undue delay or prejudice to the Debtors. The Certificateholders satisfy neither prong. The Certificateholders interests are being represented by Midland, as special servicer. To the extent the Certificateholders now dispute the adequacy of Midlands representation, their recourse is to pursue the remedies available to them under the C-6 Servicing Agreementnot to intervene and stall the Debtors restructuring to pursue such disputes within these Chapter 11 Cases.6 To that end, Certificateholder intervention poses an unwarranted risk of undue delay and complexity in these Chapter 11 Cases and prejudice to the Debtors and their estates. 8. Further, the Standing Motions make clear that the Certificateholders have certain

divergent interests from other certificateholdersand the Debtors should not be caught in that crossfire. It is the role of Midland, as special servicernot of the Debtors or this Courtto consider and balance those divergent interests when negotiating or determining the treatment of

The Standing Motions devote considerable attention to the Debtors stalking horse motion and the auction process contemplated therein. The Debtors will respond appropriately in the proper context and at the appropriate time.

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the Fixed Rate Loan under the Debtors chapter 11 plan.

Allowing Certificateholders to

intervene would add yet another layer of complexity to the already myriad complexities in these Chapter 11 Cases and require the Debtors to negotiate with at least the five Certificateholders that filed the Standings Motions, and perhaps countless more, despite the facts that the Certificateholders will not even have the right to vote on the Debtors plan, are already represented by special servicers, and have recourse to the extent they have grievances. 9. In adjudicating the Standing Motions, the Court should consider that LNR, which

by its own account is the largest special servicer in the United States,7 recently filed a brief opposing Appaloosas certificateholder intervention request in Bank of America, N.A. v. PCV ST Owner L.P., No. 10-1178 (S.D.N.Y) (Stuytown), in which it adopted many of the same arguments the Debtors make here. There, LNR argued, among other things, that [i]ndividual certificateholdershave no contractual right to seek to challenge or override the actions of a CMBS special servicer or to second guess through intervention the special servicers exercise of remedies...8 and that certificateholder intervention (i) raises serious public policy concerns relating to the distressed commercial real estate market, and (ii) undermines the contractual agreements established to foster effective administration of mortgage loans and to enhance recoveries on defaulted loans.9 Given LNRs prominent role in the special servicing industry, this Court should not countenance LNRs willingness to pursue inconsistent strategies to advance its interests in individual cases.
7

LNR was correct when it argued in Stuytown that

See Bank of America, N.A. v. PCV ST Owner L.P. No. 10-1178 (S.D.N.Y Mar. 19, 2010): Brief of Amici Curiarum LNR Partners, Inc. and American Capital, Ltd. in Support of CWCapital Asset Management LLCs Opposition to Motion for Leave to Intervene as a Party-Defendant Filed by Appaloosa Investment L.P. I, Palomino Fund Ltd., Thoroughbred Fund L.P., and Thoroughbred Master Ltd., filed on March 19, 2010 [Docket No. 71] (the LNR Stuytown Amicus Brief) at p. 10. The LNR Stuytown Amicus Brief is attached hereto as Exhibit A. See LNR Stuytown Amicus Brief at p. 10. Id. at pp. 2-3.

8 9

6
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certificateholders do not have standing and should not be allowed to intervene in the foreclosure proceeding of a mortgage borrower. And the District Court for the Southern District of New York in Stuytown rightfully agreed with LNR.10 10. The Debtors therefore respectfully request that the Court deny the

Certificateholders requests for standing and/or authority to intervene. Background A. 11. The Fixed Rate Loan As of the Petition Date, the Debtors had incurred aggregate funded secured

indebtedness of approximately $1.42 billion, including approximately $1.29 billion of propertylevel secured debt, approximately $1.05 billion of which was securitized and sold into the CMBS market. Approximately $825,402,542 remains outstanding on account of the Fixed Rate Loan (the Fixed Rate Mortgage Loan Obligations), which represents the largest piece of the Debtors secured debt. The Fixed Rate Loan is collateralized by 45 of the Debtors hotel properties (each of which is owned by a separate Debtor) and has a maturity date of July 9, 2017. B. 12. The C-6 and C-7 Trusts and Servicing Agreements, the Co-Lender Agreement, and the Adversary Proceeding The Debtors prepetition lenders transferred their interests in the Fixed Rate

Mortgage Loan Obligations in equal principal amounts of $412,701,271 to two REMIC trusts; namely, LB-UBS Commercial Mortgage Trust 2007-C6 (the C-6 Trust) and LB-UBS Commercial Mortgage Trust 2007-C7 (the C-7 Trust and, together with the C-6 Trust, the C6 and C-7 Trusts).

10

See Summary Order Denying Motion to Intervene, No. 10-1178 [Docket No. 89].

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13.

The C-6 Trust holds 181 loans totaling approximately $2.95 billion, is secured by

291 properties, and is divided into 27 certificate tranches. The approximately $412 million in Fixed Rate Mortgage Obligations represents approximately 14% of the C-6 Trust. 14. The C-7 Trust holds 97 loans totaling approximately $3.15 billion, is secured by

154 properties, and is divided into 26 certificate tranches. The approximately $412 million in Fixed Rate Mortgage Obligations represents approximately 13% of the C-7 Trust. 15. The C-6 and C-7 Trusts are governed by separate Servicing Agreements. The C-6

Trust is governed by that certain Pooling and Servicing Agreement, dated August 13, 2007, by and between Structured Asset Securities Corporation II, as depositor, Wachovia Bank, National Association, as master servicer, Midland Loan Services, as special servicer, and LaSalle Bank National Association, as trustee (the C-6 Servicing Agreement). The C-7 Trust is governed by that certain Pooling and Servicing Agreement, dated as of November 12, 2007, by and between Structured Asset Securities Corporation II, Wachovia Bank, National Association, as master servicer, LNR Partners, Inc., as special servicer, and LaSalle Bank National Association, as trustee (the C-7 Servicing Agreement). 16. In addition, the Fixed Rate Loan is governed by a Co-Lender Agreement (the

Co-Lender Agreement) dated as of August 13, 2006, by and between Lehman Brothers Holdings, Inc., acting as initial Fixed Rate Note A-1 lender, and Lehman Brothers Holdings, Inc., acting as initial Fixed Rate Note A-2 lender. Pursuant to section 3.01 of the Co-Lender Agreement, Midland is the rightful initial special servicer under the Fixed Rate Loan and the C-6 Servicing Agreement shall be the initial applicable Servicing Agreement for the Fixed Rate

8
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Loan.11 As such, Midland is the special servicer under the Fixed Rate Loan and is required to act in accordance with the provisions of the C-6 Servicing Agreement.12 17. Section 1.01 of the C-6 Servicing Agreement sets forth the servicing standard,

which requires Midland to act in the collective best interests of the Certificateholders.13 In addition, Section 3.01(a) of the C-6 Servicing Agreement states that Midland is responsible for servicing and administering the assets in the Fixed Rate Loan for the benefit of the Certificateholders. See C-6 Servicing Agreement at section 3.01(a). 18. The C-6 Servicing Agreement also expressly reserves the rights of the Majority

Controlling Class Certificateholder (e.g, with respect to the C-6 Trust, Five Mile Capital Partners LLC or an affiliate thereof (collectively, Five Mile), as holder of the majority interest in the controlling class of the C-6 Trust) to replace Midland in the event Five Mile is dissatisfied with its services. Specifically, section 6.09(a) states: . . . the Majority Controlling Class

Certificateholder(s) may at any time and from time to time designate a Person to serve as Special
11 Section 3.01(a) of the Co-Lender Agreement states as follows: . . . for purposes of servicing and administering the Mortgage Loans and any REO Property . . . (1) the Series 2007-C6 Pooling and Servicing Agreement shall be the initial Applicable Servicing Agreement and (2) the Series 2007-C6 Master Servicer and the Series 2007C6 Special Servicer shall be the initial Servicers with respect to the Mortgage Loans. . ...
12

On October 27, 2010, LNR filed a complaint in the Supreme Court of the State of New York seeking, among other things, specific performance and/or preliminary injunctive relief requiring CRES to replace Midland with LNR as special servicer for the Fixed Rate Loan. See LNR Partners, LLC v. CRES Investment No. II, LP, No. 651850-10 (N.Y. Sup. Ct. Oct. 27, 2010) (the State Court Action). On November 10, 2010, CRES removed the State Court Action to federal court. The State Court Action was then automatically referred to the docket of these Chapter 11 Cases under 28 U.S.C. 1334(b) because the State Court Action aris[es] in or [is] related to a case under title 11. The removal of the State Court Action, in turn, initiated the Adversary Proceeding before this Court. The Adversary Proceeding is ongoing, Midland continues to be the special servicer for the Fixed Rate Loan, and the C-6 Servicing Agreement remains the Servicing Agreement that governs the Fixed Rate Loan. The C-6 Servicing Agreement provides that, with respect to the required servicing standard, Midland is obligated to service and administer the Fixed Rate Loan in the same manner in which, and with the same care, skill, prudence, and diligence with which, Midland services and administers comparable mortgage loans (a) with similar borrowers and comparable foreclosure properties for other third-party portfolios (giving due consideration to the customary and usual standards of practice of prudent institutional commercial mortgage lenders servicing their own mortgage loans and foreclosure properties), and/or (b) owned by Midland, exercising reasonable business judgment and acting in accordance with applicable law, the terms of the C-6 Servicing Agreement, and the Co-Lender Agreement. See C-6 Servicing Agreement at section 1.01.

13

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Servicer hereunder and to replace any existing Special Servicer without cause or any Special Servicer that has . . . otherwise ceased to serve . . . as Special Servicer. . . . See C-6 Servicing Agreement at section 6.09(a). 19. The C-6 Servicing Agreement also contains standard no-action provisions that

expressly prohibit certificateholders from instituting any suit, action, or proceeding with respect to the C-6 Servicing Agreement or the Fixed Rate Loan, unless the following conditions are met: a. A certificateholder gives the trustee under the Servicing Agreement written notice of a default under the Servicing Agreement; and b. Certificateholders entitled to at least 25% of the voting rights have made a written request to the trustee to institute such suit, action, or proceeding and the trustee has neglected to take such action for at least 60 days.14 See C-6 Servicing Agreement at section 11.03(c). 20. To the best of the Debtors knowledge, no certificateholders under either the C-6

or C-7 Trusts have given written notice of a default under the C-6 Servicing Agreement or the C-

14

Section 11.03(c) of the C-6 Servicing Agreement states as follows: No Certificateholder shall have any right by virtue of any provision of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement or any Mortgage Loan, unless, with respect to any suit, action or proceeding upon or under or with respect to this Agreement, such Person previously shall have given to the Trustee a written notice of default hereunder, and of the continuance thereof, as hereinbefore provided, and unless also (except in the case of a default by the Trustee) the Holders of Certificates entitled to at least 25% of the Voting Rights shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and (except in the case of a default by the Trustee) the Trustee, for 60 days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding. It is understood and intended, and expressly covenanted by each Certificateholder with every other Certificateholder and the Trustee, that no one or more Holders of Certificates shall have any right in any manner whatsoever by virtue of any provision of this Agreement to affect, disturb or prejudice the rights of the Holders of any other of such Certificates, or to obtain or seek to obtain priority over or preference to any other such Holder, which priority or preference is not otherwise provided for herein, or to enforce any right under this Agreement, except in the manner herein provided and for the equal, ratable and common benefit of all Certificateholders. For the protection and enforcement of the provisions of this section, each and every Certificateholder and the Trustee shall be entitled to such relief as can be given either at law or in equity.

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7 Servicing Agreement, nor have any Certificateholders entitled to at least 25% of the voting rights made a written request to institute a suit, action, or proceeding.15 C. 21. Role of LNR and Appaloosa in the Chapter 11 Cases LNR has played an active role in these Chapter 11 Cases already. LNR serves as

the special servicer for the following of the Debtors secured mortgage loans: the Residence Inn Mission Valley Mortgage Loan; the Hilton Doubletree Washington D.C. Mortgage Loan; the Residence Inn Tysons Corner Mortgage Loan; the Hilton Homewood Suites San Antonio Mortgage Loan; and the Residence Inn Anaheim (Garden Grove) Mortgage Loan. To be clear, the Debtors do not dispute that LNR has standing in these Chapter 11 Cases with respect to issues relating to the mortgage obligations for which LNR serves as special servicer. In addition, as described above, LNR is the plaintiff in the Adversary Proceeding against CRES. 22. Appaloosa also has played an active role in these Chapter 11 Cases. In

recognition of the fact that it is not entitled to standing as a Certificateholder in these Chapter 11 Cases, Appaloosa purchased $10 million of the Debtors $53 million Five Mile DIP Loan. Moreover, Appaloosa purchased 100 of the approximately 5.8 million outstanding Innkeepers USA Trust 8% Series C Cumulative Preferred Shares (or less than .02%) for the admitted purpose of manufacturing standing in these Chapter 11 Cases.16 23. The Debtors do not dispute that Appaloosa has standing in its capacity as a post-

petition lender and preferred shareholder. The Debtors do, however, believe Appaloosa should
15

To be clear, if CRES were to exercise its right to replace Midland as the special servicer of the Fixed Rate Loan, the effect would be that a new special servicer would be appointed. However, the no-action clause (regardless of whether the C-6 Servicing Agreement or the C-7 Servicing Agreement governed the Fixed Rate Loan at that time) would still serve to bar Certificateholders from having standing in these Chapter 11 Cases because any claim for relief would continue to rest on the legal rights of the special servicer of the Fixed Rate Loan. See Appaloosa Standing Motion at p. 3 (Appaloosa purchased Preferred Shares for the wholly permissible purpose of bolstering any conceivable challenge to its standing, so as to enable it to protect its significant financial stake in these Bankruptcy Cases.).

16

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be limited to raising arguments that are related to the treatment of the claims arising out of the postpetition financing and the interests arising out of the preferred shares. Under any

circumstances, any claims arising under the Five Mile DIP Loan will be paid in full pursuant to the chapter 11 plan confirmed in these Chapter 11 Cases. Further, the Debtors note that an Ad Hoc Committee of Preferred Shareholders has formed to represent the interests of the Debtors preferred shareholders. As the Court is aware, that Ad Hoc Committee has demonstrated the ability to represent adequately the interests of preferred shareholders. 24. Notably, neither LNR nor Appaloosa has filed a proof of claim on account of its

interests as a Certificateholder. The deadline for filing proofs of claim in these Chapter 11 Cases was October 29, 2010. Further, counsel for Appaloosa has not filed the requisite statement under Federal Rule of Bankruptcy Procedure 2019 to reflect each of the entities it represents. D. 25. Current Status of Restructuring Process Over the course of the last several months, the Debtors have undertaken an

extensive process to identify a stalking horse bidder to facilitate the successful conclusion of these Chapter 11 Cases. As a result of these efforts, the Debtors have selected Five Mile and Lehman to fund a chapter 11 plan of reorganization pursuant to a joint proposal by Five Mile and Lehman (the Five Mile/Lehman Bid). The Five Mile/Lehman Bid contemplates an

enterprise-level transaction involving the Debtors entire portfolio, is valued at approximately $1.14 billion, and, if consummated, will significantly deleverage the Debtors capital structure. Notably, Midland has agreed to support the Five Mile/Lehman Bid. As such, with Midland and Lehman both on board, the Debtors two largest secured creditorsrepresenting more than $1 billion of the approximately $1.29 billion of property-level, prepetition secured claims against the Debtors and holding mortgages on 65 of the Debtors 72 hotelssupport the Five Mile/Lehman Bid. 12
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26.

The Court has scheduled a hearing on the Debtors motion for authority to enter

into commitment papers for the Five Mile/Lehman Bid for March 8, 2011.17 In the meantime, the Debtors are continuing the marketing process for both stalking horse bids and overbids.18 27. The Debtors are currently engaged in extensive discovery with six partiesLNR,

Appaloosa, the Ad Hoc Committee of Preferred Shareholders, the Official Committee of Unsecured Creditors, TriMont Real Estate Advisors, Inc., and CWCapital Management and C-III Asset Managementover the proposed Lehman/Five Mile Bid. Argument I. Certificateholders Do Not Qualify For Standing Under Section 1109(b) Of The Bankruptcy Code. 28. Section 1109(b) of the Bankruptcy Code provides that [a] party in interest,

including the debtor, the trustee, a creditors committee, an equity security holders committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter. 11 U.S.C. 1109(b). The Certificateholders assert they have standing in these Chapter 11 Cases under section 1109(b) as parties in interest. While the Bankruptcy Code does not otherwise define party in interest, courts generally construe the meaning of the term to ensure fair representation of all constituencies impacted in any significant way by a chapter 11 case. In re Ionosephere Clubs, Inc., 101 B.R. 844 (Bankr. S.D.N.Y. 1989). Specifically, courts in this District have held that a party in interest is any party that has (a) a direct financial interest in the outcome of a chapter 11 case, (b) a pecuniary interest affected by a chapter 11 case, or (c) a sufficient interest in a chapter 11 proceeding

17 18

See footnote 6. See Notice of Filing of Process Letter, dated January 25, 2011 [Docket No. 856].

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that would require representation. See, e.g., In re Stone Barn Manhattan LLC, 405 B.R. 68, 75 (Bankr. S.D.N.Y. 2009). 29. While courts generally endorse a broad interpretation of the term party in

interest, it cannot reasonably be interpreted to confer standing on every conceivable party that asserts an interest in the outcome of the Debtors Chapter 11 Cases. Recognizing there must be a limit, courts in this and other Circuits have expressly held that a party must assert its own rights and cannot rest its claim for relief on the legal rights and interests of a third party. See e.g., In re Saint Vincents Catholic Med. Ctrs. of New York, 429 B.R. 139, 149 (Bankr. S.D.N.Y. 2010) (quoting In re Comcoach Corp., 698 F.2d 571, 573 (2d Cir. 1983)) (The real party in interest is the one who under the applicable substantive law, has the legal right which is sought to be enforced or is the party entitled to bring suit.); Savage & Assoc., P.C. v. Mandel (In re Teligent, Inc.), 417 B.R. 197, 210 (Bankr. S.D.N.Y. 2009) (A party in interest . . . cannot raise the rights of a third party even though it has a financial stake in the case.); Southern Blvd., Inc. v. Martin Paint Stores, 207 B.R. 57, 62 (S.D.N.Y. 1997) (The concept of a party in interest does not, according to the Second Circuit, encompass a creditor of one of the debtors creditors.).19 30. Although it appears no court has specifically addressed whether a CMBS

certificateholder has standing in a chapter 11 case of an underlying mortgage borrower, various courts in this and other jurisdictions have held that CMBS certificateholders do not have a direct financial stake in the obligations of a borrower in a CMBS structure and are strictly limited to the rights available under the applicable pooling and servicing agreement. See LaSalle Bank Natl Assn v. Nomura Asset Capital Corp., 180 F. Supp. 2d 465, 471 (S.D.N.Y. 2001) (holding that
19

The court in Southern Blvd. specifically noted that a creditor of one of the debtors creditors is not a party in interest under section 1109(b), stating that [s]uch a party may be deeply concerned about the bankruptcy proceeding, since the debtors ability to pay its creditor may affect the creditors ability to pay in turn its creditor. But, the partys legal rights and interests can only be asserted against the debtors creditor, not against the debtor, and hence is not a party in interest under the Second Circuits view of section 1109. Id. at 61.

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the plain meaning of the relevant servicing agreement governs in an event of default and that the special servicer has the sole power and obligation to sue on behalf of the REMIC certificateholders); Braddock Fin. Corp. v. Wash. Mut. Bank, 637 F. Supp. 2d 924, 928-29 (D. Colo. 2009) (holding that certificateholders, as owners of a beneficial interest in a REMIC, are not successor owners of the mortgage loans as defined by the contracts at issue and that the trustee of the REMIC has exclusive authority to maintain an action on behalf of the trust against a third party); In re Shilo Inn, Diamond Bar, LLC 285 B.R. 726, 729-30 (Bankr. D. Or. 2002) (noting that certificateholders in a REMIC do not have any direct interests in the obligations of the debtor-borrower whose obligations are owned by the REMIC). Not surprisingly, of course, the Certificateholders did not file proofs of claim in the Debtors Chapter 11 Cases.20 31. As such, certificateholders are not treated in the same manner as holders of

corporate bond debt, which have standing in chapter 11 cases even when an indenture trustee is also representing their interests. In Shilo Inn, the Court explained it is appropriate to distinguish holders of corporate debt from certificateholders. The Court noted that certificateholders only have a beneficial interest in the assets of a REMIC, while corporate debt holders hold a direct financial stake in the issuer of the debt. See 285 B.R. at 728. This is an important and justified distinction. Commercial loan pools owned by REMICs often contain commercial loans from multiple borrowers (as do the two REMICs that hold the Fixed Rate Loan), making it unwieldy for all involved parties if each certificateholder of a REMIC were to have rights against each of the borrowers in the loan pool. Id. This supports the conclusion that a certificateholders

20

To date, counsel for Appaloosa has also not filed the requisite statement under Federal Rule of Bankruptcy Procedure 2019 to reflect each of the entities it represents. As set forth in Bankruptcy Rule 2019(b), the Court may refuse to permit that entity to be heard further or to intervene in the [Chapter 11 Cases.]; In re Ionosphere Clubs, Inc., 101 B.R. 844, 852-53 (Bankr. S.D.N.Y. 1989).

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beneficial ownership in a REMIC is separate from ownership of the assets in the mortgage pools themselves. 32. The Second Circuit employed a similar analysis in Krys. v. Official Comm. of

Unsecured Creditors of Refco, Inc. (In re Refco, Inc.), 505 F.3d. 109 (2d Cir. 2007), where it affirmed the District Courts determinations that investors in a segregated portfolio company (SPC) did not have standing to contest a settlement between the SPC and the debtors because the settlement only indirectly affected investors of the SPC (i.e., the debtors creditor). Id. at 110. The lower courts had found that party in interest standing does not encompass a creditor of one of the debtors creditors. Id. On appeal, the Second Circuit noted that, by investing in the SPC, investors placed control of their funds entirely within the hands of the directors or managers of the SPC. Id. at 114. Only the SPC, not individual investors, or even investors as a group, could assert a claim against the Refco estate. Id. So, while investors maintained a financial interest in the SPC, they were not a party in interest; that designation belonged only to the SPC, the party representing the investors financial interest in the cases. Id. at 116. 33. The same reasoning and holding should apply here. The Certificateholders, as

beneficiaries of the C-6 and C-7 Trusts, delegated to Midlandvia contract the responsibility to defend their interests. To the extent the Certificateholders are now unsatisfied with Midlands performance as special servicer, their recourse is to seek to replace Midland as special servicer (which LNR already is pursuing via the Adversary Proceeding). Stated differently, standing under section 1109(b) does not arise if a party seeks to assert a right purely derivative of another partys rights in the bankruptcy proceeding. Indeed, it would be unfair, burdensome, and

contradictory to the spirit of section 1109 to force a debtor to negotiate with legal representatives

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of its creditors and the interest holders of those creditors as the Standing Motions are, in essence, requesting. 34. The Certificateholders provide no controlling authority to support their standing

argument.21 Instead they primarily rely on Extended Staycases easily distinguishable from these Chapter 11 Cases. See Hrg Tr. 25:15-20 (Bankr. S.D.N.Y. Sept. 10, 2009); see also Hrg Tr. 71:15-22 (Bankr. S.D.N.Y. June 16, 2009). As an initial matter, the certificateholder

standing issue in Extended Stay was never briefed, much less decided. It was addressed when Judge Peck allowed certain certificateholders to make appearances and be heard with respect to certain objections to the interim use of cash collateral and also when he denied a motion to remand an adversary proceeding between junior and senior certificateholders. Id. That intraREMIC dispute addressed the legality of the senior certificateholders negotiating with the debtors on behalf of the trust.22 35. In addition, Extended Stay is not on point because the applicable REMIC

contained only one loanthe Extended Stay loan. In these cases, the C-6 and C-7 Trusts hold, in addition to the Fixed Rate Loan, approximately 276 loans unrelated to these Chapter 11 Cases, collectively worth over $5 billion and split into approximately 50 unique classes of certificates. Allowing certificateholderspossibly (if not probably) with competing interests within REMICs and contrasting views across REMICs with respect to the Debtors restructuringto participate
21

The Standing Motions cite to cases with facts easily distinguishable from those present in these Chapter 11 Cases, including (a) In re Stone Barn Manhattan LLC, 405 B.R. 68, 74 (Bankr. S.D.N.Y.) (holding that a prospective purchaser had standing as a party in interest), (b) In re First Humanics Corp., 124 B.R. 87, 92-93 (Bankr. W.D. Mo. 1991) (holding that a creditor that acquired its unsecured claims postpetition enjoyed party in interest status), and (c) In re SFD @ Hollywood, LLC, 411 B.R. 453, 454-55 (Bankr. S.D. Fla. 2009) (finding that an equity security holder is a party in interest). To be clear, the Debtors do not dispute that prospective purchasers, creditors, and equity security holders generally have standing. Further, the arguments LNR puts forth in its Standing Motion are inconsistent with those it put forward in the LNR Stuytown Amicus Brief and are likely contradictory to the arguments LNR would make if itand not Midlandwere special servicer for the Fixed Rate Loan.

22

See Line Trust Corp. v. Lichtenstein, Case No. 09-01354 (Bankr. S.D.N.Y. Oct. 7, 2009) [Docket No. 46].

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in these Chapter 11 Cases may overburden the Debtors reorganization process. With vastly more REMICs and certificateholders implicated, certificateholder standing poses a greater threat to the reorganization process here than in Extended Stay. 36. The facts and circumstances of Extended Stay are further distinguishable because,

in those cases, a special servicer had not been appointed prior to the petition dateleaving the Extended Stay debtors no other option but to engage in prepetition negotiations with certificateholders. Here, Midland was appointed as special servicer for the Fixed Rate Loan on April 19, 2010, two months prior to the commencement of these Chapter 11 Cases and has been an active participant since day one. As such, the circumstances that arguably necessitated that certificateholders be heard in Extended Stay are not present in these Chapter 11 Cases. 37. In sum, the Bankruptcy Code and applicable caselaw dictate that the

Certificateholders do not qualify for standing under section 1109(b) of the Bankruptcy Code. II. The Certificateholders Should Not Be Allowed To Intervene In These Cases Pursuant To Bankruptcy Rule 2018(a). 38. LNR also asserts that the Certificateholders should be allowed to intervene in

these Chapter 11 Cases pursuant to Bankruptcy Rule 2018(a), which provides that [i]n a case under the Code, after hearing on such notice as the court directs and for cause shown, the court may permit any interested entity to intervene. Fed. R. Bankr. P. 2018(a). Such intervention is not warranted in these Chapter 11 Cases. Though some courts have applied a broad

interpretation of standing issues, the interpretation is not infinitely expansive and courts have embraced several judicially self-imposed limits, typically looking to (a) whether the proposed intervenors interests are adequately represented by a party already in the case and (b) whether intervention would result in undue delay or prejudice. See, e.g., Longfellow Indus., Inc. v.

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Blumberg (In re Longfellow Indus., Inc.), 76 B.R. 338, 341 (Bankr. S.D.N.Y. 1987).23 The Certificateholders satisfy neither of these prongs. 39. First, the Certificateholders interests are adequately represented by Midland, as

the special servicer. This representation is explicitly detailed in the C-6 Servicing Agreement. Pursuant to the C-6 Servicing Agreement, Midland has the contractual duty as special servicer to act in the collective best interests of all certificateholders in the REMICs. In buying certificates, the Certificateholders explicitly agreed to allow Midland to represent their interests. However, the Movants devote considerable space in the Standing Motions to intra-REMIC issues, including, among others, allegations that Midland (a) is advancing the interests of Five Mile, rather than the interests of all of the certificate holders that Midland is obligated to represent,24 (b) acted in a manner adverse to [LNRs] interests,25 (c) is supporting the Five Mile/Lehman stalking horse transaction in violation of its servicing standards,26 and (d) is conflicted with respect to its simultaneous servicing of the Trusts and pursuing a course of action for its and Five Miles financial benefit.27 If the Certificateholders have determined they are less than

adequately represented by Midland, their recourse is to pursue any and all remedies set forth in the C-6 Servicing Agreementnot to intervene in these Chapter 11 Cases.

23

To intervene, a party must also have a direct and non-contingent claim. As set forth in the District Courts Stuytown decision, Bank of America, N.A. v. PCV ST Owner LP, No. 10-1178 (S.D.N.Y. Apr. 29, 2010): Transcript of Hearing on Motion to Intervene [Docket No. 90], a certificateholder does not have direct, substantial, and legally protectable interests with respect to the Bid Procedures Motion. Id. at 36:19-23. Instead, a certificateholders interest is indirect and is contingent upon the concurrence of a sequence of events, namely the negligence or failure of the trustee acting for all of the groups, and it is not the business of this lawsuit. Id. at 36:24-37:2. LNR Standing Motion at 19. Id. at 21. Appaloosa Standing Motion at p. 3. Id.

24 25 26 27

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40.

Second, intervention by the Certificateholders may result in undue prejudice to

the Debtors and delay to their Chapter 11 Cases. If the Movants are allowed to intervene, the floodgates may be opened to identical motions, and the Debtors would then be forced to negotiate with literally hundreds of certificateholders in the C-6 and C-7 Trusts, each motivated by their own economic self interestswhich would be an inefficient, unnecessarily wasteful, and likely chaotic exercise. As Judge Gonzalez recently stated in Chryslers chapter 11 cases (and as was quoted in the LNR Stuytown Amicus Brief at p. 8): restricting enforcement to a single agent to engage in unified action for the interests of a group of lenders, based upon a majority vote, avoids chaos and prevents a single lender from being preferred over others. See In re Chrysler LLC, 405 B.R. 84, 103 (Bankr. S.D.N.Y. 2009), affd, 576 F.3d 108 (2d Cir. 2009), cert. dismissed 78 U.S.L.W. 3107 (2009). If each Certificateholder is allowed to argue for a loan resolution strategy that favored its position in the payment priority structure of its REMIC, progress in these Chapter 11 Cases could grind to a halt amid peripheral litigation. As described above, intra-REMIC disputes have already resulted in the Adversary Proceeding, and the Debtors are already engaged in extensive discovery with multiple Certificateholders (and other parties). 41. In sum, the Certificateholders fail to satisfy the two-prong test for Bankruptcy

Rule 2018 intervention in the Chapter 11 Cases. III. The Certificateholders Are Contractually Bound by the No-Action Clause of the C-6 Servicing Agreement. 42. The Standing Motions inaccurately overstate the legal rights ascribed to

Certificateholders and seek to usurp the role of the servicers of the REMICs in these Chapter 11 Cases. Such rightsdictated by the terms of the C-6 Servicing Agreementcan only be

20
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enforced against the Debtors by Midland as special servicer.28 As such, the Certificateholders should be barred from asserting standing or intervening in these Chapter 11 Cases because any claim for relief would rest on the legal rights of a third partythe special servicer.29 43. Put simply, to the best of the Debtors knowledge, none of the conditions required

by the no-action clauses in the C-6 Servicing Agreement have been met here. Specifically, the Standing Motions do not allege that any written notice of default or request to institute suit has been provided or that any resulting trustee or special servicer neglect has taken place. 44. No-action clausestypical in pooling and servicing agreements governing

CMBS transactions, as well as in corporate bond and other indenturesare designed to prevent individual certificateholders (such as, for example, the Certificateholders) from seeking to exercise enforcement remedies or interfere with such remedies following default and are intended for the security of all the bondholders. See Quirke v. St. Louis-San Francisco Ry., 277 F.2d 705, 710 (8th Cir. 1960) (quoting Home Mortg. Co. v. Ramsey, 49 F.2d 738, 743 (4th Cir. 1931)).30 Thus, the issue here is not whether Appaloosa or LNR could sue the trustee or the

28

The Debtors are aware of this Courts limited holding in In re Boston Generating, LLC, 440 B.R. 302 (Bankr. S.D.N.Y. 2010) allowing the standing of certain subordinated creditors in those cases to object to the portion of the sale motion seeking approval of the bidding procedures. The Debtors respectfully submit the circumstances of Boston Generating are readily distinguishable from these Chapter 11 Cases. Most significantly, Boston Generating involved an attempt to preclude the second lien agent and the second lien lenders in those casesall of which were parties that had confirmation voting rightsfrom having standing, which would have resulted in no participation at all for this entire constituency in the bidding procedures dispute. Id. at 316-17. In these Chapter 11 Cases, denying standing to Certificateholders does not preclude the special servicer from exercising full contractual responsibilities, including on behalf of the Certificateholders, and only denies participation to parties that do not have any right to vote on the Debtors plan of reorganization in any event. See, e.g., Roslyn Sav. Bank v. Comcoach Corp. (In re Comcoach Corp.), 698 F.2d 571, 573 (2d Cir. 1983) (holding that a real party in interest is the one that has the legal right that is sought to be enforced or is the party entitled to bring suit); In re Refco, Inc., 505 F.3d. at 117-18 (quoting Comcoach decision); In re Ionosphere Clubs, 101 B.R. 844, 849 (Bankr. S.D.N.Y. 1989) (same); see also In re Kang Jin Hwang, 396 B.R. 757, 766 (Bankr. C.D. Cal. 2008) (holding that the trustee of a REMIC is the real party in interest when suing on behalf of the trust); LaSalle Bank Natl Assn v. Lehman Bros. Holdings, Inc., 237 F. Supp. 2d 618, 633 (D. Md. 2002) (same); In re Shilo Inn, 285 B.R. 726, 728 (court acknowledged that certificateholders have no direct rights against the obligors of pooled mortgage loans). The American Bar Association has long recognized the importance of no-action clauses: The major purpose of this Section is to deter individual debenture-holders from bringing independent law suits for unworthy or

29

30

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issuer, but whether Appaloosa or LNR can exercise or interfere with the exercise of the enforcement remedies by the special servicer against the Debtors, which it specifically agreed it would not do. 45. The foregoing reasoning was validated in Stuytown when the District Court for

the Southern District of New York denied Appaloosa, a certificate holder of the CMBS trust in those cases, the right to intervene in a foreclosure action against the borrower of a securitized mortgage loan based on a no-action clause substantially similar to the no-action clause of the C-6 Servicing Agreement. See Motion to Add Party(ies) Appaloosa Investment L.P. I, Palomino Fund Ltd., Thoroughbred Fund L.P., and Thoroughbred Master Ltd., Case 10-1178 [Docket No. 16]; Summary Order Denying Motion to Intervene, Case 10-1178 [Docket No. 89]. The Court denied Appaloosas motion to intervene because under the operative pooling and services agreement it was prevented from instituting any suit, action or proceeding in equity or law with respect to the mortgage loan that was in default in that case. See Summary Order Denying Motion to Intervene, Case 10-1178 [Docket No. 89]. 46. Furthermore, as the court in Shilo Inn noted, there is no legal theory under which

the terms of a pooling and servicing agreement (including no action clauses) should not be enforceable.31 Allowing a certificateholder to intervene in these Chapter 11 Cases would equate to sanctioning a certificateholders deliberate decision to breach their Servicing Agreements to

unjustifiable reasons, causing expense to the [Debtors] and diminishing [their] assets. The theory is that if the suit is worthwhile, 25% of the debentureholders would be willing to join in sponsoring it. The 25% figure is standard. An additional purpose is the expression of the principle of law that would otherwise be implied that all rights and remedies of the indenture are for the equal and ratable benefit of all the holders. See American Bar Foundation, Commentaries on Model Debenture Indenture Provisions (1971), at 232.
31

See Shilo Inn, 285 B.R. at 732 (If the parties agreed that the special servicer, as the representative of the trusts interests in the pooled assets, can not take certain actions in connection with the reorganization of an obligor on some of the assets in the pool, I know of no legal theory under which that agreement should not be enforceable between the parties to the PSAs.).

22
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the detriment of other certificateholders. The Standing Motions fail to mention any logical or legal reason why this should be allowed in these Chapter 11 Cases.

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Conclusion The Court should not grant the Certificateholders standing or otherwise allow the Certificateholders to intervene in these Chapter 11 Cases. Rather, the Special Servicer should continue to fulfill its exclusive contractual duty to represent the interests of the Certificateholders in these Chapter 11 Cases. To the extent the Certificateholders object to the adequacy of the special servicers representation of their interests, they may exercise the rights and remedies they have under the C-6 Servicing Agreement. For the foregoing reasons, the Debtors respectfully request that this Court deny the relief requested in the Standing Motions.

New York, New York Dated: February 1, 2011

/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 Street Chicago, Illinois 60654-3406 Telephone: (312) 862-2000 Facsimile: (312) 862-2200 Counsel to the Debtors and Debtors in Possession

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EXHIBIT A LNR Stuytown Amicus Brief

K&E 18322769

Case 1:10-cv-01178-AKH Document 71 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

Filed 03/19/10 Page 1 of 14

BANK OF AMERICA, N.A., as Trustee for the Registered Holders of Wachovia Bank Commercial Mortgage Trust 2007-C30, acting by and through its Special Servicer, CWCapital Asset Management LLC, BANK OF AMERICA, N.A., as Trustee for the Registered Holders of COBALT CMBS Commercial Mortgage Trust 2007-C2, acting by and through CWCapital Asset Management LLC pursuant to the authority granted under that certain Amended and Restated Co-Lender Agreement dated March 12, 2007 and U.S. BANK NATIONAL ASSOCIATION, as Trustee for the Registered Holders of Wachovia Bank Commercial Mortgage Trust 2007-C31, ML-CFC Commercial Mortgage Trust 2007-5 and ML-CFC Commercial Mortgage Trust 2007-6, acting by and through CWCapital Asset Management LLC pursuant to the authority granted under that certain Amended and Restated Co-Lender Agreement dated March 12, 2007, Plaintiffs, -againstPCV ST OWNER LP, ST OWNER LP, TRI-LINE CONTRACTING CORP., ATLAS FIRE PROTECTION, INC., POMALEE ELECTRIC CO. INC., REFUSE SYSTEMS CORP., PRO TILE DISTRIBUTORS, INC., TRITON STONE AND MARBLE LLC, S.T.S. TRADING INC. d/b/a S.T. LUMBER & HOME CENTER, ELECTRICAL, PLUMBING, S.D. INTL INC. d/b/a S.D. STONE DEPOT, ELBEX AMERICA OF NEW YORK INC., NEW YORK CITY DEPARTMENT OF TRANSPORTATION PARKING VIOLATIONS BUREAU, NEW YORK CITY ENVIRONMENTAL CONTROL BOARD, and FIRE DEPARTMENT OF THE CITY OF NEW YORK, Defendants. 10 Civ. 1178 (AHK) (ECF Case)

BRIEF OF AMICI CURIARUM LNR PARTNERS, INC. AND AMERICAN CAPITAL, LTD. IN SUPPORT OF CWCAPITAL ASSET MANAGEMENT LLCS OPPOSITION TO MOTION FOR LEAVE TO INTERVENE AS A PARTYDEFENDANT FILED BY APPALOOSA INVESTMENT L.P. I, PALOMINO FUND LTD., THOROUGHBRED FUND L.P., AND THOROUGHBRED MASTER LTD. CADWALADER, WICKERSHAM & TAFT LLP One World Financial Center New York, NY 10281 Telephone: (212) 504-6000 Facsimile: (212) 504-6666 Attorneys for Amici Curiarum LNR Partners, Inc. and American Capital, Ltd.

Case 1:10-cv-01178-AKH Document 71

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TABLE OF CONTENTS PAGE TABLE OF AUTHORITIES ...................................................................................................... ii STATEMENT OF INTEREST ................................................................................................... 1 ARGUMENT ............................................................................................................................. 3 ALLOWING CERTIFICATEHOLDERS TO INTERVENE IN FORECLOSURE ACTIONS WOULD BE CONTRARY TO PUBLIC POLICY, PARTICULARLY IN THE CURRENT COMMERCIAL REAL ESTATE MARKET, AND IS IN DIRECT CONFLICT WITH THE EXPRESS PROVISIONS OF THE GOVERNING DOCUMENTS ............ 3 CONCLUSION ........................................................................................................................ 10

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TABLE OF AUTHORITIES PAGE(S) CASES: Central States Life Ins. Co. v. Koplar Co., 80 F.2d 754 (8th Cir. 1935), cert. denied, 298 U.S. 687 (1936) ............................................. 7 In re Chrysler LLC, 405 B.R. 84 (Bankr. S.D.N.Y. 2009), affd, 576 F.3d 108 (2d Cir. 2009), cert. dismissed, 78 USLW 3107 (2009) ................................................................................ 7 Friedman v. Chesapeake & Ohio Ry. Co., 261 F. Supp. 728 (S.D.N.Y. 1966), affd, 395 F.2d 663 (2d Cir. 1968), cert. denied, 393 U.S. 1016 (1969) ................................. 7 Home Mortg. Co. v. Ramsey, 49 F.2d 738 (4th Cir. 1931)................................................................................................... 8 Quirke v. St. Louis-San Francisco Ry. Co., 277 F.2d 705 (8th Cir.), cert. denied, 363 U.S. 845 (1960) ................................................ 7, 8 Rossdeutscher v. Viacom, Inc., 768 A.2d 8 (Del. 2001) ......................................................................................................... 8

OTHER CITATIONS: American Bar Foundation, Commentaries on Model Debenture Indenture Provisions (1971), at 232 ....................................................................................................................... 9 Commercial Mortgage Alert, CMBS Credit Quality Continues to Plunge, Mar. 5, 2010, available at http://www.cmalert.com/headlines.php? hid=68826 ....................................... 4, 5 Vincent Fernando, Commercial Real Estate Default Rate Doubles As Banks Sit on $1.1 Trillion in Loans, The Bus. Insider, Feb. 24, 2010, available at http://www.businessinsider.com/commercial-real-estate-default-rates-suddenlydouble-2010-2 ...................................................................................................................... 4 Dawn Kopecki, Commercial Real Estate is a Time Bomb, Maloney Says (Update 2), Bloomberg, July 9, 2009, available at http://www.bloomberg.com/apps/news?pid=20601087&sid=aTP9nCROB6PU .................... 3 David M. Levitt, U.S. Property Investors Deem 2010 Worst Time to Sell (Update 1), Bloomberg, Nov. 5, 2009, available at http://www.bloomberg.com/apps/news?pid=20601103&sid=aHljg1MMC.MU .................... 3 ii

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PAGE(S) Maureen Milford, Commercial real estate next bubble in economy, The News Journal, March 14, 2010, available at http://www.delawareonline.com/article/20100314/business/3140360/Next-bubbleCommercial-real-estate..................................................................................................... 3, 5 Stephanie Petosa, et al., CMBS YE 2009 Servicing Update, Fitch Ratings, Mar. 15, 2010, available at http://cmbs.informz.net/cmbs/data/images/fitch_cmbsye2009.pdf ...................... 5 Marc Wieder, Securitized Mortgages in Commercial Real Estate Signal Trouble Ahead, Real Estate Weekly, Jan. 20, 2010, available at http://www.allbusiness.com/bankingfinance/banking-lending-credit-services/13856172-1.htmls............................................... 4, 5 Paul Wiseman, Smaller Banks Could Be at Risk; Congressional Panel Fears Commercial Real Estate Trouble, USA Today, Feb. 11, 2010, at 1B, available at http://www.usatoday.com/printedition/money/20100211/banks11_st.art.htm?loc=inte rstitialskip.......................................................................................................................... 3-4

iii

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Amici curiarum LNR Partners, Inc. and American Capital, Ltd. respectfully submit this Memorandum of Law in support of CWCapital Asset Management LLCs (CWCAM) Opposition to the Motion for Leave to Intervene as a Party-Defendant (the Motion) filed by Appaloosa Investment L.P. I, Palomino Fund Ltd., Thoroughbred Fund L.P., and Thoroughbred Master Ltd. (collectively, Appaloosa).1 STATEMENT OF INTEREST LNR Partners, Inc. (LNR) is the countrys largest special servicer of commercial real estate mortgage loans included in commercial mortgage-backed securities (CMBS) transactions. LNR is a subsidiary of LNR Property Holdings Ltd. LNR through its subsidiaries, affiliates and joint ventures, is involved in the real estate investment, finance and management business and engages principally in: (i) acquiring, developing, repositioning, managing and selling commercial and multifamily residential real estate properties; (ii) investing in high-yielding real estate loans; and (iii) investing in, and managing as special servicer, unrated and non-investment grade rated CMBS. LNR and its affiliates have been engaged in the special servicing of commercial real estate assets for over 18 years. As of December 31, 2009, LNR and its affiliates acted as special servicer for 136 domestic CMBS pools with a then current face value in excess of $191 billion. Additionally, LNR has resolved approximately $21.2 billion of U.S. commercial and multifamily loans over the past 18 years. As a special servicer, LNR has a keen interest in the protection and the proper recognition of the legal rights and duties of a CMBS special servicer such as CWCAM and in the orderly and efficient resolution and disposition of defaulted loans in

Unless otherwise defined herein, all capitalized terms shall have the meaning set forth in CWCapital Asset Management LLCs Memorandum in Opposition to the Motion for Leave to Intervene as a Party-Defendant, dated March 12, 2010 (the Opposition Brief or Opp. Br.).

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the best interests of all certificateholders, especially in significant foreclosure proceedings such as those before this Court. American Capital, Ltd. (American Capital) is a publicly traded private equity firm and global asset manager which originates and manages investments in middle market private equity, leveraged finance, real estate and structured products. American Capital has invested in 36 different CMBS pools, 18 of which have been in bonds that result in American Capital being named the Controlling Class Representative. These 18 trusts are collateralized by $55.6 billion of commercial mortgages in over 3,600 loans. Additionally, American Capital has invested in 35 below investment grade securities in 12 CMBS trusts that are collateralized by $45 billion of commercial mortgages in over 2,500 loans. American Capital has also invested in 29 investment grade securities in 17 CMBS Trusts that are collateralized by $16 billion of commercial mortgages in over 1,000 loans. As it relates to this action, ACAS CRE-CDO 2007-1, managed by American Capital CRE Management LLC (a subsidiary of American Capital, LLC, a portfolio company of American Capital), along with LNR Securities Holdings, an affiliate of LNR, and CWCAM, are noteholders and controlling class representatives for the following trusts that hold interests in the underlying loans on the subject properties: Wachovia Bank Commercial Mortgage Trust 2007C31; ML-CFC Commercial Mortgage Trust 2007-5; and ML-CFC Commercial Mortgage Trust 2007-6. See Opp. Br. Ex. 2 at 3.25(a), Ex. 11. LNR, in its capacity as a special servicer of CMBS, and American Capital, in its capacity as the controlling representative of certain of the trusts submit that allowing Appaloosa to intervene in this foreclosure action (i) raises serious public policy concerns relating to the distressed commercial real estate market, and (ii) undermines the contractual agreements established to foster effective administration of mortgage loans and to enhance recoveries on 2

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defaulted loans.

For the reasons set forth below (as well as those set out in CWCAMs

Opposition Brief) Appaloosas motion to intervene should be denied. ARGUMENT ALLOWING CERTIFICATEHOLDERS TO INTERVENE IN FORECLOSURE ACTIONS WOULD BE CONTRARY TO PUBLIC POLICY, PARTICULARLY IN THE CURRENT COMMERCIAL REAL ESTATE MARKET, AND IS IN DIRECT CONFLICT WITH THE EXPRESS PROVISIONS OF THE GOVERNING DOCUMENTS The $3.5 trillion commercial real estate market is experiencing serious financial stress as billions of dollars of commercial mortgage loans mature over the next few years. See e.g., Maureen Milford, Next bubble: Commercial real estate, The News Journal, March 14, 2010 (Congressional Oversight Panel has recognized that there is a commercial real estate crisis on the horizon . . .).2 As of June 2009, there were 5,315 commercial properties in default,

foreclosure or bankruptcy, more than twice the number at the end of 2008. See Dawn Kopecki, Commercial Real Estate is a Time Bomb, Maloney Says (Update 2), Bloomberg, July 9, 2009;3 see also David M. Levitt, U.S. Property Investors Deem 2010 Worst Time to Sell (Update 1), Bloomberg, Nov. 5, 2009 (The worldwide credit crisis has driven $138 billion worth of U.S. commercial properties into default, foreclosure or debt restructuring through September).4 As commercial real estate loans increasingly reach maturity through 2010 and beyond, defaults and foreclosures likely will increase. Indeed, in 2010, approximately $475 billion of commercial real estate loans nationwide are expected to mature, see Milford, supra, and by 2014 a total of $1.4 trillion in
2

Available at http://www.delawareonline.com/article/20100314/business/3140360/Next-bubble-Comm ercial-real-estate.

3 4

Available at http://www.bloomberg.com/apps/news?pid=20601087&sid=aTP9nCROB6PU. Available at http://www.bloomberg.com/apps/news?pid=20601103&sid=aHljg1MMC.MU.

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commercial real estate loans will reach the end of their terms. See Paul Wiseman, Smaller Banks Could Be at Risk; Congressional Panel Fears Commercial Real Estate Trouble, USA Today, Feb. 11, 2010, at 1B.5 With trillions of dollars in commercial real estate mortgage loans coming due in the United States over the next few years, and with many lenders unable or unwilling to refinance them, defaults and foreclosures likely will continue to occur at a rapid rate. As commercial property values have declined and credit remains restricted, refinancing often is not available, thus resulting in increased delinquencies and foreclosures. See Vincent Fernando, Commercial Real Estate Default Rate Doubles As Banks Sit on $1.1 Trillion in Loans, The Bus. Insider, Feb. 24, 2010 (According to Bloomberg, [t]he default rate for loans on office, retail, hotel and industrial properties surged to 3.8 percent from 1.6 percent a year earlier).6 The statistics regarding risks associated with potential upcoming maturity defaults are staggering. And these statistics do not take into account the loans that have or will go into default during their term because of the inability of the borrowers to meet their monthly debt service requirements. The current economic environment has seriously impacted the ability of these properties to meet cash flow requirements necessary to operate and maintain the property as well as service the mortgage debt.

Available at http://www.usatoday.com/printedition/money/20100211/banks11_st.art.htm?loc=interst itialskip.

6

Available at http://www.businessinsider.com/commercial-real-estate-default-rates-suddenly-double2010-2. See also Wiseman, supra, at 1B (Deutsche Bank estimates that more than 65% of commercial real estate loans might not qualify for refinancing because banks have tightened underwriting standards and property values have collapsed); see also Commercial Mortgage Alert, CMBS Credit Quality Continues to Plunge, Mar. 5, 2010, available at http://www.cmalert.com/headlines.php? hid=68826. (In many cases, property values have fallen below the levels when the loans were originated . . . . Because of that and tighter credit standards, borrowers are having a hard time refinancing the full amount of current loans. Fitch expects that maturing loans originated within the last five years will continue to play a big part in boosting the CMBS delinquency rate).

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Nationally, CMBS loans represent approximately 20% of commercial property debt. Marc Wieder, Securitized Mortgages in Commercial Real Estate Signal Trouble Ahead, Real Estate Weekly, Jan. 20, 2010.7 As this Court is aware, CMBS, like those issued by the Trusts at issue here, are securities backed by commercial real estate which are sold to numerous different investors with varying appetites for risk. Upon the occurrence of certain events of default, including a monetary default, the administration of the commercial loans underlying the CMBS is transferred from the master servicer to the special servicer.8 The special servicer is then solely responsible for servicing and administering the loan in accordance with the Servicing Standard and the terms of the applicable pooling and servicing agreement. Opp. Br. at 4. Accordingly, as defaults in commercial real estate loans have and will continue to increase, loans backing CMBS increasingly have been transferred to special servicing. According to a special report issued by Fitch Ratings earlier this week, CMBS special servicers resolved $8.7 billion loans in 2009, but this figure reflects only 11% of the amount in special servicing at the end of last year. Stephanie Petosa, et al., CMBS YE 2009 Servicing Update, Fitch Ratings, Mar. 15, 2010.9 The number of loans transferring to the special servicer is growing exponentially. Id. At the end of February, $76.6 billion of the $722 billion of outstanding CMBS loans in the U.S. were in special servicing. See Commercial Mortgage Alert, supra (The net amount of loans in special servicing climbed by 8.5%, or $4.3 billion, [in February 2010 and] [t]here was a net increase of 341 loans, bringing the total [of commercial

Available at http://www.allbusiness.com/banking-finance/banking-lending-credit-services/138561721.htmls.
8

Cadwalader notes for the record that it also advises Wachovia Bank N.A., now part of Well Fargo N.A. (Wells), in its capacity as Master Servicer of this Trust. Wells is not a party to this foreclosure action, as CWCAM acts as Special Servicer.
9

Available at http://cmbs.informz.net/cmbs/data/images/fitch_cmbsye2009.pdf.

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real estate loans in special servicing] to 4,332);10 see also Milford, supra (Fitch anticipates delinquencies on loans in commercial mortgage-backed securities will reach 6 percent by the first quarter of this year and could reach 12 percent by 2012);11 Wieder, supra (Bloomberg recently reported that the rate of defaults and late payments on real estate loans packaged as commercial mortgage-backed securities increased by more than five times in the third quarter of 2009). LNR, like all special servicers in the industry, experienced an exceptionally high inflow of new special servicing volume in 2009, which has continued into 2010. Accordingly, LNR and special servicers nationwide must, in accordance with the Servicing Standard and the terms of the applicable pooling and servicing agreement, administer and service thousands of defaulted commercial real estate loans in the best interests of the certificateholders taken as a whole, and, where appropriate, exercise remedies available to the lender under the loan documents upon default of the loan, including foreclosure. Courts should not permit individual certificateholders (such as Appaloosa) to intervene in routine foreclosure actions, particularly in the current economic environment, where intervention by a holder acting solely in its own self interest would be detrimental to other investors in the same trust fund. Intervention here would be inconsistent with a number of important public policy considerations and the express contractual provisions of the governing documents. First, intervention would set an undesirable precedent that could open the court system to a flood of litigation by investors acting for their self interested economic gain. The

10 11

Available at http://www.cmalert.com/headlines.php?hid=68826.

Available at http://www.delawareonline.com/article/20100314/business/3140360/Next-bubbleCommercial-real-estate.

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special servicer is the party who is designated to serve on behalf of all certificateholders precisely to avoid conflicts among holders who may be differently impacted by actions taken by the special servicer. The special servicers duty is to act for all the certificateholders, and in their best interests taken as a whole. Individual holders such as Appaloosa act only for their own interest. In a complex multi-class capital structure like these CMBS, if each holder were free to argue for a loan resolution strategy that favored its position in the payment priority structure, chaos would result. The number of intervention motions that could be filed as a result of one foreclosure could clog up the court systems and create gridlock in the efficient resolution of defaulted mortgage loans, allowing distressed properties to further deteriorate in value. See generally Friedman v. Chesapeake & Ohio Ry. Co., 261 F. Supp. 728, 731 n.7 (S.D.N.Y. 1966), affd, 395 F.2d 663 (2d Cir. 1968), cert. denied, 393 U.S. 1016 (1969). And in the end, it is the assets of the trust fund itself, the source of repayment to all certificateholders, which will bear the cost of litigation involving challenges to the special servicers recommended course of action. If each bondholder had the right to intervene in a foreclosure of a mortgage without the required consent of other bondholders, a single foreclosure could result in numerous individual intervention motions. Here, given that the PSA specifically addresses the mechanics and requirements for action by certificateholders, compliance with these provisions would provide for an orderly manner for investors to take action if they so desire. This Court has recognized that [i]f in a mortgage securing thousands of bonds every holder of a bond or bonds were free to sue at will for himself and for others similarly situated, the resulting harassment and litigation would be not only burdensome but intolerable. Friedman, 261 F. Supp. at 731 n.7 (quoting Quirke v. St. Louis-San Francisco Ry. Co., 277 F.2d

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705, 709 (8th Cir.), cert. denied, 363 U.S. 845 (1960)); see also Central States Life Ins. Co. v. Koplar Co., 80 F.2d 754, 758 (8th Cir. 1935), cert. denied, 298 U.S. 687 (1936). Second, intervention would allow an individual certificateholder to circumvent the administrative structure of CMBS transactions and the agreements and undertakings of all certificateholders, who contracted to vest in the special servicer the sole responsibility for administering defaulted mortgage loans. As the United States Bankruptcy Court for the Southern District of New York recently stated in the Chrysler Chapter 11 case: Restricting enforcement to a single agent to engage in unified action for the interests of a group of lenders, based upon a majority vote, avoids chaos and prevents a single lender from being preferred over others. In re Chrysler LLC, 405 B.R. 84, 103 (Bankr. S.D.N.Y. 2009), affd, 576 F.3d 108 (2d Cir. 2009), cert. dismissed 78 USLW 3107 (2009). A certificateholder with the economic resources to pursue legal action should not be permitted to contravene the agreements to which its securities are subject in order to advance its own interests over those who abide by the contractual terms of such agreements. Here, affiliates of LNR and American Capital, like Appaloosa, each hold certificates issued by the trusts. LNR and American Capital additionally represent the

controlling class for certain of the trusts and possess certain consultation rights here afforded to the controlling class in the trusts. Despite such rights and interests, however, under the PSA, all certificateholders have vested in CWCAM (as Special Servicer), the sole responsibility for administering the Loan and have respected and adhered to the terms of the PSA. Third, intervention would allow certificateholders to ignore no-action clauses by which they are contractually bound, to the detriment of other certificateholders. As noted in CWCAMs Opposition Brief, section 11.03 of the PSA at issue here contains a standard no8

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action clause that prohibits certificateholders with less than 25% of the voting rights to institute any suit, action or proceeding. See Opp. Br. at 8. No-action clauses are designed to prevent individual noteholders from seeking to exercise enforcement remedies or interfere with such remedies following default.12 Such clauses are typical in PSAs governing CMBS

transactions, and they are typical in corporate bond and other indentures. These clauses are intended for the security of all the bondholders. See Quirke, 277 F.2d at 710 (quoting Home Mortg. Co. v. Ramsey, 49 F.2d 738, 743 (4th Cir. 1931)). They are included for just such a case as here, where one bondholder, or a small minority, is determined upon action which a large majority believe hostile to their interests. Id.; see also Rossdeutscher v. Viacom, Inc., 768 A.2d 8, 22 (Del. 2001). The American Bar Association has long recognized the importance of no action clauses: The major purpose of this Section is to deter individual debentureholders from bringing independent law suits for unworthy or unjustifiable reasons, causing expense to the Company and diminishing its assets. The theory is that if the suit is worthwhile, 25% of the debentureholders would be willing to join in sponsoring it. The 25% figure is standard. An additional purpose is the expression of the principle of law that would otherwise be implied that all rights and remedies of the indenture are for the equal and ratable benefit of all the holders. See American Bar Foundation, Commentaries on Model Debenture Indenture Provisions (1971), at 232.

12

Thus, the issue here is not whether Appaloosa could sue the Trustee or the Issuer, but whether Appaloosa can exercise or interfere with the exercise of the enforcement remedies by the Special Servicer against the Borrowers, which it specifically agreed it would not do.

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CONCLUSION Individual certificateholders such as Appaloosa have no contractual right to seek to challenge or override the actions of a CMBS special servicer or to second guess through intervention the special servicers exercise of remedies, including foreclosure upon default. Nor should an individual certificateholders such as Appaloosa be permitted to intervene to assert defenses to foreclosure when all certificateholders, including those with rights of consultation, have delegated the power to exercise remedies to the special servicer. Allowing Appaloosa to intervene in this action would spawn satellite litigation that will clog the courts and impair recoveries to CMBS bondholders. For the foregoing reasons, and for the reasons set forth in CWCAMs Opposition Brief, Appaloosas Motion for Leave to Intervene as a Party-Defendant should be denied. Dated: New York, New York March 19, 2010 CADWALADER, WICKERSHAM & TAFT LLP

By: /s/ Howard R. Hawkins, Jr. Howard R. Hawkins, Jr. Michael N. Abdo Joshua M. Bennett One World Financial Center New York, NY 10281 Telephone: (212) 504-6000 Attorneys for Amici Curiarum LNR Partners, Inc. and American Capital, Ltd.

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