10000004370

- 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 B E F O R E: HON. SHELLEY C. CHAPMAN U.S. BANKRUPTCY JUDGE August 31, 2010 2:00 PM U.S.
Bankruptcy Court One Bowling Green New York, New York - - - - - - - - - - - - - - - - - - - - -x Debtors. INNKEEPERS USA TRUST, et al., UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK Case No. 10-13800-scc - - - - - - - - - - - - - - - - - - - - -x In the Matter of:
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VERITEXT REPORTING COMPANY www.veritext.com
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- 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Transcribed By: Clara Rubin HEARING re "Five Mile Capital DIP": Motion for Entry of an HEARING re "Cash Management": Debtors' Motion for the Entry of HEARING re "Cash Collateral": Debtors' Motion for the Entry of
Interim and Final Orders (A) Authorizing the Debtors to (I) Use the Adequate Protection Parties' Cash Collateral and (II) Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. Sections 361, 362, and 363, (B) to the Extent Approved in the Final Order, Granting Senior Secured, Priming Liens on Certain Postpetition Intercompany Claims, (C) to the Extent Approved in the Final Order, Granting Administrative Priority Status to Certain Postpetition Intercompany Claims, and (D) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(b) [Docket No. 13]
an Order Authorizing the Continued Use of (I) Existing Cash Management System, as Modified Herein, (II) Existing Bank Accounts, (III) Existing Business Forms, and (IV) Certain Existing Investment Guidelines [Docket No. 14]
Order Authorizing the Debtors to Obtain Postpetition Financing from Five Mile Capital Partners on a Priming Basis Pursuant to Sections 364(c)(1), 364(c)(2), 364(c)(3), 364(d)(1), and 364(e) of the Bankruptcy Code [Docket No. 24]
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- 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: MICHAEL J. CANNING, ESQ. ARNOLD & PORTER LLP Attorneys for Five Mile Capital II Pooling International LLC 399 Park Avenue New York, NY 10022 BY: PATRICK M. BRYAN, ESQ. DANIEL T. DONOVAN, ESQ. KIRKLAND & ELLIS LLP Attorneys for the Debtors and Debtors-in-Possession 655 Fifteenth Street, N.W. Washington, DC 20005 BY: ANUP SATHY, P.C., ESQ. JAMES H.M. SPRAYREGEN, ESQ., P.C. (TELEPHONICALLY) A P P E A R A N C E S: KIRKLAND & ELLIS LLP Attorneys for the Debtors and Debtors-in-Possession 300 North LaSalle Chicago, IL 60654
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- 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: IRENA M. GOLDSTEIN, ESQ. DEWEY & LEBOEUF LLP Attorneys for the Ad Hoc Committee of Preferred Shareholders 1301 Avenue of the Americas New York, NY 10019 BY: MICHAEL J. SAGE, ESQ. DECHERT LLP Attorneys for Lehman ALI Inc. 1095 Avenue of the Americas New York, NY 10036 BY: LAWRENCE P. GOTTESMAN, ESQ. BRYAN CAVE LLP Attorneys for LNR Partners, LLC 1290 Avenue of the Americas New York, NY 10104
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- 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: ALAN W. KORNBERG, ESQ. PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP Attorneys for Apollo Investment Corporation 1285 Avenue of the Americas New York, NY 10019 BY: LORENZO MARINUZZI, ESQ. MORRISON & FOERSTER, LLP Attorneys for the Official Committee of Unsecured Creditors 1290 Avenue of the Americas New York, NY 10104 BY: JOHN D. PENN, ESQ. HAYNES AND BOONE, LLP Attorneys for Midland Loan Services 201 Main Street Suite 2200 Forth Worth, TX 76102
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- 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: PHILLIP K. WANG, ESQ. (TELEPHONICALLY) DUANE MORRIS LLP Attorneys for LNR Properties 1540 Broadway New York, NY 10036 BY: PAUL K. SCHWARTZBERG, ESQ. U.S. DEPARTMENT OF JUSTICE Office of the United States Trustee 33 Whitehall Street 21st Floor New York, NY 10004 BY: DAVID M. NEFF, ESQ. PERKINS COIE LLP Attorneys for Creditors, C-III Asset Management, LLC and CWCapital Asset Management 131 South Dearborn Street Suite 1700 Chicago, IL 60603
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- 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: MARK A. FINK. ESQ. (TELEPHONICALLY) KILPATRICK STOCKTON LLP Attorneys for Creditor, TriMont Real Estate Advisors 1100 Peachtree Street, Suite 2800 Atlanta, GA 30309
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INNKEEPERS USA TRUST, et al.

- 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 operator. THE CLERK: THE COURT: P R O C E E D I N G S All rise. Good afternoon. Please be seated.
All right, let's get some housekeeping matters out of the way first. phone, please? MR. WANG: This is Philip Wang of Duane Morris, on Can I take appearances of the folks on the
behalf of two securitized trusts specially serviced by LNR Partners LLP. THE COURT: All right, thank you, Mr. Wang. I'm showing Mr. Fink and
Anyone else on the phone? Mr. Sprayregen. (No response) THE COURT: Okay.
(Noise heard over loudspeakers) THE COURT: (No response) COURTCALL OPERATOR: Yes, Your Honor. This is the Someone want to be heard on the phone?
It's -- they have notified CourtCall that they would
just like to listen only in today's -THE COURT: All right. So Mr. Fink and Mr. Sprayregen
are indeed on the line? COURTCALL OPERATOR: THE COURT: Yes, Your Honor.
All right, thank you.
All right, pursuant to the discussions that we had
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- 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 yesterday, I think the order of play is going to be we're going to start with cash collateral. (No response) THE COURT: All right, no one's disagreeing. Everyone agree?
And as you may recall, we also dealt with cash management on an interim basis at the original hearing. technically this is going to be a final hearing on cash management and on cash collateral. I received, I think in the last twenty-four hours, two additional pleadings, and I just want to make sure there isn't anything else. About an hour ago, I got a supplemental So,
authority filed by the debtors, supplemental authority in support of debtors' omnibus replies. MR. SATHY: THE COURT: Yeah, supplemental affidavit. Is -It's --
It says "Supplemental Authority".
it was signed by Mr. Basta. MR. SATHY: THE COURT: Yes. Yes. It's the
And it's a -- as Exhibit A.
deposition transcript, it appears to be, of Kevin -MR. SATHY: THE COURT: correctly. MR. SATHY: THE COURT: Kevin Semon from FT -- from Midland, yes. Okay. So I got that. And Mr. Sage filed Yes. -- Semon. I don't know if I'm saying that
a reservation of rights with respect to Lehman's position on
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- 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 testify. cash collateral. MR. SATHY: Your Honor, we had also filed an
additional supplemental affidavit of Mr. Cook. THE COURT: affidavit -MR. SATHY: THE COURT: Very good. -- of Mr. Cook. And I think that's all So with that, Yes. Thank you. I got the supplemental
that I've gotten in the last twenty-four hours. I'm ready to go when you are. (Pause) MR. SATHY: THE COURT: MR. SATHY: Good afternoon, Your Honor. Good afternoon.
Your Honor, as you noted, this is our
final hearing with respect to cash collateral as well as our cash management motion. Your Honor, in addition to the reply
that we filed, and in conjunction with the reply we filed, there are two affidavits that we have filed in support; I'm going to refer to them as Cook 1 and Cook 2, Cook 1 being the affidavit we filed with the response, and the Cook 2 affidavit being what was filed last night. Your Honor, Mr. Cook is here; he's available to Per the discussion yesterday, we will not be
conducting a direct exam; it's simply submitting his affidavits and offering him up for cross-examination. Your Honor, with respect to the Cook 1 affidavit, we
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- 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 had attached a number of documents, and I think some of them are important for the discussion on cash collateral, and they include our original thirteen-week cash flow, a chart describing the reporting frequency and the types of reporting -- and I'll be referring to that chart -THE COURT: MR. SATHY: Okay. -- through my presentation -- two There's been a significant amount
checklists of information.
of information flow between the company and FTI, who has taken primary responsibility for monitoring the cash collateral use. And with respect to the Cook 2 affidavit, Your Honor, that was intended to rebut Mr. Greenspan's declaration. The
reason why it was submitted yesterday was Mr. Greenspan was deposed yesterday. THE COURT: MR. SATHY: Okay. And so we needed to finish that deposition
before submitting Mr. Cook's second declaration. Your Honor did note that Lehman has filed also a reservation, and that was in part based on the colloquy we had yesterday, the interplay between -THE COURT: MR. SATHY: collateral order. THE COURT: Right. I mean, and just to be clear on Understood. -- the plan support agreement and the cash
that, I guess we're just going to have to let the string to
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- 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 order. play out, so to speak, and I think we agree that the record is going to remain open. I don't quite know how it's going to
work out, because at some point I'm going to have to -- I'm going to rule, and -MR. SATHY: THE COURT: Right. -- I'm going to rule in a particular
And then Mr. Sage may want to make certain arguments, And I just
or not, depending upon the way things come out.
guess we just have to be cognizant of the availability of any witnesses that we have today, in the event that Mr. Sage desires to pursue an objection and wants to take testimony. So I'm not going to put him in the position today of doing hypothetical cross-examination -MR. SATHY: THE COURT: Right. -- or hypothetical arguments, but I think
we have to somehow deal with that and just keep it in the back of our minds. MR. SATHY: Sure. Sure. And, Your Honor, we have
language in the proposed order to try to deal with that issue, although it's not perfect. Your Honor, the adequate protection order that we're seeking is similar in many respects to the interim order, with a series of enhanced protections that we have identified as appropriate under the circumstances. The adequate protection
is really intended to create that fair balance between lenders'
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- 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 rights to know what's happening to their cash, have visibility and transparency, and defaults to the extent that the debtors don't perform, and the debtors' ability to operate its business and function as an enterprise. Your Honor, with respect to the adequate protection we provided at the interim hearing, Your Honor might recall there are thirteen-week cash flows, which have been provided, including an updated one that will be provided later today. There was also -- will be variance reports with respect to changes to the thirteen-week cash flow. Your Honor, we've been
providing the flash reports with respect to interim perspective of what's going on with the cash on a tranche-by-tranche basis. We did provide the first flash report for the stub period on August 16th. We'll be providing the second flash report for And
the second -- for the first part of August later today.
we'll also be providing the full reconciliation for the stub period. While that would technically be due on September 15th,
the company's been able to complete that stub period, full reconciliation, and it will be providing it later today, or certainly by tomorrow. Your Honor, the flash report is a key metric for transparency; it provides for tranche-by-tranche expenses at real time in terms of allocation. With respect to the vast
majority of the expenses, I'd say upwards of ninety percent of expenses that are incurred during a particular period -- the
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- 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 flash report has described those expenses on a tranche-bytranche basis. So when a party sees a tranche -- a flash
report, it is tranche-by-tranche and it's upwards of ninety percent of the expenses for that period. And, again, those are
provided twice a week -- twice a month and on that tranche-bytranche basis. Your Honor, with respect to the -- what we call the application report, that's the full reconciliation; that's done forty-five days after the end of a month. We obviously will be
giving the shorter part of the month for July, so only part of the month. We were able to complete that early. Again,
tranche-by-tranche; full application of the expenses. Your Honor, we have of course the -- with respect to the thirteen-week (sic), there are covenants in terms of disbursement covenants, 110 percent disbursement for any thirteen-week period, 106 -- I'm sorry, 110 percent for any four-week period, 106.5 percent for any thirteen-week period, in terms of ensuring that on an enterprise level the revenues and expenses/disbursements are meeting our budgets, basically. We've established, Your Honor, the waterfall with respect to how expenses get paid. We've agreed to reserves to
deal with the nuances and the vagaries of what might happen in a particular month, so that we would ensure that there's enough money to pay expenses. Of course property-level expenses get And
paid; corporate expenses, pursuant to the allocation.
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- 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 professional fees, including the fees of the representatives will also get paid. Notably, Your Honor, after all of that waterfall -when it works its way to the bottom, all of the remaining cash, then, would be sent back to the respective lenders, pursuant to the rights parties have. It's not just for interest payment
or -- it could be more than the interest payment that parties would get; it just depends on a particular month and how much cash is generated. Your Honor, there's a whole litany of defaults, and parties can certainly come back to the Court at any point in time with respect to concerns about cash collateral. Your Honor, since the entry of the interim order, we have been providing the reports, and the company has been performing at or above budget. So the concerns that were in
some ways hypothetical on the first day haven't materialized yet. And we're pleased about the performance that obviously is
an important part of any proceeding. We have given -- as I said, the flash reports have been provided. We have had very little response from FTI or
any of the other constituents with respect to flash reports. They are being prepared either on time or early with respect to the -- and with respect to the first application report that's been provided early. We're providing additional reporting
based on what's in the existing loan docs, and those are --
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- 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 documents, and those are being provided as well. And, frankly, with respect to where we are today in the first six weeks of the case, the cash collateral use has been in conformity with the budget. as we have projected. as well. Your Honor, there was some discussion about -- in Mr. Greenspan's affidavit, with respect to one tranche potentially performing -- a floating tranche potentially performing worse than the others. made. It's just not true. Certain assumptions were The hotels are performing
Disbursements are where we have expected
Mr. Cook is obviously here; he can certainly explain the
basis of the -- of his declaration and the assumptions he's been using to show that the floating tranche has been performing at the same level as the others. And with respect to our flash period for July, the floating pool contributed the -- you know, a percentage of cash, excess cash, similar to the number of hotels, about twenty-seven of the hotels in the pool, about twenty-five-or-so percent of the excess cash generated from that period. floating pool clearly is performing at the same level. Your Honor, the result of our July period, the stub period, is that approximately eight million dollars of excess cash, once the full reconciliation has been completed, will be available. There'll be some reserves that are held back, but a So the
substantial portion of that cash will be set forth in the
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- 17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 allocation and sent back to lenders. Your Honor, with respect to additional protections that we've been providing, we've had discussions with a number of the lenders, LNR in particular. has asked for some provisions. provisions. protection. The creditors' committee
TriMont has asked for some
And we've tried to accommodate additional adequate I'm not sure which of the objections are resolved
as a result of these additional protections, but we felt like these were reasonable. So in addition to the protections that
existed in the interim order, we've agreed, and it's set forth in the proposed final order, to pay additional expenses of representatives, including for pre-petition periods. agreed to include receipts on our flash report. We've
And the flash
report did not contain receipts; it just contained disbursements on particular tranche. So we've included
revenues on a tranche-by-tranche basis, and this is intended to give people a real-time picture of revenue and cost, not just disbursements but as a particular hotel or particular tranche that's not performing. THE COURT: So the receipts -- it's going to not just
be tranche by tranche but property by property -MR. SATHY: THE COURT: MR. SATHY: THE COURT: It will be --- the receipts? It'll be tranche by tranche. Okay.
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- 18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SATHY: report's -THE COURT: MR. SATHY: THE COURT: MR. SATHY: Right. -- set up. Okay. But it will be tranche by tranche. And Ultimately that's the way the flash
not just disbursements.
So parties will know, for example, if
there's going to in theory be an intercompany loan based on revenue for a period, and then disburs -- not just the disbursements. And it's -- you know, these things are not done
on a two-week basis, and so there will be vagaries in these reports, but it'll be more information -THE COURT: MR. SATHY: Okay. -- for parties to at least understand
whether or not there is a risk of that potential intercompany loan. We've provided in the final order for there to be an increase in the reserve of up to four and a half million dollars as the proposed reserve. And, again, this is intended
to deal with the vagaries of if expenses are coming in after the money is disbursed; that we have enough set aside, taxes or whatever it might be. And, again, the goal of that is to I mean, that is ultimately
prevent intercompany borrowings. the goal by -THE COURT:
So if there is a blip and you're in the
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- 19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 negative at the end of a particular period, you can look to that reserve -MR. SATHY: THE COURT: the next period? MR. SATHY: As opposed to sending it back to the Absolutely. -- in order to fund that and purchase in
lenders, we would reserve a portion of -THE COURT: MR. SATHY: Okay. -- what would otherwise be disbursed in a
month, and then use it the next month -THE COURT: MR. SATHY: THE COURT: All right. And is that --
-- if we need to. -- is that evergreen? Then if you went
positive the next month, that would be topped back up to 4.5? MR. SATHY: THE COURT: MR. SATHY: Right. Okay. So it would be no more than 4.5. It needs I Right.
to work its way -- it might need to work its way up to 4.5. mean, based on -THE COURT: MR. SATHY: THE COURT: MR. SATHY: Right, based on actual -Exactly. Okay. Exactly.
But that's intended to prevent,
again, the intercompany scenario from occurring. We've agreed to waivers of 506(c) claims; we've agreed
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- 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to the waiver of the 552(b) equities-of-the-case provision. We've agreed to provide that, to the extent there are intercompany loans, that those loans receive interest so that, to the extent there is a particular tranche of debtors that is lending, that they would be repaid with interest. And we've
proposed seven percent; that's the rate of our DIP financing. So the theory being, if they're extending a loan, that they should receive compensation for that, not just the repayment. We've agreed to provide reporting that would otherwise be given to Five Mile under their DIP to particular lenders whose parties are affected. So to the extent there's
additional reporting that Five Mile would be getting -THE COURT: basically. MR. SATHY: THE COURT: MR. SATHY: It feels that way, but yes -Okay. -- I think that's right. Most Favored Nations on Reporting,
And we've also agreed to provide for a lien in the master account for lenders to the extent that there is cash in that master account that would otherwise, if the music stopped, belong to them; that they would have a lien. And that was to
address a concern that LNR had expressed and we felt was a legitimate concern. So we agreed to that. And it's a
provision that Mr. Gottesman and I have negotiated in other cash collateral orders.
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- 21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. SATHY: Okay. Your Honor, in essence, I think our view
is that we have earned the right to continue the system that we have in place; it's working. Lenders have transparency; they
have visibility; there's accountability with respect to this process; that it's a fair balance with respect to the rights of the debtors versus the rights of the representatives; and that, to the extent that there are legitimate concerns by the lenders with respect to cash collateral, that we have addressed those and we've met our burden under 363(p). To the extent that the goals of the parties are more case-specific or case strategy, we don't think that the Court should entertain some of the concerns, because they really don't apply to cash collateral. They might apply to a more
fundamental case strategy of particular representatives, for example, to terminate exclusivity or to try to silo off assets, which is not appropriate for purposes of cash collateral. So we would tender Mr. Cook for cross-examination if Your Honor -- and tender his affidavits, and offer him for cross-examination. order. But we would ask that -- we have a proposed
At some point, if Your Honor would like, at whatever We've sent it
point we would be happy to walk through changes. around.
We've gotten some comments; we've accepted, you know, Obviously there's a fundamental disagreement
a number of them.
about cash collateral that is not -- has not been bridged
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- 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 between the debtors and, effectively, Midland and the Midlandrelated servicers. THE COURT: All right, so none of the additional
protections that you describe fully resolve any of the other objections, is that -MR. SATHY: THE COURT: MR. SATHY: THE COURT: That's correct. -- that correct? That's correct. Okay. That's --
Is there any objection to the Cook 1 and Cook 2 declarations coming into evidence? (No response) THE COURT: I can't recall if Midland yesterday said
that there was going to be an objection to some of the background statements perhaps? MR. PENN: Not any -- we'll be able to address
everything we need to -THE COURT: MR. PENN: THE COURT: declarations are in. (Cook 1 and Cook 2 affidavits of Nathan Cook were hereby received into evidence in lieu of direct testimony, as Debtors' exhibits, as of this date.) THE COURT: And it's Midland's turn, I suppose. In cross. -- in cross, Your Honor. Okay, very well. All right, so those
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- 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SATHY: THE COURT: MR. PENN: Thank you, Your Honor. Thank you. Thank you, Your Honor. John Penn on behalf
of Midland Loan Services. THE COURT: MR. PENN: Good afternoon, Mr. Penn. Good afternoon. We'd reserve opening until
presentation of our case-in-chief. THE COURT: MR. PENN: Certainly. And so at this point I believe it'd be
proper for Mr. Cook to come on up. THE COURT: All right.
Hello, Mr. Cook. MR. COOK: THE COURT: hand for me? MR. COOK: Yeah. Hello. You want to stand up and raise your right
(Witness duly sworn) THE COURT: CROSS-EXAMINATION BY MR. PENN: Q. A. Q. Mr. Cook, do you have your declaration before you? Yes, I do. Would you turn to paragraph 19, please? THE COURT: MR. PENN: Mr. Penn, which declaration? I'm sorry. Thank you.
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- 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Q. THE COURT: MR. PENN: THE COURT: Okay, I'm there. Is the statement in 19 true today? Yes, it is. It is being -- those reports are being provided in advance He has two. The original. All right. I apologize.
of the hearing on cash collateral? A. It is being provided in advance of September 1st and it
will be provided today. Q. Okay. But just so we're clear, you're going to a --
you're starting a final cash collateral hearing using thirteenweek projections that are six weeks old and only run out six weeks in the future, right? A. That's not true. We're actually going to provide a
thirteen-week cash forecast, which will be attached to the final order, which is being presented. Q. And to make sure I understand that, you want the Court to
approve a thirteen-week cash flow that we have never seen and it is not subject to cross-examination, and you want to attach that to the order; is that your request? A. Again, we will be providing that thirteen-week cash The thirteen-week cash forecast that will be
forecast to you.
presented is, in general, consistent with the cash forecast that was previously provided. I can represent today to the
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- 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Court that the company has been operating above budget for the first stub period from the petition date -MR. PENN: Your Honor, I hate to interrupt and object, It's also hearsay and best-
but that's all nonresponsive. evidence rule problems. THE COURT:
All right, Mr. Cook, I think what Mr.
Penn's going to want you to do is answer the questions that he asks. THE WITNESS: THE COURT: Okay. But can I be clear on -- Mr. Penn, on what
thirteen-week cash forecast you're talking about? MR. PENN: Yes, Your Honor.
The thirteen-week cash forecast, the only one that has
ever been provided is the one that was attached to the original cash -- interim cash collateral order, correct? A. That is correct. We provided a cash forecast on July
19th, and then -Q. A. Q. Okay. -- the next requirement is September 1st. And the July 19 thirteen-week cash flow goes to, I
believe, October 16? A. Q. That's correct. And so have you provided -- excuse me, has the debtor
provided any other cash forecasts that carry beyond October 16? A. Not prior to today.
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- 26 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Now, has the debtor provided any cash forecasts on a
collateral-pool-by-collateral-pool basis? A. Q. No. Our cash forecasting is on a consolidated basis.
And so when you were discussing -- in your second
declaration, discussing Mr. Greenspan's declaration, you opted to criticize components of his declaration and how he ran out some projections, correct, generally? A. Generally. I disagree with the methodology, and then
there were specific items in there that were faulty assumptions. Q. Well, we can talk about the assumptions, but I just want
to be sure; did you provide your own forecast for cash use for any collateral pool going forward? A. For -- well, it is included in my second declaration. I
did utilize the Greenspan methodology and then apply corrected assumptions so that that would be, I believe, considered a corrected forecast under that methodology for the floating pool through the end of this calendar year. Q. But did you actually provide that detail or any kind of So it
backup other than just changing the numbers in his? would be your own forecast? A.
I have not provided a tranche-by-tranche forecast, no.
Again, our forecasting is done on a consolidated basis. Q. Okay. Now, as far as revenues in the -- let's talk about
the floating-rate pool for a moment, because that's what was
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- 27 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 discussed in Mr. Greenspan's declaration. What adjustments
have been made to your forecasts to address the fact that the Troy, Michigan property, the Troy (Central), is no longer going to be in the Marriott pool -- or the Marriott flag? A. We have not specifically adjusted the revenue budget that However, the company has been
was the basis for the forecast. performing above budget.
So there -- we have not made an
adjustment for that either. Q. Well, when you say -- I'm just talking about the Troy So did you include any adjustment because it's not
property.
going to have the Marriott flag? A. Q. No, we have not included upward or downward adjustments. Okay. Now, does your adjustment to Mr. Greenspan's
declaration address the cost of the Marriott professionals that are going to be paid from the Lehman cash collateral pool? A. I believe that Mr. Greenspan, in his analysis, included
those costs, and I did not take those out of my correction to his analysis. Q. Mr. Greenspan included the cost for the Marriott
settlement whereby the debtors are going to pay Marriott's legal fees? A. I believe he included some Marriott professional fees.
I'd have to look at his declaration to see what specific fees those relate to. Q. Okay, we'll take a look at that. But I believe that that
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- 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 settlement arose after his declaration, and so I'm not sure that's going to be included. But we'll take a look.
Now, what's the least burdensome way that the fixed-rate cash collateral could be segregated so that it could be in one account that the debtors could draw from as they needed it, but that all revenues would go into that, so that at any given point in time we could say what's the balance in that account? What's the least burdensome way to do that? A. The least burdensome way to achieve that would be to set If we were to do that, though --
up a separate bank account.
that is not the complication with running the business that we have described. You simply would just have a different amount It's the processing of the
of cash in a different account.
invoices and the payments that is burdensome for the debtors. Q. Okay, so if we just set up a separate bank account and
drew the funds out and then just wrote the same -- just one check at a time, and you wouldn't have to do double-checks, like you talked about initially, that would be one way to segregate funds that would not be overly burdensome, correct? A. It actually would be burdensome from an operation-of-the To the extent that we were to set up
business perspective.
separate bank accounts for each of the tranches and then have to get approval for -- to draw funds out of those accounts, that would result in delays in payments -Q. Oh, I understand, but --
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- 29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. -- to vendors. -- I didn't say anything about getting approvals. I just
said, whenever you needed to use the money to pay for that expense, you would just draw it out of that account? And so if
there's no approval process, that's not much of a burden just to have that cash? It comes in over here and stays in that
account so that, any given day, someone from FTI can say 'What's the balance?' A. That's not overly burdensome, is it?
No, you could set up a bank account and put separate cash But, again, in order to track actual expenses, it
in accounts.
would need to come out to fund expenses for each tranche. There would be an estimation process to come to those amounts if you were to do that on a daily basis without approvals. Q. And that's something that you could do anyway; and as a
part of the reconciliation and the application report, you could true that up? Or you can probably even do it with the
flash reports every two weeks, right? A. That's true. There are further complications in the fact
that the invoices that do come into the debtor often come on a consolidated basis. So we have a number of vendors that
aggregate purchases, and we're making payments on behalf of all nine tranches. So to the extent that we're going to start to
make payments out of each of those separate tranches, we would then need to process nine invoices as opposed to one -Q. Actually, no, because --
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- 30 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. -- and nine payments. Excuse me. -- because what you can do is -- you're still It's just a question of you just draw
just processing the one.
the money out of those and pay that one check, right? A. You could do that. There would be significant additional
reconciliation of the accounts as a result of that, though, from an accounting perspective. Q. But you're doing that reconciliation anyway every two
weeks with the new flash reports to track revenues too, correct? A. That's correct. We do it on a look-back basis fifteen I think what you're
days after the end of the period.
proposing is to do it in -- you know, at the time that the payment is actually made. Q. A. Q. But it is something that is possible to be done, correct? I'm sorry, which part? The setting up just a separate bank account to track
fixed -- or to receive fixed-rate cash collateral deposits and then fund the expenses out of that account. A. It's theoretically possible but, again, it would result in
a significant amount of additional work on the accounting staff to be able to reconcile and track back each of those disbursements to the separate bank accounts and then also, you know, or to -- and/or split invoices out. Q. But it'd be a whole lot less than what they had been
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- 31 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 experiencing pre-petition, right? A. Q. I'm sorry, what -- who had been experiencing pre-petition? I'm sorry. It would be a much lower burden than your
accounting staff had pre-petition with getting prior approval, correct? A. That's not necessarily the case. I think you're proposing
something different than what was in place pre-petition. Q. Well, definitely. Actually, it should be a whole lot
easier because you don't have to ask for permission to spend any money, right, under what I was talking about? A. Correct, but the accounting side would be more burdensome
than before. Q. Now, you were critical of Mr. Greenspan's declaration and
his methodology because, as the way you described it, it used accrual rather than cash basis, correct? A. Q. That's correct. Okay. That is one of the criticisms.
And that was pretty much -- well, the other
criticism, I believe, was that there were professional expenses that were included for a possible equity committee or an examiner, right? A. Correct. There were fees for an examiner -- actually, I
don't believe there were for an examiner; there were for an equity committee. And then there were also -- the assumption
was that the accrued expenses for professionals are paid essentially at the -- in real time, at the time that they are
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- 32 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. incurred. And then, also, Mr. Greenspan did not apply a twenty
percent holdback for Kirkland & Ellis, Moelis, Morrison & Foerster and Jefferies, and all of those things actually will occur. Q. Okay. Now, let's break out on the equity I believe his declaration was that it
committee/examiner.
would be either, and his deposition testimony was that those dollars would likely be either for an equity committee or an examiner, correct? A. Again, I don't have it in front of me. If you have a
copy, I'd be happy to take a look. MR. PENN: THE COURT: (Pause) Do you want me to respond? Yes. Okay. If I look at Exhibit A to Mr. Greenspan's analysis, Your Honor, if I could? Sure.
he lists equity committee counsel with a monthly run rate of 125,000, and then equity committee FA for 100,000. schedule I don't see mention of examiner. Q. Why don't you take a look at page 2, paragraph 3, third On this
line from the bottom -A. Q. A. Okay. -- and continuing through the end. (Pause). Okay, I've read it. I believe it -- he reserves
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- 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. his right to include costs for an examiner. Q. A. Okay. But it -- I don't necessarily read that statement to say
the costs in Exhibit A would cover an examiner. Q. A. Q. Okay, let's say an examiner gets appointed -Okay. -- hypothetically -MR. PENN: Calm down. Where in your second
-- examiner gets appointed.
declaration are the fees and expenses of the examiner and the examiner's professionals? A. They're not included. That would not change the
conclusion of my analysis, the magnitude of those fees. Q. That's your opinion that you can add on an examiner
without having a significant burden on the estates? A. In Mr. Greenspan's analysis, he's allocating twenty-three And so if
and a half percent of the cost to the floating pool.
my conclusion is based on his methodology, and this is not saying that I agree with his methodology, but -Q. A. Sure. -- if the conclusion is that there's 1.6 million dollars
of positive cash flow generated by the floating pool, that would imply a significant amount of cost for an examiner between now and the end of December. Q. Okay. And I believe that in your analysis of Mr.
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- 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Greenspan's work, you're using EBITDA, correct? A. Q. Using EBITDA for what? I'm sorry.
As the starting point for then taking that to net cash
flow, right? A. Again, I have adopted Mr. Greenspan's methodology, which And then
was to take revenues less expenses to get to EBITDA.
he backs off DIP interest, allocates corporate overhead, backs off capex and then allocates professional fees. the same exact methodology. Q. Okay. Where are the tax obligations factored into your I've utilized
methodology that you used? A. Q. Tax obligations would be included in the expenses. Not in the EBITDA? Because wouldn't EBITDA be before
taxes? A. Well, the EBITDA is net of the -- you have to be clear on There are tax obligations that are at the property
taxes.
level, and tax obligations at the corporate level. Q. A. Q. Okay. Can you clarify which taxes you're referring to? Just wanted to double-check to see which ones you were
including and excluding in your analysis. A. Again, I've adopted his methodology to -- you know, this
is really his methodology and analysis corrected for a few, you know, things that we identified. Q. Okay. How much do you understand the professional fees to
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- 35 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 be for the Marriott side of the Troy (Central) litigation? A. I'm not aware of what the amount of those fees are at this
point. Q. A. Have you ever asked? Not at this point. That settlement just occurred. Those
fees would not be available to us until a reconciliation's been prepared. Q. Did you -- or, excuse me, did the debtors agree to pay
those fees without having some idea of the magnitude of those fees? A. I was not awar -- I was not involved in those negotiations
around that settlement, so I'm not aware as to what we specifically agreed to as it relates to the Marriott professional fees. Q. Okay, so you don't know if that's 100,000 or half a
million dollars, right? A. I don't know. THE COURT: MR. PENN: THE COURT: out these things? Can I ask a question -Yes. -- since apparently I'm the last to find Has in fact -- I'm asking the room; has the
U.S. Trustee rejected the request to appoint an equity committee? And when did that occur? Hi, Your Honor. Paul Schwartzberg.
MR. SCHWARTZBERG: THE COURT:
Hello, Mr. Schwartzberg.
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- 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SCHWARTZBERG: Trustee's Office. That was actually done, I believe, yesterday. THE COURT: All right. All right. Because I did read Paul Schwartzberg from the U.S.
that in the -- Mr. Cook's second declaration, and that was the first time I had seen any reference to that. the clarification. MR. PENN: THE COURT: Your Honor, I join you in that timing. Okay. I don't control who the U.S. So I appreciate
Trustee communicates with or how, so -MR. PENN: I understand. Your Honor, for the record, we sent
MR. SCHWARTZBERG:
a letter to the requestor, counsel to the ad hoc shareholder committee, as well as the debtor and committee counsel. THE COURT: BY MR. PENN: Q. Under your commentary on Mr. Greenspan's work, your All right. Thank you.
assumption is that, through the end of the year, there will only be eighty-percent payments on estate professional fees, correct? A. No, there'd be eighty-percent payments on a monthly basis
to the four professionals noted at the bottom of my exhibit; that would be Kirkland & Ellis, Moelis, Morrison & Foerster and Jefferies. And then there would be quarterly hearings to
approve the holdback, and we have assumed that one of those
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- 37 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Where -MR. PENN: THE COURT: Sure --- what note (b) did you just refer to, holdback hearings will occur between now and the end of the year. And so there is just a portion of those fees which is
being held back at the end of the year. Q. A. So -We're -- I'm sorry. We're assuming that hearing occurs
sometime in November.
So there would essentially be one month
of twenty percent holdback once you got to the end of the period, under Mr. Greenspan's analysis. Q. I don't see where that's noted in your declaration or in It seems to be that your criticism was that it
the footnotes.
was only -- it should have only included eighty -- or, excuse me, twenty percent holdback all the way through. A. Well, my note (b) says it reflects a twenty percent And the holdback mechanism is that there is a twenty
holdback.
percent holdback on the monthly payments, and then there's a quarterly fee hearing whereby the other twenty percent would get discussed and approved. Q. So is the twenty percent holdback for one month -- what's 2.2 million dollars? The difference in the
that going to be?
allocated professional fees? A. No, the -THE COURT: Mr. Penn, I must confess, I've lost you.
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- 38 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Flows". THE COURT: THE WITNESS: THE COURT: THE WITNESS: THE COURT: Right. If you look at note 5(b) -Right. Yeah. Note 5(b). Apologize. Okay. Mr. Cook? THE WITNESS: declaration. THE COURT: THE WITNESS: THE COURT: THE WITNESS: Right. There's a chart in the very back. I'm there. It says "Illustrative Floating-Pool Cash Oh, I'm sorry. I'm in the -- my second
It says "reflect twenty percent holdback
for Kirkland, Moelis, Morrison & Foerster and Jefferies". THE WITNESS: THE COURT: Correct. Okay.
Sir, I believe that the 2.2 million dollar difference
you're referring to is the combination of all three effects that I've mentioned in (a), (b) and (c). biggest impact is actually (c). The -- you know, the
You know, essentially Mr.
Greenspan has assumed that professional fees incurred on a day are paid that same day. So, just take an example: We're all
going to be here tomorrow and September 1st; professional fees will be incurred. Under Mr. Greenspan's methodology, he In reality what
assumes that those fees will be paid tomorrow.
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- 39 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 will happen is that the professionals will incur fees for the month of September, sometime in October submit an invoice; there'll be a review process on behalf of the debtors, and then those fees will be paid sometime likely in the month of November. Conservatively, I've assumed that there's a forty-five day float period between the actual date fees are incurred and when they're paid. I actually think it could be longer than that.
So that would create a bigger difference between Mr. Greenspan's assumption and mine. Q. Okay, but, still, those are fees that are incurred and
would be obligations that would be owed, right? A. That's correct, but the cash waterfall is based on actual
cash, not accruals. Q. Okay, but if you look at Mr. Greenspan's analysis -- and
you say it is an accrual-based analysis; that's your basis, right? A. Q. It is. -- do you disagree with his conclusion as an accrual-based
system, or accrual-based presentation? A. Don't know yet, and the reason I say that is because Mr. He
Greenspan's analysis includes a period of actual activity.
starts on July 1st; and that's one of the other criticisms is that he picks up an eighteen-day period pre-petition. But
putting that aside, we have outperformed, and this will be
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- 40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. evident in the reporting that -MR. PENN: Your Honor, I'm going to object. He's now
talking about records we haven't seen and were supposed to be in the declaration; it's supposed to be here. THE WITNESS: THE COURT: THE WITNESS: Well -All right, fair enough. Okay.
The -- so the short answer is no, I don't agree that
conclusively that, on an accrual basis, will have -- the floating pool will have a negative cash flow. Q. Did you prepare any projection on an accrual basis to show It would be your own work.
that it would be positive? A. Q. A. Q. On an accrual basis? Yes.
I prepared no such analysis. And you understand that Mr. Greenspan's work was a six-
month look, and so he used six calendar months? A. Q. Yes, I understand that. So he could have used January 1 -- or, excuse me, July 1
to December 31, or just shifted everything from July 19 to January 19, right, and still gotten to about the same place? A. I don't know if it would get to the same place. He could
certainly conduct an analysis over any time period. Q. In your experience, isn't January one of the slower months
in the travel business?
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- 41 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. January is a slower month relative to July. Okay. So if it was shifted from July 1st to July 19 and
you go trade off July days and pick up January days, you're actually decreasing revenues and EBITDA, right? A. Yes. Again, July would be a higher EBITDA month than
January. Q. Okay. Do you -- aside from the equity committee
allocation in there of roughly 210,000 dollars, does all the rest look appropriate for a six-month run? A. Q. A. Q. A. And, I'm sorry, you're referring to Mr. Greenspan's -Mr. Greenspan. -- Exhibit A? Sure. As far as I can tell. I'll caveat that, though, by saying
that I have not seen many invoices from any of the professionals in this case yet, so it's hard for me to give you an accurate estimate. Q. A. Q. Could actually be a higher burn rate, right? Could be higher or lower. Is there anything in this case that would indicate to you
so far that it would be lower? A. Q. A. Q. Lower than the estimated amount? Yes. It would depend on which professional we're talking about. Okay. What protections does the debtor have in place to
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- 42 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 prevent intrapool borrowing? A. There are a number. The main protection that's in place And you'll recall that for the interim
is the expense reserve.
order we had a limit on the expense reserve of two million. That has been increased to four and a half million for purposes of the final order. Q. While I'm thinking about that, with whom was that
negotiated, the increase? A. It's just been mentioned to all of the parties, I believe.
I believe that all the draft documents had been circulated. Q. A. And when was that draft circulated with that number in it? You know, I don't know. I don't control the drafts. I don't -I
would have to ask my colleagues at Kirkland. Q. A. Q. A. Perhaps yesterday? I don't know. Go ahead and continue. Okay. I'm sorry.
So there is an expense reserve in place, and we can
put an expense reserve up to four and a half million dollars. That is meant to hold back the excess cash distributions for pools where we believe there might be a risk of intertranche borrowing. And when we head into later periods in the year
which are low cash-generation periods, notably NovemberDecember-January time period, we would expect to be able to have the excess cash which is being held back from the months that we're currently in -- July, August and so forth -- to
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- 43 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 cover timing of expenses that might occur. Q. Okay, so, basically that stops some of the water at the
top of the waterfall from getting to the bottom, right? A. Q. That's correct. So the water that doesn't get to the bottom just turns
into an accrued obligation, especially if it's in the professional fees or the DIP part of the waterfall, right? A. That's correct. So that is the first protection. We do
anticipate utilizing that to the greatest extent possible to prevent intertranche borrowing. To the extent that
intertranche borrowing does occur, there's also a cap in terms of the amount of intertranche borrowing that could occur, and that's a two million dollar cap, which is included as part of the order. And then to the extent that the intertranche
borrowing does occur, there's superpriority liens that are provided, as well as an interest rate which is provided to the lending party; I believe it's at seven percent. Q. Now, for this reserve account, is there going to be any
kind of allocation among the pools? A. Q. Absolutely. And so how is that going to be reported? Because I don't
remember seeing that report anywhere. A. Yeah, the -- that will actually be reported as part of the
final application report, which we will be providing later today. We have done a final allocation for the stub period in
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- 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. July, which was from July 19th through July 31st. MR. PENN: I don't -- objection, because that's still
a report that we've never seen, right? A. Q. A. That's correct. Okay. It's -THE COURT: All right. When -It --
It's required to be -THE COURT: When is he going to -- when is this
document that we keep hearing so much about going to actually be produced? MR. BRYAN: produced today. Your Honor, those documents will be
And -Okay. -- I believe the witness was just
THE COURT: MR. BRYAN:
describing what will be in a typical application report, not -THE COURT: Right. I think that's fair. But I just
want to remove this area of contention, because I think Mr. Penn wants to see the report, and I'm pretty sure he's going to reserve his rights to continue to question Mr. Cook once he has the report. So, you know -Absolutely, Your Honor. We're actually
MR. BRYAN:
producing them at least a day early. THE COURT: MR. BRYAN: Okay.
They're not due --
-- until tomorrow, but we will get them to
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- 45 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Mr. Penn today. THE COURT: All right, so will you be able to get them
to him in a meaningful time frame this evening? MR. BRYAN: THE COURT: clear up that -MR. BRYAN: THE COURT: Thank you. -- piece. But I think the objection or Yes, absolutely, Your Honor. All right. So -- all right, we at least
the point made in response was fair in that I was listening to what I thought was kind of more generic testimony. MR. PENN: As long as it stays as generic and not what
the yet-to-be-provided report describes -- or provides. BY MR. PENN: Q. What kind of circuit breakers do you have in place? Let's
say your flash reports -- looking two weeks back, say you're getting, like, a million-eight of interpool borrowing. What
kind of circuit breakers are out there to keep you from going over the two million dollar line? A. You know, I would say it's the same circuit breakers in We would manage disbursements appropriately such
any business:
that we could, you know, prevent the timing of payments going out in periods which would result in excessive intertranche borrowing, which would result in a, I believe, a termination of the cash collateral. Q. Okay. Now, when it comes to providing records and
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- 46 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 information to FTI, I believe your declaration has a couple of charts that FTI had kept a running total of what had been provided and when? A. Q. A. Q. Yes, I've seen those. Are you familiar with that? Yes, I've seen those. When did FTI first request cash balance information from
Innkeepers? A. I don't know. My involvement with Innkeepers began in
early June.
So I don't know if it predated that or was after
that time period. Q. A. Has that request been outstanding since you've been there? I don't know that either. Again, I started as a financial So I'm
advisor to the company; became the CFO on August 1st.
not sure who that request would have been made to and the timing of that. Q. Has it been outstanding since you've been the chief
financial officer? A. Since August 1st, I believe it has. And can you refer me
to which request you're -- or -Q. Sure, it's on -- the first page of each of those two
charts -A. Q. A. Okay. -- under Cash and Cash Management, item 4. Yes, I believe we actually had a conversation with Chris
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- 47 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Dochat and indicated that this would be provided to the U.S. Trustee as part of our schedules and SOFAs on September 1st, and he agreed that they could wait to receive it then. MR. PENN: Excuse me, Your Honor. That's going to be
hearsay on the "he agreed" part. THE COURT: MR. PENN: THE COURT: Okay. Objection. That's fair. I just want to make sure
that I'm still with you.
You're on the exhibit that says
"Midland/FTI Innkeepers Request List"? MR. PENN: THE COURT: MR. PENN: THE COURT: Correct. All right, and we're looking at item 4? Under "Cash" -- first page. Right. "All current cash and cash
equivalents account balances"? MR. PENN: THE COURT: Correct. Okay.
Now, as long as you've been in the reorganization
profession, you've understood that cash is king, right? A. Q. Absolutely. Why has the debtor never provided a single cash balance
information item to FTI to date? A. Q. A. I don't know that that's a true statement. Are you aware of Mr. Dochat's deposition? I'm aware of it. I received a transcript about forty-five
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- 48 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 minutes before this hearing, so I have not had a chance to review that. Q. Okay. As the chief financial officer for Innkeepers, when
have you provided a cash balance anything item to FTI? A. We have provided many items which relate to cash,
including, you know, balances in various accounts at points in time. We have a number of different accounts. You know, part
of the complication with providing the full cash balances is that we don't actually have a full accounting from the various tranches of debt as to how much cash they're holding on behalf of the debtors, despite having asked for that information. we can't provide a full accounting yet until we get that information. Q. A. Q. A. But you ought to know how much cash you have, right? I know how much cash we have in various accounts, correct. When did you ever give that information to FTI? Again, we provided substantial cash-related information We have had a discussion So
and we have numerous cash accounts.
with FTI and Chris Dochat about our reporting as part of the court process, that we would be providing all this information, as required, on September 1st as part of the SOFAs and schedules. And our team has been going through that
information to pull that together, and we intend to provide that on September 1st. Q. And so if Mr. Greenspan gets up and testifies that that
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- 49 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 second? MR. PENN: THE COURT: Yes. I'm looking at Exhibit B to Mr. Cook's request has been outstanding since May and has never been fulfilled, will you disagree with that? A. I don't know if it was made in May or not. Again, I got
involved in June with the company. Q. Now, as far as the reporting goes, reporting what the
debtors are provid -- or proposing is essentially looking in the rearview mirror, right, as to what has already occurred? A. That's not entirely correct. We are providing a thirteen-
week cash forecast -Q. A. Q. Okay. Aside --
-- on a monthly basis. Aside from the thirteen-week, but as far as actual pool-
by-pool reporting, that is always in the rearview mirror, correct? A. Correct. It's on a look-back basis. Mr. Penn, can I interrupt you for one
THE COURT:
first declaration; that's this chart that's entitled "The Debtors have and will continue to provide substantial and timely cash collateral reporting". And not the first line
across, which is the thirteen-week cash forecast, which we've been talking about, but then you have a variance report and a flash report. My question is, and I guess it's for the
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- 50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 witness: Contained in those two reports, are there not lines
that show cash? THE WITNESS: Yes, there are. The thirteen-week cash
forecast will show the balance -THE COURT: THE WITNESS: THE COURT: Well --- of cash collateral. Okay, but in terms of what's already been
provided, I'm having a hard time understanding how a variance report or a flash report could not contain line items that speak to the cash that you have in various places. I'm just
very confused about what's been provided and what hasn't been provided. THE WITNESS: The first variance report is not -- has
not been provided yet; it wasn't due until September 30th. THE COURT: THE WITNESS: Okay. When that is provided, that will show
the balance of cash collateral, the actual -THE COURT: THE WITNESS: THE COURT: Okay. -- balance of cash collateral. All right, but you did -- on the flash You did
report -- so let's talk about the flash report.
provide them already with a flash report for the July stub, right? THE WITNESS: We did. That flash report just included
an allocation of disbursements by tranche.
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- 51 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: THE WITNESS: Okay. And what Mr. Sathy had offered to the
Court was that on a go-forward basis we're now going to also include revenues on that report. So it will show the cash
generated by tranche during the fifteen-day period, subject to the flash report. THE COURT: Okay, but if Mr. Penn is asking for -- is
inquiring about documents that reflect how much cash you have in various accounts, that -THE WITNESS: THE COURT: THE WITNESS: reporting on Exhibit B. THE COURT: clarification. THE WITNESS: BY MR. PENN: Q. For professional fees and carve-out -- we're going to look Sure. Okay. All right, thank you for the That is --- will not -That would not be included in any of the
at those just for a moment -- just high-level, those are items that are paid that do not go directly into the properties, correct? A. The majority. There are some professional fees that are But the majority.
incurred on behalf of the properties. Q. Yeah.
We're talking about just a little sliver over in
the corner for the -- goes into the property, right?
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- 52 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. Correct. Okay. And so on another high-level basis, for the secured
lenders what you have is real estate collateral and cash collateral, generally, right? Well, real estate being a hotel,
the furniture, fixtures and equipment, everything that makes it hotels? A. Q. So you've got tangible and cash, right? That would make up most of the assets.
Correct. Okay.
So to the extent that the cash collateral gets paid
to professionals, that's funds that are gone, right ? A. Q. Correct. That would no longer be an asset.
Does the reporting put any money back into the estate to
replace the cash that's gone? A. We do that on a prospective basis. Again, with the
expense reserve mechanism, part of the holdback is to account for upcoming expenses. And the largest expense that we will be
holding back for, at least in the immediate term, is the professional fees. We're in a period now where no professional
fees have yet been paid post-petition, and we know that they're being incurred. So we are going to be holding back money in
the expense reserve to cover that. Q. Understand, but really are you talking about there is
delaying the payment of those and just when that goes out, correct? A. We're holding back cash generated now associated with
professional fees to be paid at a later point in time.
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- 53 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Q. Okay, but there's nothing that you've proposed that would
increase the amount of cash and enhance the collateral to replace the cash that gets paid out to professionals, is there? A. Q. A. Q. I'm not sure I understand the question. Okay -Cash from who? That's the thing. All of the debtors' assets are fully
liened, correct? A. Q. Correct. Okay. Most of them, yes.
And so replacement liens are really just piling There's no real
onto what's already liened up, right?
additional collateral that's being provided, correct? A. have. Q. Okay. So when professional fees get paid and that money's The collateral we have today is the collateral that we
gone, it's completely gone and there's nothing to replace it, right? A. Correct. It's an expense and it no longer is an asset of
the estate. Q. Okay. So that's a diminution in the estate and in the
collateral pools, right? MR. BRYAN: Objection, Your Honor. I think he's --
he's asking the witness for a legal conclusion there. THE COURT: Sustained.
That's a reduction in the estate when that money's gone,
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- 54 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. right? MR. BRYAN: THE COURT: Same objection, Your Honor. Sustained.
Does the reporting do anything to replace the cash that is
disbursed? A. I'm -- again, I'm not sure I understand the question.
Does it re -- how can the reporting replace the cash? Q. Precisely. Thank you on that part.
Now, you also were critical of Mr. Greenspan's use of a four percent expense -- or a capital expense reserve, correct? A. That's correct. The debtors have budgeted 1.5 percent for
maintenance capex during the bankruptcy period. Q. For the monthly operating profit and loss statements, at
the property levels, what percent has been used historically by the debtors for FF&E reserve? A. Q. I believe it's four percent. So when he was using four percent, that was the four
percent that the debtors had been using historically, right? A. That was the historical accrual that was placed for P&L On a post-petition basis, we're operating under a
purposes.
cash collateral budget, which is at 1.5 percent. Q. Okay, but the four percent was there because there's
actually a cost of operating the properties, that is, wear and tear on the properties that need to be refurbished as you go along, right? Isn't that what the reserve's for?
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- 55 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. That is what the reserve is for. And then we also have,
as I'm sure you're aware, two DIPS going in place to put in, in excess of sixty-five million dollars, back into the properties through the PIP programs as well. Q. But those aren't really going to be fully going and up and
running until next year as far as the actual work being done, right? Because you got the lead-up time to get all the
ordering done, the permitting and all this other stuff where you can do that construction, right? A. year. Q. Okay. But the four percent, in your experience in I would hope that the work actually starts this calendar
hospitality, isn't that what most hotels use is four percent reserve for capex? A. Q. I don't know what other hotels use. Are you saying that what the debtors were doing pre-
petition was not reasonable, or you just don't have any way to criticize a four percent reserve? A. I'm saying I don't know what other hospitality companies
have used as their reserve amount. Q. Well, if only one and a half percent of revenues are going
back into the actual properties, there's going to be additional deferred maintenance and capex that's not done, right? A. Not necessarily, given the number of hotels that are going Again, we have -- a
to be going through the PIP programs.
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- 56 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 number of the hotels are going to be refurbished through the PIP programs, which, you know, those dollars may or may not have been contemplated as -- in terms of the derivation of four percent. I'm not aware. I wasn't there at the time the four
percent was estimated. Q. How many hotels are going to be involved in the PIP
program with the DIPs? A. There's nineteen as part of the Five Mile DIP; and then
there are four more Marriott properties as part of the Lehman DIP, Bulfinch and Louisville; and then another eight, I believe. Q. A. So -- ten, fourteen, nineteen -- thirty-three.
Still not quite half of the total hotels, right? Correct. (Pause) MR. PENN: Your Honor, subject to being able to get a Thirty-three is not half of seventy-two.
chance to look at those reports, we'll pass the witness for now. THE COURT: Redirect? Or does anyone else wish to cross-examine first? (No response) THE COURT: MR. BRYAN: All right. Good afternoon, Your Honor. Patrick Bryan All right. Thank you.
on behalf of the debtors. THE COURT: Good afternoon.
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- 57 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 REDIRECT EXAMINATION BY MR. BRYAN: Q. Mr. Cook, Mr. Penn covered a lot of areas, but I want to Did you make any
start first with the issue of cash balances.
assumptions in connection with the thirteen-week forecast regarding cash balances? A. We did. For purposes of putting together our cash
collateral budget, we assumed that there would be a zero cash balance at the start of the case, and then we forecasted from there, thirteen weeks from there. Q. And in forecasting thirteen weeks from there, what is your
expectation with respect to intertranche borrowing across all pools? MR. BRYAN: I'm going to object. There's no
foundation for this, and the document supporting it has not been provided. If he's going to testify as an expert -- we at
least gave the basis of Mr. Greenspan's opinions and the work product, and this is something that we still haven't seen anything about. MR. BRYAN: Your Honor, they have seen it. It's in
the original thirteen-week forecast that was attached -THE COURT: All right, to the extent that it is in the
original thirteen-week forecast, and I -- and it's only going to be tweaked in what they get tomorrow, I think it's fair game. And you can reserve your rights to make that comparison
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- 58 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the year? and go back at him with questions to the extent that it's new to you. That's, I think, the best way to accommodate both sets
of concerns. MR. BRYAN: THE COURT: BY MR. BRYAN: Q. And, Mr. Cook, before we were interrupted, you were about Thank you, Your Honor. All right.
to describe what your expectation was with respect to intertranche borrowing. A. Yeah. And this is based on the original cash collateral We had an expectation
budget that was provided on July 19th.
at that point in time, and we continue to have the expectation, that during the period of that thirteen weeks there will not be intertranche borrowing. And so that would take us until the
middle of October based on that forecast. Q. And since filing the thirteen-week forecast on July 19th,
how has the company been doing against this forecast? A. The company has outperformed the forecast, both on a
revenue basis as well as disbursement basis. Q. And has your outlook or view changed with respect to
intertranche borrowing through the end of the year? MR. PENN: Objection, Your Honor. Through the end of
Because -MR. BRYAN: THE COURT: I'll be happ -But it's a fair question. I mean, that's
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- 59 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 a question that he can answer irrespective of the existence of the document that reflects it. A. At the time that we had put forth that original budget, we
had had a cap on the expense reserve of two million dollars. As we've talked about here today, that cap has been increased to 4.5. So my expectation of intertranche borrowing based on
that, along with the outperformance against the budget, would lead me to a conclusion that the risk of intertranche borrowing is lower than it was at the time we put that together on July 19th. THE COURT: Well, now I have a question, because I There's the
think I'm hearing apples and oranges mixed up.
question of intertranche borrowing; then there's a question of the safety net, so to speak, that you've now created in terms of the reserve. You got a two million dollar limit, right, on
intertranche borrowing? MR. BRYAN: THE COURT: THE WITNESS: THE COURT: That is correct, Your Honor. Right? That's correct. So the risk of intertranche borrowing, to
me, operates independently of whether or not you've got a reserve there to fund the borrowing; isn't that correct? MR. BRYAN: THE WITNESS: THE COURT: Well, Mr. Cook can -Would you like me to explain? I would -- sure.
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- 60 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE WITNESS: Okay. The expense reserve is a
mechanism to hold back cash that we're currently generating. THE COURT: THE WITNESS: Right. The company operates very well during
the summer months, and so we're generating positive excess cash now. Instead of distributing that cash, we'll hold back a
portion of that -THE COURT: THE WITNESS: Right. -- in the expense reserve mechanism. So
to the extent that the expense reserve has increased from two to four and a half million, we can hold back more cash such that when we get to the later months of the year, which are lower cash-generation months, we can use that expense reserve to pay for expenses, as opposed to intertranche borrowing, which is the only other -THE COURT: THE WITNESS: THE COURT: Thank you. BY MR. BRYAN: Q. And what did you tell -- Mr. Penn asked you a few Okay. I got it.
-- mechanism to get the cash. That connects the two up. I got it.
questions about information requested from FTI, Midland's advisor, including cash balances. What did you tell Mr. Dochat
regarding that information and when it will be provided? A. We had indicated that that was all being put together at
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- 61 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the time the request was made, and would be provided as part of the monthly reporting that's done to the Court in the form of the SOFAs and schedules, and we plan to file those by tomorrow, which is the required date for the filing. Q. And with that information and with the addition of
revenues to the upcoming flash report, would representatives, including Midland, have better insight into whether there'd be intertranche borrowing on a going-forward basis? A. Theoretically. But, again, since I used zero as a
starting point for the cash balance and we came to the conclusion that there would not be intertranche borrowing with no cash on hand, any cash that's reflected in the filings would just reduce the likelihood that there would be intertranche borrowing. Q. And I'd like to shift gears and go to a different issue You recall he asked you if the debtors
that Mr. Penn raised.
could just set up a different account and segregate all the -Midland's cash into cash collateral into a particular account, and I believe you testified that would be possible; is that correct? A. Q. Yes, we could set up separate bank accounts. And can you describe for us what the burdens would be if
we proceeded on a -- the fixed-rate pool under that protocol or, for that matter, all pools under the protocol that Midland has proposed?
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- 62 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Yeah, if we were to set up separate bank accounts for all
of the tranches and then have to pull money for disbursements for each of those tranches, that would require us to know what the expenses are for each of the tranches before we make the expense. If we go back to the protocol that was in place prior
to the petition date, which was just for Midland, there were many instances where we would have to borrow from the other pool's cash to make the disbursements, because of the process that was in place. There was a time period between the time we
knew we needed to make an expense and the time we actually got the funding. It was very common for us, prior to the petition date, that we would hold check runs over just for the fixed pool until a following Monday or Tuesday when everyone else's went out on Thursday or Friday, because we didn't know if we were going to get the cash or not, and we wanted to make sure we had the cash in the account to cover the checks before we sent them. So there was a burden in place at that point in time. we did that for all nine tranches, we would have the problem that there is no consolidated pool to borrow from if expenses come up in real time. example. And they do. I mean, I can give you an If
There are situations whereby a food vendor -MR. PENN: THE COURT: Your Honor, I'm going to object -All right.
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- 63 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. PENN: THE COURT: -- to the running narrative. Okay, but you know what, I was going to
ask him this exact question. And you weren't here at the first hearing, Mr. Cook, but I -- at that hearing I learned a lot about billing, and I think I must have used the example of the laundry. So you get
the laundry bill, and I don't know if this is a good example or not, but you theoretically can get a laundry bill in for, I'll say, all the hotels. THE WITNESS: THE COURT: Correct. And if you have this -- if you have
separate tranche accounts, then -And this is an important point for me, so pardon the interruption. -- then I think what you're saying is that you -- if you have one account, you pay the laundry bill, and then in the rearview mirror you allocate who's got what laundry bill by tranche, by property, you build it up somehow, but that if you had the nine separate accounts you wouldn't -- you'd have to do that process first before you took out the part payment from each of the tranches for the aggregate laundry bill? approximate -THE WITNESS: THE COURT: THE WITNESS: That's exactly correct, and -Okay. -- you state it better than I could Does that
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- 64 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 have. THE COURT: All right, I just want to understand that
that's how it works, at least in the instance of a bill that comes in on a nontranche-identifiable basis in the first instance. So -THE WITNESS: That's correct. And further to that,
because we would be using estimates for certain of the expenses, because we just won't know them ahead of time, that would certainly lead to intertranche borrowing for interim periods of time until we figure out the actual amounts, because if we're off on an estimate and it's too high or too low, since we have a fixed sum of cash on behalf of all the nine tranches, if your estimates aren't exactly one hundred percent correct, somebody's borrowing from somebody else. So I think this
creates the situation that they're hoping to avoid. BY MR. BRYAN: Q. And what impact, if any, would it have on the resources or
the attention of management of the debtors to implement this system on a going-forward basis? A. team. It would take a lot of attention of management and my And to be clear, I have a staff of roughly ten accounts,
but the majority of our accounting is done by a third-party management company: Island Hospitality. And then we have
another property manager that manages a one-off hotel; it's for Alton Beach and it's -- Dimension manages that property.
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- 65 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Most of the accounting that is done is done by those organizations, so I do not have direct control over their staffing, supervision or activities. lead to a discussion with them. So I can't conclusively answer the question. You know, So, certainly it would
from experience I know it would be a significant change to the business processes, but in terms of being able to compel them to do this additional work, it would require additional conversations. Q. And as a result of those additional conversations, is it
possible that there would be additional expenses involved in implementing this system? A. I would certainly expect that they would require
additional fees for the additional work. Q. And I'd like to shift gears again, Mr. Penn. And I
believe the Court used the term "rearview mirror" with respect to reporting. Now, with respect to the flash report with the addition of revenues and cash disbursements, can you describe for us what level of allocation is made in each flash report? A. Sure. We've done a couple now, a couple of the flash
reports, and our experience has been we can allocate one hundred percent of the revenues fifteen days after the end of the period; and I recognize that that was not included in the first flash but it will be going forward. And then we're able
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- 66 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to allocate around ninety percent of the cash disbursements by tranche for that fifteen-day period as well, on the first flash report. Q. Now, you said a hundred percent of revenues could be
allocated -- or would be -- I'm sorry, what was the term that you used? A. Q. Would be allocated to their respective tranches. So is it a fair statement that the debtors would know with
one hundred percent certainty as a result of a flash -- as of a flash report, where a particular representative's cash collateral would be? A. I don't know if it's safe to say a hundred percent.
Reserving for any errors or, you know, reallocations that would need to be made, close to a hundred percent. Q. And in terms of the application report and the variance
reports, can you describe the level of detail, what level of allocation would be available to each representative for both disbursements and receipts? A. Q. A. I'm sorry, are those for the application report? The application report, yeah. So the application report, which is provided typically
forty-five days after the end of the month, would include the revenues, it would include the items that are included in the waterfall of the cash collateral order, and then it would end in a resulting excess cash flow that was generated by the
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- 67 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 tranche, which would be distributed, you know, at the -concurrent with the -- with that report. Q. And in terms of -- on a look-back basis within two weeks,
is it possible to identify for the representatives the -- their cash collateral? A. The majority of it. Again, we can allocate a hundred
percent of the revenues and ninety percent of the disbursements. So, typically there's a small portion of
disbursements which just take a little longer to reconcile, and sometimes we need to go back and get additional support. the majority of the expenses are allocated. So with reasonable certainty, there is an estimate as to what the eventual excess cash flow distribution will be when the final application report comes out and all the expenses have been fully allocated. Q. Okay, and let's shift gears again to Mr. Penn's discussion Mr. Penn made the comment that, But
of Mr. Greenspan's analysis.
whether Marriott fees were 100,000 or 500,000, that you didn't account for that, correct? A. Q. Yes. Okay. Would that make a difference in your conclusion You recall that testimony?
whether or not the floating-rate pool would be cash-flow positive? A. I don't expect so, given the expectation of what those
fees might be.
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- 68 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay, and with respect to the level of reserves that are
being set aside by the debtors currently, what percentage are the debtors using in their thirteen-week cash-flow forecast? A. I'm sorry, can you repeat the question? I'm not sure I
understood that. Q. I'm sorry. What percentage are the debtors presently
using for purposes of their forecast for the FF&E reserve? A. Q. Oh, 1.5 percent for the cash collateral use. And if professional fees -- Mr. Penn also made an issue Would that
with respect to the holdback of professional fees.
make any impact on your ultimate conclusion that the floatingrate pool would be cash-flow positive? A. Again, I'm not sure I understood the question, but you
would need to reflect the holdback to accurately reflect the cash flows. Q. And accounting for those correctly, what is your
conclusion with respect to the floating-rate pools of cash flow over the same period as Mr. Greenspan conducted in his analysis? A. Yeah, again, using Mr. Greenspan's methodology, which is,
again, accrual-based, and I don't necessarily agree with the accrual-based methodology because there are a whole host of other revenues -- or, I'm sorry, expenses that would need to be adjusted for in this analysis, but using his methodology and correcting for those items that we've discussed, the conclusion
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- 69 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 would be that there is positive net cash flow of 1.6 million dollars for the period that Mr. Greenspan reviewed. And the
inclusion of examiner fees would not change the conclusion that there would be positive cash flows generated; it might reduce the amount, though. MR. BRYAN: questions. THE COURT: Okay. Your Honor, I have a handful of Thank you, Your Honor. No further
MR. GOTTESMAN: questions. THE COURT:
Certainly.
We're just checking on the air conditioner, because the sun's coming around; temperature's rising. MR. GOTTESMAN: Good afternoon. I had no questions regarding that. Lawrence Gottesman, Bryan Cave, on
behalf of two securitization trusts serviced by LNR Partners. CROSS-EXAMINATION BY MR. GOTTESMAN: Q. The judge asked you a couple questions regarding -- and I just wanted Can you tell
she used the hypothetical of the laundry bill.
to ask a follow-up question, sir, regarding that.
me what expenses are -- other than corporate overhead, are on a global basis rather than on a property-by-property basis, that are incurred by the debtors? A. And, I'm sorry, other than?
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- 70 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Corporate overhead. Other than corporate overhead. There are insurance
payments; there are some that are made on a more global basis. I don't know if you're including that as part of the corporate -- maybe before I start, can you define what you're including as part of the corporate overhead? Q. Sure. And actually I was just trying to drill down a
little bit on the Court's example, which is -- you know, for example, there are seventy-something hotels; is there a global laundry bill that's received, or does each debtor in fact do its laundry locally, if you will? A. Yeah, we do aggregate our purchases on a number of items.
And so at our hotels, we have terminals whereby the hotel manager can put in purchase items, items that he wants to purchase, and that gets bundled. That is done so that we And so,
get -- we can utilize our size to get better pricing. for instance, you know, Home Depot is an example. purchases from Home Depot Supply.
We'll make
Each of the hotels puts in
their orders, it gets aggregated into one bill, that bill comes into the debtors to pay, and then all the items get delivered out to the individual hotels. So there are a number of items at the hotel level that do get aggregated. Q. So, in fact, the genesis of this is that on a hotel-by-
hotel basis there's a request for the kind of items that one
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- 71 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 would buy from Home Depot; that gets put -- you know, to corporate; then gets bundled together. So in fact you're
starting with an allocation, if you will, because there's a request on a hotel-by-hotel basis, is that correct? A. Correct, and those items go to a specific hotel. So when
you get that invoice -- we don't want to sit down with it and go through all the, you know, allocation before we pay it. We'd like to go ahead and pay the bill and not be late, and then do the allocation after the fact. Q. No, I'm obviously in favor of timely payment of bills.
But you're essentially starting not from scratch but with the original request on a hotel-by-hotel basis that we need these items in Anaheim and needed items in San Diego, and so on and so forth, from Home Depot? A. That's correct, there is a request on a hotel-by-hotel
basis. Q. fact? A. Q. That's correct. Okay. You've had some testimony about the reserve account As opposed to completely starting from scratch after the
and timing issues that the debtor's generally concerned with in terms of payment of bills and that kind of thing; you recall that? Would the reserve account in the four and a half million
dollar amount that's proposed in the final order deal with these timing issues?
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- 72 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Yes. That's how we intend to deal with the timing issues
and, again, to prevent the intertranche borrowing. Q. Does the reserve account -MR. GOTTESMAN: Strike that.
Does the cash collateral order propose to pay at the
property level the reserves, required under the existent prepetition loan documents, for taxes, insurance and similar items? A. I think that's a different reserve concept that we have in
the cash collateral order. Q. Right, and I guess the question that perhaps wasn't
sufficiently clear was, does the proposed adequate protection in the cash collateral order that the debtors have requested that the Court enter provide for ongoing funding of those property-level reserves for taxes, insurance and similar items? A. Yeah, to the extent that we make payments on behalf of
properties for things which may have previously been reserved for prior to the petition date, those items would flow through their respective place in the waterfall as an expense. Q. Perhaps I'm not stating the question sufficiently clearly.
If the loan document for a particular piece of property says that you're required to reserve one-twelfth of the annual real estate taxes monthly, is that reserve going to be funded on a monthly basis by the debtors going forward, as opposed to paying real estate taxes as and when due?
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- 73 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. To the extent that there is a loan document in place which
is still effective and that would require a reserve to be put in place, the way that would historically work is that amount would get expensed and put into the reserve. continue on a post-petition basis. Q. You offered the caveat 'to the extent that loan document's Can you explain what you mean by that, please? That would
effective'. A.
Well, I think you're posing a hypothetical, so I'm not
sure specifically what loan document we're referring to. Q. Well, I guess I've heard debtors argue that all preSo I just wasn't
petition loan documents are not effective.
sure if the exception was swallowing the rule in this instance. If you have loan documents that require the funded reserves, is it contemplated under the proposed cash collateral order that those reserves will be funded going forward, or is it contemplated that simply when taxes, the insurance and those items come due that they'll be paid out of whatever cash happens to be available? A. Yeah, to the extent we're required to make a reserve, we
would continue to make that reserve. Q. A. So -And that is accounted for under the cash collateral order;
it would fall into one of our expense items in the waterfall. Q. So that when we look at the property-level expense item in
the waterfall, that would include the full fund of any reserves
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- 74 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that are required under the existent pre-petition loan documents? A. Q. I believe that's correct. Okay. And so therefore there's not a duplicative item in
the four and a half million dollar reserve? A. No, the four and a half million dollar expense reserve
being put in place pursuant to the cash collateral order is really just to account for the timing of payments that are going to occur. Again, we have some payments which are a
little lumpy in nature, and so we were holding back -- you know, professional fees is a good example -- holding back cash now to pay for those later. Q. Okay. Understood. You also testified a bit about the
application and what's going to be in it; do you recall that? A. Q. A. Q. Yes. Generically -Yeah. -- as opposed to specific numbers. And I know that you've
testified that you're optimistic that there won't be intercompany borrowings, but, should that optimism not be warranted, the application report will specify those intercompany borrowings, is that correct? A. Yes. It will identify the intertranche borrowings, to the
extent that there are any. Q. Okay, so you'll be able to specify that Debtor A, which
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- 75 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 time. THE COURT: All right, thank you -Thank you. happened to be a lender, has intercompany loans due and owing from B, C and D? A. Q. A. Q. A. Correct. With that dollar amount specifically? Correct. That would be set forth in that level of detail? That will be included in the application report, to the
extent that there are intertranche borrowings. Q. Okay. MR. GOTTESMAN: I have no further questions at this
MR. GOTTESMAN: THE COURT:
-- Mr. Gottesman.
All right, anybody else have any questions they want to ask of Mr. Cook? (No response) THE COURT: And as we discussed earlier, I suppose
we're going to -- Mr. Penn, you're reserving your right to recall Mr. Cook after you've had an opportunity to review the new thirteen-week forecast. And we also have Mr. Sage on
behalf of Lehman, who I suppose -- although perhaps he should tell me whether or not he's reserving his rights to ask. think he might have stepped out. Did he step out? I
All right, well, in any event, Mr. Cook, you're
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- 76 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Okay. well. THE COURT: MR. PENN: All right. And so it'd be -- we're not quite at the first. THE COURT: MR. PENN: THE COURT: You want to keep -Were they resting? You want to -- I think they're resting. excused for now. Thank you very much. Okay. Thank you, Your Honor.
THE WITNESS: THE COURT: collateral? MR. PENN:
All right, closing arguments on cash
I'd say, Your Honor, we'd double-check
You want to keep it open until you finish an examination and you get the new thirteen-week forecast, or do you want to assume that you're not going to change very much what you have to say and make your argument now? like. MR. PENN: THE COURT: MR. PENN: We'll go ahead and make the argument now. All right. But we still have evidence to put on as You can do whatever you
closing argument stage. THE COURT: Okay. That's fair.
Mr. Sage has come back in. While you were out, I think I reserved rights for you.
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- 77 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 it? MR. PENN: That's correct. We're going to offer it, well. (Pause) MR. PENN: And while I am really old-school in MR. SAGE: THE COURT: Thank you, Your Honor. All right, so we have addition -- an
additional witness or evidence? MR. PENN: Two things, Your Honor: First of all, you
had heard about Mr. Dochat's deposition. THE COURT: MR. PENN: I heard about it, yeah. And we have prepared a designation of It was provided --
certain testimony from that deposition. THE COURT: MR. PENN: Okay.
-- by e-mail; provided to the Court as
understanding that usually the way you could do this is have somebody climb up on the witness stand and read it, I'm a firm believer that you're a much faster reader than a listener. so I would rather not go down that process, if the Court's okay -THE COURT: All right, this has not been filed, I take And
and then we can file it later on today. THE COURT: MR. PENN: All right. And then, second, Your Honor, we would call
Mr. Ronald Greenspan, and refer to his second declaration.
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- 78 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: Okay. Good afternoon, Mr. Greenspan.
(Witness duly sworn) THE COURT: DIRECT EXAMINATION BY MR. PENN: Q. I should have asked this earlier: Did you bring a copy of Thank you.
your second declaration with you? A. Q. Yes, I did And would that be your direct testimony -- or your
testimony on direct examination? A. Yes. MR. PENN: Your Honor, at this time we would hand over
the witness for cross. THE COURT: All right. Any objections to the
declaration coming in? MR. DONOVAN: THE COURT: No objection, Your Honor. All right.
(Declaration of Ronald Greenspan was hereby received into evidence in lieu of direct testimony, as a Debtors' exhibit, as of this date.) MR. DONOVAN: THE COURT: MR. DONOVAN: THE WITNESS: CROSS-EXAMINATION Good afternoon, Your Honor. Okay. Good afternoon, again, Mr. Greenspan. good afternoon.
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- 79 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. BY MR. DONOVAN: Q. Attached to your second declaration is your Exhibit A that
you attached and Mr. Cook discussed, is that right? A. Q. That is correct. Okay. And that's an analysis you did of the floating --
what's called the floating-pool cash flows, correct? A. Q. Well, yes. Okay. And this analysis you have not done the same
analysis with respect to the fixed-rate pool, correct? A. Q. That is correct. Okay. And you have not done the same analysis with
respect to any of the other individual ones, correct? A. Correct. MR. DONOVAN: THE COURT: REDIRECT EXAMINATION BY MR. PENN: Q. Mr. Greenspan, you've heard today Mr. Cook criticize your That's all I have, Your Honor. All right. Mr. Penn.
opinions, correct? A. Q. Yes. Why did you use accrual based -MR. DONOVAN: THE COURT: Objection, beyond the scope, Your Honor. No, I'm going to allow it.
What I would describe as subtle types of things that can
be described as accrual what I did was utilize the actual costs
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- 80 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 incurred. And they are accrual only to the extent that there But none
is a certain ability to defer actual payment on them.
of the numbers I used, other than the capex reserve, which we can discuss, but none of the other numbers, and I don't believe Mr. Cook criticized my actual numbers, none of the actual numbers are anything but what's actually been incurred during this period of time. The fact is the debtor has the equivalent
of a credit card that they're charging some of these on and they only have to make the payment when the credit card bill comes due. But that bill will come due, that bill will have to
be paid out of the EBITDA from these properties, and they will not, whenever that bill comes due, whether it's when the holdback is due or the balance of the professional fees are actually due, they will not have the money to pay it out of the floating-rate pool. So I believe that if you reflect over any full period of time when the actual bills that are being incurred now, the actual obligations that are being incurred now, the only way you reflect those is on an accrual basis. And the fact is the
holdbacks, for example, will have to be paid at some point out of the cash of the pool. Q. When that bill comes due, what does that indicate about
the floating-rate pool estates? A. Only one of two things: Either it's going to be
administratively insolvent because it's expending more than the
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- 81 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 cash available, or else it's going to have to borrow from the other estates, it's the only two options. Q. You heard Mr. Cook criticize the four percent reserve
versus the one and a half percent reserve, why the four percent reserve in your analysis? A. These properties, like any property, particularly
hospitality property that's used by guests suffers degradation everyday. And every budget you will see for hospitality
properties will include a capex reserve to cover this maintenance so it doesn't become deferred maintenance. The debtor, traditionally, up until the most recent projections, included a four percent reserve just to handle this ordinary customary work. This is not PIP work, it's not
improvement work, it's simply the amount necessary to prevent degradation from the ordinary wear and tear. In my experience and professional belief four percent's a bare minimum for a property like this. traditionally included four percent. As I said, the debtor Now, with the
projections, what they've described it as emergency repairs, they've put one and a half percent in to cover the emergencies they will cover. What that means is if you're not covering
four percent the physical asset is degrading every single day. And if you're looking at the issue of adequate protection and where -- what is happening to the collateral, you're either going to allow for four percent, or this asset's going to be
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- 82 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 degrading everyday and every month for the course of these bankruptcies. Q. Over a six-month period what would be the magnitude of a
difference between one and a half percent and four percent? A. It's about a million dollars on the floating-rate pool
alone. Q. A. Q. On the floating-rate pool? About a million dollars. Your declaration refers to an equity committee -THE COURT: interrupt you. MR. PENN: THE COURT: Sure. The floating-rate pool, though, you know Can I ask a question? I'm sorry to
we're talking about -- we're looking at a very selective slice. So we're only looking at the floating-rate pool for the purposes of this Exhibit A, right? MR. PENN: THE COURT: That's correct. And the floating-rate pool, I think, has a
lot of Generation 1 properties in it, does it not? MR. PENN: THE COURT: Yes So -- I mean, I'm just trying to
understand how representative looking at the floating-rate pool is. The floating-rate pool, for example, has older -- may have Okay. But your
on a percentage basis older properties in it.
testimony as reflected in the exhibits, your second
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- 83 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 like. (Pause) MR. PENN: in the book. It does help if we're all on the same page me. declaration, the swing between the 1 percent and the 1-1/2 percent looks like it's 1.1 million through the end of the year, and that's what your testimony is today? THE WITNESS: THE COURT: I don't -I'm on -- I'm on -- I'm sorry, not you, The swing in the -- in Mr.
I'm putting words in your mouth.
Cook's analysis; the so-called corrected Greenspan analysis, appears to be 1.1 million. that you just testified to? THE WITNESS: analysis last night. THE COURT: THE WITNESS: Okay. So I don't have a copy of it in front of Yeah. Your Honor, we just received that And that foots with the one million
I believe Mr. Cook's testimony was is that was over --
crossed three items, rather than just the -- I'd have -frankly, I'd have to look at to -THE COURT: THE WITNESS: THE COURT: MR. PENN: THE COURT: I apologize, I don't mean to -That's approximate. -- throw a monkey wrench in. And I thought I brought a spare with me. Mr. Penn, we have spares up here if you'd
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- 84 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: THE WITNESS: is basically correct. Literally. Your Honor, that's -- what you surmised Although, what is utilized as actual
capex through July 31st I don't know what that number is, they haven't given that to us. THE COURT: THE WITNESS: Okay. But that, in essence, I think what
probably happens they probably under spent the one and a half percent during that time and that's why that number looks a little larger, is an adjustment. But, yeah, it's approximately
a million or a million-point-one difference. THE COURT: interruption. BY MR. PENN: Q. Based on your understanding of the cash resources Okay. Thank you. I apologize for the
available to these debtors, if the floating-rate pool goes negative where's the mostly likely source of those funds? A. The most likely source is the fixed- rate pools cash
collateral. Q. And what you have seen with respect to the cash collateral
order do you see anything that's included as a way to replace the degradation of the properties and the loss of collateral during the case? A. To the best of my knowledge there are no unencumbered
assets in this estate and that all cash being produced by all
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- 85 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of the properties is someone's cash collateral. So when that
cash is spent I see no way, as I said in my declaration, there is no plan B. There is nothing -- there is no other source to
replace the spent cash. MR. PENN: THE COURT: RECROSS-EXAMINATION BY MR. DONOVAN: Q. Mr. Greenspan, how many of the forty-five hotels in the Your Honor, I'll pass the witness. All right, thank you.
fixed-rate pool are Generation 1 hotels? A. I don't remember the exact number offhand. We have a
schedule and I think I even put it in one of my earlier declarations. I think the number's about half. You said in a
fixed-rate pool? Q. A. Q. Yes, sir. I believe it's about half. Okay. And how many Generation 1 hotels of the twenty are
in the floating pool? A. Q. I don't recollect sitting here. If I told you there's three would that refresh your
recollection? A. Q. No. Do you know how many new developments; say brand new
hotels, are in the floating-rate pool? A. No, I do not.
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- 86 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Pause) MR. DONOVAN: THE COURT: MR. DONOVAN: THE COURT: Mr. Greenspan? (No response) THE COURT: THE WITNESS: THE COURT: MR. PENN: THE COURT: (Pause) MR. SATHY: Good afternoon, Your Honor, I'll be brief. All right, thank you. Thank you, Your Honor. Mr. Penn, what's next? We would rest, Your Honor. All right. Closing arguments anyone? That's all I have, Your Honor. All right. Thank you. Anybody else want to ask any questions of
Question for the Court is whether or not the debtors have provided adequate protection to the lenders the use of their cash collateral, that's the issue. It's our burden, we
have to meet it by a preponderance of the evidence under 363(p). We believe we've done that. But, Your Honor, the right of the lenders to come back to this Court at any point in time, should they wish, if they believe that they're not adequately protected is preserved in this order. It was preserved in the interim order, and it's
preserved in the final order. We believe that the burden has been met by virtue of
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- 87 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the extensive reporting that we've provided to give the lenders as much real time as is reasonable and practicable. It is more
real time reporting than they received prior to the filing. Your Honor, oversight with respect to representatives who have audit rights, visitation rights, the availability to come to the company at any point in time, to sample and test invoices, they've been doing all of this, Your Honor, and they still haven't come up with the real issue, just a theoretical issue. it. But when there's a real issue I'm sure we'll hear about
And if we can resolve it we will, and if not, I'm sure
they'll bring it to Your Honor. With respect to the intercompany, and we spent a lot of time on this at the interim hearing, unfortunately, I think it is a little bit of a distraction, frankly. We don't believe
that there are going to be intercompany loans -THE COURT: MR. SATHY: Intertranched. Intertranched loans. We're going to work We think In some
as hard as we can to make sure that doesn't happen. that the additional reserve go the long way to that.
ways the representatives and the debtors have the exact same goal which is that property level cash pays property level expenses. It's the fundamental premise of both parties' goal.
And we have the same goal. To the extent, and because this is an enterprise, I know the lenders don't necessarily always agree that it's an
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- 88 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 enterprise, but to the extent that there are intertranched borrowings, the parties who are basically the beneficiaries of that cannot receive any -- the lenders who are beneficiaries cannot receive any amounts until those are repaid. to be repaid. They have
This is not a loan, it's simply a cash flow And we're going to do
issue from the debtors' perspectives.
everything we can to give representatives the ability to understand when that's going to happen, if it's going to happen, and we've provided for the protection, both in terms of if it happens, then there's, of course, the limit of the two million dollars. come back. In which case, then they all have a right to And
The interest rate to the extent that there is.
the requirement that it get repaid.
And to the extent that all
of that doesn't happen, they get a lien on the property of the party who's the beneficiary. And it's a lien that's senior to It's
the existing lender's lien on those -- on that property.
just junior to the -- for example, junior to the DIP, to the extent that there's a DIP. So they will be adequately protected and repaid, that's the goal. That's the provision that we've set up. It's
intended to protect the lenders.
But the fundamental basis of
property level cash pays property level expenses, but we have to run an enterprise. So we've created a balance that we think is fair, that we think has now been battle-tested for the first six weeks of
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- 89 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 this case. And to the extent that something happens in January We don't
or December I'm certain that we'll all hear about it. expect that that will happen.
But if it does, then Your Honor
will -- Your Honor will certainly hear about it. So we would ask that a final order be entered. We
have changes that we're happy to walk through which accommodate some of the suggestions. The objections get overruled. And
that the debtors be authorized to use cash collateral on a final basis. THE COURT: All right. Are the -- the document that
you filed yesterday, I believe, has a proposed order, a blackline of proposed order attached to it. Is that current
with respect to the resolutions that you've put on the record when we started today? MR. SATHY: Your Honor, I believe there were some
additional changes to the order that were made over the last -THE COURT: looking at -MR. SATHY: THE COURT: supplement. (Pause) MR. SATHY: THE COURT: you're having fun. Just one moment, Your Honor. I'm sorry. You know, time flies when -- few hours. -- is attached to a notice of filing of I think the order that I -- the one I'm
Apparently that was filed on August 25th.
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- 90 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Honor. THE COURT: MR. SATHY: THE COURT: MR. PENN: Okay. All right. Thank you. (Pause) MR. SATHY: Your Honor, there -- I mean, though
there's a series of additional changes, of course the parties -- we're trying to accommodate all kinds of language requests. THE COURT: Understood, okay. So then I'm not going
to -- I'm going to not look at this one anymore. MR. SATHY: THE COURT: MR. SATHY: THE COURT: MR. SATHY: THE COURT: MR. SATHY: THE COURT: Of course. And I'll wait -- give me a blackline -Of course. -- against the interim. Of course. Whenever the music stops. Absolutely. In recognizing that -- well, first of all,
I haven't heard from Mr. Penn yet, but that we're not going to be done-done today for the reasons that we've talked about. MR. SATHY: Of course, that's -- of course, Your
We'll submit that. Mr. Penn.
Your Honor, I must say in the many years
that I've been doing cash collateral issues, I don't think I have ever been through a hearing where the debtor never put on
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- 91 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 a single shred of anything approximating evidence dealing with the value of the collateral, or how that value will be maintained, preserved or restored when cash collateral is used, especially on professional fees. That is an enormous, gigantic In fact, it
hole in the evidence that has never been filled. was completely shied away from.
Now, when you talk about the interpool borrowing and the reserve account, what I really think you heard was that the reserve account is there to mask the interpool borrowing. put a great big pool over here that's going to be doing the borrowing among the pools and use that as the cash pot that it's going to come from. But make no mistake the indication is You
that the floating-rate pool is going negative based on the projections that the debtors have provided in Mr. Greenspan's testimony. And that creates a risk to the fixed-rate pool.
And so that's what we need to be protected from. By the same token, if we're wrong, if perhaps we're the ones that end up being the borrower and there's a priming lien there's zero evidence supporting priming under 364(d)(1), no evidence to support it. And so they can't justify putting a
priming lien on the fixed-rate pool, whatsoever. We've already, in lots of other places, addressed the issues of professional fees, and the reservation we'll be dealing with that as we go. But that's value that gets -- it's
left and it's gone and it's never coming back, and there's
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- 92 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 nothing proposed to adequately protect the fixed-rate pool for that loss of value. Reporting doesn't do it. All it does is
let you count the number of horses that have left the pasture. It doesn't put any horses back in the pasture. We're not objecting to the operating level expenses. We want the hotels to operate. Even back when we had the cash,
you know, the pre-petition, cash trap going, hotel expenses always paid. We have never tried to interrupt that flow at all But what's proposed between
because we want the hotels to go.
the pool, the carve-out, and, frankly, there is no cap on professional fees. THE COURT: MR. PENN: Oh, yes there is. In the cash collateral order -- excuse me.
In the terms of the cash collateral order there is no adequate protection for us for those. this record. And there's no evidence of it in
It does not enhance the hotels' values, it's an Therefore, we don't believe that they have
expense, it's gone.
any evidence to support the use of cash collateral for those purposes. With the -- this is already going to be a challenging case, but I think that the fact that we don't have in hand projections going forward, this hearing's been noticed for six weeks. There was lots of time, lots of deposition requests,
lots of depositions, lots of opportunity for debtors to come forward with their own independent evidence, not criticizing
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- 93 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 somebody else's, to come forward and say this is the plan, this is what it looks like. They didn't do it. And, frankly, Your Because
Honor, I believe there's a reason they didn't do it.
if it was going to be pretty the Court would have seen it. (Pause) THE COURT: Mr. Gottesman. Good afternoon, Your Honor. Lawrence
MR. GOTTESMAN:
Gottesman, Bryan Cave on behalf of the two securitization trusts specially serviced by LNR Partners. I'm not going to repeat Mr. Penn's remarks, which I largely concur. observations. And do want to make a couple of additional To state the obvious, we have no objection to
budgeted entirely control use of cash collateral to continue to operate and preserve the properties themselves. think that's in dispute. We are greatly concerned regarding the intercompany loan issue as you might have imagined. Mr. Penn remarked that And I don't
there's no evidence regarding the priming lien mechanism for protection of these intercompany loans. We're a little bit on
the mirror image of that in the sense our properties are cash positive, they overall have a positive debt service coverage rates. And in theory may wind up being intercompany or
intertranche lenders in this. And taken into account the concerns that the fixedrate pool, and my guess, would be the other lenders here would
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- 94 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 express, we surely don't want to have cash going out of our debtors, our SP debtors, that are now unsecured, perhaps unpayable unprotected obligations, that's a vital part of our adequate protection. And is, quite frankly, a vital part of
our existing collateral under our loan documents and pursuant to 552 of the Code. Interestingly enough, I heard debtors' counsel announce that these have to be repaid. I -- to preview a
little bit tomorrow, I'm not sure that the plan contemplated by the plan support agreement contemplates that these intercompanies would survive that plan. We have grave concern We
about how they would be treated under that circumstance. have many, many dollars that have already not been paid in terms of debt service pre-petition.
Presumably those have been
sent somewhere on an intertranche or intercompany basis, and we're concerned that that will vaporize, if you will, Your Honor. All of which leads to emphasizing the remarks have already been made, that when money goes out the door to pay fees, particularly Lehman's fees, which have to be paid, you'll hear extensively tomorrow under the plan support agreement, it's hard to see how that benefits our debtors, how that benefits our collateral. We've heard no evidence that shows
how we would be adequately protected with respect to that. So we think, quite frankly, there's a fundamental flaw
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- 95 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in the debtors' position with respect to this. We've also
stated extensively in our objection, concerns regarding the reporting itself. In addition to sort of stating the
tautological obvious that reporting at best tells us what you've lost, the time delay or the forty-five days strikes us in the context of this case, in particular, unconscionable. It's too little too late. By the time you get reported forty-
five days after the fact, as opposed to the twenty that we've suggested, which, quite frankly, we think is generous under the circumstances, we're not sure what we could do at that point. I mean, yes, as debtors' counsel has repeatedly said, we have the right to come back to Your Honor. so. We won't hesitate to do
But our concern is notwithstanding that, at that point That's not what
Your Honor can simply say 'Well, it's gone.' adequate protection is.
The right to come back after it's too
late to do something isn't good enough. We know that the debtor can do things early. We've
heard that involuntarily they've done a flash report earlier than is otherwise recorded under the interim. Given the amount
of money involved, given the debtors' position with respect to valuation issues, we think proceeded on a tight basis, rather than the forty-five days' basis, is at a minimum required in order to protect the lenders, even if you were able to address these other issues. I'm glad to hear that the waterfall contemplates
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- 96 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 funding the property-level reserve requirements. I will
confess that I did not necessarily glean that from my reading of the order. But now that it's been confirmed on the record, I do want to commend the
I do take some comfort on that.
debtor in terms of that, as well as some of the other changes that debtors' counsel has mentioned, which have been productive. But there's still a fundamental flaw in terms of
what the debtors are trying to do here today. Thank you, Your Honor. THE COURT: (Pause) MR. NEFF: THE COURT: MR. NEFF: Good afternoon, Judge. Good afternoon. David Neff from Perkins Coie in Chicago. I All right, anyone else?
represent CWCapital Asset Management LLC and C-III Asset Management LLC. We are the CMBS special servicers with regard
to two assets; the Hilton Ontario and the Hilton Suites in Anaheim. Your Honor, we had filed objections. They largely
raise the same issues that some of the other servicers; Midland and LNR, had raised. And I did want to point out to Your Honor
that we did not participate actively in today's hearing because we had had discussions with the debtor and we think we may be able to resolve the issues that we have which are somewhat unique to our properties. So we're going to continue to have
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- 97 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 discussions with the debtor after today. And I remain
optimistic at least with regard to cash collateral. If we don't reach agreement, Your Honor, you may be hearing from us at least with regard to cash collateral a little more vociferously in the future. So I just wanted to point that out to Your Honor. THE COURT: MR. NEFF: THE COURT: All right. Yes. Now's the time, unfortunately. So, I Let me pause though.
mean, I'm doing this balancing act of holding it open because of the contingent nature -MR. NEFF: THE COURT: MR. NEFF: I would say that --- of Lehman's position. Right. But -We
We're two of seventy-two.
raised the same objections that others. THE COURT: MR. NEFF: Okay. I'm going to go on faith that we will
resolve our differences -THE COURT: MR. NEFF: All right. -- on cash collateral with the debtors.
And leave it that way to Your Honor. THE COURT: All right, fair enough. Thank you. Lorenzo
MR. MARINUZZI:
Good afternoon, Your Honor.
Marinuzzi, Morrison & Foerster on behalf of the official committee of unsecured creditors.
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- 98 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 We filed a limited objection, Your Honor. And I'm
happy to report that we resolved all of the issues that we cited in our objection except for one. And that's the question of whether it's appropriate for the adequate protection parties to be able to assert their superpriority claim against avoidance actions, of the proceeds of avoidance actions. THE COURT: They're not -- they're not going to get a
lien, the question is the claim. MR. MARINUZZI: They're not getting a lien a lien. But I've watched the evolution in
They're not getting a lien.
fifteen years of representing committees where it was a lien and then the lien disappeared, but suddenly there was a superpriority claim that attached to the proceeds. So they
wound up jumping ahead of unsecured creditors one way or another on those proceeds. And I'm of the fundamental view
that avoidance actions really are property of the estate for the benefit of unsecured creditors. different. don't. The last time I've actually had to fight over this issue was in front of Judge Walrath in connection with a debtor's attempt to sell avoidance action in a case where there really were no assets, they were simply flipping it over to an insider. And we -- Judge Walrath agreed with us that they -And every case is
And some cases you fight over it, some cases you
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- 99 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 it wasn't appropriate for the estate to sell those causes of action because they belonged to the estate for the benefit of unsecured creditors. Adequate protection. When I first learned about
adequate protection it was intended to protect the secured party for the diminution in value of its collateral during the pendency of a bankruptcy case caused by the automatic stay. What we have here is an evolution into nine pages of adequate protection provision, some of which are monetary in nature, including the payment of the pre-petition fees of the adequate protection parties, some of which are reporting. We are not objecting to the nine pages of adequate protection that the debtors want this Court to agree is adequate protection for these adequate protection parties. But
what we're trying to do is preserve the work that we intend to do for the benefit of unsecured creditors, and investigating and perhaps challenging these avoidance actions claims, bringing these avoidance action claims to create a pot of assets for unsecured creditors in a case where there is likely no other recovery for these unsecured creditors. So we would ask the Court to grant the debtors' motion, but to make it clear in the order that the superpriority claims of the adequate protection parties does not extend to the proceeds of avoidance actions. Thank you, Your Honor.
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- 100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 DIP. (Pause) MR. SATHY: THE COURT: MR. SATHY: Good afternoon, Your Honor. Good afternoon. Your Honor, the starting point for both of THE COURT: (No response) THE COURT: All right. It's five minutes after 4. Thank you. Anyone else?
Why don't we take a brief break, and then we're going to start on the Five Mile DIP. Everyone agree with that procedure? Yes. So it's five after 4, why
UNIDENTIFIED SPEAKER: THE COURT: All right.
don't we come back at 4:20. IN UNISON:
Thank you.
Thank you, Your Honor.
(Recess from 4:05 p.m. until 4:32 p.m.) THE CLERK: THE COURT: All rise. Okay. Next on the agenda is the Five Mile
our DIP agreements is the, actually, the adequate assurance agreement that we have with Marriott. Section 1 of that
agreement provides for what's called acceptable financing commitments. And in analyzing the DIP agreements we were
governed by those provisions, because, frankly, those are the provisions that the company and Marriott agreed to with respect to what we're calling the PIP DIP financings. The Five Mile agreement is the first of the two. We
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- 101 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 have been working with Marriott on the actual documents, they know about them, they've seen them. And our expectation is
that that both of them will constitute acceptable financing commitments with respect to the two -- with respect to the PIP financing that's required under that adequate assurance agreement. THE COURT: Okay. So we actually don't know that as
we're sitting here now? MR. SATHY: THE COURT: MR. SATHY: No, we do. Okay. Yes. We do. We do.
It's a better answer. Your Honor, the Five Mile DIP is
intended to cover the fixed-pool hotels in a tranche A, the Mission Valley Hotel in tranche B, and the Tyson's Corner property in tranche C. In support of the motion we've tendered the declaration of Mr. Derrough from Moelis. Mr. Derrough is here.
We do not intend to put him up for direct examination, but he's certainly available for any party to cross-examine. Your Honor, the provisions of the facility are pretty straightforward. PIP DIP. This is not a working capital DIP, this is a
It is intended to fund the improvement plans with
respect to the specific hotels under certain schedules, certain disbursement requirements. It's required under the Marriott
agreement to be done and funded within sixty days; that's why we have this timing. The Marriott agreement provides that
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- 102 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 defaults. there cannot be voting controls or case controls with respect to the DIPs and there are none. We, in the process of determining which facility to utilize, we had discussions with Five Mile; logical DIP provider. We also talked to Apollo. And Moelis engaged in a
general review of the market to determine if there was an alternative. And we concluded that the Five Mile facility is
the best facility available for the debtors to deal -- to address these PIP obligations. As Your Honor may know, it -- again, it's divided up into three tranches. There's no cross-collateralization They are
between tranche A, of tranche B, and tranche C. customary closing fees, commitment fees. believe, again, are customary defaults. defaults between the tranches. THE COURT: MR. SATHY: THE COURT: Let me stop you there. Yes. Is that true?
They do have what we Again, no cross-
Well, there were cross-
I know there's no cross-collateralization, but I
thought that looking at the -MR. SATHY: THE COURT: MR. SATHY: defaults -THE COURT: Defaults. Oh, you're right. -- Wells Fargo objection -You're absolutely right. There are cross-
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- 103 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SATHY: THE COURT: MR. SATHY: THE COURT: MR. SATHY: THE COURT: change on that? MR. SATHY: THE COURT: MR. SATHY: Correct. Okay. Correct. Your Honor, there are -- but not cross-collateralization. Right. Right. Okay. That's correct, Your Honor. Still, you haven't -- there's been no
requirements for reporting and delivery, completion of the budgets; PIP budgets, but there are no operating covenants with respect to the DIP. Your Honor, with respect to the objections we've resolved I believe two of the three. committee objection has been resolved. has been resolved. I believe the creditors' And the LNR objection
And I'll describe both of those two you.
We do not believe that the preferred committee -preferred equity committee's objection has been resolved. THE COURT: Okay. So the -- I'm looking at the
pleading filed by Mr. Gottesman. MR. SATHY: THE COURT: MR. SATHY: THE COURT: Yes. Limited objection. Yes. And on page 9 of that objection there were
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- 104 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 requests for changes to the DIP order. So you've come to an
agreement with respect to those bullet point items? MR. SATHY: Your Honor, the resolution is basically to
allow for -- there'll be a separate stipulation that will be entered resolving this objection. It's a stipulation that Mr. That, in
Gottesman's firm and my firm had been negotiating.
essence, allows for LNR to take out the B tranche and the C tranche of the DIP facility. And, in essence, as a special
servicer be, in essence, the DIP lender. THE COURT: MR. SATHY: The DIP lender? In essence, the DIP lender. So we're
working through that stipulation with -THE COURT: MR. SATHY: Okay. -- with Mr. Gottesman. We believe that
there's, both legal and -- the legal side and the financial side, and the business have agreed on the form of that we'd be presenting it. But the concept would be that if, assuming
Marriott's comfortable and we can reach documentation, that LNR would then step into the shoes. And we've advised Five Mile of
this and they don't have an issue, as long as, obviously, they get repaid, that LNR would then step into the shoes and be -DIP lender might not be the perfect word for it, because it will be making protective advances -- ironically, will be making protective advances on behalf of the trust to fund the same PIPs with respect to tranche B and tranche C.
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- 105 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: to go through this. All right. So at some point we're going
And then at some point, assuming we're at
the point of -- that this is going to be approved, you're going to put this on the record and put it out on notice, so that in the event that this causes a hiccup somewhere else, folks have an -MR. SATHY: THE COURT: Right. -- opportunity to look at it, right? Yes, Your Honor. But to be very
MR. GOTTESMAN:
precise a couple of clarifications to debtors counsel's recitation. First, as my client is fond of reminding me we actually represent the trust as opposed -THE COURT: You do, yes. -- to the special servicer.
MR. GOTTESMAN: THE COURT:
Right. And the advances would actually be by
MR. GOTTESMAN:
the trust as opposed to LNR, itself. THE COURT: not LNR, right? MR. GOTTESMAN: Correct. And to be very precise, Right. You're here on behalf of Wells,
perhaps too lawyerly about it, LNR's simply the special servicer, which is the attorney, in fact, for these two separate securitization trusts. THE COURT: Okay.
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- 106 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. GOTTESMAN: And so the protective advances that They
Mr. Sathy alluded to would be coming from the trust.
would have all the protections that Five Mile would have under the contemplated tranche B and tranche C of the Five Mile DIP facility in terms of priority and everything else. conditions would be the same. The proposed stip that's still in the process of being finalized would have conditions in which we have a right within ninety days to come in and simply take out tranche B and C. That would obviate our issues in terms of cross-default. There Funding
are one or two minor issues that we've been discussing with debtors' counsel and counsel for Five Mile with respect to other aspects of the order, which I don't believe to be insurmountable. I assume those will be resolved between now
and tomorrow morning, Your Honor. THE COURT: All right. And I'm obviously hearing this
for the first time, which is fine, and I'm glad that you resolved the issues. I'm just thinking in real time. And it's
not going to require -- we're going to approve it now -MR. GOTTESMAN: THE COURT: Correct.
-- as part of the DIP resolution, and it's
not going to require a separate order under 364 or motion. MR. GOTTESMAN: Your Honor. Well, I guess it's a two-step process,
Because there would be the order that would
approve the Five Mile DIP facility, which would include tranche
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- 107 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 B and C. THE COURT: Right. The stipulation that's been negotiated
MR. GOTTESMAN:
between the debtor and my clients would also have to be so ordered by Your Honor because that's the basis for the withdrawal of our objection to the Five Mile facility. contemplates a subsequent -- if we, in fact, do take out through the method of a protected advance, we do take out tranche B and C, Your Honor would have to approve that -THE COURT: Okay. -- pursuant to a subsequent order, That
MR. GOTTESMAN:
which is yet to be drafted by the parties. THE COURT: All right, that's perfect. That staging,
I think, is -- works for me. MR. SATHY: is with A, B, and C. Gottesman's clients. So we would approve the Five Mile DIP as We would have an agreement with Mr. And that would be pursuant to a
stipulation, that would -- if certain other cond -- there's a series of conditions that need to be satisfied -THE COURT: MR. SATHY: Okay. -- including Marriott, for example, being
comfortable, that if we meet those conditions then we would then move to have the B and C tranches replaced. THE COURT: MR. SATHY: Okay. And we would come to your Court.
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- 108 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: Okay. And are you going to know if
Marriott is comfortable before I sign, hypothetically, the order approving the Five Mile DIP and the stip? Are you going Or is
to know at that juncture that Marriott is on board?
Marriott going to retain a right to not allow the B and Cs to be taken out at some later date? I mean, maybe you haven't
gotten down to this level of detail, I'm just kind of asking the questions in real time. MR. GOTTESMAN: Your Honor, perhaps more detail than But the way the Five Mile DIP
you want or need at this point.
is currently structured is that all amounts get advanced on day one. THE COURT: Okay. It was one of the issues we raised.
MR. GOTTESMAN:
We have raised the issue as to whether we could advance on an as needed basis the current contemplation of a stip is that that aspect will require Marriott to consent to that -THE COURT: I --- since that would be a change to the
MR. GOTTESMAN: adequate -MR. SATHY:
Assurance agreement. -- assurance agreement if I'm
MR. GOTTESMAN:
describing the title correctly. THE COURT: Right. The ability simply to take out Five
MR. GOTTESMAN:
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- 109 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Mile as long as it's on the same terms and conditions, would not be subject to Marriott's consent, since the fund dollars are fungible. THE COURT: MR. SATHY: Okay. Got it. Okay.
And we have advised Marriott of the
possibility of this -THE COURT: MR. SATHY: Okay. -- over the weekend, is when this was They know about it. They haven't
first surfaced as a potential resolution.
Obviously, it's going to have to get worked out.
committed to that yet, but, again, there's a condition that Marriott -- both parties agree that Marriott has to be comfortable and that it doesn't change anything with respect to the adequate assurance agreement. THE COURT: MR. SATHY: THE COURT: MR. SATHY: Okay, great. That's a condition. Thank you, that helps. Okay. Your Honor, in terms of the
declaration, again, Mr. Derrough is here and is prepared to testify. Your Honor, his declaration -- Mr. Derrough describes
the good faith arm's length negotiations between the parties regarding the DIP facility and then the fact that they reached out to a number of additional institutions regarding the DIP facility that the parties evaluated. interest that was shown by AIC. All interest, including a
And that ultimately after
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- 110 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 evidence. (Declaration of William Derrough was hereby received into evidence in lieu of direct testimony, as a Debtors' exhibit, as considering a variety of factors that the terms were -- that were best available and that were closest to the market were provided by Five Mile. Both parties were negot -- were
represented by sophisticated parties, both financial and legal. And that this is an appropriate exercise of the company's business judgment to secure this financing. And, Your Honor, I talked about the LNR objection, which we, I think, hopefully have clarified for you. The
creditors' committee objection has been resolved by virtue of the elimination of the liens and the superpriority claims with respect to avoidance actions, has been eliminated with respect to this DIP facility. order. THE COURT: MR. SATHY: answer any questions. Okay. Your Honor, I'm certainly available to This may be one of the least contested So that will be reflected in a revised
things we've had, but the reality is this is an important part of our case, and we'd ask the Court to approve the financing. THE COURT: All right. So are there any objections to
the introduction of Mr. Derrough's declaration? (No response) THE COURT: All right, there being none, it's in
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- 111 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Derrough? (No response) THE COURT: MR. SATHY: THE COURT: MR. SATHY: THE COURT: (Pause) MS. GOLDSTEIN: Irena Goldstein, Dewey & LeBoeuf, on All right, no one's responded. Okay. All right, thank you. Thank you, Your Honor. I think I need to hear from Ms. Goldstein. of this date.) THE COURT: And does anyone wish to cross-examine Mr.
behalf of the ad hoc committee of shareholders. Your Honor, we filed a combined objection to the Five Mile DIP along with the plan support agreement. And,
obviously, we'll discuss the plan support agreement tomorrow. But the reason we see them as linked somewhat is because we think that both provide an unfair advantage to Apollo to the detriment of the estate and ultimately to the preferred shareholders. The first reason we objected to the DIP was we felt that the lien was encumbering property that might actually ultimately provide a benefit and yield a recovery to preferred shareholders. But the way the debtor, in their objection,
clarified the way the lien would work we take a lot of comfort in that in that the estate, each particular debtor, is only
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- 112 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 going to be obligated to the extent the money is spent on that property for property improvements. that objection. But the second one, as I referred to, is the one that we believe it's unfair to the estate to the benefit of Apollo. As has been discussed, Apollo guaranteed to Midland the obligation to make property improvements with respect to certain of the properties covered by the Five Mile DIP. It's So that resolves basically
my understanding not all of the properties are subject to this guarantee. And to the extent that the debtors are incurring obligations to pay obligations which Apollo would otherwise owe, we think that's unfair to the estate when you take into consideration the fact that Apollo is also pursuing this -pushing this plan support agreement under which Apollo eventually will be buying back stock in the company and will have been likely released of its PIP obligations. The debtors say well, this is not really a valid objection because the guarantee obligation doesn't run to the debtors, it runs to a third party. That may be true, but that
does not mean that the estate has not been harmed by being forced to incur obligations which ultimately would benefit its parent corporation. So we would be fine with this if the order
approving the File Mile DIP just preserved the right for the estate and/or any third parties to ultimately recover from
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- 113 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Apollo any funds borrowed to pay obligations that Apollo also is obligated on. objection. THE COURT: I'm not sure that the DIP order would And that's really the extent of our
address that one way or the other. MS. GOLDSTEIN: Well, I think the problem is when you
have the debtor saying well, we have no ability to enforce that, we have no ability to recover that, I think that does raise a problem someday in the future if we try to go into court, either an examiner or trustee or someone, goes in and says we think that there is an ability to recover some of this money from Apollo. So all we asked for was a reservation of rights. We've discussed that, it's been rejected and I accept that. But, again, we think that a simple statement in the proposed order which made it clear that it was not prejudicing anyone's right, including the estate's right in the future to recover those funds from Apollo. THE COURT: And that's it.
All right, thank you. Thank you.
MS. GOLDSTEIN: THE COURT: MR. SATHY:
Any reply? Just briefly, Your Honor. And, actually,
there was one additional point I needed to raise. THE COURT: MR. SATHY: Okay. During the break we were advised that the
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- 114 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 size of the tranche A facility is going to be increased -- has been proposed to be increased by an additional two and a quarter million dollars. THE COURT: So the aggregate of the facility is going
to go up or that's going to come out of the B and C? MR. SATHY: No, no, it will go up. The whole thing
goes up by two and a quarter million dollars, the same terms. It's just to provide an additional cushion for the tranche A PIP work. We understand that Midland is fine, Five Mile is fine, the debtors obviously -- that's fine with our -- with us. the order will actually reflect that change. THE COURT: MR. SATHY: Okay. It will be the same terms, same So
conditions, same interest rate, everything will cinch the amount. With respect to the guarantee issue, Your Honor, that's just not an issue really with respect to this DIP. That's an issue that we'll probably have to address tomorrow. What's happening here is that there's a DIP facility that's being provided by a third party to the debtor to fund PIPs. We're not a party to that guarantee. Midland's not objecting And, Your Honor,
to this DIP or to any issues related to that.
I'm not sure what rights need to be reserved, but we don't want there to be any implication that's even effective, because it's
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- 115 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 just not part of this DIP facility. THE COURT: MR. CANNING: All right, thank you. Anyone else?
Your Honor, Michael Canning from Arnold
& Porter, on behalf of Five Mile. Just to reiterate what Mr. Sathy said with respect to the request to put language in the DIP order, and with respect to the guarantee, we don't think that that's appropriate. THE COURT: All right, thank you. Yes, Your Honor. Mr. Kornberg. Alan Kornberg of Paul
MR. KORNBERG:
Weiss Rifkind Wharton & Garrison, for Apollo Investment Corporation. Just to be clear, the subject of this guarantee is pending with another court right now. I think Your Honor has
seen in the papers references in footnotes and elsewhere that Midland did bring an action against AIC on the guarantee, and I might add, without any advance notice, or warning or demand. But in any event, those issues will play out in the State Court, and they have no relation to the matter's before the Court today, or in my view, tomorrow. And whether AIC has
liability or none to their guarantee is something that Midland will be heard with respect to in State Court. THE COURT: All right. Thank you, Mr. Kornberg.
Mr. Sathy, I have a couple of very small questions. MR. SATHY: THE COURT: Sure, of course. One, I'm assuming -- I didn't see it, but
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- 116 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 correct. THE COURT: All right. And, secondly, there's a I want to make sure I didn't miss it, there's no conditionality in the Five Mile DIP with respect to whether or not the PSA goes forward or not, is that correct? MR. SATHY: That's correct, absolutely. And -- that's
pending motion to appoint an examiner that's been brought by Ms. Goldstein's group. MR. SATHY: THE COURT: Correct. And there's an event of default, is there
not, in this DIP in the event there's an appointment of a trustee -- an examiner with expanded powers? MR. SATHY: THE COURT: MR. SATHY: THE COURT: That's correct. Okay. That is correct, Your Honor. All right. Why don't we take a ten-minute And then we Yes.
break, and why don't I see if I can rule on this.
can cross this one off our list, and I can send you all home early today. MR. SATHY: THE COURT: today, correct? MR. SATHY: THE COURT: Nothing else. All right. So it's five minutes to 5. Very good. We have nothing else on the agenda for
Why don't we come back at ten minutes after 5.
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- 117 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SATHY: THE COURT: Thank you, Your Honor. All right, thank you.
(Recess from 4:53 p.m. until 5:08 p.m.) THE CLERK: THE COURT: All rise. All right. Pending before the Court is
the debtors' motion seeking final approval pursuant to Section 364 of the Bankruptcy Code for Authority to obtain postpetition loans in a principal amount not to exceed fifty-three million dollars, correct, from Five Mile. Which is designed to
provide the liquidity necessary to fund the so-called PIPs on properties in the fixed-rate pool, Capmark Mission Valley and Merrill Tyson's Corner, and to pay certain fees and expenses. The fundamental issue before the Court is whether entry into the DIP financing arrangement reflects a reasonable exercise of the debtors' business judgment, and otherwise comports with the applicable requirements of the Bankruptcy Code. Preliminarily, there is no dispute on the record, and I find that the debtor has satisfied the requirements of 364(c). Because the debtors determined in their reasonable business judgment that post-petition financing was necessary that underline a substantial marketing effort to secure a DIP loan. Mr. Derrough's declaration recites that there was a
substantial arm's length negotiation that resulted in the terms
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- 118 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of the Five Mile DIP agreement. In addition, Mr. Derrough states that no higher or better financing offers have materialized. The record was also clear that the Five Mile DIP financing is critical to the implementation of the adequate assurance agreement with Marriott. The DIP was divided into three tranches. relates to the fixed-rate borrower's properties. Tranche A Based upon
the representations by the debtor and counsel to Wells Fargo and U.S. Bank; counsel to the properties in tranche B and C, the objections of those trustees will be resolved pursuant to a stipulation that, in essence, allows tranche B and C to take out Five Mile at a later date. The objection of the unsecured creditors' committee has also been addressed, leaving the objection of the ad hoc committee of preferred shareholders, that the DIP unfairly advantages Apollo. The ad hoc committee requested a
reservation of rights with respect to the ability to pursue claims against Apollo. The objection is overruled. I do not
believe it is necessary or appropriate to address any issues relating to the AIC guarantee in the context of the Five Mile DIP financing order. Accordingly, subject to finalization of the order, and my having an opportunity to review it, the DIP financing is approved.
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- 119 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8:30. I would like to extend my thanks and compliments to the parties for working together to resolve as many of the objections as was possible, resulting in this largely consensual order. Any questions? (No response) THE COURT: No. All right. We're going to start at And we're going to
So let's talk about tomorrow. I think we have documents here. No?
start with the PSA. MR. SATHY: makes sense.
Your Honor, we can start with whatever
But if the cash collateral issue is still open -Well --- with respect to documents that we will
THE COURT: MR. SATHY:
be tendering to the representatives tonight -THE COURT: MR. SATHY: that that's all done. THE COURT: MR. SATHY: THE COURT: All right. So we'll at least -All right, fair enough. -- it might make sense to push that off so
Or we can do that at the end. -- finish the Midland other object or But then we still have PSA. And
portion of cash collateral.
then we have to toggle back -- if we have to toggle back -MR. SATHY: THE COURT: Right. -- to the Lehman -- potential Lehman cash
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- 120 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 no -better -MR. SATHY: THE COURT: Yeah, I think it's the right order. -- order having clarified that there's order. THE COURT: Why don't we do that. I think that's a collateral issues -MR. SATHY: THE COURT: MR. SATHY: facilities. THE COURT: Of course, Lehman DIP. And let me ask you Right. -- if we get there. And the Lehman DIP -- the Lehman DIP
that question now, and I ask the question with respect to Five Mile. I didn't find conditionality with respect to the Lehman In other words, is the -- is the
DIP, vis-a-vis the PSA.
availability of the Lehman DIP conditioned on the approval of the PSA? agreement. Mr. Sathy is shaking his head no. MR. SATHY: THE COURT: MR. SATHY: THE COURT: It is not. Okay. It is completely -So that we could actually go from cash I did not find that anywhere in the Lehman DIP
collateral to the Lehman DIP and then to the PSA. MR. SATHY: Yes, Your Honor. I think that's the right
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- 121 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 period. THE COURT: MR. SATHY: it's not connected. THE COURT: All right, that's great. And I understand Got it. So that was the fundamental reason why MR. SATHY: THE COURT: MR. SATHY: No linkage between them. -- linkage between the two. And that was part of my presentation.
When I said Marriott said no case controls, no case -THE COURT: MR. SATHY: Got it. They only want the PIPs to be done,
from my chambers that we've gotten a copy of the -- a blackline of the cash collateral order, and we'll just wait for this one to come in. MR. SATHY: THE COURT: All right, Your Honor. All right. Thank you all very much. I'll
see you in the morning. MR. SATHY: Thank you.
(Proceedings concluded at 5:14 PM)
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- 122 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Debtors Debtors PARTY Debtors NO E X H I B I T S DESCRIPTION Cook 1 and Cook 2 affidavits of Nathan Cook (in lieu of direct testimony) Declaration of Ronald Greenspan (in lieu of direct testimony) Declaration of William Derrough (in lieu of direct testimony) 110 78 ID. EVID. 22 WITNESS Nathan Cook Nathan Cook Nathan Cook Ronald Greenspan Ronald Greenspan Ronald Greenspan Ronald Greenspan T E S T I M O N Y EXAM BY Mr. Penn Mr. Bryan Mr. Gottesman Mr. Penn Mr. Donovan Mr. Penn Mr. Donovan PAGE 23 57 69 78 79 79 85 LINE 21 3 19 6 2 18 9 I N D E X
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- 123 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 DESCRIPTION Debtors' Motion for Entry of an Order Authorizing the Debtors to Obtain Postpetition Financing from Five Mile Capital Partners on a Priming Basis, approved. R U L I N G S PAGE 118 LINE 25
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- 124 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Date: September 1, 2010 Veritext 200 Old Country Road Suite 580 Mineola, NY 11501 I, Clara Rubin, certify that the foregoing transcript is a true and accurate record of the proceedings. C E R T I F I C A T I O N
Clara Rubin
Clara Rubin
___________________________________
Digitally signed by Clara Rubin DN: cn=Clara Rubin, c=US Reason: I am the author of this document Date: 2010.09.02 17:00:58 -04'00'
AAERT Certified Electronic Transcriber (CET**D-491)
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- 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 B E F O R E: HON. SHELLEY C. CHAPMAN U.S. BANKRUPTCY JUDGE August 31, 2010 2:00 PM U.S.

VERITEXT REPORTING COMPANY www.veritext.com

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INNKEEPERS USA TRUST, et al.

It's -- they have notified CourtCall that they would

All right, thank you.

All right, pursuant to the discussions that we had

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INNKEEPERS USA TRUST, et al.

It says "Supplemental Authority".

And it's a -- as Exhibit A.

a reservation of rights with respect to Lehman's position on

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INNKEEPERS USA TRUST, et al.

Your Honor, as you noted, this is our

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that, I guess we're just going to have to let the string to

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or not, depending upon the way things come out.

is really intended to create that fair balance between lenders'

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the second -- for the first part of August later today.

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paid; corporate expenses, pursuant to the allocation.

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based on what's in the existing loan docs, and those are --

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Disbursements are where we have expected

Mr. Cook is obviously here; he can certainly explain the

substantial portion of that cash will be set forth in the

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TriMont has asked for some

And the flash

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not just disbursements.

So parties will know, for example, if

prevent intercompany borrowings. the goal by -THE COURT:

So if there is a blip and you're in the

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-- if we need to. -- is that evergreen? Then if you went

But that's intended to prevent,

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At some point, if Your Honor would like, at whatever We've sent it

point we would be happy to walk through changes. around.

about cash collateral that is not -- has not been bridged

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