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Hearing Date: June 23, 2011, at 10:00 a.m.

DECHERT LLP 1095 Avenue of the Americas New York, New York 10036-6797 Telephone: (212) 698-3500 Facsimile: (212) 698-3599 Michael J. Sage Brian E. Greer Nicole B. Herther-Spiro Attorneys for Lehman ALI Inc. and SASCO 2008-C2, LLC UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK --------------------------------------------------------------: In re: : : INNKEEPERS USA TRUST, et al. : : Debtors. : : ---------------------------------------------------------------

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

LEHMAN ALI INC. AND SASCO 2008-C2, LLCS (I) LIMITED OBJECTION OF TO CONFIRMATION OF THE REMAINING DEBTORS PLAN AND (II) RESERVATION OF RIGHTS Lehman ALI Inc. (Lehman ALI) and SASCO 2008-C2, LLC (SASCO, together with Lehman ALI, the Lenders)1 submit this limited objection to confirmation of the Remaining

Certain of the Debtors (the Floating Rate Debtors) in the above-captioned cases are borrowers under that certain Loan Agreement, dated as of June 29, 2007, in the original principal amount of $250,000,000.00, between and among the Floating Rate Debtors, as borrowers, and Lehman ALI, as lender (as amended, the Floating Rate Loan Agreement). Grand Prix Mezz Borrower 2 Floating LLC (the Floating Mezz Debtor) is borrower under that certain Mezzanine Loan Agreement, dated as of June 29, 2007, in the original principal amount of $121,000,000.00, between and among the Floating Mezz Debtor and Lehman ALI, as original lender (as amended, the Floating Rate Mezz Loan Agreement). Grand Prix Mezz Borrower Term LLC (the Anaheim Mezz Debtor) is borrower under that certain Mezzanine Loan Agreement, dated as of June 29, 2007, in the original principal amount of $21,300,000.00, between and among the Anaheim Mezz Debtor and Lehman ALI, as original lender (as amended, the Anaheim Mezz Loan Agreement). Lehman ALI is holder of all claims and lender of record under the Floating Rate Mortgage Loan Agreement. SASCO owns 100% of the economic and beneficial interests under (a) the Floating Rate Mezzanine Loan Agreement and (b) the Anaheim Mezzanine Loan Agreement. The Debtors obligations to Lehman ALI and SASCO under the various loan

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Debtors Plan,2 and reservation of rights with respect to the Fixed/Floating Plan and the Anaheim Plan, and respectfully state as follows: The Lenders object to the confirmation of the Remaining Debtors Plan with respect to the following two provisions: (a) the payment of $3.5 million to the Ad Hoc Committee as an administrative claim (the Ad Hoc Payment), although the Lenders would not object to the payment of the reasonable and documented fees and expenses of counsel to the Ad Hoc Committee as an administrative expense claim against Innkeepers USA Trust and (b) the payment of a $500,000 bonus to the Debtors chief restructuring officer and other employees (the Employee Payment). Further, the plan for Grand Prix cannot be confirmed. Additionally, Lehman ALI reserves all rights with respect to the confirmation of the Fixed/Floating Plan, including, without limitation, its consent rights with respect to the Confirmation Order, the Fixed/Floating Plan and the Plan Supplement. reserves all its rights with respect to the confirmation of the Anaheim Plan. I. Objections to Confirmation of the Remaining Debtors Plan A. The Ad Hoc Payment 1. The Lenders object to granting the Ad Hoc Commitee the $3.5 million Ad Hoc SASCO likewise

Payment as an administrative expense claim against the estates of all (with limited exceptions) of the Remaining Debtors.3 The Lenders would not, however, object to the reimbursement of
agreements have been guaranteed (the Grand Prix Guarantees) by Grand Prix Holdings, LLC (Grand Prix), one of the Debtors under the Remaining Debtors Plan.
2

Each capitalized term not otherwise defined herein shall have the respective meaning assigned to it in the Debtors Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code [Dkt. No. 1145] (the Plan). The Disclosure Statement provides that the Ad Hoc Payment shall be an administrative expense paid by a Remaining Debtor other than Grand Prix, Innkeepers USA Trust, or Innkeepers Financial Corporation. Disclosure Statement [Dkt. No. 1444], p.51.

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reasonable and documented fees and expenses of counsel to the Ad Hoc Committee (the Counsel Fees and Expenses) to the extent they were asserted as an administrative claim against Innkeepers USA Trust and were subject to the final fee application process set forth in the Plan. The Lenders submit that the disbursement of any funds to the Ad Hoc Committee members in addition to the Counsel Fees and Expenses (the Committee Members Payment) is inappropriate and not permissible under the Bankruptcy Code. See Disclosure Statement, pp.5-6, 51. This is true regardless of whether the Committee Members Payment is asserted as a section 503(b) claim or a settlement payment under Bankruptcy Rule 9019. 2. Section 503(b)(3)(D) of the Bankruptcy Code authorizes the bankruptcy court to

award the payment of actual, necessary expenses of creditors or ad hoc committees of creditors or interests holders incurred in the process of making a substantial contribution to the chapter 11 case. In re Bayou Group, LLC, 431 B.R. 549, 560 (Bankr. S.D.N.Y. 2010). In the Southern District of New York, [e]xtensive participation alone is insufficient to justify an award. In re Granite, 213 B.R. 440, 445 (Bankr. S.D.N.Y. 1997). While 503(b)(3)(D) promotes meaningful creditor participation in the reorganization process, there is a tension with the contrasting policy that provisions establishing administrative expenses should be construed narrowly and administrative expenses kept to a minimum. Id. The integrity of 503(b) can only be maintained by strictly limiting compensation to extraordinary creditor actions which lead directly to tangible benefits to the creditors, debtor or estate. Id. (quoting In re Best Prods. Co. Inc., 173 B.R. 862, 866 (Bankr. S.D.N.Y. 1994)). 3. Section 503(b)(3)(D) of the Bankruptcy Code does not authorize a bankruptcy

court to modify the rights of creditors and interest holders by allowing for payments directly to individual creditors or members of ad hoc groups of creditors except as payment of actual and

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necessary expenses incurred in connection with a proven substantial contribution. If the Court were to authorize and approve the Committee Members Payment, ad hoc committee members in all cases would attempt to attract bonuses or success fees for their role on the ad hoc committee at the expense of other stakeholders, including those similarly situated to such committee members. 4. Likewise, the Committee Members Payment cannot pass muster under the guise

of settlement. Bankruptcy Rule 9019 does not permit debtors to approve a settlement that is inconsistent with or not permitted by the Bankruptcy Code. See In re Adelphia Communs. Corp., 441 B.R. 6, 10 and 14 (Bankr. S.D.N.Y. 2010) (holding that a settlement payment of nonfiduciary creditors fees may be absorbed by the estate under a plan because 1123(b)(3) provides that a plan of reorganization may provide for the settlement or adjustment of any claim or interest belonging to the debtor or to the estate, and 1123(b)(6) provides that a plan may include any other appropriate provision not inconsistent with the applicable provisions [of the Bankruptcy Code].) 5. First, the Ad Hoc Payment is not limited to the reasonable and documented fees

and expenses of the Ad Hoc Committee, subject to the final fee application process set forth in the Plan. In fact, the Committee Members Payment is not for fees and expenses at all. As such, the Ad Hoc Payment is inconsistent with 1129(a)(4) of the Bankruptcy Code, and the Committee Members Payment is inconsistent with both 503(b) and 1129(a)(4) of the Bankruptcy Code. See 11 U.S.C. 503(b)(3) (allowing for the payment of the actual and necessary expenses of a creditor group or individual creditor that makes a substantial contribution to a bankruptcy case); id. 1129(a)(4) (providing that a plan must provide that [a]ny payment made or to be made by the proponent [or] by the debtor . . . for services or for

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costs and expenses in or in connection with the case, or in connection with the plan and incident to the case, has been approved by, or is subject to the approval of, the court as reasonable.); see also In re Adelphia Communs. Corp., 368 B.R. 140, 370 (Bankr. S.D.N.Y. 2007) (requiring creditors counsel to file applications for reimbursement, which acted as the safety valve [that] makes the Plan confirmable); Adelphia, 441 B.R. at 19 (ruling that it would allow the requested fees to the extent they were reasonable and the requirements of 1129(a)(4) were complied with). 6. Second, the Ad Hoc Payment is not being made in the context of a global

settlement that is necessary to allow a substantial transaction to go forward. See Adelphia, 441 B.R. at 8-9. Under the Remaining Debtors Plan, the Chatham Hotel Sale Transaction will still go forward even if the Ad Hoc Committee withdraws its support for the Remaining Debtor Plan. See Plan, p.54. 7. In addition, the Ad Hoc Payment should not be allowed as an administrative claim

against any Debtor other than Innkeepers USA Trust. The Ad Hoc Committee members solely have an interest in Innkeepers USA Trust. As such, the provision of an allowed administrative claim at any other Debtor would constitute a distribution to parties that have no privity with such Debtors. At best, such treatment would constitute an impermissible gift under applicable Second Circuit law. See In re DBSD N. Am., Inc., 634 F.3d 79, 100 (2d Cir. 2011) (Congress . . . did not create any exception [to the absolute priority rule] for gifts like the one at issue here.). 8. Finally, if the Court determines that the payment of the Committee Members

Payment is justified, such payment should come out of the recovery distributed to the holders of Series C Preferred Shares and should not dilute the recovery to the holders of the Series A

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Preferred Shares. Substantially all of the Series A Preferred Shares are held by Grand Prix, the Remaining Debtor against which the Lenders have substantial guaranty claims. B. The Employee Payment 9. The Bankruptcy Code provides two means by which compensation plans for

employees or directors can be approved -- either by meeting the requirements of 503(c) of the Bankruptcy Code or if the compensation plan can be approved as an ordinary course transaction pursuant to 363 of the Bankruptcy Code. In re Dana Corp., 351 B.R. 96, 102 (Bankr. S.D.N.Y. 2006) (holding that the proposed executive bonus was not an incentive bonus that could be authorized under 503(c) because the bonus was payable to executives upon emergence from chapter 11 regardless of the outcome of the cases); see also In re Borders Group, Inc., 2011 Bankr. LEXIS 1537, at *24 (Bankr. S.D.N.Y. Apr. 27, 2011) (authorizing a revised incentive program after rejecting two programs that failed to meet the requirements of 503(c) because they permitted the Executives to receive an incentive bonus that was merely predicated on exiting bankruptcy in a timely manner without regard to the financial state of the business.). 10. The Remaining Debtors propose to make a $500,000 payment to certain members

of the Debtors management team as an administrative expense. Disclosure Statement, p.49 (This Employee Payment will be funded by the Chatham Hotel Sale Transaction Purchase Consideration, which amount shall be distributed on the Effective Date of the Remaining Debtor Plan to certain members of the Debtors management and employees at the direction of, and in the sole and absolute discretion of, the current board of Innkeepers USA Trust.). 11. The Employee Payment is not permitted under the Bankruptcy Code. It is not an

ordinary course transaction and the Remaining Debtors have not even attempted to establish the requirements under 503(c)(1) (establishing the requirements for authorization of employee

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incentive plans) or 503(c)(2) (establishing the requirements for authorization of severance programs). Accordingly, the Employee Payment cannot be authorized or paid pursuant to the Remaining Debtor Plan as an administrative expense claim. II. The Plan For Grand Prix Cannot Be Confirmed 12. In order to confirm a plan over the objection of an impaired class of claims, there

must be acceptance of the plan by at least one class of impaired creditors. 11 U.S.C. 1129(a)(10); Bank of Am. Natl Trust & Sav. Co. v. 203 N. LaSalle St. Pship, 526 U.S. 434, 441, 119 S. Ct. 1411, 1415-16, 143 L. Ed. 2d 607 (1999) (Critical among [the conditions of cramdown] are the conditions that the plan be accepted by at least one class of impaired creditors, see 1129(a)(10) . . . .). 13. The only class of claims at Debtor Grand Prix is Class R4B, General Unsecured

Claims. See Plan, p. 39-48; Claims Docket for Grand Prix, Case No. 10-13793; Schedules of Assets and Liabilities for Grand Prix, Case No. 10-13793. Accordingly, the plan for Grand Prix cannot be confirmed if Class R4B votes to reject the plan. 11 U.S.C. 1129(a)(10). Based on the size of the Lenders claims, the Lenders control the vote in Class R4B and have voted to reject the Remaining Debtors Plan. See Stipulation Providing Certain Guaranty Claimants Ballots and Voting Rights [Dkt. No. 1639]. 14. The Remaining Debtors have not been substantively consolidated and substantive

consolidation is not justified here. See Plan, p.48; In re Augie/Restivo Baking Co., 860 F.2d 515, 518 (2d Cir. 1988) (Substantive consolidation comes down to two critical inquiries: (1) whether creditors dealt with the entities as a single economic unit and did not rely on their separate identity in extending credit; or (ii) whether the affairs of the debtors are so entangled that consolidation will benefit all creditors.). Based on the Debtors corporate and capital structure

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and business operations, there can be no argument that Grand Prix should be consolidated with any other Debtor. 15. As there is no actual substantive consolidation under the Remaining Debtor Plan,

any attempt to effectuate a de facto consolidation of the Debtors by asserting that the vote of an impaired accepting class of one debtor may be used to confirm a plan of another debtor which does not have an impaired accepting class must be rejected in light of the objection of the nonconsenting impaired class. See In re Charter Communications, 419 B.R. 221, 270-71 (Bankr. S.D.N.Y. 2009).4 III. Reservation of Rights 16. Lehman ALI has certain consent rights under the Fixed/Floating Plan, including

without limitation with respect to the form of Confirmation Order for such plan, any amendments or modifications to the Fixed/Floating Plan, and the contents of the Plan Supplement. The Debtors have not yet provided Lehman ALI with any draft of the Confirmation Order for the Fixed/Floating Plan. Lehman ALI reserves all its rights with respect to confirmation of the Fixed/Floating Plan, including without limitation its consent rights with respect to the Fixed/Floating Plan, the Plan Supplement, and the Confirmation Order. In addition, SASCO reserves all its rights with respect to the confirmation of the Anaheim Plan. WHEREFORE, for the foregoing reasons, the Lenders respectfully request that the Court (i) condition the confirmation of the Remaining Debtors Plan on the removal of the provisions providing for (a) the Ad Hoc Payment (although the Lenders would not object to the payment of Counsel Fees and Expenses as an administrative claim solely against Innkeepers
4

If the Remaining Debtors were substantively consolidated, Lehman and the other creditors of Grand Prix would share pro rata with the other unsecured creditors of the Remaining Debtors in the proceeds of the Chatham Hotel Sale Transaction, prior to there being any distributions to equity, including to the holders of Series C Preferred Shares.

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USA Trust and subject to the final fee application process set forth in the Plan) and (b) the payment of the Employee Payment and (ii) grant the Lenders such other or further relief as the Court deems appropriate.

Dated: New York, New York June 17, 2011 Respectfully Submitted, DECHERT LLP By:/s/ Michael J. Sage Michael J. Sage Brian E. Greer Nicole B. Herther-Spiro 1095 Avenue of the Americas New York, New York 10036-6797 Telephone: (212) 698-3500 Facsimile: (212) 698-3599 michael.sage@dechert.com brian.greer@dechert.com nicole.hertherspiro@dechert.com Attorneys for Lehman ALI Inc. and SASCO 2008-C2, LLC

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