Judge: Innkeepers Failed to Uphold Duties to Creditors

09/07/2010

Innkeepers USA Trust didn’t properly carry out its duties to creditors, U.S. Bankruptcy Judge Shelley C. Chapman ruled last week. Chapman refused to approve an agreement that would have compelled Innkeepers, a real estate investment trust, to pursue a reorganization plan giving the stock to a subsidiary of Lehman Brothers Holdings Inc.

As shown in the transcript of the Aug. 1 hearing, Chapman honed in on how Innkeepers and Lehman subsidiary Lehman Ali Inc. signed a contract, known as a plan-support agreement, which precluded Innkeepers from “negotiating in good faith with their numerous constituents.” She noted that the so-called PSA “lacks support from nearly the entire capital structure.”

Chapman also said it was “troubling” that Innkeepers didn’t disclose to the largest creditor that it was working on a parallel agreement where Lehman would sell half the stock for $107.5 million to the current owner, Apollo Investment Corp.

Midland Loan Services Inc., the servicer for $825 million in mortgage debt, was opposed to the Lehman-Apollo plan. Midland has liens on 45 of Innkeepers’ 72 properties. It has a competing plan that would be financed by selling the new stock for $236 million to Five Mile Capital Partners LLC.

Midland was represented at the PSA trial by Lenard Parkins and John Penn from Haynes and Boone LLP.

The case is In re Innkeepers USA Trust, 10-13800, U.S. Bankruptcy Court, Southern District New York (Manhattan).

Excerpted from Bloomberg. To view the full article, click here.

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