HAYNES AND BOONE, LLP 1221 Avenue of the Americas, 26th Floor New York, New York 10020

Telephone: (212) 659-7300 Facsimile: (212) 884-8211 Lenard M. Parkins (NY Bar # 4579124) John D. Penn (pro hac vice pending) Mark Elmore (pro hac vice pending) Attorneys for Midland Loan Services, Inc. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: INNKEEPERS USA TRUST, et al., Debtors. ) ) ) ) ) ) ) Chapter 11 Case No. 10-13800 (SCC) Joint Administration Requested

MIDLAND LOAN SERVICES, INC.S, SPECIAL SERVICER FOR THE FIXED RATE TRUSTEE, OBJECTION TO (1)THE MOTION (A) AUTHORIZING THE DEBTORS TO (i) USE THE ADEQUATE PROTECTION PARTIES CASH COLLATERAL AND (ii) PROVIDING ADEQUATE PROTECTION TO THE ADEQUATE PROTECTION PARTIES PURSUANT TO 11 U.S.C. 361, 362, AND 363 AND (B) SCHEDULING A FINAL HEARING PURSUANT TO BANKRUPTCY RULE 4001(b) AND (2) MOTION FOR ENTRY OF 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 TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE: Midland Loan Services, Inc. (Midland), special servicer pursuant to that certain pooling and servicing agreement dated as of August 13, 2007 (the Special Servicing Agreement) for the Fixed Rate Trustee (as defined below), files this objection (the Objection)1 to the motions of the above-captioned debtors (collectively, Innkeepers or the Debtors) for (1) entry of an

Contemporaneously herewith, the Declaration of Ronald F. Greenspan, Senior Managing Director with FTI Consulting, financial advisor for Midland (the Greenspan Declaration), has been filed in support of this Objection.

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order (the Cash Collateral Interim Order) (a) authorizing the Debtors to use Midlands cash collateral (as defined below) pursuant to 11 U.S.C. 361, 362, and 363 (the Cash Collateral Motion) and (b) scheduling a final hearing pursuant to Bankruptcy Rule 4001(b); and (2) entry of an order (a) authorizing the continued use of (i) the existing cash management system, as modified herein (ii) the existing bank accounts, (iii) the existing business forms, and (iv) certain existing guidelines, and (b) granting such other relief (the Cash Management Motion, together with the Cash Collateral Motion, the Motions) and respectfully represents as follows: INTRODUCTION 1. Midland pursuant to the Special Servicing Agreement services and administers

that certain secured loan in the amount of not less than $825,402,542 plus interest, costs and fees (the Fixed Rate Mortgage Loan)2 owed by certain of the above referenced Debtors.3 The Fixed Rate Mortgage Loan is secured by forty-five (45) hotels and other property, including property constituting Midlands cash collateral generated from the hotel operations.4 Midland is the largest secured creditor of the Debtors. Its debt is larger than all the debt (whether on a stand-alone or combined basis) existing in the Debtors other collateral pools. The Midland
2

The Fixed Rate Mortgage Loan was made pursuant to that certain loan agreement dated as of June 29, 2007 (as amended, the Fixed Rate Mortgage Loan Agreement), and is evidenced by (i) a certain Replacement Note A-1 and (ii) a certain Replacement Note A2, each dated as of August 9, 2007, and each in the original principal amount of $412,701, 271. Replacement Note A-1 was assigned to LaSalle Bank National Association as trustee for the holders of the LB-UBS Commercial Mortgage Trust 2007C6. Bank of America, N.A. is the successor-in-interest to LaSalle Bank National Association (the Fixed Rate Trustee). Replacement Note A-1 is currently held by the Fixed Rate Trustee. Replacement Note A-2 was assigned to and is currently held by the trustee for the holders of the LB-UBS Commercial Mortgage Trust 2007-C7. The Debtors who are borrowers under the Fixed Rate Mortgage Loan Agreement are identified on Exhibit A attached hereto and are collectively referred to as the Midland Debtors. The Fixed Rate Mortgage Loan is secured by cross-collateralized and cross-defaulted first priority mortgages, liens and security interests on forty-five (45) hotel properties and their contents and assets related thereto (collectively, the Midland Properties) and the other collateral, including all cash collateral as such term has meaning under section 363 of the Bankruptcy Code, generated by the Midland Debtors hotel and business operations with respect to the Midland Properties, as set forth in the Fixed Rate Mortgage Loan Agreement.

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Debtors defaulted under the Fixed Rate Mortgage Loan Agreement on April 9, 2010 for nonpayment of interest, and Midland became special servicer under the loan on April 19, 2010. Midland objects to the Motions and does not consent to the Debtors proposed use of the Midland cash collateral.5 2. Midland has five basic objections to the Motions: a. Midlands cash collateral should not be commingled, and the segregation of Midlands cash collateral currently in place should not be abandoned. Rather, Midlands cash collateral should continue to be segregated pursuant to a revised cash collateral protocol, similar to one currently in place, but more debtor-friendly in the context of these Chapter 11 cases; b. There should be real time ability to monitor cash collateral use to make certain that Midlands cash collateral is used for the benefit of Midlands hotel collateral; c. There should not be any inter-debtor borrowing or lending between the various debtors and their separate collateral pools; d. Midlands cash collateral should not be used to fund estate professionals in furtherance of a cramdown plan of reorganization providing for a coerced write down of over $300 million of principal like that described in the Declaration of Dennis Craven, the now-resigned Chief Financial Officer of Innkeepers USA Trust, in Support of First-Day Pleadings (the Craven Declaration). Midlands objection to the use of its cash collateral includes its attempted use in furtherance of any plan that would benefit Apollo Investment Corporation (Apollo) through

The Midland cash collateral is comprised of all of the cash collateral as such term has meaning under section 363 of the Bankruptcy Code, generated before or after the petition date, from the Midland Properties, including, but not limited to, all profits, rents or proceeds of the Midland Properties.

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Apollos retention or receipt of equity in the newly reorganized debtors. Incredibly, the initial Craven Declaration was devoid of any mention of Apollos involvement in the proposed plan support agreement and plan of reorganization. Midland has been advised that Apollo will be a major beneficiary of the proposed plan and to become a substantial equity owner in the reorganized Debtors. It was only late in the day on July 19, 2010, that the Debtors submitted an amended Craven Declaration including a passing reference about Apollos possible involvement in the proposed plan. Midland intends to explore this situation at the hearing; and e. The proposed Cash Collateral Order is missing language necessary for the protection of the Midland cash collateral. OBJECTIONS 3. Midlands cash collateral should not be commingled with the cash from the

Debtors other pools of debt as proposed in the Motions. Rather, the Midland cash collateral should be segregated, administered and used during these cases pursuant to a cash collateral protocol specifically designed for these bankruptcy cases (the Fixed Rate Separate Account Procedures), similar to an existing, working, and satisfactory cash collateral protocol (the Midland Cash Protocol) established two months ago for the Midland Debtors.6 Midland will consent to the use of its cash collateral subject to the use of the Fixed Rate Separate Account Procedures7 and the inclusion of the other language necessary for adequate protection contained in Exhibit D attached hereto.
6 7

A copy of the Fixed Rate Separate Account Procedures is attached hereto as Exhibit B and a depiction of the Midland Cash Protocol is attached hereto as Exhibit C. Midland created the Fixed Rate Separate Account Procedures to modify the Midland Cash Protocol to make it more debtor friendly.

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4.

The Midland Cash Protocol came into existence after Midland became special

servicer in April of this year and discovered that the Midland Debtors had diverted the Midland cash collateral away from segregated lockbox accounts to different accounts. These Debtors diverted more than $9 Million of Midlands cash collateral beginning on April 19, 2010 in violation of the Fixed Rate Mortgage Loan Agreement. The Debtors accomplished this diversion of the Midland cash collateral by giving instructions to the credit card companies to divert cash to accounts outside of Midlands control. It remains to be seen whether the instructions were given to the credit card companies by the Debtors or the Debtors hotel manager, Island Hospitality Management, Inc. The Debtors subsequently exercised unfettered control of the Midland cash collateral and used a portion of its cash collateral to pay Debtors professionals. Consequently, Midlands first task as special servicer was to regain control of the Midland cash collateral and to establish a workable cash collateral use protocol to provide for the operations of the Midland Properties and to protect the integrity of the Midland cash collateral. As a result of Midlands efforts, the Debtors soon instructed the credit card companies to redirect the Midland cash collateral to lockbox accounts controlled by Midland.8 5. The Midland Cash Protocol has been in place since the third week of May, 2010

and has become the ordinary course of business between Midland and the Midland Debtors since that time. The Debtors describe the basic mechanics of the Midland Cash Protocol in the Cash Management Motion and state that the Debtors continue to operate under this arrangement. See Cash Management Motion 18 at p. 13. As described in the Cash Management Motion, the

Midland has repeatedly sought information from the Midland Debtors regarding the full extent of the diverted the Midland cash collateral, but the Midland Debtors have refused to provide the requested information regarding cash as of April 19, 2010 and before even though the same is required pursuant to the terms of the Fixed Rate Mortgage Loan Agreement.

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past few months have demonstrated that the core protections of the Midland Cash Protocol work, allow the Midland Debtors to satisfy their operating expenses, the essence of which should not be disrupted to allow for a commingling of the Midland cash collateral. What Midland now proposes, with the Fixed Rate Separate Account Procedures, is even more streamlined for these Chapter 11 cases. The Fixed Rate Separate Account Procedures is a critical part of the adequate protection necessary to protect Midland for the use of its cash collateral. 6. In addition, during the period of cash diversion where the Debtors had unfettered

control of cash, and prior to the implementation of the Midland Cash Protocol, the Debtors failed to pay real estate taxes on the Midland Properties for the first quarter of 2010. These tax obligations were senior in priority to Midlands first lien. Midland was forced to make a protective advance in the amount of $5,171,771.45 to pay these tax obligations in order to preserve its first lien position. 7. The filings of these bankruptcy cases were precipitated to a large extent because

of material defaults declared by Marriott International, Inc. or its affiliates (Marriott) resulting from the Debtors failure to comply with the property improvement plans (PIPs) required by the Marriott franchise agreements since 2007. Upon information and belief, Marriott first approached the Debtors regarding the failure to complete the PIPs over nineteen (19) months ago. Neither the Debtors nor Apollo, the Debtors ultimate, out of the money parent, has provided the funding necessary to complete the PIPs during the ensuing time. 8. On March 16, 2010, Marriott notified the Debtors that it would terminate sixteen

(16) franchise agreements for hotels in the Midland collateral pool for failure to complete the PIPs. To put the catastrophic nature of the threatened Marriott termination in perspective, Midlands collateral pool contains forty-five (45) hotels, of which thirty-three (33) carry the

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Marriott flag. The threatened termination of sixteen (16) franchise agreements jeopardized approximately 50% of the Marriott hotels in the Midland collateral pool and over 35% of the total number of hotels in the Midland collateral pool.9 It is no coincidence that these bankruptcy cases were filed before Marriotts notices of franchise termination could take effect. 9. When Apollo acquired Innkeepers in 2007, Apollo executed a guarantee (the PIP

Guarantee), as required by the Fixed Rate Mortgage Loan Agreement, to pay for and perform the PIPs. Apollo has refused to perform under its PIP Guarantee.10 10. With the Midland Debtors not having the funds necessary for the PIPs and no

money coming from Apollo, third party funding had to be secured in order for the Debtors to complete the PIPs and solve the looming Marriott problem. To protect its interests in the Midland Properties, Midland brought the Debtors a source of financing in the form of a $50 Million DIP loan (the Five Mile DIP) with Five Mile Capital LLC (Five Mile), which the Debtors project will provide sufficient funds to substantially complete the PIPs as required by Marriott and prevent the loss of the Marriott flag. Although the Five Mile DIP will prime Midlands lien on the Midland Properties and Midlands cash collateral will pay the debt service on the Five Mile DIP, the completion of the PIPs is essential to preserve the value of the Midland Properties. Because the Midland cash collateral will fund the debt service on the Five Mile DIP, the need to segregate the Midland cash collateral becomes even more critical and further distinguishes Midlands cash collateral from the cash collateral of the Debtors other secured
9

10

The Debtors concede that the loss of a franchise flag has a dramatic effect on the value of a particular hotel. The Debtors first day declaration states that [i]n September of 2009, a Residence Inn Franchise Agreement with respect to a hotel property in Columbus, Ohio terminated. Subsequent to the termination, revenue precipitously dropped by 50% and the property was sold for a fraction of its appraised value from only two years prior. See Craven Declaration (as defined below) at 53. Midland has filed suit in the Supreme Court of the State of New York, County of New York, styled Midland Loan Services, Inc. against Apollo Investment Corporation, for specific performance of Apollos obligations as guarantor under the Fixed Rate Mortgage Loan Agreement.

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lenders. The Fixed Rate Separate Account Procedures (along with the additional requested language contained in Exhibit D) provides the necessary adequate protection to Midland, the most critical provision of which is already in place namely, the segregation of Midlands cash collateral. There simply is no good reason not to continue this practice postpetition. 11. Midland objects, in part, to the Motions because the Debtors have rejected the

implementation of the Fixed Rate Separate Account Procedures and further seek to disregard the separateness required by the Debtors special purpose entity (SPE) structure. Innkeepers designed its capital structure (and Apollo structured the financing to acquire Innkeepers) with five (5) lenders each lending to and secured by separate and distinct borrowers and pools of collateral. While Debtors cleverly describe the collateral pools as nine (9) tranches of debt, the actual facts are that each lender is secured with different hotel properties and each has different rights under the respective loan documents.11 From the outset of the acquisition of Innkeepers,

the financing was done on a separate collateral pool basis in part to protect the individual rights of the respective secured parties among the various pools of debt, and this separateness should remain intact. 12. The Debtors insistence upon including Midlands cash collateral in a comingled

cash collateral process demonstrates the Debtors indifference to the separateness of their SPE structures. Since the implementation of the Midland Cash Protocol, the Midland cash collateral has been segregated. The Debtors consternation that maintenance of separateness is not possible in these Chapter 11 cases is simply not true and is not supported by facts because the Midland Cash Protocol has been effective for the past few months. Midland is not proposing to place additional burdens on the Midland Debtors with implementation of the Fixed Rate Separate
11

A tranche of debt is customarily understood to be a particular layer of debt (one of many) owed by a common debtor.

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Account Procedures it merely asks this Court to maintain the separateness of the Midland cash collateral from the cash generated by other collateral pools.12 In fact, what the Debtors propose through the Motions is a modification of the Midland Cash Protocol under which the Midland Debtors have been efficiently operating. See Cash Management Motion 22 at p. 15 (although the Debtors couch the relief requested in the Cash Management Motion as the continuation of existing cash management system, the Debtors actually request a modification of existing systems). 13. Additionally, Midland objects to the Motions because they do not provide for real

time monitoring of the cash collateral with respect to each of pool of debt. The proposed reporting process would, at best, advise a secured party of funds that had been collected and disbursed months after the fact, but not otherwise provide a critical mechanism to track on a real time basis cash on deposit, cash collected, and cash disbursed on a daily basis with respect to the various pools of debt.13 Being primed by the Five Mile DIP puts Midland in a very different position than other secured lenders: Midlands cash collateral must not only be used to operate the Midland Properties, but it will be used to service the Five Mile DIP. Midland should have the ability to monitor every dollar of its cash collateral and be sure that its cash collateral is not diverted again (including for loans to affiliates) to support assets owned by other Debtors whose
12

13

The task of allocating the receipts and disbursements is commonly performed by someone in the purchasing department, on-site at a property or in the finance department based on a review of the invoice (for disbursements) or remittance advice (for deposits). It does not require unique accounting skills or training. If the Debtors should need additional assistance to perform these functions, Midland believes that Alix Partners is capable of deploying staff level employees to implement the Fixed Rate Separate Account Procedures. If additional staffing is needed to continue the Fixed Rate Separate Account Procedures, Midland will fund such additional expense from its cash collateral. What the Debtors request this Court to approve is akin to asking someone to abide by a system where he cannot know the balance of his checking account except well over a month in arrears, having to guess or estimate what money is being deposited and what expenses are being paid from the account. At the same time, the depositor has to hope that related depositors have not overdrawn their accounts because they can quickly and secretly borrow from his account without notice. The Debtors cannot seriously assume that just because they now operate without accounting discipline, that it is acceptable to continue to do so in Chapter 11.

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properties might be losing money. Even worse, the Cash Collateral Motion seeks pre-approval of additional priming liens in favor of certain debtor lenders against other debtor borrowers.14 It is an anathema to suggest that Innkeepers with its history of financial failures, defaults and lack of disciplined cash management could cause automatic lending (on a priming basis) using one debtors cash collateral to fund another debtor with reconciliation only to occur months later. If that is the best the Debtors can offer with respect to adequate protection, this Court should reject that proposal, and at a minimum, provide Midland with adequate protection for the use of its cash collateral and implement the Fixed Rate Separate Account Procedures. 14. Further, the Debtors failure to timely complete the PIPs will be an event of

default under a new Agreement for Adequate Assurance of Completion of Certain PIPs and Assumption of Agreements between the Debtors and Marriott (the Marriott Agreement). The Marriott Agreement provides for the termination of the franchise agreements on the Midland Properties if the Midland Debtors default. Midland has a right to step in and cure the Midland Debtors defaults and prevent the loss of the Midland Debtors Marriott franchises. The segregation of Midlands cash collateral will facilitate ready access to Midlands cash without having to both dissect and extract the Midland cash collateral from the cash collateral of other Debtors. It is important to remember that defaults with Marriott are a precipitating reason for the filing of these bankruptcy cases. If a Marriott crisis arises again, Midland will need to be able to identify and access its cash collateral to respond promptly to Marriott in order to protect the value of the Midland Properties. Imagine the catastrophe for Midland if the Marriott franchises were lost after Midland had subordinated to $50 Million of DIP financing.
14

See Cash Collateral Interim Order 6(f) at p. 30 providing for the provision of super priority, priming liens in the event of intercompany lending among the various pools of debt.

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15.

As described in the Craven Declaration, the Debtors state plainly that they have

successfully negotiated a consensual, integrated restructuring transaction supported by a Plan Support Agreement (the PSA) between the Debtors and Lehman ALI, Inc. (Lehman). In addition to the PSA, the Debtors represent that the restructuring includes the Five Mile DIP and the Marriott Agreement. See Craven Declaration at p. 6. Under the PSA, Lehman has agreed to support a plan in which Apollo, as Midland has been advised by the Debtors chief restructuring officer, will receive 50% of the reorganized Debtors equity in what amounts to a new value plan with every other creditor taking a massive haircut. 16. In the course of consummating this allegedly pre-negotiated transaction, the

Debtors failed to include the most important party in these integral discussions namely, Midland.15 Rather than invite the largest secured creditor to the table to reach consensus on a plan, the Debtors have opted to negotiate the PSA without Midlands participation. 17. Upon reviewing the PSA, received for the first time only after the filing of these

Chapter 11 cases, it is clear that the Debtors have entered into a transaction with Lehman, which puts Midland and the use of its cash collateral at extreme risk. The PSA contemplates a series of triggering events that will allow Lehman to terminate the use of its cash collateral, including the Debtors failure to meet certain plan milestones.16 See PSA 6(a) at p. 8. Upon the occurrence of a triggering event, the Debtors right to use the Lehman cash collateral automatically terminates. See PSA 8(a) at p. 11. A termination of the Debtors right to use the Lehman cash collateral places all of the Debtors, including the Midland Debtors, at risk because

15 16

With the Debtors not having additional unsecured loans, Midland represents holders of approximately 60% of the Debtors total debt obligations. For example, a triggering event includes the failure by the Debtors to assume the PSA within 45 days of the Petition Date. Additionally, Lehman has sole discretion to terminate the PSA if the transaction as contemplated by the PSA does not satisfy Lehmans tax objectives and goals.

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the Lehman cash collateral will no longer be available for payment of the Debtors corporate overhead and certain other expenses. In the event that Lehman walks due to a termination event and cuts off the use of its cash collateral, Midlands cash collateral will basically be all that is left to fund the entire case (including all unpaid, accrued professional fees for Lehman) for all the Debtors. The Midland Properties and Midlands cash collateral should not bear the risks and costs inherent with either the success or failure of the PSA. Midlands cash collateral must be segregated so that its available to protect the Midland Properties and to perform PIP work in the event of a meltdown due to Lehman. Midlands cash collateral must be segregated in order to protect Midland and its collateral in such a high risk situation. 18. Adding insult to injury, the Debtors intend to use the Five Mile DIP brought to

them by Midland to complete the PIPs on the Midland Properties to create a windfall of value appreciation to be reaped by Lehman and Apollo and not Midland under the plan described in the Craven Declaration. Midland should reap the benefit of the upside associated with completing PIP work on the Midland Properties not Lehman and Apollo because Midland alone bears the risk associated with being primed by the Five Mile DIP. Absent compliance with the United States Supreme Courts clear mandates regarding new value plans, Apollo is not entitled to receive new equity under any plan of reorganization without exposure to the market. See Bank of Am. Natl Trust & Assn v. 203 N. LaSalle St. Pship, 526 U.S. 434 (1999). No market exposure is contemplated in the plan as described in the Craven Declaration. To the extent Apollo obtains equity in the reorganized debtors, the proposed plan constitutes a nonconfirmable new value plan. 19. Midland objects to the use of its cash collateral to finance the prosecution of the

plan of reorganization as described in the Craven Declaration or other efforts by the Debtors to

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cramdown Midlands claims in a plan. On Wednesday, July 14, 2010, the Debtors first apprised Midland of the terms of what it said is a fully negotiated plan of reorganization with Lehman and Apollo. Midland, as the largest creditor and secured party holding approximately 60% of the total debt of all the Debtors, is targeted to bear about 60% of the cost of the Debtors professionals and non-collateral overhead. It is now clear that those professionals have been busy at work devising a new value plan that targets Midland. It is simply beyond reproach for Midland to have the Debtors use Midlands cash collateral to fund the Debtors professionals who intend to effect a coerced write-off of $300 Million of principal of Midlands debt in a cramdown.17 Moreover, the Debtors have access to other assets to pay professionals--- the assets encumbered by Lehman, the only creditor supporting the Plan, appear to generate funds sufficient to pay the expenses of operating the Lehman properties and the reasonable costs of Debtors professionals. If Lehman supports the plan described in the Craven Declaration, then it or Apollo (to the extent Apollo proves to be a beneficiary under that plan) should pay for the costs associated with the Debtors prosecution of that effort and the anticipated litigation against Midland. 20. Taking the insult and inequity one step further, the Debtors have now apparently

agreed to pay the professional fees incurred by Lehman associated with the PSA. See PSA 5(d) at p. 7 (Debtors agreement to pay all reasonable professional fees and expenses incurred by Lehman in connection with the Transaction.).18 Midland understands that the Debtors have budgeted the monthly payment of $460,000 for Lehmans professional fees related to the PSA,
17

18

As previously relayed to the Debtors, Midland does not object to the use of its cash collateral to fund the operations (including overhead after reasonable allocation) of the Midland Properties, but cannot consent to fees for professionals advocating positions harmful to Midlands interests. This refusal is found in standard carve-out provisions in cash collateral and DIP financing orders. The Debtors have further obligated themselves to Lehman to the detriment of their other creditors by agreeing to broadly indemnify Lehman in connection with the PSA. See PSA 26 at p. 17.

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consisting of $300,000 for Lehmans attorneys, Dechert LLP, and $160,000 for Lehmans investment banker, Lazard. These fees and expenses should be paid exclusively from Lehmans cash collateral. Midland objects to the use of its cash collateral to fund the professionals for both the Debtors and Lehman in pursuit of the PSA. LEGAL AUTHORITY IN SUPPORT OF OBJECTION A. Midland Does Not Consent to Use of the Midland Cash Collateral 21. Under section 363(c) of the Bankruptcy Code, [t]he trustee may not use, sell, or

lease cash collateral under paragraph (1) of this subsection unless- (A) each entity has an interest in such cash collateral consents; or (B) the court, after notice and hearing, authorizes such use, sale, or lease in accordance with the provisions of this section. 11 U.S.C. 363(c)(2). If the Debtors cannot obtain the secured partys consent to use cash collateral, the use of cash collateral is strictly prohibited unless expressly authorized by the Bankruptcy Court in accordance with the provisions of section 363 of the Bankruptcy Code. 11 U.S.C. 363(c)(2)(B); Harvis Trien & Beck, P.C. v. Fed. Home Loan Mortgage Corp. (In re Blackwood Assocs., L.P.), 153 F.3d 61, 67 (2d Cir. 1998). Section 363 of the Bankruptcy Code further provides that the Court shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection for the secured creditors interest. 11 U.S.C. 363(e). The Debtors have the burden of establishing that adequate protection has been provided. 11 U.S.C. 363(p). Without Midlands consent to the Midland Debtors use of the Midland cash collateral, the Midland Debtors use of the Midland cash collateral is dependent upon the Midland Debtors ability to demonstrate that they can provide adequate protection for such use. 22. The Midland Debtors have not carried their burden with establishing that

adequate protection has been provided. In the Cash Collateral Motion, the Debtors propose

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replacement liens and super-priority claims as adequate protection for the use of Midlands cash collateral. While Midland requests that any adequate protection package approved by this Court include both replacement liens and super-priority claims, these protections should not be the limit of adequate protection. Rather, the Debtors should additionally segregate the Midland cash collateral in accordance with the Fixed Rate Separate Account Procedures and provide real time access to data with respect to the use of the Midland cash collateral by the Midland Debtors and among the debtors in the other pools of debt. Finally, as additional adequate protection for the use of the Midland cash collateral, cash in excess of the Midland Debtors operating expenses and a reasonable reserve, as determined consistent with using the Fixed Rate Separate Account Procedures, should be disbursed to Midland to protect Midland for the use of its collateral, including the Midland cash collateral, and any diminution of the value thereof.19 B. Midland Should not be Forced to Finance the Debtors Efforts to Prosecute the Proposed Cramdown Plan 23. Midland objects to the use of its cash collateral for the payment of professional

fees to pursue the plan as described in the Craven Declaration or otherwise support efforts to cramdown Midlands claims. In a typical carve-out situation, a debtor (or other estate professional) is not entitled to use a secured creditors cash collateral to finance efforts to challenge a secured lenders claims or interests in its collateral. Accordingly, the Debtors attorneys, as estate professionals, cannot use the Midland cash collateral to advocate the proposed cramdown plan, which is a direct challenge to Midlands position. 24. Likewise, Midlands collateral pool cannot be surcharged. The Second Circuit

has held time and time again that a secured creditors collateral cannot be surcharged for
19

The Court can later determine whether such disbursements should be treated as interest or principal under the Fixed Rate Mortgage Loan Agreement.

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payment of attorneys fees unless there is a direct benefit, one not merely incidental to the reorganization. See, e.g., In re Flagstaff Foodservice Corp. (Flagstaff I), 739 F.2d 73 (2d Cir. 1984); In re Flagstaff Foodservice Corp. (Flagstaff II), 762 F.2d 10 (2d Cir. 1985); Harvis Trien & Beck, P.C. v. Federal Home Loan Mortgage Corp. (In re Blackwood Assocs., L.P.), 153 F.3d 61 (2d. Cir. 1998); In re Hotel Syracuse, Inc., 275 B.R. 679 (Bankr. N.D.N.Y. 2002). 25. The proposed cramdown of Midlands claims does not constitute a direct benefit

to Midland quite the opposite. If other secured creditors, such as Lehman, support the actions embodied in the Craven Declaration and the PSA, then those secured creditors should bear the responsibility of paying any professional fees associated with this course of action. C. The Cash Collateral Interim Order Excludes Language Necessary for Midlands Adequate Protection 26. Finally, the form of cash collateral order prepared by the Debtors is missing

certain language Midland deems necessary to adequately protect it. To that end, before authorization of the use of the Midland cash collateral over Midlands objection and in addition to the requirement that any cash collateral order adopt the Fixed Rate Separate Account Procedures, Midland requests that the form of order incorporate the language attached hereto as Exhibit D. For ease of reference, attached is a redline draft of the requested language compared to the language now contained in the proposed Cash Collateral Interim Order. Local Rule 9013-1(a) 27. This Objection includes citations to the applicable rules and statutory authorities

as support and a discussion of their application to this Objection. Accordingly, Midland submits that this Objection satisfies Rule 9013-1(a) of the Local Rules for the Southern District of New York and respectfully requests the waiver of the need to file a supporting memorandum of law.

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CONCLUSION WHEREFORE, Midland respectfully requests that this Court enter an order: (i) denying the Motions and the Debtors request to use the Midland cash collateral; (ii) sustaining the Objection; (iii) authorizing the use of the Midland cash collateral only through implementation of the Fixed Rate Separate Account Procedures and adoption of the language contained in Exhibit D; and (iv) granting such other and further relief as the Court deems just and proper.

Dated: July 19, 2010 New York, New York

/s/_Lenard M. Parkins____________ HAYNES AND BOONE, LLP 1221 Avenue of the Americas, 26th Floor New York, New York 10020 Telephone: (212) 659-7300 Facsimile: (212) 884-8211 Lenard M. Parkins (NY Bar# 4579124) John D. Penn (pro hac vice pending) Mark Elmore (pro hac vice pending)

ATTORNEYS FOR MIDLAND LOAN SERVICES, INC.

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EXHIBIT A

MIDLAND DEBTORS
Grand Prix Fort Lauderdale LLC Grand Prix Addison (RI) LLC Grand Prix Altamonte LLC Grand Prix Arlington LLC Grand Prix Atlanta LLC Grand Prix Atlanta (Peachtree Corners) LLC Grand Prix Bellevue LLC Grand Prix Binghamton LLC Grand Prix Bothell LLC Grand Prix Campbell/San Jose LLC Grand Prix Cherry Hill LLC Grand Prix Chicago LLC Grand Prix Denver LLC Grand Prix Englewood/DE South LLC Grand Prix Fremont LLC Grand Prix Gaithersburg LLC Grand Prix Lexington LLC Grand Prix Livonia LLC Grand Prix Louisville (RI) LLC Grand Prix Lynnwood LLC Grand Prix Mountain View LLC Grand Prix Portland LLC Grand Prix Richmond LLC Grand Prix Richmond (Northwest) LLC Grand Prix Saddle River LLC Grand Prix San Jose LLC Grand Prix San Mateo LLC Grand Prix Shelton LLC Grand Prix Sili I LLC Grand Prix Sili II LLC Grand Prix Tukwila LLC Grand Prix Windsor LLC Grand Prix Horsham LLC Grand Prix Columbia LLC Grand Prix Germantown LLC Grand Prix Islandia LLC Grand Prix Lombard LLC Grand Prix Naples LLC Grand Prix Schaumberg LLC Grand Prix Westchester LLC Grand Prix Willow Grove LLC Grand Prix Belmont LLC Grand Prix El Segundo LLC Grand Prix Las Colinas LLC Grand Prix Mt. Laurel LLC Grand Prix Holdings, LLC Grand Prix Fixed Lessee LLC

EXHIBIT B

FixedPoolSeparateAccountProcedures InnkeeperswillestablishandmaintainanewseparateaccountfortheFixedPoolcashcollateralthatwill besubjecttoliensandsecurityinterestsinfavorofandmonitoringbyMidland(theInnkeepers/Fixed PoolAccount)inaccordancewiththefollowingprocedures: InnkeeperswillhavecontroloftheInnkeepers/FixedPoolAccount. AllcreditcardreceiptswillcontinuebeingdepositedintotheMidlandlockboxaccountsand sweptonadailybasisintotheInnkeepers/FixedPoolAccount. AllreceiptsorwiresreceivedbyInnkeepersandassociatedwiththeFixedPoolcollateralwillbe depositeddirectlyintotheInnkeepers/FixedPoolAccount. InnkeeperswillbeabletodisbursefundsoutoftheInnkeepers/FixedPoolAccountforthe expensesassociatedwiththeFixedPoolhotels,withoutMidlandspriorapproval,including: o Operatingexpensesandinvoiceswhichtypicallyarebilledtoaspecifichotelincluding payroll,realestatetaxes,sales&occupancytax,utilities,franchiseandmanagement fees,etc. o Reasonableallocationsofthoseinvoiceswhicharenotbilleddirectlytoaspecifichotel andforwhichquickreconciliationscannoteasilybecompleted o TheFixedPoolsallocableshareofcorporateoverheadandbankruptcyrestructuring expenses(otherthanthefeesofDebtorsprofessionalsincurredinconnectionwith prosecutingtheplanofreorganizationdescribedintheCravenDeclaration),basedon EBITDA,whichwillbesetat57%andwhichamountswillbetrueduponceamonth basedonactualEBITDAoftheFixedPoolrelativetoothercollateralpools FTIandInnkeeperswillidentifywithinaweekthoseexpensesthataretypicallyinvoiced toaspecifichotelandthoseforwhichareasonableallocationmethodwillneedtobe establishedandimplemented. Everytwoweeks[orsuchothertimethatFTIandInnkeepersjointlydetermineisreasonable], andotherthaninconnectionwithcorporateoverheadandbankruptcyexpenses,Innkeepers willprovideareconciliationandtrueupoftheestimatedandallocatedoperatingexpensesto actualexpensespaid.Midlandwillberesponsiblefortheincreasedcost,ifany,incurredin connectionwithcompletingtheseexpeditedreconciliationsandwillmakeFTIpersonnel availabletoassistinthereconciliationprocess. Onaweeklybasis,Innkeeperswillprovideareportoftotalreceiptsdepositedintoand disbursementsmadefromtheInnkeepers/FixedPoolAccount,indicatingthe$amountsand purposeofthedisbursements.

EXHIBIT C

Exhibit C Innkeepers USA Trust Existing Midland Cash Protocol g

Fixed Pool Hotels
Credit card receipts, wires and other deposits are transferred to the Lock Box Account (1) by the Fixed Pool hotels, operating lessee, and Island Management. The Lockbox is controlled by Midland

Midland
Credit card receipts, wires, and other deposits are collected in Lock Box Account

Innkeepers
Miscellaneous receipts inadvertently collected by Innkeepers are credited in the weekly funding requests (i.e. a customer unintentionally wires funds directly to Innkeepers account) Request for utilities, payroll utilities (bi-weekly) and other one-off expenses requiring immediate funding is submitted to Midland (utilities and payroll are estimates) Funds received from Midland

Daily

Weekly (Beginning of Week)

Reviews and approves request for utility, payroll (biweekly) and other one-off urgent expenses requiring immediate funding

Request

Funds are wired to Innkeepers

Weekly (End of Week)

(1) The Lock Box Account is controlled by Midland and individual hotel borrowers, (i.e. Grand Prix Belmont LLC), the operating lessee (Grand Prix Fixed Lessee LLC), and Manager (Island Hospitality Management, Inc) are required to deposit all gross income from operations into the account.

Reviews and approves request for other hotel operating expenses and corporate overhead

Request

Request for other hotel operating expenses and corporate overhead submitted to Midland (actual utilities and payroll payments are reconciled to estimates and the funding request is debited or credited depending on the adjustment) Funds are received from Midland in the beginning of week following request

Funds are wired to Innkeepers in the beginning of p g g the next week following request

EXHIBIT D

Exhibit D Requested Language to be Included in Specific Paragraphs of the Debtors Interim Cash Collateral Order
6. Adequate Protection for Use of Cash Collateral. As adequate protection for, and

to the extent of, any diminution in the value of any Adequate Protection Partys interest in the Prepetition Collateral securing obligations owing to it during the Cash Collateral Period resulting from (x) the use of its Cash Collateral pursuant to section 363(c) of the Bankruptcy Code, (y) the use, sale, lease, or other diminution in value of its Prepetition Collateral (other than the Cash Collateral) pursuant to section 363(c) of the Bankruptcy Code, or (z) the imposition of the automatic stay pursuant to section 362(a) of the Bankruptcy Code (collectively, the Adequate Protection Obligations), and effective as of the Petition Date, without the necessity of the execution by the Debtors of mortgages, security agreements, pledge agreements, financing statements, or otherwise: a. (i) Representatives Expense Reimbursement. The Debtors shall pay or reimburse, subject to the provisions set forth in paragraph 6(fg) hereof, following submission of reasonably detailed invoices or statements (redacted as may be necessary to preserve privilege), the reasonable, documented out-of-pocket fees and expenses of attorneys and other professional advisors retained by the Representatives in connection with matters relating to this Order and, to the obligations hereunder, and to the plan support agreement among the Floating Rate Lender and the Floating Rate Debtors, and to these Chapter 11 cases. The foregoing obligations shall be referred to herein as the Representatives Expense Reimbursement. Notwithstanding the foregoing, the professional fees incurred by the professionals retained by Midland in connection with matters relating to this Order, to the obligations hereunder, and to these Chapter 11 cases shall be paid or reimbursed pursuant to cash procedures and protocol set forth in the provisions of paragraph 6(f) hereof subject to the provision of professional fee invoices or statements as provided for in paragraph 6(a)(ii).

(ii)

Each professional referred to in paragraph 6(a)(i) hereof, shall submit copies of its professional fee invoices or statements, to respective counsel to the applicable Debtor, the U.S. Trustee, and any official committee appointed in the Chapter 11 Cases (each, a Committee). Such invoices may be redacted only to the extent necessary to delete any information subject to the attorney-client privilege, any information constituting attorney work product, or any other confidential or proprietary information, and the provision of such invoices shall not constitute any waiver of the attorney-client privilege or of any benefits of the attorney work product doctrine. The Debtors, the U.S. Trustee, and any Committee may object to the reasonableness of the fees and expenses included in any such professional fee invoices. If an objection to a professionals invoice is filed and served on such professional within 10 days from the date of receipt by such objecting party of the relevant invoice, the Debtors only shall be required to pay the undisputed amount of the applicable invoice, if any, and any such objection shall be resolved by the agreement of the objecting party, the Debtors, and the affected professional or by the Court, with the payment, if any, of the disputed amount only occurring after such resolution. For the avoidance of doubt, professionals retained by the Representatives shall not be required to file any interim or final fee applications or summaries of fees with respect thereto in connection with the Representatives Expense Reimbursement provided for herein. Adequate Protection Liens.

b. (i)

To the extent of any Adequate Protection Obligations arising under any Tranche of Debt, the applicable Adequate Protection Party shall receive, and hereby is granted, a perfected replacement lien and security interest in and valid, binding, enforceable and perfected liens (the Adequate Protection Liens) on all of the applicable Debtors rights in, to, and under all present and after-acquired property and assets of the likekind or type that would constitute Prepetition Collateral of such Adequate Protection Party in accordance with the applicable Loan Documents of any nature whatsoever whether real or personal, tangible or intangible, wherever located, including, without limitation, all cash and Cash Collateral and any investment of such cash and Cash Collateral, goods, cash-in-advance deposits, contracts, causes of action, general intangibles, accounts receivable, and other rights to payment, whether arising before or after the Petition Date, chattel paper, documents, instruments, interests in leaseholds, real properties, plants, machinery, equipment, patents, copyrights, trademarks, trade names or other intellectual property, licenses, insurance proceeds, and tort claims, and any and all of the proceeds, products, offspring, rents and profits thereof, rights under letters of credit, capital stock and other equity or ownership interests held by the Debtors, including equity interests in subsidiaries and all other investment property, and the proceeds of all of the foregoing, whether in existence on the Petition Date or thereafter created, acquired or arising and

wherever located (all such property, other than the Prepetition Collateral in existence immediately prior to the Petition Date, being collectively referred to as, the Postpetition Collateral), which liens and security interests shall be subject only to (A) the Carve Out, (B) liens granted in respect of Permitted DIPs (as defined below), and (C) all valid, enforceable and non-avoidable liens and security interests in the applicable Prepetition Collateral that were perfected prior to the Petition Date (or perfected thereafter to the extent permitted by section 546(c) of the Bankruptcy Code), which are not subject to avoidance, disallowance, or subordination pursuant to the Bankruptcy Code or applicable nonbankruptcy law and which are senior to the applicable Adequate Protection Partys liens in such Prepetition Collateral as of the Petition Date (the Prior Liens). The Postpetition Collateral in favor of any Adequate Protection Party shall not include any claims and causes of action under section 544, 545, 547, 548, 549, or 550 of the Bankruptcy Code (collectively, the Avoidance Actions), but shall include the proceeds of Avoidance Actions recovered by the applicable Debtor to the extent the Court includes such provision in the Final Order, subject to the limitations set forth herein or in the Final Order. To the extent applicable, all Adequate Protection Liens shall be subject to terms and conditions of any intercreditor agreements. For the avoidance of doubt, such Adequate Protection Liens granted hereunder shall be deemed to be effective and perfected as of the Petition Date and without the necessity of the execution by the Debtors of mortgages, security agreements, pledge agreements, financing statements, or other agreements. (ii) The Adequate Protection Liens shall be enforceable against the applicable Debtors, their estates and any successors thereto, including, without limitation, any trustee or other estate representative appointed in the Chapter 11 Cases, or any case under chapter 7 of the Bankruptcy Code upon the conversion of any of the Chapter 11 Cases, or in any other proceedings superseding or related to any of the foregoing (collectively, the Successor Cases). The Adequate Protection Liens shall be deemed legal, valid, binding, enforceable, and perfected liens, not subject to subordination, impairment, or avoidance, for all purposes in the Chapter 11 Cases and any Successor Cases or upon the dismissal of any of the Chapter 11 Cases or Successor Cases. Adequate Protection 507(b) Claims. As further adequate protection for any Adequate Protection Obligations, the applicable Adequate Protection Party shall have an administrative expense claim against the Debtors with obligations arising under the applicable Tranche of Debt under section 507(b) of the Bankruptcy Code with priority over all other administrative expense claims and unsecured claims against such Debtors, now existing or hereafter arising, of any kind whatsoever

(iii)

c.

(collectively, the 507(b) Claims), subject in each case to the Carve Out, and to any superpriority claim in favor of Permitted DIPs. d. (i) Reporting. The Debtors have delivered to the Representatives a 13-week forecast of cash receipts and disbursements (a 13-Week Forecast) with respect to each Tranche of Debt, a copy of which is attached hereto as Schedule 10. The Debtors shall deliver to the Representatives: (A) except as provided in clause (C), below, on the first day of each calendar month (unless such day is not a business day in which case the required delivery date shall be the next succeeding business day) a revised 13-Week Forecast for the 13-week period from the last Saturday of the prior calendar month (each such revised forecast, for the period of its applicability, to be referred to herein as the Forecast); (B) except as provided in clause (C) below, on the last day of each calendar month (unless such day is not a business day in which case the required delivery date shall be the next succeeding business day), a report showing in reasonable detail a comparison of actual receipts and disbursements with respect to each Tranche of Debt for the period from the date of the last such report through and including the last Saturday of the prior calendar month against the receipts and disbursements projected in the Forecast for such period (the Variance Report); and (C) with respect to the first Forecast and Variance Report following the Petition Date, (1) the Forecast shall be due on the first day of the calendar month (unless such day is not a business day in which case the required delivery date shall be the next succeeding business day), that is at least 30 days from the Petition Date, and (2) the Variance Report shall be delivered on the last day of the calendar month (unless such day is not a business day in which case the required delivery date shall be the next succeeding business day), that is at least 60 days from the Petition Date, and shall set forth the required comparison from the Petition Date through the last Saturday of the calendar month that is at least 30 days prior to the date when such report is required to be delivered. The Debtors also shall provide to each Representative month-end profit and loss statements for each individual hotel property (not consolidated by Tranche of Debt) within 30 days of the end of the month (or, if the 30th day is not a business day, the next succeeding business day), which shall include year-to-year results, comparisons with same period in the immediately preceding year, and key operating metrics consisting of occupancy, so-called ADR and so-called REVPAR. The Debtors also shall provide on a monthly basis, at the same time as they provide the month-end statements referred to in the first sentence of this paragraph (ii), the so-called STR report for each property.

(ii)

e.

Cumulative Forecast Variance. Until the entry of the Final Order, the Debtors agree that (x) during each 4-week cumulative period as tested from the last Sunday of such period, the Debtors shall not use Cash Collateral to the extent such use would exceed, for such period, 110% of cash disbursements (excluding those disbursements on account of Professional Fees and any Representatives Expense Reimbursement) contemplated to be made by such Debtors during such 4-week period in the applicable Forecast, and (y) during each 13-week cumulative period as tested from the last Sunday of such period, the Debtors shall not use Cash Collateral to the extent such use would exceed, for such cumulative period, 106.5% of cash disbursements (excluding those disbursements on account of Professional Fees and any Representatives Expense Reimbursement) contemplated to be made by such Debtors during such 13-week cumulative period in the applicable Forecast. To the extent that there is a variance, positive or negative (expressed as a percentage), of receipts in any one month period as compared to the receipts for the same period forecasted in the applicable Forecast with respect to any Hotel Operating Expense (as defined below), then the variance from budget permitted pursuant to the preceding sentence on account of such Hotel Operating Expense shall be adjusted by such percentage. Hotel Operating Expense means any of the following line items listed on the applicable Forecast: (i) payroll and related; (ii) franchise taxes; (iii) utility costs; (iv) third party management and related fees; (v) all other expenses; and (vi) occupancy/sales tax. [COMMENT: VARIANCE SHOULD BE ON A POOL BY POOL BASIS] Cash Use Covenant and Fixed Rate Separate Account Procedures with Respect to the Fixed Rate Debtors. With respect to the Fixed Rate Debtors, the Debtors shall employ the cash management protocol and procedures (the Fixed Rate Separate Account Procedures) attached hereto as Exhibit [ ]. f. Cash Use Covenant with Respect to Debtors other than the Fixed Rate Debtors; True-Ups. (i) In the ordinary course of operations and consistent with practices in place prior to the Petition DateWith respect to all Debtors other than the Fixed Rate Debtors, the Debtors shall consolidate all cash in a master account owned by one or more Debtors.3 Such consolidated cashFor the avoidance of doubt, the Fixed Rate Debtors shall operate pursuant to the Fixed Rate Separate Account Procedures. Cash shall be applied as follows: 1) first, [to the extent of any excess, to pay amounts then owing on account of any Permitted DIPs to the extent then

f.

g.

For the avoidance of doubt, nothing contained in this Order shall constitute a substantive consolidation of the Debtors estates.

payable, but only to the extent such fees and expenses are not payable from the proceeds of such Permitted DIPs;] 2) 3) ][second, to the extent of any excess, to pay property level costs and expenses of the hotels and the Operating Lessees;] ] third, given the timing of cash receipts versus certain disbursements, to establish or increase, as the case may be, an expense reserve in amounts and at times reasonably determined by the Debtors for the purpose of ensuring sufficient cash on-hand to pay accrued expenses of the type contemplated by an applicable Forecast but which expenses are expected to become payable during a period other than the period when cash in excess of thenpayable expenses has been generated, in an amount at any time outstanding not to exceed $2,000,000; [second, to the extent of any excess, to pay property level costs and expenses of the hotels and the Operating Lessees;] 3) third[fourth], to the extent of any excess, to pay corporate overhead charges and expenses of Innkeepers USA Trust and the other Debtors; and 4) [fourth][fifth], to the extent of any excess, to pay any Professional Fees (to the extent permitted by the Court to be paid at such time), as well as the Representatives Expense Reimbursement; [fifth], [to the extent of any excess, to pay amounts then owing on account of any Permitted DIPs to the extent then payable, but only to the extent such fees and expenses are not payable from the proceeds of such Permitted DIPs;] and sixth, to the extent of any excess, to repay any intercompany loans incurred pursuant to or as a result of the provisions set forth in Paragraph 6(f)(v). provided however that, the Fixed Rate Debtors shall not be responsible for the payment of the Professional Fees incurred in prosecuting the plan of reorganization described in the Craven Declaration or otherwise attempting to cramdown the Fixed Rate Debtors interests.

2) 4)

5)

5)

6)

(ii)

The Debtors shall provide to each Representative a so-called flash report as to each Tranche commencing in August, 2010, (x) on the 15th of each calendar month (or, if such day is not a business day, then on the next succeeding business day), detailing cash disbursements for the Debtors for the period from the 16th through and including the last day of the immediately prior month (except for the report due on August 15,

2010, only for the period from the Petition Date through and including July 31, 2010), and (y) on the 30th of each calendar month (or, if such daysecond Monday after the Petition Date and continuing each Monday thereafter (or, if any such Monday is not a business day, then on the next succeeding business day), detailing cash disbursements for the Debtors for the one-week period fromending the first day through and including the 15th day of such month, and, in each caseprior Saturday and, including information, to the extent then determined by the Debtors, their anticipated allocation of all or any portion of the cash disbursements made during such period, on a Tranche of Debt by Tranche of Debt basis, and the approximated amount of cash disbursements not yet allocated (it being understood that the Debtors proposed allocation shall not constitute the Debtors final allocation (which shall only be included in an Application Report (as defined below), but only their good faith application based upon information then available to the Debtors). At any time following the Debtors delivery of any flash report, any Representative may, following a reasonable request, seek from the Debtors reasonable information in order to determine, based upon a sampling of such information, the basis for certain of the Debtors proposed allocations (it being understood that such requests, if any, relative to the information contained in flash reports only, shall not be reasonable to the extent they seek from the Debtors all or substantially all of the Debtors invoices and similar information used in determining the proposed allocation). (iii) Within 4520 days (or, if the 4520th day is not a business day, the next succeeding business day) after the end of each calendar month, the Debtors shall provide to each Representative a report for such month, on a Tranche of Debt by Tranche of Debt basis, as to the application of the cash in accordance with the waterfall set forth in paragraph 6(f)(i) hereof (the Application Report), with such Application Report to be based upon (x) the Cash Collateral generated by the applicable Debtors within a Tranche of Debt, plus or minus, as the case may be, the amount deemed loaned or borrowed, as applicable, by the applicable Debtors (to the extent set forth in paragraph 6(f)(iv) hereof), (y) in the case of all of the waterfall items other than thirdsecond and, with respect to Professional Fees, fourth, in accordance with the amounts actually applicable to the applicable Debtors, and (z) in the case of waterfall items thirdsecond and, with respect to Professional Fees, fourth, in accordance with the Allocation Percentages (as defined below). Amounts actually applied in accordance with the waterfall set forth in paragraph 6(f)(i) hereof shall be deemed to have been applied for the benefit of the Debtors within a Tranche of Debt in accordance with the Application Report. Each Representative shall have the right to audit and challenge any Application Report upon the serving of notice of such challenge (a Challenge Notice) (within 10 days following receipt of such report) on the Debtors, counsel for the Debtors, and counsel for any Committee and the other

Representatives. Any such Challenge Notice shall be reasonably detailed as to the nature and basis for the challenge. Promptly following receipt of a Challenge Notice, the parties shall endeavor in good faith to resolve any disputes and, failing a resolution, shall have the right to apply to the Court for resolution after no less than 15 days after the service of a Challenge Notice. Upon a resolution, a revised Application Report (if any) shall be distributed to the Representatives (and, for the avoidance of doubt, such revised report shall not be subject to a challenge period). (iv) If the Application Report demonstrates that the Cash Collateral generated by the Debtors within a Tranche of Debt exceeded the amount of cash deemed to have been applied in accordance with the waterfall set forth in paragraph 6(f)(i) hereof, then such excess amount shall be paid to the applicable Representatives for the benefit of the applicable Adequate Protection Parties on account of the financial obligations within the applicable Tranche of Debt consisting of interest and principal owing to the applicable Adequate Protection Parties under the applicable Loan Documents.

(v) If the Application Report demonstrates that the Cash Collateral generated by the Debtors (in such case, the Borrower Debtors) within a Tranche of Debt was less than the amount of cash deemed to have been applied in accordance with the waterfall set forth in paragraph 6(f)(i) hereof, then such shortfall amount shall be deemed to be a loan from one or more Debtors (the Lender Debtors), in the amount as may be set forth in the Application Report, to the Borrower Debtors, and such loan shall be, and is hereby, secured on a super-priority basis in accordance with sections 364(c)(2) and (d) of the Bankruptcy Code by senior secured and priming liens on and security interests in all the Borrower Debtors property, and the obligations of the Borrower Debtors to pay such shortfall amounts shall constitute, in accordance with section 364(c)(1) of the Bankruptcy Code, a super-priority administrative expense claim having priority over any or all administrative expenses of the kind specified in, among other sections, sections 105, 326, 330, 331, 503(b), 506(c), 507(a) and 726 of the Bankruptcy Code; provided, however, that (A) such loans shall be allocated, in accordance with the Allocation Percentage, among the Debtors without a shortfall, and (B) all interest, liens, and claims on account of such loans shall be junior in right of payment only to all interests, liens and claims of Permitted DIPs and the Carve Out. (v) (vi) Notwithstanding anything to the contrary set forth in an Application Report, or otherwise in this Order, all payments to a Representative or an Adequate Protection Party will be made by the Debtors, and, to the extent accepted by an Adequate Protection Party, accepted, subject to recharacterization, refund, disgorgement, or other treatment as may be necessary to give effect to the Application Report at

such time, or otherwise, and as may be determined by the Court, and all parties reserve their rights with respect thereto. (vi) (vii) TheSubject to the Fixed Rate Separate Account Procedures, the term Allocation Percentages shall mean the percentage determined by multiplying (x) earnings before interest, taxes, depreciation, and amortization (EBITDA) earned in connection with each Tranche of Debt (or, in the case of intercompany loans, with respect to each Tranche of Debt deemed a lender) that as a percentage of total EBITDA for such period by (y) the total amount of corporate overhead charges and expenses of Innkeepers USA Trust and the other Debtors, as well as Professional Fees (to the extent permitted by the Court to be paid at such time) paid during such time. g. Right to Inspect and Audit. In accordance with the applicable Loan Documents, the Debtors shall permit each Representative (through its officers, senior employees, or agents, including but not limited to professionals retained in connection with these cases) to inspect the applicable Prepetition Collateral during business hours upon reasonable advance notice. In addition, the Debtors shall allow each Representative to periodically inspect and audit the books, records and account statements of the applicable Debtors in order to confirm the applicable Debtors compliance with this Order and any budget approved in connection with a Permitted DIP. h. Right to Credit Bid. The Adequate Protection Parties shall have the right to credit bid their claims to the fullest extent permitted by law in connection with any sale, auction or other disposition, including but not limited to, in connection with any plan of reorganization or liquidation of the applicable Prepetition Collateral pursuant to 11 U.S.C. 363(k).

h.

i.

Notwithstanding anything herein to the contrary, no Adequate Protection Party shall be entitled to adequate protection (and no Adequate Protection Obligations shall arise) with respect to any diminution in value of such Adequate Protection Partys interest in its Prepetition Collateral resulting from any successful Avoidance Action against, or Avoidance Action proceeds recovered from, such Adequate Protection Party, or from or as a result of the payment of any costs, fees or expenses included as part of adequate protection hereunder. 7. Carve Out. (a) As used in this Order, Carve Out means: (i) unpaid fees of the

Clerk of the Court and the U.S. Trustee pursuant to 28 U.S.C. 1930(a); (ii) in the event of a

conversion of the Chapter 11 Cases to cases under chapter 7 of the Bankruptcy Code, fees and expenses incurred by any trustee and any professionals retained by such trustee, in an aggregate amount not exceeding $75,000; (iii) to the extent allowed at any time, whether by interim order, procedural order or otherwise, all unpaid fees and expenses (the Professional Fees), incurred by persons or firms retained by the Debtors pursuant to section 327, 328 or 363 of the Bankruptcy Code and any Committee appointed pursuant to section 1103 of the Bankruptcy Code (the Professional Persons), at any time before or on the first business day following delivery of a Carve Out Trigger Notice (as defined below), whether allowed by the Court prior to or after delivery of a Carve Out Trigger Notice; and (iv) after the first business day following delivery of the Carve Out Trigger Notice, to the extent allowed at any time, whether by interim order, procedural order or otherwise, the payment of Professional Fees of Professional Persons in an aggregate amount not to exceed $5,500,000. The Carve Out shall be senior to the

Replacement Liens, the 507(b) Claims, and any other adequate protection, liens or claims securing the obligations arising under or in connection with the Loan Documents. For purposes of calculating the amount of Professional Fees permitted to be paid to a Professional Person as part of the Carve Out under subsection (iv) of this paragraph 7, such amount shall be net of all prepetition retainers held by such Professional Person. (b) As used herein, Carve Out Trigger Notice means a Termination Notice

(as defined below) delivered by a Representative on any business day (or, if such day of delivery is not a business day, the next succeeding business day), which notice has been preceded by Termination Notices delivered in connection with each Tranche of Debt, and, as a result of the most recently delivered Termination Notice, all Tranches of Debt shall have become subject to continuing Termination Events.

(c)

For the avoidance of doubt, the obligation to pay Professional Fees shall

be allocated as among the Debtors in accordance with the Allocation Percentage; provide that, no obligation to pay Professional Fees incurred with prosecuting the plan of reorganization described in the Craven Declaration or any plan seeking the cramdown of the Fixed Rate Lenders interests shall be allocated to the Fixed Rate Lender. 10. Termination Events. (a) The rights of the Debtors under a Tranche of Debt (but

not the rights of any Debtors under any other Tranche of Debt) to use Cash Collateral relating to such Tranche of Debt shall terminate upon the business day immediately following written notice (a Termination Notice) delivered to (i) the applicable Debtors, (ii) counsel to the Debtors, (iii) the U.S. Trustee, (iv) counsel to each Committee, and (v) counsel to each Representative, indicating that one of the events listed below has occurred and is continuing with respect to such applicable Debtors (each, a Termination Event): i. This Order shall (I) not have become a final order within 45 days of the Petition Date or (II) prior to becoming a final order or otherwise replaced or superseded, at any time cease to be in full force and effect, or shall have been vacated, reversed or stayed, or modified or amended in a manner that is materially adverse to the applicable Adequate Protection Party (taken as a whole) without such partys (or its Representatives) consent; ii. The Debtors under such Tranche of Debt shall fail to timely make payments required to be made by them pursuant to the terms of this Order within five (5) business days from when such payment is due; iii. The Debtors under such Tranche of Debt shall breach any of the covenants or agreements contained in this Order (other than a payment obligation) applicable to them and such breach shall continue unremedied for more than ten (10) business days following notice of such breach; iv. The Debtors shall make any misrepresentation of a fact that is materially adverse to the Debtors (taken as a whole) to any of the Representatives or their agents about the financial conditions of the Debtors, the nature, extent, or location of the applicable Prepetition Collateral, or the

disposition or use of any of the Postpetition Collateral, including the Cash Collateral; v. The Debtors under such Tranche of Debt shall permit any superpriority claim (other than the Carve Out) or shall grant any other lien or security interest (including any other adequate protection lien), that in either case is senior or equal to the claims and liens (including the adequate protection claims and liens) of the applicable Adequate Protection Party, except superpriority claims and liens senior to the Adequate Protection Liens and 507(b) Claim relating to one or more debtor-in-possession financing facilities approved by the Court and provided to some or all of the Debtors (the Permitted DIPs); provided, however, that with respect to the Fixed Rate Debtors, a Permitted DIP shall only mean that certain debtor in possession financing arrangement provided by Five Mile Capital Partners LLC, and its successors and assigns, approved solely for the purposes set forth therein (the Fixed Rate PIP DIP), and shall mean no other debtor in possession financing arrangement; provided, further, that, with respect to the Floating Rate Debtors, a Permitted DIP shall only mean that certain debtor-in-possession financing arrangement provided by Lehman ALI Inc. (or an affiliate), and its successors and assigns, approved solely for the purposes set forth therein (the Floating Rate PIP DIP), and shall mean no other debtor-in-possession financing arrangement; vi. Any lien or security interest granted or created under the applicable Loan Documents shall be asserted by any Debtor not to be a valid and perfected lien on or security interest in any of the applicable Postpetition Collateral, with the priority required by the applicable Loan Documents; provided, however, that the immediate foregoing shall not apply with respect to any liens granted under the Permitted DIPs; vii. Other than payments authorized by the Court and that are (I) approved by the Representative of such Tranche of Debt, (II) in respect of accrued payroll and related expenses as of the Petition Date, (III) in respect of general unsecured creditors, in each case to the extent authorized by one or more first day orders or other orders of the Court (including this Order) to the extent previously provided to the applicable Representative, or (IV) on account of Professional Fees, the Debtors under such Tranche of Debt shall make any payment (whether by way of adequate protection or otherwise) of principal or interest or otherwise on account of any prepetition indebtedness or payables (including without limitation, reclamation claims); Lender Debtors under such Tranche of Debt have caused to be viii. loaned to Borrower Debtors an aggregate amount of more than $2,000,000 at any one time outstanding.

viii. ix. With respect to such Tranche of Debt, one or more franchisors have terminated franchise agreements relating to hotels owned by the Debtors under such Tranche of Debt; ix. One or more franchisors have taken affirmative steps after the effective date of the Fixed Rate PIP DIP to terminate, lift or annul (including but not limited to delivery of notice of intent to terminate) ten (10) or more franchise agreements (in the aggregate during the term of the DIP Facility) upon hotels owned by any of the Debtors constituting collateral with respect to any Tranche of Debt; x. With respect to such Tranche of Debt, the Court shall enter an order granting relief from the automatic stay to the holder or holders of any security interest to permit foreclosure (or the granting of a deed in lieu of foreclosure or the like) on a hotel constituting Prepetition Collateral and such order shall not be subject to timely appeal; xi. There shall have occurred and be continuing one or more events of default under the Fixed Rate PIP DIP or the Floating Rate PIP DIP that, individually or in the aggregate, cause or permit the lenders thereunder to cause, the obligations under the Fixed Rate PIP DIP or the Floating Rate PIP DIP, as the case may be, to become immediately due and payable; xii. The Debtors under such Tranche of Debt shall use Cash Collateral arising under such tranche for a purpose not permitted hereunder unless such nonpermitted use was inadvertent, and was not in an amount in excess of $25,000; provided, that, notwithstanding the immediate foregoing, the use of Cash Collateral not permitted hereunder occurring more than five (5) times shall constitute a Termination Event unless such amounts have been repaid or reallocated, as the case may be; xiii. The Bankruptcy Court shall enter an order granting relief from the automatic stay to permit any exercise of remedies by the lenders or special servicer under a Tranche of Debt other than limited relief solely to permit the delivery of default notices under the terms of the applicable Loan Documents; xiv. The Debtors shall file any motion or other request for relief seeking to (i) dismiss any of the Chapter 11 Cases, (ii) convert any of the Chapter 11 Cases to a case under chapter 7 of the Bankruptcy Code, or (iii) appoint a trustee or an examiner with expanded powers pursuant to section 1104 of the Bankruptcy Code in any of the Chapter 11 Cases; or xv. The Debtors shall file a motion or seek confirmation of a plan of reorganization that seeks substantive consolidation of the Fixed Rate Debtors;

xvi. xv. The Bankruptcy Court shall enter an order (i) dismissing any of the Chapter 11 Cases, (ii) converting any of the Chapter 11 Cases to a case under chapter 7 of the Bankruptcy Code, (iii) appointing a trustee or an examiner with expanded powers pursuant to section 1104 of the Bankruptcy Code in any of the Chapter 11 Cases, or (iv) making a finding of fraud, dishonesty or misconduct by any officer or director of the Company, regarding or relating to the Debtors; xvii. xvi. There shall have occurred, after the entry of this Order, (i) a change that has a material adverse effect on the use, value or condition of the Debtors, their assets or the legal or financial status or business operations, in each case taken as a whole, or (ii) a material disruption or material adverse change in the financial, real estate, banking or capital markets; or xviii. xvii. For the benefit of the Floating Rate Lenders only, and not for the benefit of any other Adequate Protection Party, prior to the entry of the Final Order, the Floating Rate Debtors breach any of their material obligations arising in connection with the proposed restructuring of the Floating Rate Obligations; provided, however, that the Floating Rate Lenders shall have given three (3) business days' prior written notice setting forth in reasonable detail such material breach; provided, further, that any such notice shall not violate or be deemed to violate the automatic stay in the Debtors' Chapter 11 Cases. (b) [Notwithstanding anything to the contrary ]herein, no Termination Event

with respect to the Debtors under a Tranche of Debt shall be deemed to constitute a Termination Event with respect to the Debtors under any other Tranche of Debt. 11. Rights and Remedies Upon Termination Event. (a) Immediately upon the

occurrence and during the continuation of a Termination Event with respect to a Tranche of Debt, unless waived by a writing signed by the applicable Adequate Protection Party (or its Representative), the applicable Adequate Protection Parties (or their Representative, as applicable) may declare a termination, reduction, or restriction of the ability of the applicable Debtors to use Cash Collateral on the consensual basis provided in this Order, except for the use of Cash Collateral provided in clause (b) of this paragraph 11 (any such declaration, shall be referred to herein as a Termination Declaration). The Termination Declaration shall be

given by facsimile (or other electronic means) to lead counsel to the Debtors, counsel to each Committee, and the U.S. Trustee (the earliest date any such Termination Declaration is made shall be referred to herein as the Termination Declaration Date) and may be declared in conjunction with or as part of any Termination Notice. On the Termination Declaration Date, the applicable Debtors right to use Cash Collateral on the basis provided in this Order shall automatically cease, except as provided in clause (b) of this paragraph 11. During the five (5) business days after the Termination Declaration Date (the Remedies Notice Period), the applicable Debtors and/or a Committee shall be entitled to seek an emergency hearing with the Court seeking a determination of whether a Termination Event has occurred and/or any other appropriate relief related to continued use of Cash Collateral on a non-consensual basis, with the rights and objections of all relevant parties reserved with respect thereto. Unless the Court determines otherwise during the Remedies Notice Period, after the Remedies Notice Period, the applicable Debtors shall no longer have the right to use Cash Collateral. [Notwithstanding anything to the contrary ]contained in the foregoing, any stay under section 362 of the Bankruptcy Code shall automatically terminate and the Fixed Rate Lender and its Representative shall be permitted to immediately exercise all remedies set forth herein without first the occurrence of either the Termination Declaration Date or the expiration of any Remedies Notice Period if any stay under section 362 of the Bankruptcy Code is terminated, lifted or otherwise annulled for the benefit of any lender under the Fixed Rate PIP DIP Loan with respect to the Fixed Rate Collateral. (b) The applicable Debtors may continue to use Cash Collateral (i) for the

payment of any unpaid postpetition administrative expenses so long as such expenses were actually incurred prior to the last day of the Remedies Notice Period, (ii) to meet

payroll obligations and to pay expenses critical and immediately necessary to the preservation of the applicable Debtors and their estates incurred during the Remedies Notice Period, and (iii) to satisfy any payment obligation senior to the obligations owed to the Adequate Protection Parties (including Professional Fees but, with respect to such fees, to the extent of the Carve Out). 12. Limitations on Cash Collateral and the Carve Out. The Cash Collateral

under an applicable Tranche of Debt and Professional Fees payable from such Cash Collateral may not be used (without the prior written consent of the applicable Representative): (a) in connection with, or to finance in any way, any action, suit, arbitration, proceeding, application, motion, or other litigation of any type (or the preparation of any such action, suit, arbitration, proceeding, application, motion, or other litigation) (i) against the applicable Adequate Protection Parties seeking relief that would (A) assert, commence, or prosecute any Avoidance Actions against the applicable Adequate Protection Parties, (B) permit the applicable Debtors to prepare or prosecute an objection to, contest in any manner, or raise any defense to, the validity, extent, amount (other than entitlement to postpetition interest), perfection, priority, or enforceability of any of the rights and obligations of the applicable Adequate Protection Parties, or (C) permit the Debtors to pay for any services rendered by the professionals retained by the Debtors in connection with the assertion of or joinder in any claim, counterclaim, action, proceeding, application, motion, objection, defense, or other contested matter, the purpose of which is to seek, or the result of which would be to obtain, any order, judgment, determination, declaration, or similar relief that would otherwise be prohibited pursuant to this paragraph 12, or (ii) invalidating, setting aside, avoiding, or subordinating, in whole or in part, the applicable Loan Documents or any payments made thereunder; (b) to sell, lease, transfer, or otherwise

dispose of Collateral without the prior written consent of the applicable Adequate Protection Parties unless in the ordinary course of business, contemplated by the Forecast, or otherwise ordered by the Court; or (c) to prosecute the plan of reorganization described in the Craven Declaration or any other plan seeking the cramdown of the Fixed Rate Lenders claims and interests; or (d) to pay pre-Petition Date indebtedness unless ordered by the Court. Notwithstanding the foregoing, the Cash Collateral and the Carve Out may be used by any Committee to investigate the Loan Obligations and the Prepetition Collateral and/or a potential Challenge (as defined below); provided that no more than $150,000 in the aggregate may be spent from Cash Collateral on such investigations. 22. Section 364 Waiver. In consideration of the applicable Representatives

limited consent to the Debtors use of cash as conditioned herein, the Debtors irrevocably waive any right to: (i) grant or impose, or request that the Court grant or impose, under section 364 of the Bankruptcy Code or otherwise, liens, security interests, or mortgages on any property, equal or superior to the priority of the liens securing the applicable Prepetition Collateral, except as specifically provided for under the Permitted DIP(s); and (ii) seek authority to use the Cash Collateral as defined in section 363 of the Bankruptcy Code other than as permitted by this Interim Order. Such waiver shall be binding upon any successor trustee, examiner, or responsible person in these or any subsequent proceedings under the Bankruptcy Code.