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VERITEXT REPORTING COMPANY www.veritext.com
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK Case No. 10-13800-SCC - - - - - - - - - - - - - - - - - - - - -x In the Matter of:
INNKEEPERS USA TRUST, et al.,
Debtors.
- - - - - - - - - - - - - - - - - - - - -x
United States Bankruptcy Court One Bowling Green New York, New York
July 20, 2010 11:11 AM
B E F O R E: HON. SHELLEY C. CHAPMAN U.S. BANKRUPTCY JUDGE
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Page 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 HEARING re Debtors' motion for the entry of an order authorizing the debtors to honor certain prepetition obligations to customers and otherwise continue certain customer programs and practices in the ordinary course of business. HEARING re Debtors' motion for the entry of interim and final orders authorizing the debtors to (a) pay certain prepetition wages, salaries and reimbursable employee expenses, (b) pay and honor certain employee medical and other benefits, and (c) continue employee benefits programs. HEARING re Debtors' application for the entry of an order authorizing the retention and employment of Omni Management Group, LLC as notice and claims agent for the debtors. HEARING re Debtors' motion for the entry of an order establishing certain notice, case management and administrative procedures. HEARING re Debtors' motion for the entry of an order extending deadline to file schedules. HEARING re Debtors' motion for the entry of an order directing joint administration of their Chapter 11 cases.
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Page 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 HEARING re Debtors' motion for the entry of interim and final orders (a) authorizing the debtors to (i) use the adequate protection parties' cash collateral and (ii) provide adequate protection to the adequate protection parties, (b) granting senior secured, priming liens, on certain postpetition intercompany claims, (c) granting administrative priority status to certain postpetition intercompany claims, and (d) scheduling a final hearing. HEARING re Debtors' motion for the entry of interim and final orders authorizing but not directing the debtors to continue to honor obligations set forth in the hotel management and share services agreements. HEARING re Debtors' motion for the entry of interim and final orders (a) authorizing the debtors to grant administrative expenses priority to all undisputed obligations for goods ordered prepetition and delivered postpetition and satisfy such obligation in the ordinary course of business, (b) authorizing but not directing the debtors to pay shippers, warehousemen and materialmen, and (c) authorizing the debtors to pay prepetition PACA claims.
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Page 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Transcribed by: Penina Wolicki HEARING re Debtors' motion for the entry of an order authorizing the use of (i) existing cash management system, (ii) existing bank accounts, (iii) existing business forms, and (iv) certain existing investment guidelines.
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A P P E A R A N C E S : KIRKLAND & ELLIS LLP Attorneys for Debtors 601 Lexington Avenue New York, NY 10022
BY:
PAUL BASTA, ESQ. JENNIFER L. MARINES, ESQ.
KIRKLAND & ELLIS LLP Attorneys for Debtors 300 North LaSalle Street Chicago, IL 60654
BY:
ANUP SATHY, P.C. MARC J. CARMEL, ESQ.
KIRKLAND & ELLIS LLP Attorneys for Debtors 655 Fifteenth Street, N.W. Washington, DC 20005
BY:
DANIEL T. DONOVAN, ESQ.
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Page 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: ALAN W. KORNBERG, ESQ. LAUREN SHUMEJDA, ESQ.

KILPATRICK STOCKTON LLP Attorneys for Trimont Real Estate Advisors, Inc. 1100 Peachtree Street, NE Suite 2800 Atlanta, GA 30309
BY:
TODD C. MEYERS, ESQ.
TASHJIAN & PADIAN ATTORNEYS AT LAW Attorneys for CW Capital C-III 15 West 36th Street New York, NY 10018
BY:
JERRY PADIAN, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP Attorneys for Apollo Investment Corporation 1285 Avenue of the Americas New York, NY 10019
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Page 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: MARK ELMORE, ESQ.

HAYNES AND BOONE, LLP Attorneys for Midland Loan Services 1221 Avenue of the Americas 26th Floor New York, NY 10020
BY:
LENARD M. PARKINS, ESQ.
HAYNES AND BOONE, LLP Attorneys for Midland Loan Services 201 Main Street Suite 2200 Fort Worth, TX 76102
BY:
JOHN D. PENN, ESQ.
HAYNES AND BOONE, LLP Attorneys for Midland Loan Services 2323 Victory Avenue Suite 700 Dallas, TX 75219
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DUANE MORRIS LLP Attorneys for LNR Partners Spear Tower One Market Plaza, Suite 2200 San Francisco, CA 94105
BY:
PHILLIP K. WANG, ESQ.
DUANE MORRIS LLP Attorneys for LNR Partners 30 South 17th Street Philadelphia, PA 19103
BY:
MARGERY N. REED, ESQ.
WILLKIE FARR & GALLAGHER LLP Attorneys for Appaloosa Capital Management 787 Seventh Avenue New York, NY 10019
BY:
RACHEL C. STRICKLAND, ESQ.
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DECHERT LLP Attorneys for Lehman 1095 Avenue of the Americas New York, NY 10036
BY:
MICHAEL J. SAGE, ESQ.
SHEPPARD MULLIN RICHTER & HAMPTON LLP 30 Rockefeller Plaza 24th Floor New York, NY 10112
BY:
CARREN B. SHULMAN, ESQ.
ECKERT SEAMANS CHERIN & MELLOTT, LLC. Attorneys for Island Hospitality Two Liberty Place 50 South 16th Street, 22nd Floor Philadelphia, PA 19102
BY:
KAREN LEE TURNER, ESQ. (TELEPHONICALLY)
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PERKINS COIE LLP Attorneys for Two Servicers 131 South Dearborn Street Suite 1700 Chicago, IL 60603
BY:
DAVID NEFF, ESQ. (TELEPHONICALLY)
U.S. DEPARTMENT OF JUSTICE Office of the U.S. Trustee 33 Whitehall Street 21st Floor New York, NY 10004
BY:
BRIAN MASUMOTO, ESQ.
ALSO PRESENT:
PAUL H. DEUTCH, OMNI Management Group, Claims and Noticing Agent
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INNKEEPERS USA TRUST, ET AL.

Page 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE CLERK: THE COURT: MR. BASTA: Kirkland & Ellis. affiliated debtors. P R O C E E D I N G S Innkeepers USA Trust. Mr. Basta, good morning. Good morning, Your Honor. Paul Basta from
We're proposed counsel to Innkeepers and its We'd like to thank the Court and chambers
for handling this hearing on such short notice and all the paper that we've provided. I'm just going to introduce to you
and move pro hac vice some of the Kirkland attorneys who will be appearing today. bar. Anup Sathy is a member of the Illinois
He's actually been admitted in New York, but not in the
Federal bar yet. THE COURT: MR. BASTA: THE COURT: MR. BASTA: MR. DONOVAN: THE COURT: MR. BASTA: THE COURT: All right. Very well. Welcome.
And Marc Carmel. Mr. Carmel. And Dan Donovan. Good morning, Your Honor. Good morning. I'm going to turn it over to Mr. Sathy. All right. Mr. Sathy before you proceed,
let me find out who's on the phone. MR. SATHY: THE COURT: MS. TURNER: Very good. Thank you, Your Honor.
Is there anyone on the phone? Your Honor, my name is Karen Lee Turner And I represent Island
from the law firm of Eckert Seamans.
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Page 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 name. MR. NEFF: It's Neff, N-E-F-F, as in Frank, with I represent two CMBS Hospitality, who's a property manager. THE COURT: MR. NEFF: All right. Thank you, Ms. Turner. This is David Neff
Good morning, Judge.
with Perkins Coie in Chicago. THE COURT: I'm sorry, sir, I didn't get your last
Perkins Coie, C-O-I-E, in Chicago.
special servicers, CW Capital, which has loans in connection with Anaheim, and C-III, which is along a fair line, which has a loan in connection with the Hilton Ontario. THE COURT: All right. MR. SATHY: Thank you, Your Honor. Good morning. All right. Thank you. Anyone else?
Your Honor, Anup Sathy on behalf of the debtors, for the record. Your Honor, Innkeepers USA and ninety-one affiliated It's the next stage of
companies, filed Chapter 11 yesterday. our comprehensive restructuring.
We entered Chapter 11 with two principal objectives. First is to effectuate the prearranged recapitalization that the company has been working on over the last several weeks and months to delever the company and create a significant value creation for the constituents, and second is to secure financings that are necessary to complete improvement plans at various branded hotels.
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Page 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Your Honor, there's been a tremendous amount of effort that has been undertaken over the last few months in creating this restructuring plan. And as its centerpiece, Your Honor,
we have an agreement with our second largest secured creditor, Lehman, who has agreed to convert approximately 240 million dollars of secured debt into equity of the reorganized enterprise. Your Honor, that agreement is memorialized in the
plan support agreement which was filed yesterday, concurrently with the various first-day pleadings. That plan support
agreement is not set for hearing today, but I will briefly describe it later on in my opening comments to give the Court some additional background. Your Honor, we're hopeful that we can use the momentum of the last few weeks and months to continue through our Chapter 11 proceeding. all of the parties. Midland. Obviously, we don't have consensus from
You have read objections, I assume, from
And we will continue to work with Midland and some of
our other secured creditors, to continue to build consensus around our restructuring plan. Your Honor, before I continue my presentation, if Your Honor would permit, I'd like to introduce to you four of the parties in the courtroom, who have been part of our restructuring efforts. THE COURT: MR. SATHY: Okay. First, Your Honor, Mr. Marc Beilinson, who
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Page 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 is our chief restructuring officer. THE COURT: MR. SATHY: financial officer. Okay. Your Honor, Mr. Denis Craven, our chief And Mr. Craven has submitted an affidavit
in support of our first-day pleadings, and is also available to testify with respect to the objections on cash collateral. Mark Murphy, who is our general counsel; and Mr. Nathan Cook from AlixPartners, who has been working with the company for the last month or so. Your Honor, as described in Mr. Craven's affidavit, the company operates and owns a nationwide, integrated portfolio of seventy-two hotels. It consists of approximately It's Mr.
10,000 rooms located across the country in twenty states. a diversified national footprint.
And as a result, Your Honor,
it's our belief that all of the constituents benefit from being part of this national footprint, and that it gives the company an ability to negotiate with vendors, suppliers and franchisors, given its economies of scale. Your Honor, you're going to hear from a number of key players today and during the case. identify some of them. branded hotels. I'd like to quickly Your Honor, these are
Our franchisors.
They are owned and branded under some of the You will hear from Marriott, our largest
most common names.
franchisor, with approximately forty-four of the hotels branded under Marriott or Marriott-related names, Hilton, Hyatt and
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Page 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 other franchise relationships. Your Honor, our manager. the managers, Island Hospitality. You heard from counsel to There's a second manager, And like many
Dimension, who manages just one of our hotels.
REITs, we do have a third-party management agreement and relationship. hotels. They manage the day-to-day operations of the
They're a critical part of the operations and of
continued business performance of the hotels. You will hear later this morning about a request that the debtors are making to continue to perform, but not pay any obligations that are prepetition, but continue to perform with respect to our management agreements, to ensure the smooth transition of the management of our hotels. And, Your Honor, certainly the last but not least, our secured lenders. We have several secured lenders. And I
believe we have a corporate chart, which if I could tender, Your Honor -- I think we might have a color version, actually. THE COURT: MR. SATHY: I would love a color version. And we'll be handing those out as well to May I approach?
folks in the court who'd like to see that. THE COURT: (Pause) MR. SATHY: Please.
Your Honor, I believe the best way for me
to describe our capital structure is really to focus on three components of the enterprise. Your Honor, starting from left
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Page 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to right, with respect to our secured debt, the first group of lenders is what we call the "fixed pool" group of lenders. They're owed 825 million dollars. That -- those loans are
serviced by Midland, who you've heard from -THE COURT: MR. SATHY: Right. -- today. And there are forty-five Those loans exist in two
separate hotels in that pool. separate CMBS trusts. THE COURT: MR. SATHY: Right.
And Midland is the special servicer.
And
moving to the right -THE COURT: MR. SATHY: THE COURT: MR. SATHY: Midland's the servicer for both of those? Correct. Okay. Moving to the right, Your Honor, is what This is the Lehman That's the 238
we call our floating rate instrument. facility.
And there's a fixed component to it.
million dollar facility.
That's the facility that is
converting into equity pursuant to our plan support agreement. And above that is a mezzanine entity. It's also Lehman, but And there are twenty
not the same parties who are converting. hotels in that facility.
The other seven are single-hotel properties.
And so
starting from left to right, we typically refer to them by the location of the hotel. And I believe servicers will also do
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Page 17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that as well. With respect to the right group of entities, those are effectively our operating lesees. Those are -- pursuant to our
REIT structure, we have operating lesees that have been created to actually manage the hotels. Those are the entities that
will be contractually obligated to franchisors and to Island and -THE COURT: MR. SATHY: Okay. -- effectively intended to take advantage
of the REIT structure. THE COURT: All right. So those are the orange
entities that on your original chart were the starred entities? MR. SATHY: THE COURT: MR. SATHY: THE COURT: MR. SATHY: That's right. Correct? Okay.
I'm not sure why we change the shape, but. All right. We'll go with squares, I guess. And, Your
Honor, the top four entities are what effectively are holdco entities with the Maryland REIT being the entity whose caption we're using for purposes of these proceedings. Your Honor, the debtors entered Chapter 11 -- I'm sorry, did you have a question? THE COURT: MR. SATHY: No. Oh. Your Honor, the debtors entered The
Chapter 11 as a result of a series of related factors.
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Page 18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 hotel and travel and tourism industry obviously has been affected by the recession -- recessionary environment over the last few years. And so we've seen some improvement in the industry, certainly, as of late. recovered. levered. structure. But it certainly hasn't fully
And as a result, Your Honor, the company is overIt has significantly too much debt, basically, is the And a result of too much debt -- and these are all
related -- is that debt service obligations have just diverted funds from the ability to manage the properties, to do investments, and in particular, Your Honor, performance improvement plans. We refer to them as PIPs. And I'm sure
you're familiar with that. THE COURT: It's better than the BUPA that I got in my But not much better.
Neff hearing last week. MR. SATHY: gone uncompleted.
We have a series of PIP plans that have And our ability to complete those PIPs is a If we fail to complete
critical part of our reorganization.
PIPs, franchisors have rights under the franchise agreements to terminate flags, which we think will have a tremendous negative impact. And I think that is, frankly, uncontroverted. And so
one of the things you will be hearing about is an agreement we have with Marriott with respect to their unperformed PIPs. Your Honor, along with our typical cadre of first-day pleadings, we did file several interrelated pleadings that are in furtherance of our restructuring plan. Those are not set
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Page 19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 for hearing today. But I thought it would be helpful, Your
Honor, to provide a little bit of the background of those, so that you have that -- you can have that in your consideration. The first is the Marriott agreement. THE COURT: MR. SATHY: Okay. It was the first part of our
restructuring, which was to reach an agreement with Marriott to complete twenty-three outstanding PIPs over the course of a three-phase period. And so we negotiated an agreement, both in
terms of which hotels get PIPed and when they get PIPed over time, because you can't, frankly, do all of them at the same time, and you have to do them over time. And so we have an
agreement, it's actually attached to the plan support agreement -THE COURT: MR. SATHY: THE COURT: MR. SATHY: Right. -- as an exhibit. Exhibit B. And it effectively allows for us to have a
rational but a short period of time to complete these PIP plans. We obviously were hoping for longer. Marriott was
looking for shorter.
And we ultimately settled, effectively,
on a period that goes through November of 2011 to complete these PIPs. With this agreement, Marriott has given us time to
effectively complete these plans, and in essence, lifted the cloud of potential terminations of the franchise agreements.
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Page 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 aspects. With that platform, with the hotels now secured in our enterprise, we needed to fund these PIPs. And so we have
entered into two DIP agreements, what we're calling the PIP DIPs, and so you'll be hearing about the PIP DIPs later on, not today. But we filed two motions yesterday. One is to complete
the PIPs as they relate to the fixed pool, and one -- the fixed pool and two of the other Marriott hotels. So it would be the
fixed pool and then it would be Tysons and San Diego -- San Diego. So that's the first DIP that we filed. approximately fifty million dollars. affiliates of Five Mile Capital. It's
It's being provided by
Five Mile Capital is the The
certificate holder in the REMIC where these loans reside.
second is a DIP provided by Lehman for approximately eighteen million dollars. And that's intended to cover PIPs and other
cycles of renovations with respect to the floating pool only. Both of those motions were filed yesterday. require that the DIPs be funded within sixty days. And they And so
we'll be working with Your Honor and Your Honor's staff to schedule hearings to approve both of those DIP facilities. THE COURT: And this comes into play in various other
You're also going to have to get approval from Judge
Peck, I assume. MR. SATHY: Absolutely, Your Honor. Absolutely.
And that comes to my last key document, the plan
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Page 21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 not easy. support agreement. As I said, Your Honor, this is the Pursuant to the agreement, We
cornerstone of our restructuring.
Lehman has agreed to convert their fixed debt into equity. believe this has a tremendous benefit to the overall restructuring. enterprise. It provides an equity cushion for the entire
It allows for cash flow that would otherwise go to
pay fixed debt to now be available for the entire enterprise, both in terms of improvements and in terms of servicing debt on other pools. And we think it creates the right structure for our other secured creditors. CMBS trusts. The rest of our secured pools are
And we believe that having debt would be
beneficial, or more beneficial for CMBS servicers and trusts. And so what we've tried to do is create a platform for all of the debt capacity that this reorganized enterprise can sustain, to be given to pools of secured creditors for CMBS servicers. Getting a secured creditor to convert into equity is Getting a Chapter 11 debtor who is a secured And so as Your Honor
creditor to convert is even harder.
noted, Lehman's obligations under our PSA, as well as to fund the -THE COURT: MR. SATHY: THE COURT: MR. SATHY: DIP --- DIP --- right. -- are subject to approval by Judge Peck.
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Page 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 We understand, and Lehman is here and they'll be able to speak that they will be filing their pleadings in the near future, within a few days, we hope, with an expectation that their approval, Judge Peck's approval, would be sought before we come back to you and seek approval of the DIPs as well as the assumption of the plan support agreement. THE COURT: So both DIPs? That has to happen before
both DIPs, not just the floating pool DIP? MR. SATHY: Correct. We would -- we envision both
DIPs happening at the same time. THE COURT: MR. SATHY: Okay. The Lehman DIP will need to happen after
Judge Peck approves -- assuming he does -THE COURT: MR. SATHY: THE COURT: MR. SATHY: THE COURT: Right. -- Lehman's authority to -Okay. -- enter into that. And there's an outside date for August
27th for that approval. MR. SATHY: THE COURT: MR. SATHY: Yes. Is that correct? That's correct. We believe that that is And our hope is that
consistent with their omnibus schedule.
they will be able to get in front of Judge Peck at the next omnibus date.
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Page 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. SATHY: Okay. Your Honor, there is -- there was one
point that I do want to raise with respect to the plan support agreement. And Midland makes some issue with the relationship
between Lehman and Apollo, with respect to their agreement. The agreement with the company and Lehman is that Lehman will be converting a hundred percent of its debt into equity. That's our plan support agreement. Lehman has reached an
agreement with Apollo that allows for Lehman to sell fifty percent of the equity, should this transaction be approved -THE COURT: MR. SATHY: Lehman's decision. To --- for a fixed price. And that was
Our agreement with Lehman does not require Our agreement with Lehman is
that Apollo receive anything.
that they find a purchaser for half of the equity, presumably for the business reasons that they believe is important for them and their estates, and presumably the way that they will present that request to Judge Peck. It's a termination event
under our plan support agreement, if that agreement -- if their agreement -- if they're not able to find a purchaser. some ways they are related. THE COURT: So in
But our agreement is not that --
And that's the sentence that was added to
the new affidavit that I got, correct? MR. SATHY: That's right, Your Honor. And I do -- and
I should correct that point.
This is, frankly, a mea culpa on
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Page 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 us. We had had that disclosure in probably twenty or thirty We know
versions of the affidavit that we were working on. that's important disclosure, obviously.
In a draft of an
affidavit that we sent to Midland last week, it included that disclosure. And they will agree that on July 14th we sent them And we met with
an affidavit that includes that disclosure.
them the very next day and told them about it, obviously. So this is not one of these issues that people are trying to hide. gotchas". And I hope that this case does not become "I
But that is disclosure that we thought was
important -THE COURT: MR. SATHY: THE COURT: MR. SATHY: Okay. -- and it needed to be made. Fair enough. Your Honor, before I conclude, just a Obviously, we want to operate
general sense of our next steps.
the business seamlessly, with our guests not being aware of the Chapter 11 filing or not being affected by it. We want to And we
build more consensus around our restructuring plan. intend to do so.
And we intend, in the next forty-five days,
to reach a resolution on definitive documents with respect to our DIPs, with respect to the plan, and ultimately, assuming that things move forward with Lehman in their court, that we'd be filing our plan within the next forty-five days. The PSA provides for a relatively aggressive time
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Page 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 line. to-be. And that was negotiated between a debtor and a debtorAnd ultimately, they didn't want to be hanging around And so we negotiated that.
our bankruptcy for a long time.
And you'll hear a little bit more about the PSA negotiations -THE COURT: MR. SATHY: Okay. -- we can do that today, we can do that But we know that that's an important
when that motion's up.
overlay to our restructuring plan. THE COURT: MR. SATHY: Okay. So unless Your Honor has questions, I'd
like to turn the podium over to my colleague, Ms. Marines to start the presentation of the first days. THE COURT: MR. SATHY: MS. MARINES: THE COURT: MS. MARINES: Very well. Thank you. Good morning -Good morning. -- Your Honor. Jennifer Marines from Your Honor, my plan
Kirkland & Ellis on behalf of the debtors.
is to work through the procedural motions in order of the agenda. But before I do, I was hoping just to briefly address
notice issues, if that's okay? THE COURT: MS. MARINES: Sure. We have provided notice of all of our
first-day motions to the United States Trustee, including several drafts over the last week, week and a half, also, the
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Page 26 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 binder -MS. MARINES: THE COURT: Yes. -- did those reflect the changes that were debtors' fifty largest unsecured creditors. We've also
provided notice of the debtors' pleadings to the prepetition and postpetition lenders, including several drafts over the past couple of weeks -- two or three weeks. We've also
provided notice to Apollo Investment Corporation, the debtors' franchisors, which you heard Mr. Sathy talk about, the attorney general for each state in which the debtors conduct a substantial amount of business, and also the IRS. In addition
to all of these notices, all of the pleadings that were filed on the docket are also available on the website of the debtors' proposed noticing and claims agent. As I noted, we shared drafts of the first-day pleadings with the United States Trustee prior to filing yesterday. And we were able to incorporate many of their And
comments into the pleadings and also the proposed orders.
I believe that the first-day relief that's before Your Honor today, at least with respect to the United States Trustee, is going forward largely, if not entirely, on an uncontested basis. THE COURT: All right. So the orders that came in the
made at the behest of the U.S. Trustee? MS. MARINES: Yes, they do.
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Page 27 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MS. MARINES: They do. They do. They have incorporated all of
the U.S. Trustee's comments prior to the filing. THE COURT: Mr. Masumoto? Good morning. Your Honor. Brian I
MR. MASUMOTO:
Masumoto for the Office of the United States Trustee. believe that's correct, Your Honor.
I thought there were some Principally
last-minute changes to the cash management order.
the extension of objection deadline with respect to the Sun Trust (ph.) promissory notes. And also although not included
in the order per se, we did ask for representation that the only nonauthorized depository, the Regents Bank, did not have funds that exceeded the current FDIC limit of 250,000 dollars. THE COURT: All right. Well, when we get to that
point, then I'd like to see a black-line, and you can share one with -MS. MARINES: THE COURT: MS. MARINES: Absolutely. -- Mr. Masumoto as well. I'm sorry, I misspoke. We actually have
made minor changes to the cash management order, and will show a black-line. THE COURT: collateral? MR. MASUMOTO: order was satisfactory. No, Your Honor. The cash collateral Cash management as well as cash
We did not ask for changes.
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Page 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MS. MARINES: Okay. Right.
So with that, Your Honor, I will turn to
the first matter on the agenda, which is the debtors' motion for joint administration. This is a fairly straightforward
motion seeking to jointly administer the debtors' ninety-two related cases. Your Honor, I would like to point out that this motion is not seeking substantive consolidation. It's really purely
for the purpose of allowing the cases to operate with administrative efficiency. If Your Honor, so approves, we
would intend to the have the order entered on each of the various case dockets, and have the main case, which is Innkeepers USA Trust, serve as the lead case in these Chapter 11 proceedings. THE COURT: motion's approved. MS. MARINES: Thank you, Your Honor. The next motion All right. I've read the motion, and the
is the debtors' motion seeking a thirty-day extension of the time to file the debtors' schedules of assets and liabilities and their statements of financial affairs. Your Honor, I
believe that this request is not unusual in a case of this size. And due to the complexity and diversity of the debtors'
operations, as well as the numerous critical operational matters that the debtors' legal and accounting personnel will be addressing during the first couple of weeks of this case,
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Page 29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the debtors anticipate that they will be unlikely to complete the schedules and statements within the fourteen-day period required by the Bankruptcy Rules. The debtors' respectfully submit that a brief thirtyday extension is reasonable under the circumstances. And
unless Your Honor has any other questions, we would ask that you enter the relief. THE COURT: All right. Thank you. Does anyone wish
to be heard on the motion for the entry of an order extending the deadline to file schedules? response, this motion's approved. MS. MARINES: Thank you, Your Honor. The next All right. There being no
pleading on the agenda is the debtors' case management motion which seeks to establish procedures governing notice and administrative actions in these cases. We believe that the
proposed procedures are consistent with those that have been entered in, in other cases before Your Honor and also this court, and will also minimize the administrative burdens, not only of parties-in-interest in this case, but also of the Court. Specifically, the procedures, which are set forth in Schedule 1 to the proposed order attached to the motion provide for the establishment and maintenance of a master service list on which all notices will be served. The list will be updated
by the debtors' proposed claims agent every fifteen days for
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Page 30 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the first sixty days of the case, and then every thirty days thereafter. This list will also be available on the claims
agent website. In addition, the proposed procedures would establish, for the first two omnibus hearings in these cases, and of course subject to the Court's calendar, I think that the debtors would respectfully request the first omnibus hearing be scheduled in approximately twenty-five days. And then those
matters that are being heard before Your Honor on an interim basis today, can be heard at that hearing. THE COURT: Okay. All right. Do you want to pick two
dates for the first two hearings or do you want to pick one and see where you are at that point? MS. MARINES: THE COURT: MS. MARINES: We can pick both dates, if that's okay. Sure. The second one, I believe, would be
approximately forty-five days out, due to the necessity to hear the PSA and the DIP -THE COURT: MS. MARINES: THE COURT: Thursday, August 26. August 25th. MS. MARINES: (Pause) Sorry, Your Honor. One second. Right. -- final cash collateral order. All right. I can give you August --
Actually, I can give you Wednesday,
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Page 31 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Parkins. MS. MARINES: Your Honor, I'm sorry. When you
mentioned August 25th, were we talking about the second omnibus hearing or the first? THE COURT: MS. MARINES: The first. Is that too far out?
Well, we would -- just for purposes of
utilities, we would prefer to have it prior to thirty days after the petition date, which I think is August 18th, is thirty days out. THE COURT: August 12th? MS. MARINES: THE COURT: MS. MARINES: THE COURT: MR. PARKINS: That would be perfect, Your Honor. All right. It's actually the date we had in mind. There you go. Your Honor, if I may. My name's Lenard And I I'm really not here then. So Thursday,
I have -- I'm the lead counsel for Midland.
have a prior hearing before Judge Drain scheduled that day. THE COURT: Are you going to be with Judge Drain all
day, or if I set this -MR. PARKINS: morning, for sure. THE COURT: MR. PARKINS: THE COURT: MR. PARKINS: So why don't I set this for 2 o'clock -That's fine. -- on the 12th. I'll make that. Thank you. I'm going to be with Judge Drain in the
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Page 32 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MS. MARINES: THE COURT: the first omnibus. your second one? MS. MARINES: It's Monday. THE COURT: (Pause) THE COURT: MS. MARINES: What is Mr. Basta telling you to do? We would request -- can we request Yes. Does August 30th work for Your Honor? Does that work? Thank you, Your Honor. All right. All right. So 2 o'clock on the 12th for And then when would you like
September 2nd, which is actually -THE COURT: You can request it, but I can't give it to
you, because it's my Chapter 13 calendar. MS. MARINES: THE COURT: Okay. Okay. So are we okay --
So if it's -- if you seriously need it September 1st is
that day, I could do it in the afternoon. open. MS. MARINES: THE COURT: o'clock or 2 o'clock. MR. SATHY:
That's fine, Your Honor. All right. September 1st.
Thank you. Do you want 10
Your Honor, that would be the date we
propose to have the PSA and the DIP, so we wouldn't need -THE COURT: So we'll give you -- we'll block out
September 1st, starting at 10 o'clock.
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Page 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. SATHY: THE COURT: MS. MARINES: THE COURT: to enter the order. Thank you, Your Honor. Okay. Thank you very much. All right. Other than that, I'm prepared
I will say, though, that depending upon
how things develop in this case, I may enter a supplemental case management order or orders. approved. MS. MARINES: Okay. Thank you, Your Honor. The next But for now, this is
item on the debtors' agenda is the application to retain Omni Management to serve as the debtors' claims and noticing agent. This is, of course, one of the few applications that ever gets heard on the first day because of the obvious need for noticing. The services Omni would provide include the service of motions and pleadings to parties-in-interest; the maintenance of the debtors' claim register and schedules; and the creation of a website that will allow the public to access these and other documents. I would like to point out now that with respect to the Southern District of New York protocols governing the retention of claims agents, that we did receive four proposals. And the
debtors actually spoke with each of the claims agents, in an effort to procure the best service agreement available. believe, Your Honor, that we have. And I
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Page 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 So with that, Your Honor, I'm happy to answer any questions, if you have any specific questions. THE COURT: You just answered my question about
compliance with the protocol. MS. MARINES: THE COURT: grant the motion. MS. MARINES: Thank you, Your Honor. The final Okay. So based on your representation, I'll
procedural motion on the calendar is also a fairly standard motion, pursuant to which the debtors are seeking authority to prepare a creditors' list in electronic form as well as to maintain on a consolidated basis a list of the debtors' top fifty largest unsecured creditors. We submit that it would be burdensome for this company, which has approximately 5,000 creditors, and always maintains its creditor list on an electronic system, to essentially recreate the creditors' list to comply with the matrix requirements. In addition, Omni, now that it's been
retained as notice and claims agent, has -- will maintain and update the electronic list during the course of the cases, and will also make the list available as and when requested to any parties-in-interest. The debtors believe that using Omni for this purpose will maximize efficiency in administering these Chapter 11 cases. And moreover, Your Honor, the debtors believe that
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Page 35 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 preparing the consolidated list rather than preparing and filing separate matrices for each of the ninety-two debtor entities, will be sufficient, first and foremost, to permit Omni to promptly provide notice to all parties-in-interest, and will also maximize efficiency and accuracy, and will reduce court costs. questions -THE COURT: MS. MARINES: THE COURT: Thank you. MS. MARINES: Thank you. Now, I'm going to turn the I do not. -- thank you. All right. I'll approve the motion. So with that, Your Honor, unless you have
podium over to my colleague, Marc Carmel. (Pause) THE COURT: MR. CARMEL: from Kirkland & Ellis. Good morning. Good morning, Your Honor. Marc Carmel
The first-day motions that the debtors
are proposing for today's first-day hearing are fairly common in large cases. And the reason for that is that seamless
transition into bankruptcy is incredibly important for a company. The first motion on C(1) of the agenda, relates to wages and employee benefits. The company has approximately 26
people at the management level, and is directly responsible for paying approximately 2,600 people that work at the property
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Page 36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 level, that are technically employees of the property managers, including Island and Dimension. The debtors seek standard relief, including payment of compensation, which includes wages, the related taxes, reimbursable expenses and incentive plans, including amounts that are prepetition. The amounts that are owed that are We spoke with the U.S.
prepetition are listed in the motion.
Trustee about this, who had a concern about the extent to which a particular individual might be receiving more than 11,725 dollars. None of the employees would be receiving anything And we don't believe there But to the extent
more than that in an interim basis.
are any employees that have more than that.
there are, we would deal with that in a final hearing after a creditors' committee is appointed. THE COURT: All right. Does that include any payments
that individuals are slated to receive under the incentive plans? MR. CARMEL: That includes the wages, the incentives, Importantly, the incentive
and the reimbursable expenses.
programs are not -- none of the beneficiaries of that are insiders. That's actually at the property level. That's our
people who are trying -THE COURT: MR. CARMEL: Okay. -- to bring customers into the hotels.
The support for this is listed in the motion, and it
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Page 37 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 includes the fact that these are priority claims. large extent, it's just a timing question. And to a
The taxes, in most
instances, are trust fund taxes that are not property of the estate. This relief is absolutely necessary to maintain morale and incentivize employees to continue to do what they do best, which is keep our customers happy. This is the hospitality
industry, so our employees are incredibly important, just like many other industries. irreparable harm. THE COURT: Without this, there'd be immediate and
We ask that you approve the motion. All right. Mr. Masumoto, do you have
anything more on this motion? MR. MASUMOTO: Your Honor. THE COURT: motion's approved. MR. CARMEL: customer programs. The next matter on the agenda relates to As Mr. Sathy explained, the vast majority All right. Thank you. All right. The No, I do not. We have no objection,
of our hotels are branded through high-profile hotel chains. So for the most part, the customer programs that you might imagine for a hotel company, are actually through our franchisors. But Innkeepers has a significant -- what we
describe as a customer program, quite frankly, in an abundance of caution, which is the fact that parties provide deposits to us, and as of the petition date, the debtors believe they're
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Page 38 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 approved. MR. CARMEL: The next motion, Your Honor, C(3) on the motion? MR. MASUMOTO: THE COURT: No objection, Your Honor. Thank you. The motion's holding approximately 1.1 million dollars-worth of deposits to secure reservations. These are not out-of-pocket costs that the debtors would incur. This includes for conferences, private events and Honoring the deposits will lead to revenue,
individual rooms.
in fact, because the deposit is only a portion of the event or the stay for an individual or for a corporate event. Reputation, goodwill and loyalty will all be harmed if we don't get the relief we're requesting. And our franchisors could be
harmed as well, which would be detrimental to our restructuring. In any event, certain of the deposits may be entitled to priority, up to the amount of 2,600 dollars. For all of
these reasons, we ask that you approve the customer program motion. THE COURT: All right. Mr. Masumoto, anything on this
All right.
agenda, relates to our vendors who have special rights. There's essentially three parts to this relief. The first part
is actually just a declaration of what we believe the law is, but we're nervous that if we have vendors who are shipping
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Page 39 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 goods prepetition, that would be delivered postpetition, they may feel insecure and may think, without knowing the law and being naive as to the specifics of the law, that something that was ordered and shipped prepetition, may not be postpetition, and subject to the administrative expense priority. And so we
just ask for an order so that we can tell them you can deliver your goods, and you'll get the benefit of administrative expense priority. The second part of the motion deals with parties who have or are entitled to liens. Basically this deals with
parties who have possessory liens, which are either warehousemen or shippers. The bottom line is, the debtors are
not going to get their goods which are necessary to run their operations; because once the -- either of these two parties give up possession, they lose their lien and their secured claim status. The third category is what we call the PACA claimants. THE COURT: Pause, please. This is only about 10,000
dollars, the second category, the shippers, warehousemen and materialmen? MR. CARMEL: I think it's actually 20,000. I think
it's 10,000 for the shippers and 10,000 for the warehousemen. But in either event, obviously de minimis, both in terms of the case, as well as in terms -THE COURT: Okay.
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Page 40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 approved. MR. CARMEL: Thank you, Your Honor. The next matter motion? MR. MASUMOTO: THE COURT: No objection, Your Honor. Thank you. The motion's low. MR. CARMEL: THE COURT: MR. CARMEL: -- right. Okay. And next is the PACA? MR. CARMEL: -- of the property that we'd be
receiving, yet significant in terms of -THE COURT: I just asked because the number seemed
And the last thing is the PACA claims.
This relates to perishable agricultural commodities that are delivered to the debtors. Certain of their operations rely on
getting fresh fruit and other food that would qualify under PACA. Your Honor, the federal law already provides these parties with a trust. And to avoid the administrative hassle
of dealing with that and to maintain good relations with the parties who are delivering these goods, we ask that you approve the relief with respect to the PACA claims and the other relief in the motion. THE COURT: All right. Mr. Masumoto, anything on this
All right.
on the agenda, C(4) relates to taxes and the payment of prepetition taxes, as well as fees and other business licenses.
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Page 41 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 This is fairly common relief to ensure that we have a smooth transition into bankruptcy. The taxing authorities are
owed approximately 3.3 million dollars with respect to sales tax and occupancy tax; 3 million of that will be due within -is expected to come due within the next twenty-one days. There is a use tax -- it's a de minimis amount; and then franchise taxes, which is approximately 325,000 dollars, zero of which is expected to come due in the next twenty-one days. In addition to that, the debtors pay certain license and permit fees for their seventy-two hotels across nineteen states and the District of Columbia. The debtors estimate that in the
next twenty-one days they'll pay approximately 40,000 dollars for these. We actually believe that they're postpetition amounts. But in the event that they're not, we ask for authority to pay, particularly given the de minimis amount, and the fact that we need to operate in these states to maintain our successful restructuring. The relief requested here is supported by the
fact, again, these are trust fund taxes, to some extent, not property of the estate. priority and secured. For all of those, it's just a timing issue. And we Additionally, some of these taxes are
obviously want to avoid disruption to our restructuring and including what could be personal liability or attempts for states to exercise their statutory rights, even though we may
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Page 42 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 business. not believe that they're able to do that, with respect to there being the automatic stay in place. In light of all of this, we
ask that you approve, on an interim basis, the taxes and fees motion. MR. MASUMOTO: THE COURT: No objection, Your Honor. Thank you, Mr. Masumoto. Yes,
All right.
on an interim basis, I'll approve this motion. MR. CARMEL: THE COURT: MR. CARMEL: Thank you, Your Honor. Thank you. The next motion is what we call the We're asking for this on an interim This is one of the operational And I'll address that
property managers' motion. basis, and on a final basis.
first days that received an objection. in a minute, Your Honor.
The property managers are Island Management, managing seventy-one of our hotels, and Dimension, managing one of our hotels. They manage day-to-day operations. They interact with
and manage the hotel employees, including making staffing decisions and sales and marketing strategy on a property level. They purchase goods and services, and in fact, are agents on our bank accounts, and actually pay the bills. As part of
this, they also do the back office accounting at the property level. In sum, the hotel managers are critical to our In terms of what -- the amounts that we pay them,
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Page 43 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the monthly management fee is approximately 620,000 dollars per month. And there's also indemnity and reimbursement
obligations to the hotel managers, under the hotel management agreement. Separately, there's a shared services agreement
with Island, which is basically to allocate office space and certain other shared operating expenses, because we actually operate with space that is shared. Again, we're only asking for this on an interim basis. In the motion -- and this was after speaking with the United States Trustee -- we agreed to, on an interim basis, only ask to continue to honor and not seek to pay any prepetition amounts. In light of the objection, while we believe that we
can prove the case for why we should be able to pay the postpetition amounts, in light of seeing how we can address the objection that was filed, and quite frankly, I could address the legal side. I'm curious how we can address the fact that
we have to manage seventy-two properties without a property manager getting paid. day. So we would agree to revise the order to say that Island Management and Dimension would not receive any payments during the period between the interim and the final, and we'll be before Your Honor on the final basis to approve not only the payments of all postpetition amounts, but also the payments on the prepetition amounts, as well as honoring our other But that I think is an issue for another
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Page 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 obligations. THE COURT: All right. I'm a little confused, because
in paragraph 10 of your motion, you state your belief that you don't owe anything prepetition. MR. CARMEL: That's right, Your Honor. Our current
belief is that we don't owe any prepetition.
Just given the
fact that it's -- at the time that we're filing there may some amounts that are out there -THE COURT: MR. CARMEL: Okay. -- but certainly between now and the And we're happy
final hearing, we'll have better visibility.
to come back to Your Honor with some more specificity on that. THE COURT: All right. So does the change that you
outlined address Midland's objection? MR. PARKINS: Your Honor, if may? May name is Lenard
Parkins from Haynes and Boone.
Mr. John Penn, my partner has And I'd ask that he
filed an application for pro hac vice. speak at this time. THE COURT: MR. PENN: All right.
Very well. Is it easier to do
Thank you, Your Honor.
it from here or the podium? THE COURT: MR. PENN: in our objection.
Whichever the Court --
Why don't you come over to the podium. Your Honor, we actually raised a few issues One is the fact that the contract that the
management company has with the lender says that they're not
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Page 45 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 entitled to payment. Just flat out, they're not entitled to And there's no question And
it, as long as we're not being paid.
that there's no payment being made on the secured debt. there's none contemplated going forward.
But we are also concerned about Island's participation in the diversion of cash out of the lock box arrangement, because while we have inquired on a number of occasions, and this is addressed in Mr. Greenspan's declaration, we have never, ever been told when that diversion began, and what role Island played in the diversion. What we know is that when the
lock boxes were restored, Island was the one signing to restore the funds back to the lock box. We assume that they were involved in the diversion on the front end. Which is also a violation of our agreement, And so we have some very
which is attached to the objection.
serious concerns about Island's role going forward and their ability to perform what they're being asked to do. THE COURT: All right. But isn't the time to raise
that at the final hearing?
I'm not going to throw them out
today and cause these hotels to go dark. MR. PENN: I understand, Your Honor. And frankly, one
of the prior drafts that we saw, the motion listed a significant prepetition claim that would have been part of the request at that time. THE COURT: All right.
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Page 46 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 debtor. MR. PENN: Then that takes care of the payment issue. MR. PENN: THE COURT: MR. PENN: And so that was -So that has gone away. Right. And if they're not going to be
getting any payments between now and then -THE COURT: Which has been the representation of the
And in the meantime, we'll continue to explore with them their role in the commencement of the diversion, because when you read the declaration, it sure looks like it started before April the 19th. They're very coy in the way that's described.
But the only accounting that has ever been provided began with April 19th. There was an absolute, stone cold refusal to go And frankly, we know that nine million We want to know the total amount. All right. Well, it seems to me, you're
before that date.
dollars got diverted. THE COURT:
entitled to inquire and you're entitled to get that information. But for today's purposes, we have detente, and
I'd like you to look at the order as revised and make sure it meets your approval. MR. PENN: THE COURT: Very well. And I'll look at it as well. And then we
can take this up at the final hearing. MR. PENN: THE COURT: Definitely happy to do so. All right. Thank you.
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Page 47 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. PENN: THE COURT: Thank you. So I will get a black-lined order
reflecting these new changes. MR. CARMEL: Yes, Your Honor. We'll agree with them, Just so that there's
and then we'll submit it to Your Honor.
not something on the record left unanswered, the lock box situation is something that's going to be addressed more fully in the cash collateral discussion, and I'll leave it at that. Clearly we've addressed the main thrust of their objection, which is regarding payment. And so we ask that Your Honor
enter the order on an interim basis. THE COURT: All right. Subject to my reviewing the
order and making sure it comports with our discussion here today, I'll approve the motion. MR. CARMEL: Thank you, Your Honor. The next matter
on the agenda relates to cash collateral. MS. TURNER: Excuse me. Your Honor, excuse me, I'm May I be
sorry for interrupting. excused, Your Honor? THE COURT: MS. TURNER: motion was resolved. THE COURT: MS. TURNER: THE COURT:
This is Karen Lee Turner.
Certainly. Sorry. I just wanted to listen that that
Very well.
Thank you. Bye-bye.
Thank you very much.
I'd actually like you to switch the order,
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Page 48 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 so. MR. SATHY: And -- well. I've never had such a But, Your related. if it isn't going to cause heartburn. management before cash collateral. I'd like to hear cash
It just seems to me to make
some sense to lay the predicate to understand how the debtors' cash management system works before we address cash collateral. So if you need a few minutes to get ready for that. MR. SATHY: Your Honor, you're right that the two are
In some ways, every first-day agenda I've seen would
have cash management first and then cash collateral. THE COURT: Well, you guys have never done this before
vociferous objection to cash collateral before.
Honor, I think you're right to suggest that the way that the company operates its cash management system is critical for understanding our cash collateral request. Your Honor, we
would -- I think the best way to do that would be for us to put on testimony so that Your Honor can hear directly from our chief financial officer, Mr. Craven. He is prepared to discuss the mechanics of how the cash management system works, because that's an integral part. We don't think it'll take more than twenty minutes or so. we think that that's a very important predicate for understanding the cash collateral request. Because at the end But
of the day, the cash collateral objections are not about whether we have the right to use cash. Everyone agrees that
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Page 49 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that. MR. SATHY: THE COURT: Okay. But let me ask you a question. Are you the -MR. SATHY: THE COURT: MR. SATHY: THE COURT: And the accounting and the --- and the inter-tranche issues. -- extra protection. Absolutely. So I -the hotels need to be paid. THE COURT: It's the mechanics around it.
It's the mechanics and the accounting and
But let me ask you, before -- so we'll do
asking me for a final order on cash management or are you looking only for an interim order? MR. SATHY: THE COURT: MR. SATHY: THE COURT: I think --
We could do it as an interim order. -- I think it makes sense to do it -Absolutely. -- as an interim order, because, as you
head into the final order, and then when you have the DIP lenders coming in, it's conceivable that you could be tweaking the cash management system, so that it would cause us less brain damage -MR. SATHY: THE COURT: MR. SATHY: because -THE COURT: All right. Absolutely. -- to have that an interim order. And the two are very much related,
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Page 50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 point. MR. SATHY: THE COURT: MR. SATHY: -- as you indicated. Okay. So, Your Honor, if I could, I could turn
the podium over to my partner, Mr. Donovan, who will be tendering the witness. THE COURT: MR. DONOVAN: THE COURT: MR. DONOVAN: Great. Good morning, Your Honor. Good afternoon. You're right, it is afternoon at this And at this time we'd call the chief
For the debtors.
financial officer, Mr. Craven, to the stand, Your Honor. THE COURT: THE WITNESS: THE COURT: Good afternoon. Good afternoon. Let's make sure the microphone works well.
We have problems with it sometimes. THE WITNESS: THE COURT: (Witness sworn) THE COURT: DIRECT EXAMINATION BY MR. DONOVAN: Q. A. Q. A. Good afternoon. Could you state and spell your name? Please be seated. Can you hear me? Yes, I can.
Dennis Craven, D-E-N-N-I-S; Craven, C-R-A-V-E-N. And what is your position at Innkeepers? I'm the chief financial officer for Innkeepers USA.
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Page 51 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. And I think it's in your declaration, but do you intend to
resign that position and become a consultant in the near future? A. Q. to? A. Q. Nathan Cook, with AlixPartners. And can you describe what your duties are currently and I do. At the end of July.
And who is going -- who are you transitioning your role
have been as chief financial officer? A. Yes, I've been chief financial officer for the company
since March of 2006, at which point we were a public company from when I arrived at the company until June of 2007. From a role perspective, I take overall financial responsibility for the company as well as the financial reporting for the entities to both our lenders and our board of trustees. Q. Okay. I know you talk about it in your first-day
declaration, but let's summarize some facts about the company. A. Q. Sure. Can you describe, in summary fashion, the business and
operations of Innkeepers? A. We're a hotel real estate investment trust, first of all,
that was formed that actually dates back -- the company itself dates back to 1994 in its first -- when it initially went public. We were taken private in June of 2007 by Apollo
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Page 52 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Investment Corporation. We are a company that currently wholly
owns 72 hotels, approximately 10,000 rooms in 20 states around the United States. As a real estate investment trust we are required by law to have a third-party management -- an independent third-party management company operate the day-to-day operations of those of that asset. So we act as an owner of real estate and an From -- you know, like I
asset manager of that real estate.
said, we were taken private in June 2007 by Apollo Investment Corporation. We have, you know, maintained that status up
until this point. Q. Okay. The Court heard this morning from Mr. Sathy, but
can you tell the Court who are the two management companies that Innkeepers uses? A. Island Hospitality manages all but one of our hotels, and
Dimension Hospitality manages one hotel, the Sheraton in Ft. Walton Beach, Florida. Q. And what does it mean when we say Island manages the
hotels? A. They are responsible for the day-to-day operations of the The employees of the hotels are employees of Island.
hotels.
Therefore, you know, their responsibility is to not only -from a revenue perspective is to drive revenue into the hotels and to maximize that revenue performance as well as to maintain the upkeep of the hotels, clean the rooms, maintain the repairs
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Page 53 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and conditions of those rooms. Q. Okay. How does Island personnel interact with Innkeepers'
personnel, especially on financial matters? A. Well, first of all, you know, we are independent We do have what -- you know, in a REIT structure we
companies.
have taxable REIT subsidiaries, which is where the lessee, in our structure, exists. Those lessees include the -- when they
report their financial performance they report the financial performance of the hotel operations. We are, you know, both located in Palm Beach, Florida. have no -- you know, none of Island's accounting or financial reporting employees report directly to me. We do have a good I
working relationship, given the proximity and given the significance that they have to us. Q. Okay. Can you summarize for the Court the contractual
relationship between Innkeepers and Island and how they get paid for their services? A. Sure. We have a -- we pay them essentially two fees, We
which is a management fee which is two percent of revenue.
also pay to them an accounting fee of 750 dollars per month per hotel, which I believe earlier we said was approximately 600,000 dollars per month. Those fees -- the fees and the
services described in that management agreement were all negotiated between both parties on a basis of here are the services that they are going to provide to us as owners of the
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Page 54 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 real estate and the scope of those services, and the scope of those services was definitely based on the structure that we had in place prior to June 2007 when we had to renegotiate those agreements and thereafter. Q. Let's turn now to cash management and the accounting
systems. A. Q. A. Q. Sure. Who accounts for the financial activities at each hotel? That's Island Hospitality. And who accounts for the financial activities of
Innkeepers? A. Q. That Innkeepers USA and its accounting department. And how does Innkeepers along with Island manage both cash Let's start at a high level
coming in and cash going out? first. A. Sure.
Cash coming in, in terms of hotel revenue, is The primary
really in the form of two sources, essentially.
source is credit card receipts which are approximately eighty percent of our monthly revenue. The second primary source is
deposits at our local hotels, whether it be, you know, miscellaneous cash receipts for whatever it may be, as well as vendor deposits for books of rooms for a group function or whatever it may be. Those checks can either be deposited
locally or at the corporate headquarters for Island. Q. And have you prepared a diagram to explain how invoices
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Page 55 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. are accounted for both on an accrual basis and a cash basis? A. We have. Yes, we have. Your Honor, may I approach? Please.
MR. DONOVAN: THE COURT: (Pause) THE COURT: MR. DONOVAN:
Do you want this marked as Debtor's 1? Please, Your Honor.
(Mr. Craven's diagram of how invoices are accounted for was hereby marked as Debtor's Exhibit 1 for identification, as of this date.) THE COURT: Okay.
Mr. Craven, you've been handed what's been marked as
Debtor's 1, and if you could turn to page 2, please. A. Q. Okay. And I would ask you to walk the Court through this diagram Here we show how invoices flow
and provide some detail.
through both the accrual-based expense module you have here and also the accounts payable module. A. Sure. The primary responsibility of not only Island's --
first of all, the primary responsibility of Island's accounting function and Innkeepers' accounting function is to report our financial information on a generally accepted accounting principle basis which is an accrual-based method of accounting. It's not cash basis. But what happens on a high-level perspective is, you know,
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Page 56 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 we have invoices that come into our companies, we receive those invoices, and we determine where those invoices should be recorded as far as which hotel it should be attributable to, what expense category it should be attributed to. Those -- there could be -- you know, in many instances, because we have Island who manages seventy-one of our seventytwo hotels and we have certain shared vendors that provide services to multiple of those hotels, in certain instances we can receive one invoice, which would then further state down the invoice the expenses listed out. And the accounting
function of, whether it be Island or Innkeepers, has to go through that invoice and determine which hotel to allocate that to. Q. A. Q. in. All right. Sure. -- on the left-hand side we have the invoices as they come And if I understand what you're saying, one of these Let me stop you there for a second. So --
invoices may be charges for more than one hotel that may cut across these different secured financing pools, is that right? A. That's correct. Certainly there can be an invoice with
charges across the multiple pools of hotels, at which point somebody does have to go through and allocate it, not only by pool but by hotel. Q. Okay. So can you say how that's done, at least for the
accrual-based expense module, then we'll talk about the actual
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Page 57 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 account payable module. A. Sure. Sure. As I indicated, they'll go through the They will
process of identifying which hotel it relates to.
enter that expense into JD Edwards, which is the accounting system we use. believe, now. JD Edwards is used -- is owned by Oracle, I It's a system that's been in place for the
company since I was there and for several years prior to that. But they will go through the process of identifying
which hotels those expenses go to and accrue those into the system. Q. Okay. And is that what gives the company the ability to
do profit and loss statements on an accrual basis, hotel by hotel? A. That's exactly right. That is the basis of the accrualThat's correct.
based method of accounting. Q. A. Q. A. Q.
Now let's talk about the cash basis -Sure. -- and how the cash flows. Sure. How are these invoices actually paid and how does it get
accounted for in the account payable module? A. Sure. Up until just a couple of months ago when we went
under the lock -- when we had our lockbox system put in place, we operated under a consolidated cash management system which essentially -- what that means is that when it came to making
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Page 58 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 vendor. THE WITNESS: THE COURT: THE WITNESS: THE COURT: Correct. Is that a good example? Sure. Okay, a linen vendor. Could you drill payments to vendors, if we had a payment to a vendor that was across forty-seven of our seventy-two hotels, we would make one payment. THE COURT: MR. DONOVAN: THE COURT: Can I interject -Absolutely. -- because I'm still mulling over the
process of divvying up the invoice. THE WITNESS: THE COURT: Um-hum. So you get one invoice from a linen
down in a little more detail on how you go about figuring out how much to allocate to each hotel? In every instance does the
vendor give you the hotel by hotel detail, or are you using some sort of a formula or convention based on rooms, revenue, or something else -THE WITNESS: THE COURT: THE WITNESS: Right --- to make an allocation? -- not in every instance. Not in every You
instance is it fully itemized on every bill for a hotel.
know, there can be an instance where there is an allocation for a service that's provided that would be based on some type of
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Page 59 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 correct. THE COURT: BY MR. DONOVAN: Q. Let me follow up there too. In addition to getting Okay, thank you. revenue or some type of EBITDA contribution. THE COURT: So some type of metric that you develop
and use across the board, or is it on a case-by-case basis? THE WITNESS: Yeah, case-by-case basis, yep, that's
invoices that you may not be sure which hotel it is, are there expenses that are actually paid or when you pay them you don't know which hotels they apply to? A. There are. There are certain payments, specifically for
health insurance claims, workers' comp claims, certain utility payments, as well as certain commissions related to online Internet travel bookings that typically we have a funding that it comes, draws the money out of our account. Subsequent to
that we will receive the detail of what those claims related to or what those payments related to and somebody in the accounting function will take those and allocate them as identified on the sheet to a particular hotel. Q. Okay. So in those circumstances, is it fair to say it is
not possible before you have to fund them to actually know which hotels they apply to? A. Q. Not specifically, yes. Okay. So let's go back to where you get an invoice and
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Page 60 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 then you actually want to pay it, and can you explain, through the account payable module, why it does not track which hotel that cash is applied to? A. Well, we -- you know, certain payments -- like I said, But typically
certain payments we are able to identify, okay?
when -- not typically, but the way the system works when it goes to the account payable module and for payments, we select the items to be paid by vendor based on a due date. And that
information will pull out for a linen provider, a Sysco Foods, or whoever it may be, it'll pull the amounts due as of a particular date across the portfolio of hotels. Q. Okay. Was this system, your cash management system,
established to be able to track cash disbursements by hotel? A. It was not, no. We've -- we're -- except for a
consolidated cash flow statement, we've never been obligated to provide any type of cash flow information on a regular basis to anybody. Q. And when an invoice is paid -- and I think that's what's
indicated, I believe, on the right-hand side -A. Q. Right. -- of this chart. After you look at the invoice and
you're able, on ones where you are able to allocate by hotel, let's say there's five different hotels, do you cut five different checks to the vendor? A. We've historically only cut one. Ever since the lockbox
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Page 61 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 system was put in place for the fixed pool hotels, our -- not only the Innkeeper's accounting staff but also the Island accounting staff, we would now have to cut, you know, a couple of checks. Q. So two for every one that we used to cut. Let's talk about,
Let's turn to a different topic.
briefly, when these pools were -- pools of loans were established in 2007 -A. Q. Sure. -- the due diligence that was done by the lenders. And
let me ask you, were you involved in the due diligence related to the establishment of these secured financing pools? A. Well, at the time, we were employees of Innkeepers USA.
Apollo Investment Corporation, who is acquiring us, was obtaining the financing to consummate that transaction. We
were certainly -- even though we were on the selling side at the time, we were involved because we were going to be ongoing management after the close of the transaction. So we were
involved in the establishment of the lockbox agreement and the overall cash management design for the new financings for the fixed pool and for the Lehman floating pool. Q. And during those discussions with the lenders -- financial
advisors and the lenders, was the consolidated cash management of the company discussed? A. It was. I mean, there was numerous discussions and one of
the things that we had always proclaimed in May and the months
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Page 62 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 leading up to June 29th, '07, was that, you know, we've got a very efficient cash management system. It allows us to, one,
have the ability to work a lot better or obviously work more efficiently. And it also provided, you know, Island
Hospitality as our manager, and the services that they were providing to be able to maintain submarket fees for the services that they were providing. But we were certainly very
conscious of the overall cash management system and the fact that we wanted that cash to ultimately roll up to our concentration accounts to be able to use on a consolidated basis. Q. How long, based on your understanding, has Innkeepers been
using a consolidated cash management system as you've described? A. Since before -- since before my arrival, but I believe it
dates back to 2003 or 2004 when they consummated their REIT transaction, TRS transaction. Q. So that would be before the secured financing pools were
even established? A. Q. Yes. Let's talk briefly about the reporting that you've
provided to the fixed-rate lenders and the other lenders since 2007. And if you'd turn to page 2 of your slides, I believe Can you summarize for the
you have one that summarizes it.
Court the reporting you have provided since 2007, what it
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Page 63 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 includes and what it didn't include? A. Sure. We were required to provide really a couple of
items, one which is an annual budget that was due in December of the calendar year, you know, December of 2009 for 2010 calendar year. So we provided to each of our lenders or to
our -- the servicers on those pools or those loans, the budgets in December of every year. And we also were required to
provide monthly profit and loss statements based on an accrual basis of accounting as we historically have done. provide those by hotel for each month. Q. Okay. And the budgets that you provide on an annual basis We would
in December before the coming year, is that broken out hotel by hotel? A. Q. They are broken out hotel by hotel. And are those budgets based on a accrual basis, profit and
loss, or are they based on cash projections? A. Q. Based on accrual basis of accounting. And the profit and loss statements that you provide to the
lenders on a monthly basis based on actual results, is that on the accrual basis, profit and loss, or cash basis? A. Q. Accrual basis. And does Innkeepers propose to continue to provide this
annual budget and monthly P&Ls to the lenders during this Chapter 11 process? A. Yes, in our proposed proposal we do volunteer to continue
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Page 64 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to provide that information. Q. And since 2007, as part of the reporting you provide to
the fixed-rate lenders have you ever provided cash flow receipts and disbursements by hotel? A. Q. Never. Have the fixed-rate lenders, before the lockbox, ever
requested that? A. They have not. THE COURT: MR. DONOVAN: THE COURT: Can I interject? Yes, Your Honor. So just to put a fine point on it, in
paragraph 28 of the cash management motion there is a reference to modifying the existing cash management system to be able to track revenue and expenses from the prior month on a propertyby-property basis as well as on a tranche-of-debt by trancheof-debt basis. You're going to give the details to the That's consistent --
representatives in application reports.
that refers to the testimony that I just heard -MR. DONOVAN: THE COURT: MR. DONOVAN: Yes, Your Honor. -- is that correct? Okay.
And we will discuss how that's -- we're
able to do that kind of manually looking backwards. THE COURT: MR. DONOVAN: THE COURT: Right. It's the real time that's the problem. Okay.
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Page 65 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY MR. DONOVAN: Q. And before we move on, I want to ask you, have you had
time to review Mr. Greenspan's declaration, the individual from FTI? A. Q. I have. Okay. And in paragraph 18 of his declaration, Mr.
Greenspan refers to Moelis providing FTI an Excel workbook that he calls was the operating model for the company. a chance to look at that model? A. Q. I have. And what type of financial information is provided in that Have you had
model? A. It is -- we provide -- well, it's monthly -- or it's hotel It is for each hotel. It's based
profit and loss statements.
on the accrual basis of accounting.
And it was -- essentially
we provided to them our budgeted information for the full year, similar to what we sent to every other pool of assets or pool of loans, as well as the actual results at a point in time that -- you know, that -- where we had already closed out our books. Q. And does that model, based on your review, provide any
cash flow, hotel by hotel? A. Q. It does not. Let's spend a few minutes on working with Wachovia and There's been some discussion about this lockbox.
then Midland.
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Page 66 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. Sure. Who was the servicer on the fixed-rate pool until early, I
think it's April 2010? A. Q. Wachovia. Okay. And just roughly, how many conversations did you
have with Wachovia's servicer from the time the fixed-rate pool was established until early 2010. A. Q. A. Q. Maybe one or two. They weren't calling often? Definitely not. Now, at some point in 2010, did Wachovia contact you
and tell you there was a triggering event under the loan documents? A. They did. They contacted me and left it first on my voice
mail that they believed that there was a triggering event. Q. A. Q. And did you have conversations with Wachovia after that? We did. And during these conversations, did Wachovia explain
whether or how Innkeepers would have access to this cash that Wachovia said they were going to lockbox? A. They did not. At that point there were no discussions of
any source of cash that was going to be provided. Q. Okay. Why did Innkeepers then have the credit card
receipts related to these hotels directed to its master cash account?
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Page 67 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Well, you know, all of our cash ultimately rolled up to In this case the credit cards And
our master concentration first.
were deposited into the fixed pool credit card depository.
up until the time -- up until April 19th when the lockbox was initiated, it was -- the cash automatically every day swept up from that fixed credit card depository up to the master concentration account that we always had the ability to move that cash up. At that point, you know, we as a management team were faced in a very dire cash situation. We had received notice
that perhaps a triggering event had occurred, and the fact that there may be a lockbox situation occurring. You know, there
was a lot of hesitation on our part as a team to say, listen, we haven't heard from these guys literally in almost three years, they call and say that they're putting a lockbox -- a triggering event and they're going to try and put a lockbox situation. And really the lack of confidence in knowing
exactly how we were going to be able to -- the lack of confidence to be able to say, listen, how are we going to have a source of cash to be able to keep the hotels open was a great concern to us. Q. Okay. And subsequent to that, did you reach an agreement
with service, once Midland came in, about how to handle the receipts and the disbursements until this filing? A. Yeah, the lockbox was -- I think the letters went out on
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Page 68 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 April 19th. The first letter that was sent, at least to
SunTrust where the fixed credit card depository was located, had actually attempted to put a lockbox on the master concentration account for which there was no agreement. Q. Let me stop you there. So the first letter from Wachovia,
they wanted to lockbox your master cash account? A. Q. Correct. And based on your understanding, is that permissible under
the agreements? A. Q. It was not. Okay. Did you then talk with Wachovia and Midland to get
an arrangement set up? A. Yes. At that point in time the letters went, the lockbox
system was put in place, and subsequent to that is when we had conversations with Midland about the direction of the credit card receipts. Q. Okay. And then can you summarize for the Court the
process you went through with FTI to reconcile all of this? A. Sure. Sure. What we told them at the time was we
expressed our concerns and the reasons why we did those actions. And we said, listen, you know, we haven't done
anything improper with this cash, we were concerned about the operating expenses of the hotel and being able to pay for those. And we said we will allow you guys and your
representatives, FTI, to come in from April 19th, the date of
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Page 69 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the lockbox, and forward. We would provide to you a full
reconciliation of receipts and disbursements, both directly attributable to that fixed-rate pool as well as an allocation of corporate type expenses, G&A type expenses that we could attribute on a pro rata basis to that pool. Q. And did you in fact work through this with FTI and come to
an agreement on it? A. We did. We did. And ultimately the agreed upon amount we
funded directly to the Midland controlled account. Q. And in paragraph 9 -- I'm going back to Mr. Greenspan's
declaration -- he states that these credit card receipts were directed to an account other than accounts in use since the loan's inception in 2007. A. Q. A. I read that, yeah. Is that right? It's not, no. The master concentration account has always Did you read that?
been in place since prior to my arrival at the company. Q. And is that where all the cash receipts ended up flowing,
historically, anyhow? A. Q. Correct. Let's turn briefly to the lockbox procedure. Can you
describe to the Court how it worked, this lockbox procedure with Midland on the fixed-rate pool? A. Sure. You know, once we reached an agreement with Midland
as to the provision of a source of cash to pay for operating
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Page 70 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 expenses for that pool of hotels, they would retain all of the receipts -- or substantially all of the receipts were deposited into either a local depository that was subject to a lockbox agreement or the fixed credit card account which was subject to a lockbox agreement. We would provide to them twice weekly, typically, a draw request that was based on estimates. Some of the amounts were
based on estimates, some of the amounts were based on actuals that we would provide to them. They would subsequently sample
certain of those items and request, you know, the substantiation for those payments at which point we would provide those to them, and then ultimately they would fund the draw request to us. And they would fund that draw request
direct to the master concentration account. Q. What burdens, if any, did this lockbox procedure place
upon the company and Island management? A. Well, as I indicated before, you know, we are -- we are
separate companies, but both sides of the structure both own the Innkeepers, the lessor REIT side versus the taxable REIT subsidiary. They each have their own accounting functions and
they each have their own payments that we distribute regularly. The accounting functions were based on our existing cash management structure prior to those lockbox agreements being put in place and prior to the bifurcation of the fixed-rate pool out of our consolidated cash system.
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Page 71 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 So as I indicated earlier, you know, we were having to cut for a shared vendor two checks every week instead of one, which, you know, two for one doesn't necessarily sound that bad, but when you have 10,000 hotel rooms and 72 hotels and 15 million dollars of expenses every month, it can be burdensome to both companies. Q. And during this lockbox procedure, were there times where
you had to use the cash or funds of the other tranches from your main cash account in order to fund expenses before Midland would fund those expenses? A. Sure. There were certain instances that I referred to as
far as health insurance claims, workers' comp claims, utility payments where, you know, either, one, we funded them in advance and we had to provide a retroactive draw for a reimbursement from Midland to us, and in certain instances, like I mentioned for utilities, we -- they would provide to us an estimate of the cash disbursements for the week for the utility related payments, and in certain instances our payments were in fact higher than those. So we certainly had to source
that shortfall from some other form of -- some other operating cash. Q. And during the time this lockbox procedure was in effect,
did Midland ever decline to pay any expenses you submitted related to these fixed-rate pool hotels? A. Related to fixed pool operating expenses, no.
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Page 72 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. Let's turn now to the proposed cash collateral
reporting the company proposes, and that's at pages 3 and 4. Can you summarize for the Court, and then we can walk through the three different reporting, really, mechanisms we propose? A. Sure. We've essentially proposed three things, one of
which is a rolling thirteen-week consolidated cash flow forecast. The second item is what we term a flash report which is a report which is intended to be provided to all constituency, all lenders or servicers on a twice monthly basis to actually provide to them actual disbursements on a retroactive basis after the cash has been disbursed. And then thirdly, forty-five days after a period end -- a calendar period end, we would provide to them a full reconciliation of receipts and disbursements with a determination of net available cash that, subject to a couple of things, one being an expense reserve for upcoming expenditures that we know are coming or certain other items that we know that will influence the hotel operations on a goforward basis, after that expense reserve we would provide that net excess cash to the lenders. Q. Okay. Let's -- on the rolling thirteen-week, on the cash
basis, is that on a consolidated or hotel by hotel basis? A. Consolidated basis.
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Page 73 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. And that's the thirteen week that was provided along with
this final? A. Q. That's correct. Okay. And how -- will that be updated through this
process as well? A. Q. Yes, it will. Let's talk about this flash report for a moment of cash I guess, first, how is this
disbursements twice monthly.
different than the final report and why is it offered twice a month? A. Well, you know, what we recognized was that waiting forty-
five days after calendar end to get, for the certain lender constituencies to have some type of understanding, at least get a first look at the cash activity for the company and for that pool of assets. We thought it'd be beneficial to those parties
to provide to them an initial glance, if you will, based on what we can actively and accurately identify specific to each pool as well as to properly allocate certain expenses that we have to provide some type of allocation to. And then lastly is
to provide for a bucket of unidentified items that we haven't been able to specifically identify to allow us to identify those to those parties. Q. Okay. And the third bullet under the flash report says,
"Provide FTI the opportunity to reasonably sample the allocations related to the Flash report". Can you explain what
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Page 74 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that means? A. Sure. Similar to what we were doing for the last couple
of months with them as far as -- I mentioned earlier that they would typically select a sample of typically ten items from a particular week's disbursements, you know, that we would allow them to continue to do the same to make sure that as we're going along that we're at least continuing to properly allocate things to their pool. Q. Okay. And we turn to page 4, you have the application Can you explain what it is
report which you mentioned before.
and how it's different than the flash report? A. It's different in the fact that it would -- well, one, Secondly, it would provide a full reconciliation
it's final.
of receipts and disbursements, whereas a flash report would primarily be designed to identify disbursements to the pools. As I mentioned, it would also allow for us to calculate and provide an actual estimate of net cash receipts after disbursements that could be provided to the lenders. Q. And is Innkeepers proposing at that time to actually
distribute the excess cash? A. Our intention in our proposal would be to distribute that
cash to the pools. THE COURT: Can I interject with another question?
Back on page 3 of the exhibit, I believe that as part of the cash collateral proposal you're putting a cap on intercompany
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Page 75 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 loans, if you will, of two million dollars, although in one place in your papers it said five, but I assume that it's two because that's what's in the order. What mechanism ensures
that you're not going to breach that cap before you know it, if that's a -- if you understand my question. my question? THE WITNESS: THE COURT: balances -THE WITNESS: THE COURT: Um-hum. -- to make sure that on as close to a real Not really. You've built in a lot of checks and Do you understand
time basis as possible you track where the money's going out. THE WITNESS: THE COURT: Correct. And you say that you're going to allocate
it on a tranche-by-tranche basis. THE WITNESS: THE COURT: Right. So first question is, I assume that once
you allocate it on a property-by-property basis the tranches build themselves, right? level -THE WITNESS: THE COURT: THE WITNESS: on a property -THE COURT: Then it just -Yes, once -- yeah, once either the --- into the tranche level. Yeah, once the payments are identified It gets built up from the property
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Page 76 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 -THE WITNESS: THE COURT: Yep. -- so that -- okay. Then the second THE WITNESS: THE COURT: -- yes, that's correct. Then there's no -- that's just automatic
question is because there's a trailing aspect of this -THE WITNESS: THE COURT: Correct. -- and because you have a trigger that
terminates -- and I'm combining the cash collateral with the cash management here -THE WITNESS: THE COURT: collateral. Um-hum. -- that terminates the ability to use cash
In the event that some debtor finds themselves
lending more than two million dollars to another debtor -THE WITNESS: THE COURT: Sure. -- what is there in this new and improved
system that will ensure that before you actually generate the report that you won't have breached that two million dollar limit? THE WITNESS: Well, there's a couple things. One is
we have a mechanism of an expense reserve that is intended to foresee and to project out for a particular asset, for an individual loan or a pool of loans, certain large expenditures that we know are forthcoming. For instance, property taxes in
the state of California, which is our largest state, the
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Page 77 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 going in. THE WITNESS: THE COURT: THE WITNESS: That's correct. Okay? That's correct. The second point is property taxes are very high. the end of the year. THE COURT: Those payments are focused at
So you know, certainly to be aware -But that's identifiable as an expense
that, you know, for the next foreseeable thirt -- well, especially for the first thirteen-week forecast, for our company these are our highest revenue producing months. Historically, even though we are -- our hotels are designed more for a business traveler as well as for -primarily for business travel, there is seasonality in the fact that January and February for us are very slow; November and December are slow; the summer months are peak travel months for us. We also operate at about a forty percent operating margin, thirty-five to forty percent, depending on the tranche. Those -- you know, that, in essence, provides your first basis of an excess cash, at which point, you know, is that sufficient enough to foresee any unknown expenses, and we believe that it is. THE COURT: All right. And there's no -- I'm sorry, I And there's no
don't mean to take over your examination.
particular property or set of properties that you can identify
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Page 78 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Q. that are particularly at risk in this period and not subject to the general overall notion that they're going to be cash rich. THE WITNESS: THE COURT: BY MR. DONOVAN: Q. That's what I was going to follow up. During at least That's correct. Okay.
this interim period, in your projections, do you believe -- let me ask this -MR. DONOVAN: Withdrawn.
Is Innkeepers going to be a net cash flow generator before
debt service over this thirteen-week period? A. Q. They are. And in addition -MR. DONOVAN: I'll withdraw.
So let's just summarize, for proposed cash collateral
reporting, the company intends to provide the consolidated thirteen-week cash forecast, the flash report twice a month along with sampling to the financial advisor, and then the application report in which at the end of that cash is actually -- we plan to distribute to our lenders, is that right? A. Q. That's correct. Okay. Now, you've been involved in calls, I know, and
reviewed what Midland is proposing, kind of tranche-by-tranche accounts with cash disbursements having come out of each
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Page 79 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 tranche, is that right? A. Q. Correct. Okay. Based on your experience, do you believe it's
feasible to operate the business having all these separate accounts and paying these invoices out of nine separate tranches? A. It would definitely divert not only staff's attention but
management's attentions away from the company's operations, as well as just the regular processing of disbursements, and be extremely burdensome to both companies. MR. DONOVAN: Your Honor, I don't know if you had any
further questions at this time. THE COURT: MR. DONOVAN: THE COURT: I don't. I don't either. Okay, thank you. Thank you, Your Honor.
Cross-examination? MR. PARKINS: (Pause) THE COURT: Just as a housekeeping matter, I assume Yes, Your Honor.
there's no objection to this coming in? MR. PARKINS: THE COURT: No objection. All right. Debtor's 1 is in evidence.
(Mr. Craven's diagram of how invoices are accounted for was hereby received in evidence as Debtor's Exhibit 1, as of this date.)
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Page 80 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 CROSS-EXAMINATION BY MR. PARKINS: Q. Mr. Craven, good afternoon. My name is Lenard Parkins.
I'm with Haynes and Boone and I represent Midland. A. Q. Good afternoon. How are you doing? I want to talk about some of your Let's talk about the
answers on direct examination.
intercompany loans the judge was asking you about. A. Q. Um-hum. If the cash management system was in place today, how
would I know tomorrow if Midland's cash collateral had been lent to someone else? A. Q. A. Q. I want to know tomorrow.
How would you know tomorrow? Yes. Based on what? I would like to know, if cash is used, how would I know
whether Midland's cash collateral had been borrowed and given to some other debtor? A. Explain that to the Court, please.
Well, currently you -- currently we don't have cash
collateral from Midland. Q. A. Q. So if the system you want was in place, sir, I'm asking -Um-hum. -- tomorrow, okay, how would I know whether Midland's cash How would I
had been lent to some other debtor here tomorrow? find that out?
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Page 81 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Well, we would provide it to you but only after the --
only twice a month. Q. And I'd find it out, finally, sir, forty-five days after
the end of the month that it had occurred in, isn't that true? A. Well, it depends. You could find it out within the twice
a month which would be within fifteen or thirty days -Q. A. Q. A. Q. So --- or you could find it -- find out -I'm sorry, I didn't mean to interrupt, sir. Sorry. Or you could find it out forty-five days.
So I think you said your final reconciliation will be
forty-five days after the close of a month, is that correct? A. Q. That's correct. So if my example is, sir, that if Midland cash collateral
was lent to another borrower, Midland wouldn't know -- for example, let's start with this month of July -A. Q. Sure. -- Midland wouldn't know that finally until September
15th, is that correct? A. Q. That's correct. Is that how you personally run your own finances? If you
make a loan, not know whether or not the money has been borrowed from your account and used for some purpose for fortyfive or fifty days? A. My personal finances?
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Page 82 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. Yes. I operate my personal finances the way I deem fit. Do you know whether -- do you check your personal finances
regularly, sir? A. Q. Yes, I do. Okay, thank you. MR. DONOVAN: THE COURT: do with anything. Q. How would Midland check regularly, weekly, to see whether Objection, Your Honor. Sustained. I don't see what this has to
or not its cash collateral had been used to fund operations or expenses for another debtor? A. You -- we are proposing that Midland have sampling rights,
as they've had for the last couple of months, to be able to select on a reasonable basis any type of expenditure. Q. I'm not asking for a sampling. How would I know if
Midland's cash was used? A. Q. A. Q. On a what basis? On a weekly basis if it was borrowed by another debtor. Well, a weekly basis you wouldn't be able to. All right, thank you. So in the protections you described
to the judge with respect to borrowing, other than with respect to projections, there really isn't any governor on the ability to identify today or on any given day how much is being borrowed by one debtor from Midland's cash collateral, is that
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Page 83 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 not true? A. Well, we have a consolidated forecast that we've included
that has certain parameters around variances and the ability to stay within those variances. Q. Aside from the forecast, how would you, as chief financial
officer of the company, if you were staying around, be able to know how much Midland's cash collateral was lent yesterday under you system? A. Q. I wouldn't. Okay, thank you. Now, under the protocol that was in
place with Midland since April 19 with respect to the lockbox, has there been a circumstance where there hasn't been a funding advanced that has been requested by the borrowers, the debtors here? A. For operating expenses of the pool as well as the
allocable, no. Q. And let me ask you, in answer to another question made
during your direct examination you talked about -- I think the judge asked a couple of questions to you, how many -- about invoices, identifying one invoice for multiple hotels. it true that most invoices are by hotel? A. It depends. I don't know what the definition of "most" Isn't
is, but it depends. Q. Well, let me ask you, how about payroll, is it a hotel by
hotel situation?
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Page 84 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 a copy? MR. DONOVAN: I do. I don't. May I pass out some A. Q. It is a hotel by hotel situation. And that is the vast majority of the expenses paid
regularly by the debtors and Island, isn't that correct? A. Q. It is our largest single expense. Isn't it truly more the exception than the norm that
identification of what expenses are to be paid is not by hotel by hotel? A. Q. I'm sorry, repeat that? Yes. Is it more the exception than the norm that you're
not able to identify what expenses are paid by hotel? A. Well, ultimately we know all expenses that are paid by
hotel. Q. A. Q. sir? A. I do. MR. PARKINS: THE COURT: MR. PARKINS: Your Honor, do you have a copy of it? Yes, I do. Okay. Do you have a copy? Do you have Within a very short time of when expenses are paid? I'd have to ask what's a short time. Do you have the Greenspan declaration in front of you,
UNIDENTIFIED SPEAKER: MR. PARKINS: copies to counsel?
We have extra.
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Page 85 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 off of? MR. PARKINS: Okay, Your Honor. out? Q. Honor. UNIDENTIFIED SPEAKER: Thank you. UNIDENTIFIED SPEAKER: I have it. Thank you, Your
Look with me, would you, please, at Exhibit D to Mr.
Greenspan's declaration. A. Q. A. Uh-huh. What is Exhibit D, sir? This appears to be a flow chart. Exhibit D, okay. Oh, that's Exhibit C,
sorry. Q. A.
What was the question? Do you recognize it?
Yeah, what is Exhibit D? I do.
This is when we go through -- and this is for
identifiable invoices that we have -- we typically cut checks once a week. This is where, on an identifiable basis, we have
pulled those invoices to be paid for the fixed pool. Q. And again -THE COURT: Excuse me, can you back up and help me
I need a little more background as to what it is that I'm
looking at. MR. PARKINS: Mr. Greenspan's -THE COURT: MR. PARKINS: THE COURT: That much I know. And I asked him what it was. Who generated it? What system did it come Okay. You're looking at Exhibit D to
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Page 86 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. A. Q. A. Q. Who generates this document? This is generated by our accounts payable department. Okay. And how often --
And our account --- is this generated? It's typically generated once a week. Okay. And has this been generated as part of the protocol
that's been in place since August 19? A. Q. A. April 19th? April 19th, yes. I don't recall at what point it started, but at some point
after that. Q. And did it become the regular way that the borrowers and
Midland have been reviewing what expenses to pay since the lockbox went into place? A. Q. A. Q. That's correct. This is the normal way it's been working, correct? That's correct. And it has been successful in that all expenses have been Is that correct?
paid per hotel as set out in this projected disbursement run, is that correct? A. Q. Ultimately, yes. Now, is it your understanding that Midland's asking that
this protocol that's been in place and the one suggested in Mr. Greenspan's declaration be applied across the board or just for
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Page 87 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Midland? A. Q. A. Q. I don't know whether you guys want it to be for everybody. Well, would you look with me, please, at Exhibit E? Um-hum. Okay.
It's entitled, "Fixed Pool Separate Account Procedures."
Is that correct? A. Q. A. Q. A. Q. Right. Fixed pool is only Midland; is that correct? That's correct. Okay. I have. Okay. Have you reviewed -- now under the existing Have you reviewed these procedures?
procedures, prepetition, Midland had to approve the expenditures requested by the borrower; is that correct? A. Q. That's correct. Have you read this Exhibit E attached to Mr. Greenspan's
declaration where the Innkeepers will have control of the account and there's no more approval required? A. Q. I have read it. That is a change in favor of the company to operate more
freely in Chapter 11; isn't that correct? A. Q. A. Q. It's correct except for the fact that it's not ideal. But it's doable; correct? It is doable. And it has been done?
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Page 88 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. It has been done. And it identifies Midland's cash collateral segregated
from other pools of lender's money; is that correct? A. Q. Yeah, that's correct. And so Midland could under this cash management system and
the Court and the US Trustee and anyone who wanted to see, could see how much cash was in a particular account and how much was expended per week for specific expenses versus what you're proposing which is a consolidated protocol; correct? A. Q. Correct. So we could track the use of Midland's cash collateral
using this protocol suggested by Mr. Greenspan; is that correct? A. Q. A. Q. And we can still do it the way as we proposed. But yours would be weeks later; is that correct? Potentially. And this would give you real time access to how much cash
is in the account, how much has been expended and what checks were written to who; correct? A. There would still be instances where we would be funding
cash before we knew what the ultimate allocation. Q. But for the most part, we could tell more or less what's
going on with Midland's cash collateral specifically and with particularity using this protocol. A. True.
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Page 89 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. And this was a -- this protocol was already in place. It's in place and it's a burden to both companies. Now have you read Mr. Greenspan's declaration that
Midland's prepared to pay to facilitate the separateness and segregation of its cash collateral and assist the company by covering those additional costs to take the burden off the company; have you read that? A. Q. I have read that. Okay. Thank you. And it is possible to have additional
help hired in order to facilitate this process at Midland's request; isn't that correct? A. It's possible but it's very time consuming and disruptive
to the companies. Q. this? A. It would certainly be disruptive to hire people to And it would be disruptive to hire additional people to do
implement a cash management system where we would have to not only hire people, train people into not only just the controls of the company but the business processes, policies and procedures of all of our hotels. Certain hotels are different,
whether it's a full-serve, an -- or an select service property and they would have to also have training on our accounting systems. Q. That would be difficult.
But none of that has had to occur in order to actually You haven't hired any people.
implement the protocol already.
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Page 90 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 You haven't had to train any other additional people. just done it because it is possible to do it. A. No, I have had to -- we have had to train people to You've
perform different types of work to accommodate your request. And that accommodation was based on a -- on our knowledge that this was a short-term basis. I believe this was in mid --
early May where we, you know, at least finalized the reconciliation and agreed on a funding process going forward. And at that time, we had a June -- a mid-June deadline to Marriott for our PIPs. So in our -- you know, in our belief and our management team's belief, we knew that this was really a five week stopgap. Q. Now this stopgap occurred because the company diverted
cash away from the lockbox accounts; is that correct? A. Well, I will tell you the stopgap occurred because of the
lockbox situation, not -- it has nothing to do with the diversion of the receipts. Q. Well as a result of the negotiations, the cash was
redirected from the credit card companies into the lockbox; right? A. Q. Repeat that again. As a result of the negotiations creating the lockbox, the
credit card companies were given notice to put it back in the lockbox; correct? A. Well the lockbox agreements were put in place on April 19.
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Page 91 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. And prior to that time, the company directed these same
credit card companies to send their money away from the lockbox. A. That's correct. But prior to that time the cash flowed
every day from the fixed card -- credit card concentration account to our master concentration account. Q. A. Q. Aside from not wanting -Which we were allowed to do. I'm sorry, I didn't mean to interrupt, sir. Aside from
not wanting to do this, this system worked prepetition; didn't it? A. Q. Which system is that? The system of the Midland protocol that was in place
before the filing. A. Q. It was not ideal. But it worked. You said -- your declaration said that's
the way the company, in fact, operated. A. Q. Of course it worked; right, yup. Let me ask you, sir, if one or the other lenders in --
that contributes its cash collateral to the consolidated pool were to terminate the use of its cash collateral, consent to use cash collateral, how would you identify how much cash collateral for Midland would be used to subsidize the other lenders -- the other borrowers?
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Page 92 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Well, we would have a -- we have proposed reporting that
would specify what that was. Q. I am asking, let's assume it happened. Such a
termination, a withdrawal, a consent to use cash collateral happened tomorrow, okay, how would Midland know how much of its cash is using -- is being used to subsidize other borrowers? A. Q. A. Q. It would not know tomorrow. It would what? It wouldn't know tomorrow. It wouldn't know tomorrow. THE COURT: MR. PARKINS: THE COURT: question. There is a circumstance --
Can I interrupt you? Yes, Your Honor. Because I don't think I understand the
How would that occur? I'm going to get into that right now. Well let me make clear -- let me make sure you
MR. PARKINS: THE COURT:
understand what I am asking because hypothetically, once I approve a cash collateral order, a lender would not willy-nilly be able to terminate the debtors' use of cash collateral. don't understand the predicate for your question. Q. The predicate to my question is you have talked about and So I
your counsel's talked about the PSA and the PSA is part -- was attached to your declaration. you not, sir? A. Yes. So, you're familiar with it, are
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Page 93 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Q. The PSA -- part of the PSA provides that if approved by
the Court, Lehman -- if there was a termination event could terminate the use of its cash collateral automatically; isn't that correct? MR. DONOVAN: Your Honor, that calls for a legal
conclusion, I believe. MR. PARKINS: MR. DONOVAN: I'm asking -Whether or not Lehman -- would have to come
to Your Honor or whether Lehman can go do self-help. THE COURT: Well that's absolutely true but if that's what
you are talking about then let -- why don't you limit it to that hypothetical. MR. PARKINS: THE COURT: MR. PARKINS: That's exactly where I am going, Judge. Okay. Okay.
Now is it your understanding, sir, that Lehman will be
able to terminate the use of cash collateral upon the termination event under the PSA? A. Q. That's correct. Okay. So what would happen in that event if Lehman was,
in fact, able to terminate -- did, in fact, terminate cash collateral? How would Midland know how much of its cash it's
going to use to subsidize the rest of the companies immediately if that happened?
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Page 94 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. MR. DONOVAN: Your Honor, objection. I think this again
calls for whether or not Lehman would need to come to Your Honor in order to kind of execute on it. THE COURT: Well I think he's positing that Lehman gets
the approval or somehow does it, that we're at the moment where the company can no longer use Lehman's cash collateral. MR. PARKINS: THE COURT: MR. PARKINS: Your Honor? That's what I think he is getting at. Let me explain, if I may. The PSA if
approved by Your Honor would provide for this. THE COURT: MR. PARKINS: I understand. So I am asking, assuming we get there and it
was approved by Your Honor, and it happened, how would Midland know how much -THE COURT: All right. But you're also talking about
something that by its terms cannot occur before we have the final hearing. MR. PARKINS: THE COURT: MR. PARKINS: Absolutely, Your Honor. All right. Absolutely.
How would that happen? How would what happen? Well, how would Midland know how much cash is going to be
used to subsidize other borrowers? A. That would be used to subsidize other borrowers?
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Page 95 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. Yes, if Lehman terminated its use of cash collateral? Well the reporting would still be the same. So the answer is it wouldn't know how to -- it wouldn't be
able to identify it immediately; is that correct? A. Q. Not immediately. So let me see. So what you want to do is take the Midland
cash collateral that's being presently used through this lockbox, scramble the egg and consolidate it. And any event --
any of these events happen down the road, not be able to unscramble the egg very quickly; is that true? A. Very quickly? I am not sure what the definition of very
quickly is again. Q. I would like to know where my cash is tomorrow, says Would I be able to know what it is? No. Okay. I pass the witness, Your Honor. Any redirect?
Midland. A.
Tomorrow?
MR. PARKINS: THE COURT: MR. DONOVAN:
All right.
Just briefly, Your Honor.
REDIRECT EXAMINATION BY MR. DONOVAN: Q. Mr. Craven, during this lockbox period, when you had to
fund an expense and Midland hadn't paid it yet, whose fund could you use? A. We used funds from our consolidated cash position.
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Page 96 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. And at that point, those funds weren't encumbered;
correct? A. Q. That's correct. Okay. And now that you're in Chapter 11, is it your
understanding that if -- you can't use those funds unless you get the Court's approval; is that right? A. Q. That's correct. Okay. And you've also spent time with the company. I
know you were asked a lot of questions about intercompany borrowing. Let me ask you, does Innkeepers believe they are
going to need to do intercompany borrowing at least over the next thirteen weeks? A. Q. We do not. And then you were asked questions, whether I think it was
today or tomorrow, you could identify all of the allocations, do you have confidence within two weeks you could do most of the allocations and within the forty-five days you could do all of the allocations for all expenses that you pay? A. Q. Definitely; yes. Thank you. MR. DONOVAN: THE COURT: Thank you, Your Honor. All right. The witness is excused.
THE WITNESS: Thank you. THE COURT: Thank you. What's next?
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Page 97 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. PARKINS: point? Your Honor, are they going to rest at this
Then I would like to call a witness. That's what I am asking them. Are you resting? I think they're talking about it. Thank you, Your Honor. Your Honor, Mr. Sathy but it does sound like So I just
THE COURT: MR. PARKINS: THE COURT: MR. PARKINS: MR. DONOVAN:
there is no evidence from Midland in the record. want to be clear on that. THE COURT: we're doing. All right.
So let's just be clear as to what
Is Mr. Craven's testimony been offered both in
support of cash management and cash collateral? MR. DONOVAN: THE COURT: other testimony? MR. DONOVAN: THE COURT: MR. PARKINS: Not at this time, Your Honor. Okay. Your Honor, we submitted the declaration of So I would like That's correct, Your Honor. Okay. And the debtors are not offering any
Mr. Greenspan in support of our objection. to -THE COURT: MR. PARKINS: THE COURT: MR. PARKINS: Is Mr. Greenspan here? Yes. Greenspan or Greenberg? Greenspan.
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Page 98 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: Greenspan, you're right. Does the debtor wish
to cross-examine Mr. Greenspan? MR. DONOVAN: THE COURT: Yes, Your Honor. All right. So let's look at the clock and I'm fine All right. So
just make sure that we're all comfortable. continuing.
Is everybody fine with continuing?
shall we call Mr. Greenspan? MR. PARKINS: Yes, Your Honor. I guess he'll go for
cross-examination based on the declaration. THE COURT: Right. We'll take the declaration as a
proffer and his direct testimony. MR. PARKINS: THE COURT: MR. PARKINS: THE COURT: MR. WANG: Yes. And I do proffer his declaration.
Very well. Mr. Greenspan? Sir? Your Honor, at one point before we begin if I
might interrupt you. THE COURT: MR. WANG: THE COURT: MR. WANG: Please step up so we can get you recorded. Thank you, Your Honor. Yes. Philip Wang from Duane Morris. We represent
LNR Partners on two trusts and there are five loans in the two trusts. Let's see, in the chart that was provided by debtor -They're on the fixed rate; correct? I -- no, that's not correct.
THE COURT: MR. WANG:
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Page 99 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: MR. WANG: are Rig, RAMV -THE COURT: MR. WANG: chart -THE COURT: MR. WANG: THE COURT: MR. WANG: THE COURT: MR. WANG: San Antonio. MR. DONOVAN: MR. WANG: Okay. Okay. I am with you. Hold on. I'm not following you. No? Okay.
The five loans where LNR is a special servicer
In the green boxes on -- this is the color
-- provided by debtors' counsel. Got it. So it's Garden Grove, California.
Garden Grove, California. San Diego. San Diego. Washington, D.C., Tysons Corner and
Your Honor, LNR has the same concerns about
cash segregation that Midland has but to save time, we have not also asked the same questions that Midland has asked but we are joining in the objections both to cash management, as well as cash collateral. And I thought it would be best for the Court
to know that before we proceed any further. THE COURT: Greenspan? (Witness sworn) CROSS-EXAMINATION BY MR. DONOVAN: Thank you. All right. Shall we have Mr.
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Page 100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. Q. A. Q. Good morning, sir. Good morning or afternoon. Yes, afternoon; right. We're still in the morning.
Mr. Greenspan, you are a lawyer; correct? I went to law school and I practiced until 1983. So,
twenty-seven years ago I stopped practicing and I am currently an inactive member of the bar. Q. A. Q. A. Q. A. Q. And you're also by training an economist; correct? Correct. Okay. You're not by training an accountant; correct?
That is correct. Okay. And FTI was engaged on May 1, 2010; correct?
Correct. And before that period, you were not involved at least
with respect directly within Innkeepers; correct? A. Q. A. The only -- I'm sorry. With Innkeepers' personnel. We had had some discussions with Midland and we were
providing some advice but the engagement letter was signed on May 10. Q. And I think pursuant to your declaration, it was May 1,
you said you were engaged to work on this matter. A. That is correct.
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Page 101 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. And in your declaration, you talk about And you would agree with me the debtor provides
projections.
the lenders hotel by hotel projections on an accrual basis. A. Q. That's correct. Okay. And they don't currently provide projections on a
cash basis hotel by hotel; correct? A. Well if you're talking about annually, that's correct but
as it's been show, what they do is they show the projected spend twice a week. Those are cash projections. So twice a We review So
week we do, in fact, get anticipated expenditures.
those and for the last two months have been funding those. those, in fact, are cash projections. short-term cash projections. Q. Okay, real time, short-term, you said expected You're aware that Innkeepers has had to fund, They're real time,
projections.
prepay some of the expenses before your client, Midland funded those expenses; correct? A. Actually, Mr. Beilinson said that to me for the very first I frankly am not aware of any of those
time two days ago. circumstances.
It has never been said to me previously and as
I said, we've gone back and looked. I am not aware of any of those. As a matter of fact, things like payroll where there
isn't an exact number, we fund and then afterwards because the exact payroll's only determined when the outside payroll provider actually goes through the time sheets, that's
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Page 102 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 literally done on the eve of them actually wiring the funds out to the employees. We fund the anticipated amount a day or two
before and then the next day, after they actually fund the actual amount, we sit down with Innkeepers and do a reconciliation. There's always a slight difference.
So to the extent if you're saying that there was -- if we funded 500,000 because that was the estimate and the actual number became 505, then technically, I think you're right. That could easily be accommodated by perhaps something like payroll. Just build in a fudge factor; fund 505 -- fund a 105 We were never made
percent and one could always solve that.
aware in advance that we would ever be using anybody else's money and I told Mr. Beilinson when he first apprised me of that two days ago, that for the record, we never asked for it and we never want it in the future. Q. And with payroll, I think I heard you say, you would agree
neither Innkeepers nor yourselves knows in advance exactly which hotel the payroll is going towards before its funded; correct? A. No, that's exactly incorrect. Payroll. And as Mr. Craven
acknowledged in his direct testimony, payroll's the largest expense. Payroll is, in fact, tracked hotel by hotel and so
there is an absolute understanding of what the expectation is. What we don't know, because you can't tell and again what we're doing is operating in real time, we don't know whether an
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Page 103 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 employee's going to put a time card in for 7.4 hours or 7.5. It's always been very, very close within our pool but we don't need to know -- and again, because we're doing a pool basis, we don't need to know hotel by hotel. But it's always been very And if
close and we've always made the reconciliation.
somebody wanted to build in a fudge factor to insure that there was integrity in the system and never was borrowing from anybody else, I am quite confident Midland would be agreeable to that. Q. And with respect in your declaration, you refer to the
Moelis operating model; correct? A. Q. A. Q. A. Yes. And that model projections on an accrual basis; correct? That's correct. Not on a cash basis; correct? And one knows you simply convert from accrual to cash by And that is what I indicated
making the non-cash adjustments. in my declaration. Q. A. Q. A.
And has FTI done that since they have had the model? In certain respects; yes. So you were able to do it on your own. Well for those things that we know that are accrued, for Property
example, it was given the example as property taxes. taxes in California are paid twice a year. the model monthly.
They're shown in
We can make that adjustment.
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Page 104 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. You also mentioned in your declaration about the PIPs.
You're aware of the PIPs; correct? A. Q. Yes. And the funding that the DIP will have of the PIPs of
fifty million dollars; correct? A. Q. That's the fixed pool DIP. Correct. Not just fixed pool, there's two other hotels in
there too; correct? A. Q. That is correct. Okay. And with that, you mentioned there's a distinct Are you aware that
possibility that may not be sufficient.
Innkeepers and Marriott met to discuss the PIPs that would have to be completed? A. Well I know there's been on -- I mean they have been in So
default on their obligation to do it for a long time. there's been a lot of ongoing discussions. I, in fact,
participated in a joint meeting with Innkeepers and Marriott. Q. And you're aware that Innkeepers and Marriott have set up
schedules saying what PIPs are going to be completed and when; correct? A. Q. A schedule; yes. And that schedule has the scope of the work that's going
to get completed; correct?
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Page 105 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A. There is a scope. The schedule I have seen doesn't
include that scope attached to it but I have seen the schedule and I know there is a scope. Q. And there's also a schedule that provides the estimated
pricing for that as well; correct? A. That is an Innkeeper estimated price. That was provided
to Marriott.
We have spoken to Marriott or we've received word
back from Marriott that they will not endorse that amount expressly. We also know that -- because I have been working
with Five Mile, because we're allowing them to prime our loans, I have been work with Five Mile to understand the loan and we've also been working with Innkeepers to try to quantify it. My understanding is Innkeepers' head of construction has already identified approximately two millions of additional expenditure that's going to be necessary in order to complete the PIP. In addition, Innkeepers is going to spend another three weeks, as I understand it, going through that budget now that they have brought on somebody from Hilton to do that and they've further reserved the right to change the budget. I don't know about you but I have never seen a construction budget for renovations that go down. further increases to that. In addition, there's other things like the installation of the life safety system which acknowledged by Innkeepers is only We're anticipating
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Page 106 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 an allowance. That allowance essentially accounts for a The wireless system has not been approved by If that's not
wireless system. Marriott.
It hasn't passed the field test yet.
approved, the estimate is the PIP budget is going to go up by another three million. So there's still many, many holes in that. estimate. It is but an
I don't know how much it's going to be exceeded by.
As I have said, they've already identified several months. It's likely to be exceeded by more than that. Q. Okay. So I take it from that, you have -- you're aware
that Marriott sat down with Innkeepers and went through this schedule before Marriott signed the agreement; correct? A. Q. Correct. Okay. And Marriott signed -- you're aware of the adequate
assurance agreement that Marriott signed; correct? A. Yes, Marriott really would like to see that fifty million
dollars go into the properties as would we. Q. And I didn't quite hear your answer. You are aware that
Marriott did sign the adequate assurance after reviewing the fifty million dollar PIP proposal; correct? A. Well when you say adequate assurance, there's nothing in
that document that I am aware of that says Marriott thinks the schedule can be actually performed for that fifty million dollars. I have never seen that assurance. As a matter of
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Page 107 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 fact, as I told you, Marriott has specifically disclaimed making that assurance. THE COURT: MR. DONOVAN: THE COURT: Can I interrupt you? Absolutely, Your Honor. Because I am just trying to bring this back
down to what I think I am supposed to focus on today -MR. DONOVAN: THE COURT: Yes, Your Honor. -- which is not ultimately what the final PIP
is going to be or what's finally going to be done with respect to any property. Isn't the bottom line for the purposes of
today's hearing that certainly within the next thirty days, and then as the projects continue to roll along, we're going to know on a property by property level what contractor is doing what and how much it costs. documentation; is there not? MR. DONOVAN: THE COURT: THE WITNESS: THE COURT: Correct. I am just having a hard time following -Your Honor? -- the relevance of this discussion. I don't There's going to be that
want to hijack your cross-examination either. MR. DONOVAN: THE COURT: No, that's fair enough, Your Honor. But I am just trying to -- we've seemed to So --
have gotten a little far afield. THE WITNESS:
Your Honor, if you would like, what I can
probably do is explain why it is interrelated and then also
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Page 108 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 explain to you why there isn't that much assurance. A lot of
the properties that we have are what are known as the "Gen-1" (sic) properties. THE COURT: THE WITNESS: are used now. Yes. These are old properties. They are not what
One of the major things that has to be done is
the installation -- reinstallation of the external stairwells. THE COURT: THE WITNESS: Yes. They're presently wood. They've got to go
in and basically tear the siding off of these buildings. THE COURT: THE WITNESS: rotted. Okay. The stairwells themselves are largely
There's very significant weather deterioration.
There's a significant concern what's inside these walls and what's going to happen when you finally open these up. All
contracts are going to be written right now, as best we know, all estimates been doing without opening up the walls of these hotels. So the answer is you're probably going to have contracts that are going to be subject to site conditions. going to know exactly what it's going to cost. So we're not There's going
to be significant uncertainties as any renovation project of a thirty, forty, fifty-year-old property but then secondly, the reason why this is all interrelated and why we're talking about and why it's in my declaration is the precipitating factor for
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Page 109 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 out. this bankruptcy is that the Marriott default expired yesterday. And that's of crucial importance to everybody. the maintenance of the value of our collateral. The way it's been staged is there's groups of properties and they have to complete the PIPs in the first group, then the second group, then the third group. That first group of As a It's vital to
Marriott properties are not all in the fixed rate pool. matter of fact, there's one that's in the Lehman pool.
The Lehman -- if Lehman, and you haven't seen the -- you probably haven't read the detail to the PSA. THE COURT: THE WITNESS: I have. Okay. Well the PSA provides that Lehman
essentially has a forty-five day out. THE COURT: THE WITNESS: Uh-huh. Our concern is that Lehman exercises that
That Lehman no longer has a DIP loan in there, cannot be And suddenly, all of our properties, both
used for that.
within that first group and all of the subsequent groups, are subject to default under the Marriott agreement because the Marriott agreement specifically says if they default on performing the PIPs in the first group, then the entire balance, the remaining -- all the remaining properties in the second and the third group are considered defaulted and Marriott can terminate their contract.
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Page 110 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 So we have a vital interest in (a) seeing that it gets done but secondly, of maintaining the integrity of our cash collateral because if it does fall apart because of Lehman's action and Lehman's unilateral actions, we need to basically be able to know how much cash is there. We need to be able to
move very quickly to cure a default under the PIPs to be sure the work is being done. accounting at that time. And essentially to have a full And it's a system that's been in
place and all we're asking for is given the uncertainty and given the unilateral potential actions, that we don't control and affect our PIPs and perfect our -- affect our franchise agreements that we're trying to keep that intact. THE COURT: THE WITNESS: THE COURT: BY MR. DONOVAN: Q. And I think to clarify, in the first forty-five days, All right. And that's -I understand. Thanks.
there's not going to be a DIP in place; correct? A. Q. That is probably correct. Okay. So let's move on. Do you have Exhibit D to your
affidavit? A. Q. A. Thank you. Do you have that open, sir? Yes, I do.
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Page 111 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. Okay. And this is a report -- do you see at the upper
left it says bank account? A. Q. A. Yes. Okay. What bank account is that?
I believe that is an Island Bank account but I can't tell
you for sure. Q. And, in fact, that's the Innkeepers consolidated cash
account; correct? A. Just, sir, without going to look at my chart of accounts,
I can't tell you that for sure. Q. You just don't know whether or not these payments were
actually made out of Innkeepers cash consolidated account; correct? A. I can't tell you that sitting here. MR. DONOVAN: THE COURT: MR. PARKINS: THE COURT: Thank you, Your Honor. All right. Yes. Okay. Any redirect?
REDIRECT EXAMINATION BY MR. PARKINS: Q. Mr. Greenspan, do you believe that Midland is at risk with
respect to the integrity of its cash collateral in the event of a DIP -- PIP DIP default? MR. DONOVAN: beyond the scope. Objection, Your Honor. I think that's
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Page 112 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Q. A. Q. A. MR. PARKINS: THE COURT: Do you? Yes. And what is that risk? Well that risk is principally on -- well it's twofold. As I don't think so. I think he testified --
I think he can answer that.
one, one has to recognize that in the structure other than Lehman which apparently is not asking for its cash to be segregated, the only multi-property pool is Midland's. Everybody else is just a single property in their pool or what's been described as a tranche. So consequently, when you
ask is Midland's cash collateral at risk, the risk is that it's the single properties that are going to go negative, not the big pools because the big pools they have what we call portfolio effect. So Midland is very unlikely to be borrowing
ever from anybody else but if there's ever a blip, any bad projection on any one of those individual properties, they're going to be borrowing from Midland and Midland being sixty some-odd percent is going to be the lender. So that's what puts the potential cash collateral at risk is that it's all going to be lending by Midland, almost impossibility that it's ever borrowing. Then you have the
situation where Midland is by the debtors' estimate under secured. The debtors' already in their plan agreement -The plan support agreement requires Midland
support agreement.
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Page 113 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to be paid no more than 550 million dollars on its 825 million dollar claim. And that's a condition of it.
Consequently, any loss at all on the cash collateral is coming out of Midland. There's no equity buffer there. So
it's coming out of Midland.
If there's a default under the
PIP, we know for example if there's a default on that group one and the -- there is -- therefore cannot perform the PIP as scheduled, there will be very, very substantial degradation in value. And the debtors put that -- Mr. Craven put it in his The magnitude of the degradation, it would be
declaration.
catastrophic, quite frankly, to value to lose the Marriott flag as well as a number of the others. And keeping it as
conditioned upon being able to do the PIP DIP. MR. PARKINS: Thank you. Your Honor, I would like to move
for admission of Mr. Greenspan's declaration and his exhibits. I have no further questions. THE COURT: MR. DONOVAN: objection. THE COURT: All right. They're admitted. Is there any All right. No. I see no objections.
I thought that already had; no
other testimony that anyone wishes to put on? (Mr. Greenspan's declaration was hereby received in evidence as Midland's Exhibit, as of this date.) THE WITNESS: Am I dismissed, Your Honor?
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Page 114 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: You are excused. Thank you, sir. Okay.
Shall we hear argument? MR. SATHY: Thank you, Your Honor. Anup Sathy again on
behalf of the debtors. Your Honor, there are a couple of points that I think need to be clarified. no DIP period. THE COURT: MR. SATHY: First, in the forty-five days there will be So the -That's absolutely true. Right. So the theory here about there being
degradation because of a DIP in the first forty-five days is entirely premature. Okay. Second, the company's own projections show that there will be no intercompany borrowings during this period. And It has nothing to do with today's hearing.
frankly, if you ask them they will say for the foreseeable future, that there will be no intercompany borrowings. concept of the intercompany borrowing was as additional adequate protection. THE COURT: That's the whole concept of it. The
When you say that the company's own
projections show no intercompany borrowings in this period, what does the "this" refer to? MR. SATHY: Certainly the interim period and likely for
the foreseeable several months because this is the period of the year when the hotels actually perform their best. So there
will be excess cash flow that is generated from the hotels at
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Page 115 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 day. MR. SATHY: I understand. But the point is that if this point. But again, for the first forty-five days which is
all we're asking for, this time for us to get the house in order and get a little bit of breathing room, there's no expectation of that. And I would suggest that we would take that provision out of the order but it's actually protection in the sense that if there happens to be, then it's not that we're asking one tranche to lend to another permanently. repaid. They would have to get And as
There will be the governor of the two million.
we would propose, there would actually be a lien such that no one tranche is actually lending permanently to the other. And that's -- but again, for purposes of the first fortyfive days, we don't even think that provision needs to be there but we think it's there for the lender's benefit. Okay.
Point three; I heard today actually a fair point which is what if Lehman actually terminates cash collateral? That's a
point that if it had been raised we would have discussed it. And I think it's actually a fair point to suggest that if Lehman terminates cash collateral that Midland can terminate cash collateral. And we would agree with that point. If
somehow one would -THE COURT: Somehow I don't think that's going to make his
somehow Lehman terminates, that they have to fund for some
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Page 116 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 period of time, I think we would all say to ourselves, if Lehman's terminating cash collateral something material happened and we should all come back to Your Honor to discuss it. THE COURT: Okay. All right. But that's not a today
issue for the interim order in any event. MR. SATHY: But it could be added to the interim order as
an additional -- because the argument is that if one tranche terminates, that they don't have an actual right to terminate. So what we would do is we would effectively cross those two. It's the two largest. defaults in our order. I mean there are seventeen independent One of them is that -- if there was a
MAC (sic) and any individual lender can call a default, our expectation is that that -- if Lehman terminated, likely would result in some kind of MAC and as it would give Midland. if we wanted to make that point crystal clear, happy to do that, Your Honor. THE COURT: I don't know if you're going to get to it but But
in the order at page 28, it is Section 6 -- oh, you set forth a waterfall. I follow it from the second paragraph on. I simply
can't parse the words on the first paragraph.
So I don't know
if you were going to otherwise address it but if you could explain that to me -MR. SATHY: I would be happy to do it, Your Honor. I mean
this is the -- the first paragraph in this waterfall is
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Page 117 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 effectively it's a reserve. It's in essence funding a reserve
for things that might not necessarily be projected like a roof collapse or some event at a hotel that it creates a reserve. And it's built up and it will not exceed this two million dollars. So it will be funded for particular expenses that So,
might not necessarily be in the operating budget.
section -- so number two would be the property level expenses. THE COURT: MR. SATHY: All right. That's just the regular expenses. The first
is almost like a reserve -THE COURT: MR. SATHY: THE COURT: there. Okay. -- for extraordinary circumstances. So that money will come in. It's going to sit
It's not going to basically renew every once -That's right. It's just going to get funded, sit there and
MR. SATHY: THE COURT:
then you'll do the rest of the waterfall. MR. SATHY: That's exactly right. And this waterfall is
intended to be additional adequate protection to suggest here's how the company is going to spend money. THE COURT: MR. SATHY: Okay. And ultimately as -- if Your Honor is there, I
mean the net result of all of this is that the lenders will receive all of the excess cash. So we in some ways have
flipped, I wouldn't say the waterfall but lender debt service
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Page 118 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 which would typically be first and will wind up being at the bottom of the waterfall which gives additional cushion for purposes of funding operating expenses. left will then be paid to the lenders. So our proposal is that operating expenses be paid. there be a reconciliation. To the extent that there's a That And then whatever is
borrowing, that this -- these protections and these governors would click in to prevent there from being some disproportionate event and that the lenders would then get all of the excess cash, in addition to all of the reporting that we've proposed, the thirteen week, the variance report, the flash report, complete reconciliation, the audit rights. FTI
has spent numerous days and weeks at the company and I don't think it's just because they're in Florida, particularly in the summer. But they are welcome there. The company is prepared
to have them there on site.
And ultimately that is part of the
additional adequate protection that we're proposing in addition to the cash covenant that we had discussed in terms of the waterfall. In terms of adequate protection -- it's adequate protection, that's the statute. It's not absolute protection.
They are not entitled to get by matter of law the remedies that they had in their prepetition default. If Congress wanted them
to have the remedies, then they would have the remedies. They're entitled to adequate protection.
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Page 119 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 So it's in essence trying to balance the needs of the debtor with the protections that the lender wants and that we think that this -- for the short term, has given that fair balance between what the debtors need versus what Midland wants. And in terms of the issue of does it -- can it -- does it work, did it work prefiling? I mean ultimately what happened
is that invoices still got paid and in essence, other lenders who were not in a cash trap whose money just flowed into the master account were funding Midland's expenses until Midland reimbursed through this reimbursement mechanism. And so the
irony is actually that the mechanism benefits Midland as opposed to the other lenders if it continues because all of the other lenders presumably have in the prepetition period, did not have the lockbox. And so I think it's important to note
that for purposes of the adequate protection that we are prepared to offer on an interim basis. Your Honor, the flash reports, that was a discussion that we had with Midland. The issue of how quickly they get
visibility on sort of a formal basis, they expressed that to us at -- in the very beginning. The cash collateral order has
been in -- we've been discussing it with them for a couple of weeks. They expressed that as besides the fact that they So we spent
wanted segregated cash, the reporting was the key.
a lot of time trying to establish reporting and we think the
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Page 120 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 flash report is important. Because it will also give a sense
of the company's performance on a relatively real time basis. And that will cascade into all of these issues; is there intercompany -- is there something going on, is someone funding? I mean, some of these are all -- these are all They're important but they are theoretical
theoretical risks.
and ultimately we think the reporting and the flash reporting and the onsite is what gives them as much visibility as is reasonable. And frankly, Your Honor, the fact that we're here under your supervision I think is also an important consideration that is protection. They have a right to come here. There's a
mechanism if they believe something is going wrong and can immediately seek relief to the extent that they believe that this mechanism isn't working. We believe this works. balance. THE COURT: So just to put a fine point on it, if they see We believe it strikes the right
something in a flash report which say would be two weeks out; it's not the day after but it's two weeks out -MR. SATHY: THE COURT: Right. -- you agree that they would have the ability
to come here and ask for some form of relief. MR. SATHY: Absolutely. Absolutely. Your Honor, I am There is
asked by my client to confirm one part of the budget.
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Page 121 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 an actual budget, a thirteen week cash flow budget that's attached. That they include in particular payment of the
company's post-petition franchise fees, as well as the fees of Marriott, assuming -- they have a provision in their adequate assurance agreement which provides for the company's reimbursement of a PIP consultant at 20,000 dollars a month and that is included in our forecast. It's not a line item for
certainly an item that small but it is included in it. And I don't want to spend too much time on the PIP agreement but we were extraordinarily careful in crafting the remedies provisions of that agreement. And we spent long
nights and long weekends debating the balance between the remedies that Marriott wanted versus protecting the estate. And so to the extent -- and where that balance fell is -- to the extent that there is a PIP that doesn't get done on an individual hotel, that Marriott has the right to come to court and seek relief from the stay to terminate the franchise. doesn't happen automatically. They come here. It
We waive our rights as the debtor but Midland and others can come in and the committee and suggest to you that that PIP is being performed or that its -- they have cure rights. of those issues are going to come here. All
Marriott will not just
be able to wake up one morning and terminate a franchise agreement subject to a PIP.
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Page 122 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 And so it is important. We understand that. And we all
agree that the franchise is a critical part of this business. That completing these PIPs are important. The fact that we
could agree with Midland on a PIP DIP where it sounds like they will be consenting, I think is actually a good sign because that is an important part of the business that we can all agree needs to get fixed. They did introduce us to five mile. length with them. We negotiated arms'
We believe that having a certificate holder There were other DIP
be our DIP lender is -- aligns interests. lenders that we were considering. best answer for the overall estate. we have agreement. otherwise.
But we thought that was the So there are places where
And so I wouldn't want to suggest
But for purposes of the adequate protection, Your Honor, we believe we've set up the right balance here for the interim period and we would ask that Your Honor overrule the objections and enter that order. And if you want -- if there are
provisions or there are -- I know it's a long order, the first twenty-five pages of it are statements of fact but if there are provisions that you would like me to discuss, that there are a couple of I think changes that folks have asked us to make, we can go through changes; however Your Honor would proceed. THE COURT: The order that I've got in the binder reflects
-- again, reflects the comments of the US Trustee.
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Page 123 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. MATSUMOTO: THE COURT: Mr. Penn? MR. PARKINS: Very briefly, Your Honor. One thing before Yes, that's correct, Your Honor. Anything more from Mr. Parkins or
All right.
I forget, I would like something added to the cash collateral order with respect to the forecast, the thirteen-week forecast. I know I will forget this if I don't do it first off. I wrote
it here; is that we would like the right of FTI to get the forecast, to have a few days to look at it before it becomes implemented in case there's an issue to talk through. THE COURT: MR. PARKINS: I think that's a yes. I hope it will be. We don't want the
forecast to become final until we have a chance to look at it and talk through it with the company and come to you if there's an issue. THE COURT: MR. PARKINS: THE COURT: MR. PARKINS: THE COURT: MR. PARKINS: That's a yes. Thank you. All right. We'll work the language out in the order. Very well. I think the one thing that since we're sort
of consolidating the issues now is that I really want to talk about is the fact that there's a lot of things coming down the road here of major import and what I think I look at here is if you scramble the eggs with consolidated cash management and you
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Page 124 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 scramble a lot of eggs, you heard from the CFO how difficult it is to sort of undo it. already in place. It's already in place. The system is
If you undo it and go down the road and we
need to do something else because of the Lehman situation, because of the DIP situation, et cetera, it's going to be difficult to pull back and say we're going to do a different cash management system or something materially different. I would suggest an interim basis, Your Honor, and this is an interim order and Your Honor suggested it, we keep the status quo. There's nothing wrong with the status quo now,
until we find out how all of these various pieces play together. There's no risk to the company. It can go forward. It's in place. And we'll see how We
know how it operates.
the Lehman deal, how the cash -- how the DIP deal falls in place, how the Marriott deal falls in place, all in the next few weeks. none. So I would suggest we do that on an interim basis because changing it and scrambling the eggs makes it much more difficult to unscramble and to leave the status quo in place. Finally, Your Honor, we have, depending on how you rule with respect to segregation of cash and cash management protocol, we suggest postpetition or not, we have suggested other language in our Exhibit D to our objection of the cash collateral order which we think ought to be considered but for And there will be no harm to the debtor whatsoever;
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Page 125 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the most part, much of what we have suggested in discussions prior to the hearing has been adopted by the debtor. But
there's other issues which are driven by the outcome of whether we go a separate cash management protocol or not, we would like considered by the Court. But I do suggest, Your Honor, that for the purposes of an interim order, and this is just an interim order, that we keep the status quo as it is until we see how all of these pieces come together because it is very uncertain. And one final point, the issue with respect to Lehman, while it was raised just today, we just got the document yesterday and we didn't see how the Lehman transaction was going to play out until yesterday. THE COURT: MR. PARKINS: The PSA you mean? Yes, and we didn't see how the PSA worked.
We didn't see the triggers, the right of Lehman under the document to pull the use of cash collateral based on certain triggers until yesterday. So we never saw that. We heard
there was one in place but we never saw the document to read it and study it. THE COURT: MR. WANG: Thank you. All right. Anyone else wish to be heard? Philip Wang from Duane I just wanted to
Yes, Your Honor.
Morris, again on behalf of LNR Partners. point out a few things, Your Honor.
The LNR, while not in a
exact same position as Midland is in a very similar position.
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Page 126 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 There are two of the properties that are securing loans, specially serviced by LNR which are part of the -- this is the fixed rate DIP PIP. While they are stand alone loans, stand
alone properties and were not part of the 825 million dollar pool, we do have similar interests in the objecting to the fixed rate DIP PIP which of course is not on for hearing today. And just one last thing, Your Honor, while the very respectable lawyers on both sides of the aisle have had a chance to spend a lot of time on this case, obviously LNR and Duane Morris has not. And so I want to make sure that Duane
Morris is preserving LNR's right to withdraw or amend or raise additional objections prior to the final order on cash collateral and cash management. Of course that's between now Thank
and I think this will be the second omnibus hearing. you, Judge. THE COURT: All right.
It's twenty minutes to two.
Why
don't we come back at 2:20 to 2:30 would be the window that I will be ready to give you a ruling. So if that's not a problem
with your staying around in that time, I will see you then. Thank you. (Recess from 1:39 p.m. to 2:30 p.m.) THE COURT: Good afternoon. Please be seated. In the
interest of moving this forward and not keeping you here all day, I am going to give you my ruling. It may not be as
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Page 127 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 elaborate as it might have been if we had the luxury of more time but we don't. Before the Court today are two first day motions of the debtors; one for the entry of an interim order (a) authorizing the debtors to use the adequate protection parties cash collateral and provide adequate protection to the adequate protection parties pursuant to 11 USC Sections 361, 362 and 363 and (b) scheduling a final hearing. And the other motion is for the entry of an order authorizing the continued use of the debtors existing cash management system, existing bank accounts, existing business forms and seeking approval of certain existing investment guidelines which the debtors have agreed to treat as an interim request for relief at this time. Support of the cash collateral motion proposed by the debtors, the debtors submitted the testimony of Dennis Craven, the chief financial officer of Innkeepers USA Trust. An
objection to the cash collateral motion was filed by Midland Loan Services, Inc., special services for the fixed rate trustee asserting that Midland's cash collateral should not be comingled and that segregation of Midland's cash collateral currently in place should not be abandoned. Rather, Midland requests that its cash collateral should continue to be segregated pursuant to a revised cash collateral protocol similar to the one in place prepetition and that there
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Page 128 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 should be "real time" ability to monitor cash collateral use to make certain that Midland's cash collateral is used for the benefit of Midland's property level collateral only. In support of its objection, Midland submitted the declaration of Ronald F. Greenspan, senior managing director with FTI Consulting and also presented Mr. Greenspan for crossexamination. An informal objection was also stated on the
record of today's hearing by LNR Partners who is a special services under several other of the debtors' secured loans. I find that both the debtors' proposed cash management protocol and the debtors' request for the use of cash collateral should be approved on an interim basis. The debtors
have shown that their cash collateral protocol which provides for reporting to the debtors' lenders comprised of first, a rolling thirteen week consolidated cash forecast; second, flash reports of cash disbursements twice monthly and finally, a formal final cash report on a tranche by tranche basis, fortyfive days after month end is necessary and appropriate in order to permit the debtors to continue to fund their business operations. The proposed protocol also constitutes sufficient adequate protection under the circumstances. I find persuasive the
testimony of Mr. Craven that instituting tranche by tranche accounts in order to separately pay invoices on a property by property basis would be extremely burdensome to the debtors,
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Page 129 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 regardless of the fact that Midland has offered to pay to facilitate this separation. In addition, the debtors have represented on the record of today's hearing that if upon receipt of a flash report Midland has a concern that cannot be resolved between the parties, Midland has the right to come to this court and seek immediate relief. I believe that approving these two requests on an interim basis will give the parties time to work out any needed adjustments to give Midland further comfort. During the
interim period, however, I am not inclined to create additional impediments to the debtors' ability to maintain the value of their properties. No party has put forth any evidence that
there is a risk during the interim period that Midland's cash collateral will be lent to another debtor. In fact, the debtors submitted evidence that the company's own projections show that there will be no intercompany borrowings in the interim period and "likely for the foreseeable several months." Moreover, there will be no
degradation because of a DIP facility in the first forty-five days because no DIP facility will be in place during that period of time. Midland focused pointedly in its argument and in its cross-examination of Mr. Craven on the risk of the eggs being scrambled and the inability to unscramble the eggs. However,
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Page 130 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 there was ample testimony by Mr. Craven and indeed some by Mr. Greenspan that the debtors, in fact, have a great deal of ability to track the flow of funds to and from each of the debtors. Payroll expenses were cited as a large component of
the debtors' payables and indeed dwarf all other expenses except perhaps taxes in certain months. Accordingly, I am unconvinced that Midland's cash will be deployed into a black hole. That, combined with the testimony
that it is extremely unlikely that Midland will be a lender to another debtor during the hotel's high season further supports granting the relief requested. Finally, as the debtor notes in its motion, this is not the first step on a path to substantive consolidation. And all
parties rights are reserved with respect to the final hearing, the DIP hearings, the approval of the PSA and other aspects of the debtors' proposed restructuring. In the amount of time that we took a break, I did look at the order that's been submitted by Midland but I did not take the time to parse through which aspects of the order relate to my having granted this relief versus the protocol that Midland proposed. So I am going to look to the parties to take a run
at coming up with an order that based on my ruling incorporates as many of Midland's concerns as possible. anywhere. I will be here. I am not going
So if you want to use a conference
room to try to work that out, we're happy to accommodate you.
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Page 131 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 well. Or if you would like to go back to your offices to work on that, we'll do whatever it is that makes your lives easiest. Questions? MR. SATHY: Thank you, Your Honor. We'll work with
Midland right after the hearing and try to do -THE COURT: MR. SATHY: THE COURT: MR. SATHY: THE COURT: Would you like to use a conference room? I think so. Mr. Wang? I think it's always better to do it here. I am going to include you in that exercise, as
Is that what you're rising to ask? MR. WANG: Yes. Yes, Your Honor. That's one point. The
second point was asking whether LNR may also be permitted to object to the flash reports in the same manner that -THE COURT: MR. WANG: THE COURT: Yes. Thank you, Your Honor. All right. So I think that disposes of I see someone
everything that we had on for hearing today. rising to tell me something. MS. SHULMAN:
Your Honor, I am sorry, there was no spot in
the hearing where I wanted to jump up and interrupt everybody. I am Carren Shulman from Sheppard Mullin and I'm here for Marriott International. THE COURT: All right.
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Page 132 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MS. SHULMAN: And our client thought it was very important
today, as we did, to come up from Bethesda for the hearing and we do have management here. Our agreement's been described as
critical and vital to the reorganization process and, in fact, it's the basis for much of the restructuring today. I just wanted to take two minutes to explain to the Court why it's important to us and why we really want to keep this all on track. We know there's a hearing set for September 1
for the DIP and that's very important because that money has to flow in, in order for the property improvements to be completed. And very briefly, there's twenty-three out of the fortythree hotels in default and they are mostly Residence Inns. Property improvements bring hotels up to a standard. the hotels in default are Generation-1. constructed in the '80s. Most of
That means they were While
We're now at Generation-8.
they can't look exactly like the Generation-8 hotels because in many cases the staircases are outside the property, when a guest walks in, they expect to see the lounge seating, the big screen television, the cafe area and the guest rooms with granite countertops and updated appliances. expectations are very important. These hotels were due to be renovated in 2008 and 2009. General renovations are fixing the carpeting, fixing the wallpaper, making sure when you walk in it looks like a new, And guest
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Page 133 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 clean hotel. Property improvements are very different and more The reason we did that was in 2007,
of a substantial upgrade.
Innkeepers came to Marriott and said we want to extent the terms of these agreements in connection with a sale to Apollo. Marriott said okay, gave an eight and a half year on average extension under each of the franchise agreements in exchange for getting these property improvements to upgrade the hotels. So now these hotels haven't even been renovated in eight to ten years. We're talking about very old rooms and that's
important because guest satisfaction is, of course, important. When you enter a Marriott, you have no idea who owns the hotel. You only know it's a Marriott and you have certain expectations. And our franchisees frankly also have the
expectation that we're going to require all other franchisees to maintain that standard. So this is why we have entered into -- this is why we asked them to do the property improvements in the first place. They asked in '08 for an extension of time because of the economic collapse. time. We gave them an unprecedented extension of
In December, we said where's your plan for getting this
done; and in March we got a plan that said we're filing for bankruptcy and we'll get to you after the bankruptcy's completed. We then sat down with the lenders and the debtor. We
called those meetings and said let's get something done here
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Page 134 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 because if you want to keep these hotels, this is what you need to do. This agreement was born out of that and so we want to
make sure it's the -- you know, otherwise frankly these defaults would be incurable because they're -- you had to fix the hotel a year or two ago. So we want to get these done. We support managers. We support our franchisee. They have a very large The
This is unusual.
number of our hotels and we want to see this get done.
first step towards getting that done is getting the DIP in sixty days to get the funds in to do this. In addition, they
can't be in default under other provisions of the agreement, paying franchise fees, et cetera. franchise fees due on July 15. were getting paid. We had a blip. There were
We were told on the 16th they
Apparently it was stuck in transit and we
extended forbearance to Monday morning to get those paid. Somehow they didn't get paid. There was a lot of confusion.
The debtor has assured us they are going to take care of that early in this case. And again, we believe them and we support But this is it.
them and we want to get this done. THE COURT: MS. SHULMAN: All right.
So we just want to make sure, Your Honor,
that as the case goes on, I won't have to do this again and we just get back -- you know, we keep everything on track. THE COURT: MS. SHULMAN: All right. Thank you. I appreciate that. Thank you.
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Page 135 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: right. Does anyone else wish to be heard? All
Then we're going to adjourn and when you are ready with
an order or if you hit a roadblock and you can't agree on an order, just let us know and we'll help out. will help get you set up in the back. MR. PARKINS: THE COURT: My chamber staff
Thank you, folks.
Thank you, Your Honor. Thank you very much.
(Proceedings concluded at 2:42 p.m.)
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Page 136 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
I N D E X
WITNESS Mr. Craven Mr. Craven Mr. Greenspan Mr. Greenspan
EXAMINATION BY Donovan Mr. Parkins Mr. Donovan Mr. Parkins
PAGE 50/95 80 99 111
E X H I B I T S DEBTOR'S 1 DESCRIPTION Mr. Craven's diagram of how invoices are accounted for MIDLAND'S Mr. Greenspan's declaration 113 MARKED 55 EVID. 79
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Page 137 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Debtors' joint administration motion is approved Debtors' motion for SOFA extension approved Debtors' case management motion approved Debtors' motion for retention of Omni as claims agent approved Debtors' creditor matrix motion approved Debtors Wages and Employee Benefits motion approved Debtors' customer programs motion approved Debtors' lien creditors motion approved Debtors' taxes motion approved on an interim basis
RULINGS Page 28 Line 16
29
11
33
34
35
10
37
16
38
20
40
22
42
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RULINGS (CONT'D) Page Debtors' property management motion approved on an interim basis, subject to review Debtors' cash collateral and cash management orders will be approved on an interim basis 128 10 47 Line 14
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Page 139 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Date: July 21, 2010 Veritext 200 Old Country Road Suite 580 Mineola, NY 11501 I, Penina Wolicki, certify that the foregoing transcript is a true and accurate record of the proceedings. C E R T I F I C A T I O N
Penina Wolicki
Penina Wolicki
___________________________________
Digitally signed by Penina Wolicki DN: cn=Penina Wolicki, c=US Reason: I am the author of this document Date: 2010.07.21 15:02:49 -04'00'
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Page 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, et al.,

July 20, 2010 11:11 AM

B E F O R E: HON. SHELLEY C. CHAPMAN U.S. BANKRUPTCY JUDGE

VERITEXT REPORTING COMPANY www.veritext.com

VERITEXT REPORTING COMPANY www.veritext.com

VERITEXT REPORTING COMPANY www.veritext.com

PAUL BASTA, ESQ. JENNIFER L. MARINES, ESQ.

ANUP SATHY, P.C. MARC J. CARMEL, ESQ.

DANIEL T. DONOVAN, ESQ.

Page 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: ALAN W. KORNBERG, ESQ. LAUREN SHUMEJDA, ESQ.

TODD C. MEYERS, ESQ.

JERRY PADIAN, ESQ.

Page 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 BY: MARK ELMORE, ESQ.

LENARD M. PARKINS, ESQ.

JOHN D. PENN, ESQ.

PHILLIP K. WANG, ESQ.

MARGERY N. REED, ESQ.

RACHEL C. STRICKLAND, ESQ.

MICHAEL J. SAGE, ESQ.

CARREN B. SHULMAN, ESQ.

KAREN LEE TURNER, ESQ. (TELEPHONICALLY)

DAVID NEFF, ESQ. (TELEPHONICALLY)

BRIAN MASUMOTO, ESQ.

PAUL H. DEUTCH, OMNI Management Group, Claims and Noticing Agent

INNKEEPERS USA TRUST, ET AL.

He's actually been admitted in New York, but not in the

from the law firm of Eckert Seamans.

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, ET AL.

Good morning, Judge.

Perkins Coie, C-O-I-E, in Chicago.

companies, filed Chapter 11 yesterday. our comprehensive restructuring.

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, ET AL.

You have read objections, I assume, from

And we will continue to work with Midland and some of

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, ET AL.

And as a result, Your Honor,

most common names.

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, ET AL.

Dimension, who manages just one of our hotels.

They're a critical part of the operations and of

Your Honor, I believe the best way for me

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, ET AL.

And Midland is the special servicer.

we call our floating rate instrument. facility.

And there's a fixed component to it.

million dollar facility.

That's the facility that is

The other seven are single-hotel properties.

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, ET AL.

Chapter 11 as a result of a series of related factors.

VERITEXT REPORTING COMPANY www.veritext.com

INNKEEPERS USA TRUST, ET AL.

Neff hearing last week. MR. SATHY: gone uncompleted.

critical part of our reorganization.