UNITED STATES BANKRUPTCY COURT HEARING DATE: T.B.

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SOUTHERN DISTRICT OF NEW YORK HEARING TIME: T.B.A.
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In re : Case No. 10-13800 (SCC)
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INNKEEPERS USA TRUST, et al., : (Chapter 11)
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Debtors. :
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OBJECTION OF THE UNITED STATES TRUSTEE TO FIRST INTERIM

APPLICATIONS FOR COMPENSATION AND REIMBURSEMENT OF EXPENSES
TO THE HONORABLE SHELLY C. CHAPMAN, BANKRUPTCY JUDGE:

Tracy Hope Davis, the United States Trustee for Region 2

(the "United States Trustee"), files this objection to the
following interim applications for compensation and
reimbursement of expenses submitted in these cases for the
period of July 19, 2010 through November 30, 2010:

Professional Fees Expenses

Kirkland & Ellis, LLP $6,276,488.50 $407,520.25
Counsel to Debtors
Moelis & Company, LLC $709,489.83 $50,435.94
Financial Advisor and
Investment Banker to Debtors
Morrison & Foerster, LLP $1,396,631.67 $35,510.51
Counsel to Committee

Jefferies & Company, LLC $508,064.52 $23,111.04

Financial Advisors to
Committee
Fried Frank Harris Shriver & $328,465.00 $6,640.60
Jacobson, LLP
Counsel to Independent Board
Members of Committee n/a $521.14
Totals: $9,219,139.52 $523,739.48
 The United States Trustee makes the following comments and
objections to the interim awards of compensation and

reimbursement of expenses in the amounts sought for the reasons

set forth below.
Introduction

The professionals seek allowance of $9,219,139.52 in fees

and $523,739.48 in expenses for this fee period. A plan of
reorganization and disclosure statement have not yet been
filed. The outcome of these cases is unresolved. Therefore,
allowance of the full amount of fees requested on the basis of

overall case results would be premature at this point.

Accordingly, the full payment of the interim fees to the
applicants at this time pursuant to 11 U.S.C. § 331 would be
inappropriate. For these reasons, the United States Trustee
respectfully requests that the Court impose a percentage fee
reduction (colloquially known as a “hold back”), with a
reservation of rights to object to the allowance of these
interim fees based upon the results of this case.

The United States Trustee also asserts specific objections

to the amounts of fees and expenses sought by the applicants.

The specific objections are more fully described below.

Background

General Background

1. On July 19, 2010 (the “Petition Date”), Innkeepers USA

Trust (“Innkeepers”) and certain of its affiliates (collectively,

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the “Debtors”) filed voluntary petitions for relief under the

Bankruptcy Code.

2. The Debtors own and operate a portfolio of 72 hotels

located in 20 states across the United States. Declaration of

Dennis Craven, Chief Financial Officer of Innkeepers USA Trust, in

Support of First Day Pleadings (the “Craven Declaration”) at ¶ 6,

ECF No. 2.

3. Since the Petition Date, the Debtors have operated their

businesses and managed their properties as debtors in possession
pursuant to Bankruptcy Code Sections 1107 and 1108. By Order dated
July 20, 2010, the Debtors’ cases are being jointly administered.
ECF No. 51.

4. On July 28, 2010, the United States Trustee, pursuant to

Section 1102(a)(1) of the Bankruptcy Code, appointed the official
committee of unsecured creditors (the “Creditors Committee”). ECF

No. 82.

5. On August 12, 2010, the Court entered an Administrative

Order Establishing Procedures for Interim Compensation and
Reimbursement of Expenses of Professionals (the “Monthly
Compensation Order”). ECF No.189. According to the Monthly

Compensation Order, professionals in these cases may be paid 80% of

their fees and 100% of their expenses on a monthly basis. Id.

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 Plan Support Agreement

6. On the Petition Date, the Debtors filed a motion seeking

authority to assume a plan support agreement with Lehman ALI Inc.

(“Lehman”) ECF No. 15. The plan support agreement supported a plan
term sheet that provided, among other things, for Lehman to receive,

in satisfaction of its secured mortgage claims of approximately $238

million, 100% of the new shares of common stock to be issued by the

reorganized Debtors. See Bench Decision Denying Debtors' Motion to

Assume Plan Support Agreement (the “Bench Decision”) at 4, ECF No.
776.

7. In connection with the plan support agreement, Apollo

Investment Corporation (“Apollo”), the holder of 100% of the equity
in the Debtors’ ultimate parent, would receive, either directly or
indirectly, 50% of the equity in the reorganized Debtors. Id. at 6
and 8.

8. After a lengthy hearing on the plan support agreement, the

Court denied the request. Id. In denying the request, the Court
found that (1) the Debtors’ did not articulate a sufficient business
judgement for the plan support agreement, id. at 14, (2) the plan

support agreement was not a disinterested business transaction, but

rather was intended to benefit Apollo, id. at 6, (3) the plan

support agreement was not entered into with due care, id at 7 and 8,
and (4) the plan support agreement was not proposed in good faith.

Id. at 10.

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 Plan and Disclosure Statement

9. As of the date hereof, the Debtors have not filed a plan

or disclosure statement.
Operating Reports

10. The Debtors are current with the filing of monthly

operating reports and the payment of quarterly fees.
General Standards

Bankruptcy Code Section 330(a)(1) provides that:

After notice to the parties in interest and the United
States trustee and a hearing, and subject to section 326,
328, and 329, the court may award to a trustee, … an
examiner, … or a professional person employed under
section 327 or 1103 –
(A) reasonable compensation for actual, necessary
services rendered by the trustee, examiner,
professional person, … or attorney and by any
paraprofessional person employed by any such person; and
(B) reimbursement for actual, necessary expenses.
11 U.S.C. § 330(a)(1)(A) and (B).
To determine reasonableness, Section 330(a)(3) of the
Bankruptcy Code instructs that:
. . . the court shall consider the nature, the extent,
and the value of such services, taking into account all
relevant factors, including –

a. the time spent on such services;

b. the rates charged for such services;

c. whether the services were necessary to the

administration of, or beneficial at the time at which
the service was rendered toward the completion of, a
case under this title;

d. whether the services were performed within a

reasonable amount of time commensurate with the

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 complexity, importance, and nature of the problem,
issue, or task addressed;

e. with respect to a professional person, whether the

person is board certified or otherwise has
demonstrated skill and experience in the bankruptcy
field; and

f. whether the compensation is reasonable based on the

customary compensation charged by comparably skilled
practitioners in cases other than cases under this
title.
11 U.S.C. § 330(a)(3).
Each applicant bears the burden of proof for its claim
for compensation. Howard & Zukin Capital v. High River
Ltd. P’ship, No. 05 Civ. 5726 (BSJ), 2007 WL 1217268, at *2
(S.D.N.Y. Apr. 24, 2007); Zeisler & Zeisler, P.C. v.
Prudential Ins. Co. (In re JLM, Inc.), 210 B.R. 19, 24

(B.A.P. 2d Cir. 1997); In re Northwest Airlines Corp., 382

B.R. 632, 645 (Bankr. S.D.N.Y. 2008) (citations omitted);
In re Keene Corp., 205 B.R. 690, 695 (Bankr. S.D.N.Y.
1997). The failure of an applicant to sustain the burden
of proof as to the reasonableness of the compensation may
result in the denial of the request for compensation. In
re Beverly Mfg. Corp., 841 F.2d 365 (11th Cir. 1988).
Additionally, only documented expenses that are actual

and necessary are reimbursable. 11 U.S.C. § 330(a)(1)(B).

Professionals must furnish enough specificity to establish

whether a given expense was both actual and necessary. In
re Korea Chosun Daily Times, 337 B.R. 758, 769 (Bankr.

E.D.N.Y. 2005) (quoting In re S.T.N. Enters., Inc., 70 B.R.

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823, 834 (Bankr. D. Vt. 1987)); see also In re Fibermark,

Inc., 349 B.R. 385, 395 (Bankr. D. Vt. 2006) (in order to

be compensated from the estate, the professional must

demonstrate, “not just recite – that . . . the expenses

sought to be reimbursed are actual and necessary and that

no other reasonable, less expensive alternatives were

available.”). Expenses are actual if they are incurred and

not based on a formula or pro rata calculation. Id. at
400. Moreover, they are necessary if they were reasonably
needed to accomplish proper representation of the client.
Korea Chosun, 337 B.R. at 769 (quoting In re Pacific

Express, Inc., 56 B.R. 859, 865 (Bankr. E.D. Cal. 1985)).

The Court has an independent burden to review fee

applications “lest overreaching … professionals drain [the
estate] of wealth which by right should inure to the
benefit of unsecured creditors.” Keene Corp., 205 B.R. at
695 (quoting In re Busy Beaver Bldg. Ctrs., Inc., 19 F.3d
833, 844 (3d Cir. 1994)).

Further, the Bankruptcy Court has the authority to

reduce fees or expenses when they are disproportionate to
the benefit to the estate, even if it already has approved

the professional’s retention under Sections 327 and 328 of

the Bankruptcy Code. In re Taxman Clothing Co., 49 F.3d

310, 316 (7th Cir. 1995); see also, Zolfo, Cooper & Co. v.

Sunbeam-Oster Co., Inc., 50 F.3d 253, 262-63 (3d Cir. 1995)

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(affirming lower courts’ denial of improperly documented

and inadequately detailed expenses).

Interim fee awards are discretionary, and are subject to

re-examination and adjustment during the course of the

case. In re Spanjer Bros., Inc., 191 B.R. 738, 747 (Bankr.

D. Ill. 1996) (citing In re Jensen-Farley Pictures, Inc.,

47 B.R. 557 (Bankr. D. Utah 1985)).

Argument
All Applicants: Percentage Fee Reduction

The United States Trustee respectfully requests a

percent fee reduction (colloquially known as a “hold back”)
of the requested fees. A plan and disclosure statement
have not yet been filed in these cases. Consequently, the
ultimate benefit to the estates for the services rendered
by the professionals simply cannot be assessed at this
time. Because those results still are unknown, the
imposition of a percentage interim hold back is
appropriate. In re Child World, Inc., 185 B.R. 14, 18
(Bankr. S.D.N.Y. 1995) (hold backs, while not mandated by
statute, are commonly used by courts to moderate

potentially excessive interim allowances and to offer an

incentive for timely resolution of the case); see also In

re Bank of New England Corp., 134 B.R. 450, 458-59 (Bankr

D. Mass. 1991) (because of the difficulty in determining

whether services were actual and necessary when reviewing

interim applications, bankruptcy courts routinely require

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percentage reductions until the end of the case), affirmed,
142 B.R. 584 (D. Mass. 1992).

Kirkland & Ellis

Plan Support Agreement: The applicant seeks $846,418.00

of fees and $6,598.18 of expenses in connection with its

services related to the Debtors’ initial plan support

agreement. See Kirkland & Ellis Fee Application at 21, ECF
No. 826; Kirkland Monthly Fee Statements July, 2010,
August, 2010 and September, 2010, ECF Nos. 318, 571 and
632. These fees and expenses are set forth in the
applicant’s project category entitled Disclosure Statement

and Plan of Reorganization. Id. The plan support

agreement, however, was not supported by the Debtors’
primary creditor body, caused parties to object to it and
incur million of dollars of litigation expenses, and was
ultimately denied by this Court. See Bench Decision. In
fact, as noted above, in denying the plan support agreement
the Court found that (1) the Debtors’ did not articulate a
sufficient business judgement for its entry, id. at 14, (2)
it was not a disinterested business transaction, but rather

was intended to benefit Apollo, id. at 6, (3) was not

entered into with due care, id at 7 and 8, and (4) was not
proposed in good faith. Id. at 10. Therefore, the

services associated with the plan support agreement not

only failed to provide a benefit to the Debtors’ estate,

but actually caused hard in terms of unnecessary litigation

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costs. Accordingly, the services in question were not
reasonable and the United States Trustee objects to the

award of any fees and expenses to the applicant in

connection with the plan support agreement. Fibermark, 349

B.R. at 395 (in order to be compensated from a debtor’s

estate, a professional must demonstrate that the fees

sought are for services that were a benefit to the estate).
Billing: The applicant seeks fees for billing the

estate. Specifically, the applicant seeks $298,975.50 in

connection with its Retention and Fee Application project
category. See Kirkland & Ellis Fee Application at 24.

Much of this time is for the task of preparing, reviewing

and editing monthly bills. The applicant’s relevant time
records are attached hereto as Exhibit 1. The time in
question is underlined. The review and editing of time
records, as opposed to fee applications, is not
compensable. See CCT Comms., Inc., 2010 WL 3386947, *9
(Bankr. S.D.N.Y. 2010)(“the review and editing of time
records - as opposed to fee applications - is not
compensable.”); see also, In re Computer Learning Centers,

Inc., 285 B.R. 191, 219-220 (Bankr. E.D. Va. 2002)(“those

portions of the billing process common to billing both

bankruptcy and non-bankruptcy clients are not compensable
under section 330 because they are part of the

professional’s overhead.”). Accordingly, the United States

Trustee objects to ten percent (20%) of the fees sought, or

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$59,795.30, by the applicant in this project category
(because the applicant fails to list the amount charged for

the services, the United States Trustee estimated the

amount in question).

Support Staff: The applicant seeks $44,076.00 for the

services of seven (6) timekeepers entitled “Conflicts

Specialists”, “Conflicts Coordinators” and “Library
Research”. See Kirkland & Ellis Fee Application at Exhibit

D. A firm’s internal administrative staff is overhead and

not compensable by the estates. See e.g., See In re
Almacs, Inc., 178 B.R. 598, 606 (Bankr. D. R.I. 1995)

(noting that debtor’s counsel use of librarian was

“overhead” and was not proper charge against estate); In re
First Software Corp., 79 B.R. 108, 123 (Bankr. D. Mass.
1987) (disallowing part of the compensation for research
performed by a librarian). Accordingly, the United States
Trustee requests that the Court reduce any compensation
awarded to applicant by $44,076.00 for services rendered by
these individuals.
Office Supplies: The applicant seeks to be reimbursed

for office supplies, including binders, tabs, indexes and

dividers, in the amount of $294.50. A copy of the relevant

portion of the applicant’s fee application seeking these
expenses is annexed hereto as Exhibit 2. These expenses

are a part of the applicant’s overhead and not compensable

11
by the estates.1 The law is clear that overhead expenses
are not compensable by the estate. See Fibermark, 349 B.R.

at 400 (Overhead expense reimbursement will be "denied . .

. categorically.").
Moelis & Company2

Plan Support Agreement: The applicant seeks $259,489.83

of fees for the period of July 19, 2010 (the Petition Date)
through August 31, 2010 (the day prior to the final hearing

on the plan support agreement). See Moelis Fee Statement

for July 19, 2010 through August 31, 2010, ECF No. 519.
Presumably, a significant portion of this work was for

services related to the plan support agreement. For the

reasons set forth above in connection with a similar
request for services by Kirkland & Ellis, the United States
Trustee objects to the award of fees to the applicant in
connection with the plan support agreement. Because many
of Moelis’ time entries are too vague to determine the
nature of work they describe, see id., the United States

1
It is noted that this is not the first instance where the
United States Trustee has objected to the applicant’s requests to
be reimbursed for these overhead expenses. See, e.g., In re Tronox
Inc., Case No. 09-10156 (ALG), Response of the United States
Trustee Regarding Applications for Interim Compensation, dated June
18, 2009, at ¶ 36. (ECF Dkt. No. 511). In that case, the
applicant responded by reducing its expense request for these
items.
2
The United States Trustee retains the right to object to the
fees and expenses of Moelis based upon all grounds, including the
reasonableness of the requested fees. See Moelis Retention Order,
ECF No. 193.

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Trustee cannot determine the amount of time Moelis
dedicated to the plan support agreement. Accordingly,

absent further information, the United States Trustee

objects to the entire request of $259,489.83 to the

applicant. See Bennett Funding Group, 213 B.R. 234, 244

(Bankr. N.D.N.Y. 1997)(In cases where the time entry is too

vague or insufficient to allow for a fair evaluation of the
work done and the reasonableness and necessity for such
work, the court should disallow compensation for such
services).

Legal Fees: The applicant seeks $11,156.73 for the

reimbursement of its counsel fees in connection with its

retention application and monthly fee statements. See
Moelis Fee Application at ¶ 11 and Exhibit C, ECF No. 808.
The applicant, however, fails to provide any authority for
this position. In fact, such an expense is not permitted
in the Southern District of New York. See Blockbuster,
Inc., 10-14997(BRL)(order upholding United States Trustee’s
objection to investment banker’s request for legal
fees)(ECF Nos. 23, 283, 372 & 464)). For an attorney to be

paid from a debtor’s estate, that attorney must be retained

under section 327 of the Bankruptcy Code. See In re Crafts

Retail Holding Corp., 378 B.R. 44 (Bankr. E.D.N.Y. 2007)

(financial advisor precluded, as a matter of law, from

being paid the fees of its attorney as a reimbursement of

expenses); In re Cenargo Intern., PLC, 294 B.R. 571 (Bankr.

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S.D.N.Y. 2003) (fees of barristers that debtor’s attorney
used to assist in English administration proceedings could

not be compensated where barristers retention was not

approved by the bankruptcy court); see also Drexel Burham

Lambert Group, 133 B.R. at 27 (Bankr. S.D.N.Y. 1991) (fees

to negotiate a retention are part of an investment banker’s

overhead and are more than adequately covered by a
retention fee).
Aside from Sections 503(b)(4) and 506(b) of the
Bankruptcy Code, the United States Trustee knows of no

other provision of the Bankruptcy Code that authorizes the

award of fees and expenses to non-retained professionals.
See Lamie vs. U.S. Trustee, 540 U.S. 526 (2004) (“A
debtor’s attorney not engaged as provided by §327 is simply
not included within the class of persons eligible for
compensation.”). Moreover, the reimbursement of fees and
expenses for retained professionals is governed by section
330 which, generally speaking, focuses on reasonableness
and benefit to the estate of the professionals’ services.
In re Lederman Enter., Inc., 997 F.2d 1321, 1323 (10th Cir.
1993). Said differently, an application for compensation
and reimbursement of expenses must demonstrate that the
professional’s services were necessary and made a

beneficial contribution to the estate or its creditors. In

re Engel, 124 F.3d 567, 573 (3d Cir. 1997); see also,
Fibermark, 349 B.R. at 396 (Bankruptcy professionals should

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be compensated “commensurate with their expertise and the
benefit their efforts yield to the estate.” ). In the case

of the payment of a professionals’ counsel fees and

disbursements, there is no direct benefit for the services

provided by such counsel directly to the Debtors’s estates

– the only benefit is to Moelis. Moreover, such counsel’s

legal advice to, and on behalf of, Moeils interests may at
times even be contrary or adverse to the interests of the
Debtors.
The Debtors should not be obligated to pay for services

that do not benefit the Debtors’ estates and that are

solely a cost of Moelis of doing business and being
retained as a professional. Such legal services should be
regarded simply as Moelis’ “overhead.” Accordingly, the
request for $11,156.73 of legal fees should not be
permitted.
Morrison & Foerster

Billing: The applicant seeks $19,188.00 in connection

with preparing, reviewing and editing monthly bills. The

applicant’s relevant time records are attached hereto as

Exhibit 3. As noted above, the review and editing of time

records, as opposed to fee applications, is not
compensable. See CCT Comms., 2010 WL 3386947, at *9(“the

review and editing of time records - as opposed to fee

applications - is not compensable.”); see also, Computer

Learning Centers, 285 B.R. at 219-220(“those portions of

15
the billing process common to billing both bankruptcy and
non-bankruptcy clients are not compensable under section

330 because they are part of the professional’s

overhead.”). Accordingly, the United States Trustee

objects to the award of $19,188.00 to the applicant.

Jefferies3

Vague Time Entries/Project Categories: The time records

annexed to the applicant’s fee application are not prepared

in project category format. See Jefferies Fee Application
at Exhibit 8, ECF No. 819. The United States Trustee
Guidelines for Reviewing Applications for Compensation and

Reimbursement of Expenses (the “UST Guidelines”),4 provide,

in pertinent part:
To facilitate effective review of the application, all
time and service entries should be arranged by project
categories. The project categories set forth in Exhibit A
should be used to the extent applicable. A separate
project category should be used for administrative matters
and, if payment is requested, for the application
preparation.
UST Guidelines at (b)(4)(i).
Additionally, many of the time records are vague and merely
state “Internal discussions”, “Conference calls with MoFo”, “Review

of case filings”, “Analysis of Data room information”, “various

3
The United States Trustee retains the right to object to the
fees and expenses of Jefferies based upon all grounds, including
the reasonableness of the requested fees. See Jefferies Retention
Order, ECF No. 541.
4
The Bankruptcy Court for this district has adopted the UST
Guidelines. See In re Brous, 370 B.R. 563, 569 at n.8. (Bankr.
S.D.N.Y. 2007).

16
correspondence”. See Jefferies Fee Application at Exhibit 8.
Accordingly, it is difficult, if not impossible, to review the

applicant’s fee application. Accordingly, absent further detail,

the United States Trustee objects to the award of any fees to the

applicant. See Bennett Funding Group, 213 B.R. at 244 (In cases

where the time entry is too vague or insufficient to allow for a

fair evaluation of the work done and the reasonableness and
necessity for such work, the court should disallow compensation for
such services).
Legal Fees: Jefferies seeks the reimbursement of $18,622.99

in legal expenses. See Jefferies Fee Application at Exhibit E, ECF

No. 819. For the reasons set forth above to Moelis’ identical
request for legal fees, the United States Trustee objects to the
award of $18,622.99 to the applicant.
Fried Frank Shriver & Jacobson

Retention Application: The applicant seeks $328,465.00 in

fees. See Fried Frank Fee Application, ECF No. 826. Of that
amount, $106,170.00, or 32.3%, is in connection with the applicant’s
retention application. Id. at 4. In fact, $51,796.50 of fees were
incurred in this project category prior to October 10, 2010, the

date the applicant’s retention application was filed. Id. at

Exhibit F. This amount of fees in connection with the applicant’s
retention application is excessive and should be reduced.
Members of the Committee

The United States Trustee does not object to the award of

expenses sought by the members of the Committee.

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 WHEREFORE, the United States Trustee prays that the Court
sustain the objections contained herein and grants such other and

further relief as is just and proper.

Dated: New York, New York
January 26, 2011
Respectfully submitted,
TRACY HOPE DAVIS
UNITED STATES TRUSTEE
By: /s/ Paul K. Schwartzberg
Paul K. Schwartzberg
Trial Attorney
33 Whitehall Street, 21st Floor
New York, New York 10004
Tel. No. (212) 510-0500

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