You are on page 1of 7

TASHJIAN & PADIAN Gerald Padian Bradley M. Rank 15 West 36th Street, 15th Fl.

New York, New York 10018 Tel.: (212) 319-9800 Fax: (212) 319-9883 and David M. Neff (admitted pro hac vice) PERKINS COIE LLP 131 S. Dearborn, Street, Suite 1700 Chicago, Illinois 60603-5559 Phone: (312) 324-8400 Fax: (312) 324-9400 Attorneys for CWCapital Asset Management, LLC UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: Innkeepers USA Trust, et al., Debtors. ) ) ) ) ) ) ) Chapter 11 Case No. 10-13800 Jointly Administered

OBJECTION OF CWCAPITAL ASSET MANAGEMENT LLC TO DEBTORS' (1) MOTION FOR THE ENTRY OF FINAL ORDER AUTHORIZING THE DEBTORS TO USE THE ADEQUATE PROTECTION PARTIES' CASH COLLATERAL AND (2) MOTION FOR ENTRY OF AN ORDER AUTHORIZING THE CONTINUED USE OF EXISTING CASH MANAGEMENT SYSTEM, AS MODIFIED CWCapital Asset Management LLC ("CWCapital") files this objection (the "Objection") to (1) 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 Pursuant to 11 U.S.C. §§ 361, 362, and 363, (B) to the Extent Approved in the Final Order, Granting Senior Secured, Priming Liens on Certain Postpetition Intercompany Claims, (C) to the Extent Approved in the Final Order, Granting Administrative

Priority Status to Certain Postpetition Intercompany Claims, and (D) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(B) (the "Cash Collateral Motion"); and (2) Motion for Entry of an Order Authorizing the Continued Use of (I) Existing Cash Management System, as Modified Herein, (II) Existing Bank Accounts, (III) Existing Business Forms, and (IV) Certain Existing Investment Guidelines (the "Cash Management Motion" and, together with the Cash Collateral Motion, the "Motions") filed by the above captioned debtors (collectively, "Debtors"). INTRODUCTION 1. As described in the Motions, Debtors are borrowers under nine separate loan

pools. The loan defined below as the "Anaheim Loan" is serviced by CWCapital. The original and current lender of the Anaheim Loan entered into that transaction with specific debtors and agreed to fund that loan based on receiving liens on specific collateral. The other lenders in these cases undoubtedly approached their transactions in a similar manner. 2. Rather than treat each of the lenders and their respective cash collateral

individually, Debtors propose to consolidate all of the cash collateral in one pot. This would, no doubt, make Debtors' lives a little easier. However, any convenience to Debtors is far

outweighed by the risks it places on the lenders, including the lenders for which CWCapital is special servicer. If Debtors' proposed final cash collateral order and cash management order are approved as written, CWCapital's collateral is at risk of being used to fund unrelated and underperforming Debtors. Furthermore, the costs of administering these cases, including the payment of professional fees, could be imposed on CWCapital in an unfair and disproportionate manner. 3. Debtors' requested relief goes beyond administrative convenience and

significantly affects CWCapital's substantive rights. The Court should not approve Debtors' cash

-2-

collateral use unless and until Debtors appropriately treat CWCapital's collateral separately from the collateral of other lenders. BACKGROUND 4. CWCapital is special servicer for a mortgage loan pool that includes a loan to one

or more of the Debtors as borrowers and guarantors. 5. More specifically, CWCapital is special servicer for Wells Fargo Bank, N.A.,

trustee for the registered holders of Credit Suisse First Boston Mortgage Security Corp. Commercial Mortgage Pass-Through Certificates, Series 2005-C5, which is the holder of loans to certain of the Debtors (the "Anaheim Debtors") in the original principal amount of approximately $13.7 million (the "Anaheim Loan"), secured by a deed of trust on certain real property operated as a Hilton Suites Hotel located in Anaheim, California, and related collateral (the "Anaheim Collateral"). OBJECTIONS A. CWCapital's Cash Collateral Should Not Be Commingled 6. The portions of the Anaheim Collateral constituting cash collateral under 11

U.S.C. § 363 should only be used by the Anaheim Debtors and should not be commingled with the cash of other Debtors in these cases. See 11 U.S.C. § 363(c)(4) ("…the trustee shall

segregate and account for any cash collateral in the trustee's possession, custody, or control"). 7. The relief Debtors request would, if granted, result in the commingling of cash

and allow some Debtors to benefit from the use of other Debtors' cash. For example, Debtors propose to "consolidate on a postpetition basis all cash in a Debtor-owned master account and apply such cash" pursuant to a waterfall. See Cash Collateral Motion, ¶ 35. In other words, all Debtors' cash would be placed into one pot from which all Debtors' expenses would be paid, with

-3-

account reconciliations (referred to as "True-Ups") occurring after the fact. Assuming sufficient cash exists to do so, all Debtors' expenses will be paid regardless of whether particular Debtors (or group of Debtors under a particular "tranche") are underperforming. Debtors attempt to address this by conducting a periodic "True-Up" after the fact by which (i) revenues and expenses would be allocated to each Debtor and (ii) underperforming Debtors would be deemed to have received loans from performing Debtors within the same "tranche". However, unless each lenders' cash is maintained separately there is no possible way to ensure a lender that its cash collateral is not subsidizing other tranches. If an entire "tranche" is underperforming, or if Debtors use more than 100% of available cash collateral as proposed, it is entirely possible for a Debtor (or "tranche" of Debtors) to use more cash than it generated – a fact that would only be learned on a later date. 8. Furthermore, the commingling of Debtors' cash diminishes the effectiveness of

the lenders' remedies. If, for example, a "Termination Event" occurs and a lender terminates a Debtor's ability to use cash collateral, that lender will not have the benefit of a segregated account containing its remaining cash collateral. Instead, the lender's cash collateral will be held in the commingled pot. The amount of the lender's remaining cash collateral would not be known, if ever, until a subsequent "True-Up" at which time the lender presumably would be required to take some affirmative action to remove it from the consolidated account. 9. In essence, Debtors want the ability to use the lenders' collective cash as it is This ignores, however, the simple fact that

generated and to sort things out later.

underperforming Debtors will receive the benefit of cash use at the expense of other Debtors and their lenders. Therefore, CWCapital requests that any order entered allowing cash collateral use

-4-

on a final basis require the Anaheim Debtors to maintain segregated cash collateral accounts to prevent the use of the Anaheim Collateral by other Debtors. B. CWCapital's Cash Collateral Should Not Be Used for Inter-Debtor Borrowing 10. Debtors request authority for "Borrower Debtors" (Debtors whose expenses

exceed revenue) to borrow from "Lender Debtors" (Debtors whose revenue exceeds expenses). Debtors appear to be requesting authority for such loans only within each "tranche" of debt. Assuming this is correct, CWCapital's cash collateral could not be used for this express purpose because its loan is not part of a larger "tranche". To the extent this interpretation is incorrect, and the Cash Collateral Motion requests this relief, CWCapital objects to it. Regardless of Debtors' express intentions, however, an involuntary loan by CWCapital could occur as a result of the proposed commingling of cash. As discussed above, placing all lenders' cash in a single pot and reconciling expenses after the fact creates a substantial risk that profitable Debtors would be subsidizing underperforming Debtors. Requiring Debtors to maintain segregated cash accounts would eliminate this risk. C. CWCapital's Cash Collateral Should Not Be Used to Fund Professional Fees Absent Adequate Protection 11. Although the Anaheim Loan is significant when viewed on a stand-alone basis

(approximately 13.7 million), it represents a relatively modest portion of the total secured debt in these cases (approximately $1.42 billion according to Debtors). 12. Debtors propose a carve out of the lenders' adequate protection liens in the

aggregate amount of $5.5 million (plus any amounts incurred prior to a "Carve Out Trigger Notice") for professional fees. As an initial matter, the Court should not allow any professional fees to be paid from the lenders' collateral unless Debtors can prove that the lenders are adequately protected for the use of such cash to pay such fees. Moreover, because the

-5-

professional fee carve out is not prorated among the various loans or otherwise limited, CWCapital potentially risks funding a disproportionate amount of professional fees in these cases despite the fact that its loan constitutes just a fraction of the secured claims. This would amount to a surcharge of CWCapital's collateral to pay professional fees unrelated to the Anaheim Loan. The professional fee carve out (if allowed) should be divided among the various lenders in proportion to the outstanding indebtedness or otherwise limited to avoid this result. D. Lenders Should Be Given the "Real Time" Ability to Monitor Cash Collateral Use 13. Under Debtors' proposed reporting procedures, CWCapital may only learn of

improper cash collateral use after it is too late. CWCapital should have the ability to monitor the Anaheim Debtors' cash use on a much more regular basis to prevent any such harm. This is particularly important if the Court does not require Debtors to maintain separate cash collateral accounts. E. Additional Changes to the Proposed Cash Collateral Order 14. Debtors' proposed order should be further modified as follows: a. Debtors should be required to provide Forecasts with respect to the Anaheim Loan that are acceptable to CWCapital, and Debtors' use of cash collateral should be limited to those budgeted amounts. b. The permitted variance in the Forecasts should apply with respect to the Anaheim Debtors without regard to Debtors' other cash use.

-6-

c. The term "Termination Event" should include (i) one or more franchisors taking affirmative steps to lift the automatic stay to terminate franchise agreements; (ii) Debtors defaulting under another "tranche" of debt; and (iii) Debtors seeking to substantively consolidate their cases. Dated: August 23, 2010

/s/ David M. Neff TASHJIAN & PADIAN Gerald Padian (NY Bar # 2257178) Bradley M. Rank 15 West 36th Street, 15th Fl. New York, NY 10018 Telephone: (212) 319-9800 Facsimile: (212) 319-9883 Email: gpadian@tashpad.com brank@tashpad.com David M. Neff (admitted pro hac vice) PERKINS COIE LLP 131 S. Dearborn, Street, Suite 1700 Chicago, Illinois 60603-5559 Phone: (312) 324-8400 Fax: (312) 324-9400 dneff@perkinscoie.com Attorneys for CWCapital Asset Management, LLC

-7-