HAYNES AND BOONE, LLP 1221 Avenue of the Americas, 26th Floor New York, NY 10020 Telephone: (212)

659-7300 Facsimile: (212) 918-8989 Lenard M. Parkins (NY Bar #4579124) John D. Penn (NY Bar # 4847208) Mark Elmore (admitted pro hac vice) Attorneys for Midland Loan Services, Inc. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: INNKEEPERS USA TRUST, et al., Debtors. ) ) ) ) ) ) ) Chapter 11 Case No. 10-13800 (SCC) Jointly Administered

MIDLAND LOAN SERVICES, INC.S OBJECTION TO THE APPLICATION PURSUANT TO SECTIONS 327(a), 328(a), AND 1103 OF THE BANKRUPTCY CODE AUTHORIZING THE RETENTION AND EMPLOYMENT OF JEFFERIES & COMPANY, INC. AS THE FINANCIAL ADVISOR AND INVESTMENT BANKER TO THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS NUNC PRO TUNC TO JULY 30, 2010 Midland Loan Services, Inc. (Midland),1 hereby files its Objection (the Objection) to the Application Pursuant to Section 327(a), 328(a), and 1103 of the Bankruptcy Code Authorizing the Retention and Employment of Jefferies & Company, Inc. as the Financial Advisor and Investment Banker to the Official Committee of Unsecured Creditors Nunc Pro Tunc to July 30, 2010 [Docket No. 422] (the Application) and respectfully represents: INTRODUCTION

Midland is the special servicer pursuant to the Pooling and Servicing Agreement dated as of August 13, 2007 (the Special Servicing Agreement) for that certain secured loan in the amount of not less than $825,402,542 plus interest, costs and fees (the Fixed Rate Mortgage Loan) owed by certain of the above captioned Debtors. Page 1 of 9

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Midland continues to be concerned about the professional fees the Debtors

estates are being called upon to bear. This is particularly true with respect to the Midland Debtors and Midlands Cash Collateral that would be used to fund a substantial portion of the same. Given the relatively small amount of unsecured claims in this case, the onerous

indemnification provisions in the engagement letter, the proposed financial advisors apparent conflicts of interest, and the ambiguity of portions of the compensation structure, the retention of a financial advisor as sought in the Application is not fair and reasonable and is not in the best interest of the estates. OBJECTIONS I. The total amount of trade debt does not appear to support the hiring of Jefferies in light of the compensation arrangements detailed in the Application. 2. The Application, which seeks to employ Jefferies & Company, Inc. (Jefferies)

to work for the Official Committee of Unsecured Creditors (Creditors Committee) should be placed into context. A review of the Schedules of Assets and Liabilities along with supplemental information from the Debtors indicates that the trade debt owed by the Debtors appears to be less than $6.6 million. See Greenspan Dec.2 This amount does not account for the reductions that are likely to occur as a result of allowed claims for reclamation or administrative expense claims under 11 U.S.C. 503(b)(9), which will reduce the amounts even further. For perspective, $6 million is less than of 1% of the total claims of over $1.4 billion. (It is actually 0.428%.) This estimate also does not include potential deficiency claims from secured creditor
2

Contemporaneously with this Objection, Midland submitted the Declaration of Ronald F. Greenspan in Support of (1) Midland Loan Services, Inc.s Objection to the Application Pursuant to Sections 327(A), 328(A), and 1103 of the Bankruptcy Code Authorizing the Retention and Employment of Jefferies & Company, Inc. as the Financial Advisor and Investment Banker to the Official Committee of Unsecured Creditors Nunc Pro Tunc to July 30, 2010 and (2) Objection by Midland Loan Services, Inc. to the Motion of Ad Hoc Committee of Preferred Shareholders for Order Directing Appointment of Statutory Committee of Preferred Shareholders Pursuant to Bankruptcy Code Section 1102(A)(2) (the Greenspan Dec.). Page 2 of 9

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Representatives (as described in the Final Cash Collateral Order entered in these cases) that are represented by their own counsel. 3. The Creditors Committee has employed Morrison & Foerster LLP on an hourly

rate basis. The Debtors current cash forecasts required to be provided pursuant to the Final Cash Collateral Order estimate that the Creditors Committee will incur legal fees at the rate of $200,000 per month. See Greenspan Dec. The Application proposes to increase the amount of professional fees even further. Under the proposed engagement agreement, Jefferies would receive a monthly fee of $125,000 plus a Transaction Fee of $750,000 if a plan is confirmed and consummated. (Application, 14). Between the monthly fees and the Transaction Fee, Jefferies being involved in the above-captioned cases (the Cases) for six months would cost the estates (and the cash collateral of the secured lenders) $1.5 million (6 x $125,000 per month plus $750,000) while counsel for the Creditors Committee would incur $1.2 million in fees. If confirmation and consummation extended beyond 6 months, the total fees are projected to exceed one half of the total amount of the unsecured trade claims. 4. It is easy to envision a scenario where, in a relatively short period of time, the fees

and expenses of the Creditors Committees professionals could exceed half of the total of their constituents claims. Proceeding down such a path is neither a reasonable nor prudent approach to undertake. II. The indemnification provisions discussed in the Application are overly broad. 5. The Application also presents additional issues to be considered. The types of

indemnification available to financial advisors retained by the estate must be closely scrutinized. See In re Joan & David Halpern, Inc, 248 B.R. 43 (Bankr. S.D.N.Y. 2000), affd, 2000 U.S. Dist. LEXIS 17589 (S.D.N.Y. Dec. 6, 2000) (examining the indemnity provision for financial

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advisors and approving it based on the facts that (1) no one, including the [objecting party], has questioned the debtors need for [the financial advisors] services, and (2) all of the parties with a financial stake in the case supported the indemnity provision, but noting that the decision did not mean that every similar agreement will pass muster, or that every similar retention will satisfy the best interest criteria); see also In re Allegheny Intl, Inc., 100 B.R. 244 (Bankr. W.D. Pa. 1989) (approving the retention of financial advisors and then sua sponte reconsidering the retention order by excluding liability based on ordinary negligence). The need for such scrutiny of indemnification provisions for financial advisors was explained well in the case of In re DEC International, Inc.: Although [indemnification provisions for professional advisors] need to be scrutinized with care to protect creditors, to preserve the publics perception of the fairness and integrity of the bankruptcy system, to ensure that debtors, trustees and creditors committees have true freedom of choice in retaining financial advisers and to guard against breaches of the fiduciary duty that professional investment advisers owe to the bankruptcy estate, I cannot say that such provisions are unreasonable in all situations. They may be either reasonable or unreasonable under 11 U.S.C. 328, depending on the circumstances of the particular retention agreement, the specific terms of the agreement, the complexity of the work involved and the nature of the particular bankruptcy proceeding. 282 B.R. 423, 424 (W.D. Wisc. 2002). 6. In this case, the indemnification provision is exceptionally broad and would have

the Debtors indemnify Jefferies even though the Creditors Committee would be the recipient of Jefferies advice. Such an indemnification is overly broad and unreasonable. The Application does not provide any rationale for the need for such an expansive indemnification nor the basis of why the Debtors (rather than the proposed client the Committee) should indemnify Jefferies for actions it takes on behalf of the Committee.3

Query whether the indemnification would be enforceable against the Debtors estates when the indemnity agreement was never executed by the party sought to be charged with the obligation. For
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III.

Jefferies has conflicts of interest with various parties in this case. 7. Jefferies existing relationships and engagements should be carefully considered

in light of the disclosure in the Application that Jefferies makes markets in the securities of both Lehman and Apollo Investment Corporation (a large creditor in these cases and the ultimate corporate parent of the Debtors) and has numerous relationships with these lenders in other capacities. The duties Jefferies currently owes to those parties conflict with the duties that are carried with the Debtors.4 8. 11 U.S.C. 1103(b) provides, An attorney or accountant employed to represent a

committee appointed under section 1102 of this title may not, while employed by such committee, represent any other entity having an adverse interest in connection with the case. There is no indication in the Application that Jefferies intends to reduce its existing relationships with Apollo Investment Corporation or Lehman if it is engaged by the Committee. 9. Likewise, 11 U.S.C. 328(c) provides (in pertinent part), [T]he court may deny

allowance of compensation for services and reimbursement of expenses of a professional person employed under section 327 or 1103 of this title if, at any time during such professional person's employment under section 327 or 1103 of this title, such professional person is not a disinterested person, or represents or holds an interest adverse to the interest of the estate with respect to the matter on which such professional person is employed. It seems likely that
example, Schedule A to the Engagement Letter includes the indemnity and begins, Reference is made to the engagement letter attached hereto between Jefferies & Company, Inc. (Jefferies), the Committee and the Debtors (each as defined therein) (as amended from time to time in accordance with the terms thereof, the Agreement). (emphasis added) The Debtors are not a party to the engagement letter. Regardless of whether the Creditors Committee wishes to retain Jefferies under section 1103(a) or section 327(a), Jefferies must comply with a disinterestedness standard. While section 327(a) explicitly requires disinterestedness, if Jefferies is retained under section 1103(a), in order to be compensated under section 328, a similar standard applies. See 11 U.S.C. 328(c) (empowering the court to deny compensation to any professional who holds an interest adverse to the estate or who is not disinterested).
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authorizing the Creditors Committee to engage Jefferies would require the Court and parties to confront the type of divided loyalties that the Bankruptcy Code prohibits when it requires disinterested representation. See In re AroChem Corp., 176 F.3d 610 (2d Cir. 1999) (adopting the definition of adverse interest from In re Roberts, 46 B.R. 815 (Bankr. D. Utah 1985)). Section 1103 refers to the employment of professionals by a committee thereby engrafting the disinterestedness standard for committee professionals. 10. Disinterested persons is defined in the Bankruptcy Code, and the relevant

portion of its definition includes a person that . . . (C) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason. See 11 U.S.C. 101(14)(C) (emphasis supplied). Jefferies existing

relationships and engagements on behalf of the ultimate corporate parent and second largest secured creditor prevent it from being disinterested and 11 U.S.C. 328(c) precludes Jefferies from receiving compensation from the estates. IV. The Transaction Fee is Not Adequately Defined. 11. The Creditors Committee also seeks approval of a substantial Transaction Fee

that would be payable to Jefferies on the effective date of a plan of reorganization or a plan of liquidation in the Cases or upon the closing of a sale of the Debtors assets pursuant to section 363 of the Bankruptcy Code, in each case that is supported by the Committee. (Application, 14). The phrase in each case that is supported by the Committee lacks specificity. Does the support refer to support of the plan of reorganization or support for the fee that is requested? If the latter, it would seem that Jefferies might face a conflict of interest to encourage the Committee to support a plan of reorganization so it might receive a transaction fee.

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12.

Additionally, the Transaction Fee definition does not appear to take into account

the fact that there could be multiple plans confirmed in these Cases or a combination of asset sales and plans. Because the engagement letter does not appear to account for this possibility, it creates uncertainty as to what would occur if multiple plans were to be confirmed in the Cases or if plans were confirmed in some, but not all, of the cases. For example, would a transaction fee be earned and payable if a plan of reorganization was confirmed for one or only a few of the Debtors or if some, but not all, Debtors assets were sold pursuant to 11 U.S.C. 363? Would multiple transaction fees be possible if there were either multiple asset sales, multiple plans or a combination of each? These issues should be clarified before any engagement is approved since only a limited review is available under 11 U.S.C. 328. V. To the extent that Midlands cash collateral will be used against Midland, the employment of Jefferies should not be approved. 13. As Midland has discussed previously in this case, Midland objects to the use of its

cash collateral for any activities that are contrary to Midlands interests. In a typical carve-out situation, a debtor (or other estate professional) is not entitled to use a secured creditors cash collateral to finance efforts to challenge a secured lenders claims or interests in its collateral or to support actions taken against the secured lender. Accordingly, the Creditors Committee and any professionals it employs, as estate professionals, cannot use the Midland cash collateral to advocate a challenge to Midlands position. 14. Likewise, Midlands collateral cannot be surcharged. The Second Circuit

has held time and time again that a secured creditors collateral cannot be surcharged for payment of estate professionals fees unless there is a direct benefit, one not merely incidental to the reorganization. See, e.g., In re Flagstaff Foodservice Corp. (Flagstaff I), 739 F.2d 73 (2d Cir. 1984); In re Flagstaff Foodservice Corp. (Flagstaff II), 762 F.2d 10 (2d Cir. 1985); Harvis Trien

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& Beck, P.C. v. Federal Home Loan Mortgage Corp. (In re Blackwood Assocs., L.P.), 153 F.3d 61 (2d. Cir. 1998); In re Hotel Syracuse, Inc., 275 B.R. 679 (Bankr. N.D.N.Y. 2002). While Midland may, in the future, consent to allow its cash collateral to be used to pay certain professional expenses, it has yet to consent to such payments from its cash collateral to pay the fees and expenses charged by Jefferies. Local Rule 9013-1(a) 15. This pleading includes citations to the applicable rules and statutory authorities

upon which the relief requested herein is predicated and a discussion of their application to this pleading. Accordingly Midland submits that this pleading satisfies Local Bankruptcy Rule 90131(a). CONCLUSION WHEREFORE, Premises Considered, Midland respectfully requests that this Court deny the relief requested in the Application and grant such other relief as is necessary or appropriate.

Dated:

September 23, 2010 New York, New York

HAYNES AND BOONE, LLP

/s/ John D. Penn Lenard M. Parkins (NY Bar #4579124) Mark Elmore (admitted pro hac vice) 1221 Avenue of the Americas, 26th Floor New York, NY 10020-1007 Telephone No.: (212) 659-7300 Facsimile No.: (212) 884-8211 - and John D. Penn, Esq. (NY Bar # 4847208) Haynes and Boone, LLP
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201 Main Street, Suite 2200 Fort Worth, Texas 76102 Telephone No.: (817) 347-6610 Facsimile No.: (817) 348-2300

ATTORNEYS FOR MIDLAND LOAN SERVICES, INC.

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