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Hearing Date: Objection Deadline:

September 30, 2010 at 10:00 a.m. (Prevailing Eastern Time) September 24, 2010 at 5:00 p.m. (Prevailing Eastern Time)

MORRISON & FOERSTER LLP 1290 Avenue of the Americas New York, New York 10104 Telephone: (212) 468-8000 Facsimile: (212) 468-7900 Brett H. Miller Lorenzo Marinuzzi Jordan A. Wishnew Counsel for the Official Committee of Unsecured Creditors of Innkeepers USA Trust, et al. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re Innkeepers USA Trust, et al., Debtors. ) ) ) ) ) ) ) Chapter 11 10-13800 (SCC) Jointly Administered

OBJECTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO THE LIMITED MOTION OF MIDLAND LOAN SERVICE, INC. TO RECONSIDER FINAL ORDER 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 The Official Committee of Unsecured Creditors (the Committee) of Innkeepers USA Trust and certain of its direct and indirect subsidiaries in the above-captioned chapter 11 cases, as debtors and debtors in possession (collectively, the Debtors), by its counsel, Morrison & Foerster LLP, hereby submits this objection (the Objection) to Midland Loan Services, Inc.s (Midland) Limited Motion to Reconsider Final Order 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

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U.S.C. 361, 362 and 363 (the Reconsideration Motion).1 In support thereof, the Committee respectfully represents and alleges, as follows: PRELIMINARY STATEMENT Midland improperly seeks to have the order approving the Debtors use of the prepetition lenders cash collateral modified under the guise of Rule 59 of the Federal Rules of Civil Procedure and Rule 9023 of the Federal Rules of Bankruptcy Procedure. A motion for reconsideration should not be granted where the moving party seeks solely to re-litigate issues already considered by the court. In addition, a movant should neither address facts, issues, or arguments not previously presented to the court. Midlands

motion does exactly that it offers new legal arguments and re-visits points examined and debated over two days of hearings earlier this month. Moreover, Midland fails to demonstrate that the Courts decision on these two contested provisions constitutes a manifest error of law. The decision is based on a thorough evidentiary record and is grounded in settled legal precedent. Avoidance actions are meant to benefit a debtors unsecured creditors, and in a case with questionable residual value beyond the secured debt, it is inequitable to deprive the unsecured creditors of their recoveries. Therefore, Midland is not entitled to a second bite at the apple, and the Reconsideration Motion must be denied. BACKGROUND 1. On July 19, 2010 (the Petition Date), each of the Debtors filed with the

Court a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, commencing the above captioned Chapter 11 cases.
Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Reconsideration Motion.
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2.

Pursuant to an order of this Court dated July 20, 2010, the Debtors

Chapter 11 cases are being jointly administered. 3. The Debtors continue to operate their businesses and manage their

properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 4. On the Petition Date, the Debtors filed the Motion to Approve Use of Cash

Collateral /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. Sec. 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) [Docket No. 14] (the Cash Collateral Motion). 5. Midland filed its initial objection to the Cash Collateral Motion on the

Petition Date [Docket No. 36]. 6. On July 28, 2010, the United States Trustee for the Southern District of

New York appointed the five (5) member Committee2 pursuant to section 1102(a)(1) of the Bankruptcy Code. 7. On August 23, 2010, Midland filed an amended objection to the Cash

Collateral Motion [Docket No. 259].

The members of the Committee are: (i) JMC Global, (ii) PDQ Consulting, Inc., (iii) Triangle Renovations USA, (iv) American Hotel Register Company, and (v) The Eric Ryan Corporation.

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8.

On August 23, 2010, the Committee also filed an objection to the Cash

Collateral Motion [Docket No. 265], which, in part, objected to the granting of a superpriority claim to the prepetition lenders against the proceeds of the Avoidance Actions pursuant to section 507(b) of the Bankruptcy Code. 9. On August 31 and September 1, the Court held an evidentiary hearing on

the Cash Collateral Motion during which Midland made its oral argument in support of its objection, cross-examined the Debtors witnesses and offered testimony from its own witness. During this hearing, counsel for the Committee explained to the Court why certain provisions in the proposed Final Order (defined below) were not acceptable. 10. On September 1, 2010, the Debtors filed their Schedules of Assets and

Liabilities as well as their respective Statements of Financial Affairs. The collective sum of non-mortgage, unsecured debt identified in Schedule F of the Debtors petitions exceeds $13 million.3 11. On September 2, 2010, the Court approved the Cash Collateral Motion,

granted the Committees objection to the final cash collateral order (the Final Order), and held that the section 507(b) claim of the Adequate Protection Parties could not attach to the Avoidance Actions or the proceeds thereof [Docket No. 402]. 12. On September 16, 2010, Midland filed the Reconsideration Motion.

This is well beyond the $2 million asserted by Midland. See Reconsideration Motion, pp. 2-3, n. 2 (suggesting the universe of unsecured, non-priority trade claims was approximately $2 million). It is not clear to the Committee why Midland seems to believe that the only unsecured creditors for which the Committee acts are trade creditors. That is certainly not the case.

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ARGUMENT A. The Reconsideration Motion Must Be Denied Because Midland Relitigates Issues Already Decided By The Court [A] motion to reconsider should not be granted where the moving party

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[is solely attempting] to relitigate an issue that already has been decided. Shrader v. CSX Transp., Inc., 70 F.3d 255, 257 (2d Cir. 1995). A motion for reconsideration is not a second opportunity for the movant to proffer previously rejected arguments or introduce evidence that was previously available to the movant but not timely introduced. Motor Vehicle Mfrs. Assn of the U.S., Inc. v. N.Y. State Dept. of Envtl. Conservation, 831 F. Supp. 57, 60 (N.D.N.Y. 1993). Similarly, a motion for reconsideration is not an

opportunity to introduce a new legal theory. See 389 Orange St. Partners v. Arnold, 179 F.3d 656, 665 (9th Cir. 1999) (holding that argument presented to court for the first time during Rule 59(e) motion could not be used to show that the court erred in its judgment); Uphoff v. Elegant Bath, Ltd., 176 F.3d 399, 410 (7th Cir. 1999); FDIC v. World Univ. Inc., 978 F.2d 10, 16 (1st Cir. 1992). 14. A court is justified in reconsidering its previous ruling only if: (1) there is

an intervening change in the controlling law; (2) new evidence not previously available comes to light; or (3) it becomes necessary to remedy a clear error of law or to prevent obvious injustice. Atl. States Legal Found., Inc. v. Karg Bros., Inc., 841 F. Supp. 51, 53 (N.D.N.Y. 1993). 15. There has not been an intervening change in the controlling law either

dealing with carve outs or adequate protection claims under section 507(b) of the Bankruptcy Code, and no new evidence has come to light concerning either of these matters since the Court entered the Final Order. Instead, Midland, which is dissatisfied

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with the Courts ruling and intent on causing as much disruption as possible,4 is trying to take a second bite at the apple and re-argue points addressed and discussed during the hearing on the Cash Collateral Motion. 16. Midland received the Committees objection well in advance of the

August 31st hearing and had a sufficient opportunity to address both the Carve-Out and the section 507(b) issue with the Court. The Court conducted an extensive hearing on the Cash Collateral Motion and the provisions in the Final Order, and all parties, including Midland, were given more than an adequate opportunity to proffer their objections, introduce evidence to support such objections, and present all relevant legal arguments regarding the relief being sought. 17. Similarly, Midland questioned Mr. Cook about the Carve-Out, see Aug.

31, 2010 Cash Coll. Hrg Tr., pp. 51-54, and argued to the Court that there was insufficient adequate protection for the alleged loss of value associated with the payment of professional fees from Midlands cash collateral, id. at p. 92. Notwithstanding such arguments, the Court held that the lenders whose cash collateral is being used are adequately protected as contemplated by the Bankruptcy Code. Sept. 2, 2010 Cash Coll. Hrg Tr., p. 15, lines 14-15. 18. Dissatisfied with the Courts ruling, Midland is now seeking a do-over

and proffering legal arguments not previously raised. Midlands actions are untimely, and the Court should not give Midland the opportunity it seeks to try and re-argue the terms of the Final Order. The Reconsideration Motion should be denied.

To date, Midland has filed eleven (11) objections with the Court, not including certain affirmative motions (i.e., the motion to break the Debtors plan exclusivity).

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B. 19.

The Courts Decision Was Correct As A Matter Of Law If the Court believes that it is appropriate to reconsider the Final Order,

before the Court excises the requested provisions, Midland must prove to the Court that there has been a manifest error of law i.e., the matters the Court allegedly overlooked would render its prior decision erroneous. Motor Vehicle Mfrs. Assn, 831 F. Supp. at 61. i. 20. The Carve-Out Is Appropriate

The Committee asserts that the Courts ruling on the permissibility of the

Carve-Out was entirely appropriate. If Midland had its way, it would approve the use of its cash collateral so long as it stood to benefit from the professionals actions. Unfortunately, these cases are not being run solely for Midlands benefit, and as previously noted, the Court found that the Debtors provided sufficient evidence that Midlands collateral was being adequately protected. Midland should not be permitted to re-open the debate on this issue. 21. Moreover, the Carve-Out is a funding mechanism used in nearly all

Chapter 11 cases that puts professionals on a level paying field and preserves the balance among the different constituencies in a case. It is necessary to ensure that professionals will be compensated for their efforts and will not be left with unpaid fees and expenses. This case is no different from any other case, and despite its assertions to the contrary, Midland benefits not only from the actions of the Debtors but of the Committee as well. Accordingly, the Carve-Out, as provided for in the Final Order, should be preserved. ii. 22. The Ruling on Avoidance Actions Is Appropriate

Avoidance actions exist for the benefit of an estates unsecured creditors.

See Official Comm. Of Unsecured Creditors of Cybergenics Corp. v. Chinery (In re

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Cybergenics Corp.), 226 F.3d 237, 244 (3d Cir. 2000) (noting that that avoidance actions benefit the creditors, not the debtors themselves, and a debtor in possession should be empowered to pursue an individual creditors cause of action and avoid a transaction, thus allowing other unsecured creditors to share in this valuable right). 23. If the Court were to grant the relief being sought by Midland, then the

Committee would be acting for the benefit of the secured creditors, not its constituents the holders of tens of millions of dollars of trade and litigation claims, plus any creditors with (yet-to-be determined) rejection damage and deficiency claims. For example, if the Committee successfully identifies a defect in Midlands perfection of its liens or otherwise identifies Avoidance Actions that could benefit the estate, the proceeds of those claims would be the first dollars used to repay Midland on its section 507(b) claim, thereby diminishing the value created for unsecured creditors. This turns the Bankruptcy Code on its head and appears to eviscerate section 551 of the Bankruptcy Code, which provides that any avoided transfer must be preserved for the benefit of the estate. See, e.g., In re Adams, 275 B.R. 274, 283 (Bankr. N.D. Ill. 2002) (Taken together, 361 and 362 are intended to give a secured creditor the benefit of its bargain, no more and no less. There is nothing in these statutes that permits a prebankruptcy secured creditor to treat unsecured creditors as guarantors of its collateral . . .); see In re Caribbean Petroleum Corp., Case No. 10-12553 (KG) (Bankr. D. Del. Sept. 8, 2010) (denying the Debtors request to permit the post-petition lender to assert superpriority claims against avoidance actions) See Declaration of Lorenzo Marinuzzi In Support Of The Objection (the Marinuzzi Decl.) - Exhibit 1 (p. 86, wherein Judge Gross advised the parties he was prepared to deny the debtors financing request if the

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secured party insisted on asserting a superpriority claim against avoidance actions, and the resolution set forth on p.106) and Exhibit 2 (p.34, 27(b), wherein avoidance actions are carved out of the secured partys section 507(b) claim). 24. Moreover, the Courts decision is supported by its equitable powers under

section 105(a) of the Bankruptcy Code. The Courts equitable powers give it the ability to craft flexible remedies not expressly authorized by the Bankruptcy Code but that provide the result the Code was designed to obtain. Official Comm. Of Unsecured Creditors of Cybergenics Corp. v. Chinery (In re Cybergenics Corp.), 330 F.3d 548, 568 (3d Cir. 2003). 25. Avoidance powers are a statutorily created power to recover property.

Robison v. First Fin. Capital Mgmt. Corp. (In re Sweetwater), 55 B.R. 724, 731 (N.D. Utah 1985). These powers are provided to a debtor in order to ensure equitable

distribution of assets of an insolvent corporation among its creditors and increase the return to creditors or augment the distribution to them . . . United Capital Corp. v. Sapolin Paints, Inc. (In re Sapolin Paints, Inc.), 11 B.R. 930, 938 (Bankr. E.D.N.Y. 1981). 26. Interestingly, Midland argues that the Bankruptcy Court is powerless to

make any ruling that would inhibit Midlands right to seek payment for its superpriority claim, but in this Reconsideration Motion, it seems to acknowledge that marshalling may have been appropriate. See 18 (Had the Court chosen to marshal the estates assets in a way that would not disburse certain proceeds unless and until all of the estates other assets had been used to fund superpriority claims (or a date certain, whichever occurs sooner), the provisions might pass muster.) Yet, section 507 of the Bankruptcy Code

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does not specifically provide that it is subject to marshalling. Rather, the doctrine of marshalling is a means utilized by bankruptcy courts under section 105(a) to promote fairness. See In re Maddox, 84 B.R. 251, 257 (Bankr. N.D. Ga. 1987) (Marshalling of assets is an equitable doctrine under which a debtor's assets are used and apportioned in such a manner as to provide protection to the rights of each of two or more creditors or of a creditor and someone else who has an interest in the assets). In cases with minimal unencumbered asset value, Bankruptcy Courts have protected the estate and its unsecured creditors by preventing secured creditors from asserting their superpriority claims against avoidance action proceeds. If Midlands superpriority claim would be subject to the Courts inherent equitable powers to require marshalling, so too are they subject to other equitable remedies that may be imposed by this Court. 27. At this stage of the case, it is not entirely clear whether there will be

proceeds in excess of the secured debt encumbering the different pools of assets that will flow through to unsecured creditors. Avoidance actions are a significant unencumbered asset that may provide a recovery for unsecured creditors. But, according to Midland, it should have the right to satisfy its claims before the unsecured creditors receive any funds, even though the avoidance action proceeds will have been obtained through the efforts of the unsecured creditors. 28. It should be noted that the Committee did not object to the waiver in the

Final Order depriving the Debtors estates of the ability, pursuant to section 506(c) of the Bankruptcy Code, to surcharge the prepetition lenders collateral for the necessary costs and expenses of preserving their collateral. However, if Midland succeeds with the Reconsideration Motion and obtains the right to assert a superpriority claim against the

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avoidance action proceeds, then Midland would be receiving a windfall at the expense of the unsecured creditors, because not only will Midland be spared from the costs of preserving its collateral, but it will be able to utilize the proceeds of unencumbered assets ahead of all unsecured creditors. 29. If the unsecured creditors are to undertake the efforts to pursue relevant

avoidance actions, then equity demands that the unsecured creditors be entitled to recover something for their efforts. See Marinuzzi Decl., Exh. 2, p. 86, lines 6-11 (Judge Gross states, But in this case where there really is nothing and it's obvious that there may be nothing for unsecured creditors. I think that they are entitled to more than just the opportunity to investigate and the opportunity to participate in the case. And that unsecured creditors should at least have some opportunity for some recovery.) Otherwise, these cases will be nothing more than a foreclosure proceeding run solely for the benefit of the Debtors secured creditors. Perhaps that is exactly what Midland seeks to accomplish. 30. Accordingly, the Courts ruling on the Cash Collateral Motion was

entirely consistent with these well-established principles. The Court should deny the Reconsideration Motion, as Midland has failed to prove the existence of a manifest error of law.

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CONCLUSION WHEREFORE, for all of the foregoing reasons, the Committee respectfully requests that this Court enter an order denying the Reconsideration Motion, and granting such additional relief as is just and proper. Dated: September 24, 2010 New York, New York

Respectfully submitted, /s/ Lorenzo Marinuzzi MORRISON & FOERSTER LLP Brett H. Miller Lorenzo Marinuzzi Jordan A. Wishnew 1290 Avenue of the Americas New York, NY 10104 Telephone: (212) 468-8000 Facsimile: (212) 468-7900 Counsel for the Official Committee of Unsecured Creditors of Innkeepers USA Trust, et al.

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