Innkeeper-Lehman Deal Denied by Judge, Lawyer Says (Correct)

(Corrects Apollo entity in the first paragraph.)

Innkeepers USA Trust was denied permission to enter an agreement to support its bankruptcy reorganization with Lehman Ali Inc. and Apollo Investment Corp. after creditors said it was an inside deal with parties to Innkeepers’ 2007 buyout.

U.S. Bankruptcy Judge Shelley Chapman in Manhattan denied the real estate investment trust’s request for an agreement that would give all its equity to the affiliate of Lehman Brothers Holdings Inc. to satisfy a $220 million claim, according to lawyer John Penn, who represents Lehman’s largest creditor, Midland Loan Services LP.

Chapman’s ruling at 11 p.m. New York time came after a 14- hour day that began at 8:30 and focused on testimony about how Innkeepers had devised the agreement.

Separately, Chapman deferred ruling on a request by preferred shareholders to appoint an independent examiner to probe the support agreement, under which Lehman will give 50 percent of its equity to Apollo, according to Penn.

Innkeepers owns 72 hotels and its parent is managed by an affiliate of Leon Black’s private-equity firm, Apollo Global Management LLC. Lehman helped Apollo finance its 2007 buyout of Innkeepers with a $1.2 billion loan. The company’s July 19 bankruptcy filing included a pre-arranged plan that called for Lehman and Apollo’s support as a cornerstone of its reorganization.

Midland, whose $825 million debt is secured by 45 hotels, objected to the agreement. Midland said the deal isn’t fair and isn’t open to higher and better offers.

‘Heightened Scrutiny’

The agreement “contemplates a classic insider transaction and therefore is subject to heightened scrutiny by the court to ensure its entire fairness,” lawyers for Midland wrote.

Marc Beilinson, Innkeepers’ chief restructuring officer, testified yesterday that he started negotiating with Lehman in 2008. He said under cross-examination that he received a $2 million bonus last March, after the company had defaulted on its debt to Lehman and other creditors.

“At that time, the peppercorn wasn’t fully baked,” Beilinson said, referring to the “peppercorn of an idea” that became the plan support agreement.

David Tepper’s Appaloosa Management LP also objected to the plan support agreement, saying it could allow Lehman to terminate the use of its cash collateral or sell its collateral.

Midland is seeking court permission to file a plan to compete with the one Lehman and Apollo had proposed. The rival plan will pay $263 million for all the new equity in Innkeepers, giving a greater return to all creditors except Lehman Ali, Midland said.

The case is In re Innkeepers USA LP, 10-13800, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter for this story: Tiffany Kary in New York at tkary@bloomberg.net.

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