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Innkeepers Sues Cerberus, Chatham for Breach of Commitment

Innkeepers USA Trust, an operator of Residence Inns, Marriott hotels and Hampton Inns, sued Cerberus Capital Management LP and Chatham Lodging Trust, saying its agreement to sell 64 hotels to Cerberus and Chatham can’t be called off due to market conditions or a change in its business.

The operator of 71 hotels, expected to exit bankruptcy in July, will go back to court to resolve the dispute. The lawsuit, filed in Manhattan bankruptcy court today, says there has been no change in Innkeepers business since a binding agreement was signed May 16.

“General market volatility is wholly irrelevant here,” lawyers for Innkeepers wrote.

Innkeepers said in a statement that the attempt to terminate the deal is a “calculated effort to apply leverage” to renegotiate the terms. The lawsuit seeks to hold Cerberus and Chatham to their commitment, and seeks damages for potentially more than their $20 million deposit.

Innkeepers won final court approval of a Chapter 11 reorganization plan June 29 that rested on the sale to Cerberus and Chatham. Cerberus and Chatham said Aug. 22 that they’d ended the $1.1 billion agreement, citing a possible adverse change that could affect Innkeepers’ long-term business. They didn’t state what the change was.

On Hold

“The plan is on hold until this is resolved,” said Evan Flaschen, chairman of the restructuring group at Bracewell & Giuliani LLP, who isn’t involved in the case. Possible resolutions include a settlement under which Cerberus and Chatham agree to do the deal at a different price. Depending on how radical any changes are to the sale, Innkeepers could need to renegotiate its entire reorganization, he said.

The material adverse change clause in Innkeepers’ agreement allowed Cerberus and Chatham to pull out of the deal for “any condition, change or development that could reasonably be expected to have a material adverse effect on the business, assets, liabilities or operations, condition or prospect” of Innkeepers.

The generalizations of such clauses can lead to legal disputes, as in the bankruptcy of Solutia Inc.. The plastics maker was close to exiting bankruptcy in February 2008 during the credit crunch when lenders cited a material adverse change clause to pull out of a deal to fund a $2 billion loan. Citigroup Inc., Goldman Sachs Group Inc. and Deutsche Bank AG ended up settling with Solutia after a four-day trial in bankruptcy court, and funding a revised loan.

Apollo Management

Innkeepers, whose parent is managed by an affiliate of Leon Black’s private-equity firm Apollo Global Management LLC, filed for bankruptcy on July 19, 2010, with a pre-arranged reorganization plan proposed by Apollo and Lehman Ali, a unit of bankrupt Lehman Brothers Holdings Inc., which was rejected by creditors.

Cerberus and Chatham later won an auction to acquire the 64 hotels after topping a $970.7 million offer from Lehman Ali and Five Mile Capital Partners. According to that agreement, which also had a material adverse change clause, the termination date on the offer isn’t until Sept. 15.

The sale to Cerberus and Chatham would have allowed Innkeepers’ secured creditors to be repaid in full. Midland Loan Services, servicer of an $825 million mortgage loan, would have gotten a debt instrument of $723.8 million, and cash of $12.8 million. Another mortgage covered by the deal, known as the floating rate mortgage, would have gotten a cash payment of about $233 million, and the floating rate mezzanine loan would have gotten a cash payment of about $2.6 million.

Innkeepers, based in Palm Beach, Florida, has 71 extended-stay and limited-service properties with 10,000 rooms in 20 states. Chatham, a Palm Beach-based hotel investment company, owns properties under Hilton brands including DoubleTree and Hampton Inn, and Marriott brands including Courtyard and Residence Inn, according to its Web site. Cerberus, a private equity investor, is based in New York.

Innkeepers’ initial Chapter 11 petition listed assets of $1.5 billion against debt totaling $1.52 billion.

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

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