Shareholders question sale of Innkeepers USA Trust

A group of shareholders is attempting to block Innkeepers USA Trust’s $1.12 billion sale of its properties to Cerberus Capital Management and Chatham Lodging Trust
because they say the hotel owner unexpectedly placed several other properties on the block that were to be withheld from the auction.

In papers filed with the U.S. Bankruptcy Court in Manhattan, the shareholders said the company is trying to slip through a separate $195 million sale of five hotels to a second Chatham entity without adequately marketing those properties.

Despite never having made a formal request to the court to sell those properties, Innkeepers “decided to proceed anyway with an auction,” the shareholders said in court papers filed Friday. The shareholders said they never even received definitive notice that the auction of those properties would be held.

Innkeepers is set to seek court permission Tuesday to move forward with the deals that arose out of the auction. The sales would provide the basis for Innkeepers’ creditor-payment plans.

Cerberus and Chatham won last week’s auction for the majority of Innkeepers 71 hotels, besting a rival bid from Lehman Brothers Holdings Inc.
and Five Mile Capital Partners by $154 million.

Following that 19-hour auction, Innkeepers placed on the block the so-called “seven sisters” hotels, properties whose mortgages are pledged to a different set of lenders than the core 64 hotels.

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Chatham LP purchased five of those independent hotels at the auction after facing little challenge from rival bidders. The only other potential bidder sought to purchase just two of the properties.

The shareholders say the reason Chatham’s bid went largely unchallenged is that very few potential bidders knew of the auction.

According to the shareholders, Innkeepers didn’t provide adequate notice of the independent hotels’ auction and did not file a lead bidder agreement with the court, as it did for the other 64 hotels.

In fact, the shareholders said the only notice that there “might” be an auction of the properties came in a letter from Innkeepers’ financial adviser Moelis & Co.

Innkeepers apparently believes “that allowing their financial advisor to bury one sentence in a five-page process letter…satisfies their fiduciary duty to adequately market test” the hotels, the shareholders said.

Representatives for Innkeepers did not respond to requests for comment Monday. In court papers, however, Innkeepers said “over 125 potential investors” received information on the seven independent properties when they received marketing materials the company’s other hotels.

The two remaining independent hotels that Chatham will not purchase are to be turned over to lenders under the proposed plan.

The protesting shareholders hold a minority stake in Innkeepers. Apollo Investment Corp.
is majority owner of the Palm Beach, Fla., company, although its stake in Innkeepers is slated to be wiped out under the proposed Chapter 11 plan.

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The minority shareholders previously successfully fought to have the seven independent hotels removed from the larger group because they had different lenders. Most of Innkeepers hotels have loans from Lehman or mortgage holders represented by Midland Loan Services Inc.

As part of the pending sale to Cerberus and Chatham, the Midland lenders, owed $825.4 million, have agreed to reduce the amount owed under their loans to about $736 million, according to court papers. Lehman will have its loans paid off in cash from the sale proceeds.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)

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