UPDATE 2-Lehman plan for Innkeepers USA swap wins judge OK

Wed Aug 18, 2010 2:43pm EDT

* Lehman eyes swap of Innkeepers secured claims for equity

* Appaloosa had opposed swap (Adds judge and lawyer's comments, background, byline)

By Caroline Humer

NEW YORK, Aug 18 (Reuters) - A federal bankruptcy judge has authorized a Lehman Brothers Holdings Inc LEHMQ.PK unit to proceed with a plan to convert its secured claims in hotel owner Innkeepers USA Trust INKPQ.PK into equity.

Wednesday's ruling by U.S. Bankruptcy Judge James Peck is a defeat for hedge fund Appaloosa Management, which had argued that Lehman should not be allowed to sell its potential stake in Innkeepers without testing its value in the marketplace. [ID:nSGE67B0J1]

The move clears a path for Innkeepers to present a prearranged bankruptcy plan to the court for review at a Sept. 1 hearing.

Innkeepers filed for Chapter 11 protection on July 19, saying its debt load made it difficult to maintain and upgrade its properties. The company owns and operates about 72 hotels under such brands as Hilton, Hyatt and Marriott. About half operate as Marriott's Residence Inn hotels.

Lehman, which like Innkeepers is operating under bankruptcy protection, had provided $1.2 billion of financing for Innkeepers' 2007 buyout by Apollo Investment Corp (AINV.O).

It holds a $220 million mortgage loan backed by 20 hotels on which Innkeepers has defaulted, and had arranged with Apollo to convert that debt for equity and then sell a 50 percent stake in the equity to Apollo for at least $107.5 million.

At Wednesday's hearing, a lawyer for Lehman defended the swap, saying it was the best result it could offer after it had tried and failed to sell the mortgage loan.

Rachel Strickland, a partner at Willkie Farr & Gallagher LLP representing Appaloosa, said at the hearing that the hedge fund owns debt backed by 45 other Innkeepers hotels. Appaloosa is also a Lehman creditor.

Peck said he believed the swap was reasonable.

"With all respect to Appaloosa, it is manifestly clear that Appaloosa's motive for being here is not as a creditor for Lehman paper," he said.

Innkeepers' bankruptcy has grown increasingly heated. Recently, a group of shareholders asked the court to appoint an examiner to look into the role of Lehman and Apollo in the bankruptcy filing.

The case is In re: Innkeepers USA Trust, U.S. Bankruptcy Court, Southern District of New York, No. 10-13800. (Reporting by Caroline Humer in New York; Writing by Jonathan Stempel; Editing by Gerald E. McCormick and Richard Chang)