Innkeepers wants quick pace for Cerberus lawsuit

NEW YORK Wed Aug 31, 2011 1:57pm EDT

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NEW YORK (Reuters) - Lawyers for Innkeepers USA Trust INKPQ.PK will spend the day on Wednesday hammering out a timetable for its lawsuit against Cerberus Capital Management LP CBS.UL and Chatham Lodging Trust (CLDT.N), the investment firms that abruptly backed out of a deal to buy 64 of the bankrupt hotel operator's properties.

Judge Shelley Chapman ordered the sides to negotiate a schedule by the end of Wednesday at a hearing in U.S. Bankruptcy Court in Manhattan. The parties are expected to appear in court later during the day with updates on negotiations.

Innkeepers filed the lawsuit on Monday after Cerberus and Chatham backed out of the $1.12 billion deal. Innkeepers accused the buyers of invoking a "material adverse effect" clause to wrangle a lower price.

Innkeepers asked the court to expedite the litigation, saying the matter needs quick resolution so it can market itself to new potential buyers. Cerberus contested the point, saying it should not have to abide by strict scheduling when Innkeepers took nearly three weeks to file the lawsuit after learning Cerberus was investigating a potential MAE event.

Judge Chapman sympathized with Innkeepers' desire to resolve the MAE issue as quickly as possible, citing widespread media coverage about the uncertainty of the deal.

She rejected Cerberus lawyer Adam Harris' argument that Innkeepers should have done more to affirm its readiness to close the deal in August.

"Come on, Innkeepers was ready to close," she said. "They were there. It's not like asking a girl to dance. You didn't need to hear from them the next day, saying: 'We're really, really ready to close.'"

THE MAE MYSTERY

Innkeepers said in the lawsuit it was blindsided and never got an explanation on what triggered it. The lawsuit asks Chapman to rule that no MAE occurred and order Cerberus and Chatham to close the deal or pay damages.

MAE clauses, common in sale deals, allow buyers to pull out of purchase commitments if the seller's business suffers a material change. While many MAE clauses include exceptions for general economic changes, Innkeepers' was more buyer-friendly, including market volatility as a possible MAE.

Innkeepers said it received only vague indications that market volatility might be at the root of their decision.

In recent weeks, stock markets have slid, credit conditions have tightened and high-yield bond spreads have widened. Cerberus first told Innkeepers it might not be able to close on August 5, the same day Standard & Poors downgraded the credit worthiness of the U.S. government, an Innkeepers lawyer said at the hearing.

The parties argued their cases at Wednesday's hearing, with Chapman intervening early and often to remind them to remain focused on scheduling.

"Lawyers have a great ability to make things more complicated," she said.

An attorney for Cerberus did not accept invitations from the judge and from Innkeepers to publicly identify the material adverse event at the hearing.

Harris argued that damages are cut-and-dry with respect to the sale termination, with Innkeepers entitled to no more than the $20 million value of the deposit on the sale. A lawyer for Innkeepers disagreed, saying it may be legally entitled to large damages or an order that Cerberus complete the sale.

Innkeepers also asked the court to extend its deadline to file a restructuring or sale plan without interference from creditors after the deal fell through. Chapman did not rule on that issue.

The bankruptcy case is In re Innkeepers USA Trust, U.S. Bankruptcy Court, Southern District of New York, No. 10-13800.

The lawsuit is Innkeepers USA Trust et al v. Cerberus Series Four Holdings LLC et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-ap-2557.

(Reporting by Nick Brown; editing by Gunna Dickson and Andre Grenon)

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