UPDATE 1-Cerberus blames economy for failed Innkeepers deal

Mon Sep 12, 2011 6:04pm EDT

* Backed out of $1.12 bln deal in August; Innkeepers sued

* Cerberus says unstable markets triggered pull-out clause

* Says Innkeepers not entitled to major damages (Adds comment from Innkeepers in 7th graph)

By Nick Brown

NEW YORK, Sept 12 (Reuters) - Cerberus Capital Management LP [CBS.UL] said economic instability triggered its decision to end a $1.12 billion purchase deal with bankrupt hotel operator Innkeepers USA Trust INKPQ.PK.

Responding to a lawsuit filed by Innkeepers in U.S. Bankruptcy Court in Manhattan, Cerberus said "unforeseeable" turmoil in the markets impacted Innkeepers' business, triggering a clause in the deal's contract allowing it to end the purchase.

The response, filed late on Friday, was Cerberus' first public explanation for invoking the "material adverse effect" clause to end the agreement.

Innkeepers, which had agreed to sell 64 hotels under brand names like Hilton, Hyatt and Marriott, sued Cerberus and its joint venture partner on the deal, investment firm Chatham Lodging Trust (CLDT.N), saying they backed out without explaining why. Cerberus and Chatham backed out of the purchase in August.

Innkeepers has said it received "vague" indications that economic fluctuation had triggered the decision, but chastised Cerberus and Chatham for their opaqueness on the issue.

The hotel operator has said its business is performing well and that it does not believe an adverse change has taken place.

"Cerberus and Chatham signed a binding and irrevocable written agreement to acquire 64 hotels from Innkeepers," Marc Beilinson, the company's chief restructuring officer, said in a statement on Monday. "In their answers, Cerberus and Chatham yet again failed to provide any basis that a material adverse event has occurred with respect to Innkeepers' hotels."

Material adverse event clauses allow buyers to pull out of purchase commitments if the seller's business suffers a material change, but the language of Innkeepers' clause included general market volatility as a potential trigger.

Cerberus said in court papers that "adverse changes in the debt and equity capital markets between May 16, 2011, and today" changed Innkeepers for the worse.

Comparable hotel operators have seen 30 percent to 40 percent declines in equity, Cerberus said. It also cited the downgrade by Standard & Poor's of the United States' credit rating, and noted that some analysts are predicting a second recession.

Innkeepers, owned by Apollo Investment Corp (AINV.O), is demanding a court order forcing Cerberus and Chatham to close on the deal, or compensatory damages if they do not.

Cerberus said in its filing that, even if a breach has occurred, the terms of the deal limit damages to the $20 million deposit included in the buyout agreement.

Chatham, in a separate filing on Friday, denied the allegations and echoed Cerberus' position against damages.

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, in the same court, No. 11-ap-2557. (Reporting by Nick Brown; editing by Gunna Dickson and Carol Bishopric)

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