Blackstone settles Extended Stay lawsuit for $10 million

(Reuters) - Blackstone Group LP BX.N agreed to pay $10 million to settle a lawsuit that had sought $8.4 billion for its role in the sale and subsequent bankruptcy of hotel chain Extended Stay Inc.

Citigroup Inc C.N, an adviser to the private equity firm that took control of Extended Stay in a 2007 leveraged buyout, agreed to pay $200,000, according to a filing with the U.S. Bankruptcy Court in New York on Thursday. Bank of America Corp BAC.N, which advised Blackstone, was also released from the lawsuits as part of the settlement.

The lawsuits stemmed from the 2009 bankruptcy of Extended Stay Inc, which creditors blamed on a leveraged buyout of the chain two years earlier.

In 2007, Blackstone sold the chain of about 680 hotels for $8 billion to a little-known private equity investor, David Lichtenstein. The settlement excluded Lichtenstein.

After Extended Stay filed for bankruptcy, a trustee acting for the benefit of its creditors filed five lawsuits in 2011.

The lawsuits alleged that Blackstone skimmed $2.1 billion from the sale of the chain. The trust also asked the court for $6.3 billion in punitive damages because it alleged Blackstone and others maliciously breached their duties to Extended Stay creditors.

In court papers on Thursday seeking approval of the settlement, trustee Finbarr O’Connor said the agreement was fair, given recent court rulings that strengthened the so-called safe harbor defense. The 2nd U.S. Circuit Court of Appeals, in New York, has given broad protections to prebankruptcy sales and transfers, making them very difficult for creditors to challenge.

As part of the settlement, the defendants agreed to aid the trustee in the remaining lawsuits.

O’Connor asked the court to consider approval of the Blackstone and Citigroup settlements at a hearing on July 18.

The Chapter 11 case is Extended Stay Inc, U.S. Bankruptcy Court, Southern District of New York, No. 09-13764; the adversary proceedings are Nos. 11-02254, 11-02255 and 11-02398.

Reporting by Tom Hals in Wilmington, Del.; editing by Matthew Lewis