Pg 1 of 12 Forman, Holt, Eliades & Ravin, LLC 80 Route 4 East, Suite 290 Paramus, NJ 07652 Telephone: (201) 845-1000 Facsimile: (201) 845-9112 Michael J. Connolly, Esq. mconnolly@formanlaw.com Andrew Karas, Esq. akaras@formanlaw.com Joseph M. Cerra, Esq. jcerra@formanlaw.com UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: EXTENDED STAY, INC. et al., Debtors. Chapter 11 Case No. No. 09-13764 (JMP) (Jointly Administered) LITIGATION TRUSTEE S LIMITED OBJECTION TO STIPULATION AND ORDER RECONCILING AND FIXING THE ALLOWED CLAIMS OF THE ALLOWED CLASS 4B MEZZANINE FACILITIES CLAIMS Walker, Truesdell, Roth & Associates, and Hobart Truesdell, collectively, as "Trustee" for, on behalf of, and together with the Extended Stay Litigation Trust (the "Trust"), respectfully submit this limited objection (the Limited Objection ) to the proposed Stipulation and Order Reconciling and Fixing the Allowed Claims of the Allowed Class 4B Mezzanine Facilities Claims (the Stipulation ) and respectfully represents as follows: Background 1. The debtors in the chapter 11 cases of Extended Stay Inc. and its debtor affiliates, as debtors and debtors in possession (collectively, "Extended Stay" or the "Debtors") commenced voluntary cases under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in this Court on either June 15, 2009 or February 18, 2010 (the "Petition 00004499-1 1
Pg 2 of 12 Date"). The Debtors' chapter 11 cases were consolidated for procedural purposes only and are being jointly administered pursuant to Rule 10 15(b) of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). The Litigation Trust 2. By order dated July 20, 2010 [Docket No. 1172] (the "Confirmation Order"), the Bankruptcy Court confirmed the Debtors' Fifth Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code, Dated June 8, 2010, as Amended (the "Plan"), which applies to all of the Debtors (collectively, the "Plan Debtors") other than Extended Stay, Inc. ("ESI"). On October 8, 2010, the Effective Date of the Plan occurred. 3. The Litigation Trust was formed pursuant to the Plan and Confirmation Order. The Litigation Trust Assets are comprised of essentially all claims, potential claims, causes of actions, charges, suits or rights of recovery of the Debtors (i) referenced in the Report of Ralph R. Mabey, as Examiner, as amended [Docket Nos. 913, 1031, 1094, 1218] (the "Examiner's Report"), and (ii) under 502(d), 542 through 551, and 553 of title 11 of the Bankruptcy Code (see Plan, 1.89; ESI Settlement Agreement, 4). Pursuant to the Plan and Litigation Trust Agreement, the Litigation Trustee is responsible for, among other things, the disposition of the Litigation Trust Assets. 4. The Litigation Trust was established for the benefit of the Litigation Trust Beneficiaries. As described in the Plan and the Litigation Trust, the Litigation Trust Beneficiaries are the parties entitled to any proceeds realized from the Litigation Trust Assets and include the holders of Mezzanine Facilities Claims, the Mortgage Deficiency Claim and General Unsecured Claims (see Plan, 1.90). The Mezzanine Facilities Claims are the claims arising under the $3.3 billion mezzanine loans (see Plan, 1.98, 1.99). The General Unsecured 00004499-1 2
Pg 3 of 12 Claims are claims, other than (i) the Mezzanine Facilities Claims, (ii) an unsecured claim separately classified under the Plan (i.e., Mortgage Deficiency Claim), and (iii) other claims entitled to priority under the Bankruptcy Code, such as Administrative Expense Claims and Priority Claims (see Plan, 1.69). 5. Pursuant to Article VII of the Plan, the Litigation Trustee is also responsible for objecting to General Unsecured Claims and Mezzanine Facilities Claims. See Section 7.1(c) of the Plan. Newco or the Reorganized Debtors are tasked with filing objections to the claims for which they are responsible for payment as provided in the Plan (Section 7.1(a) of the Plan), and the Debtors and the Plan Administrator are tasked with filing objections to Administrative Expense Claims or Priority Claims. (See Section 7.1 (b) of the Plan.). 6. The Debtors and Extended Stay, Inc. transferred to the Litigation Trust the right (and hence responsibility) to object to: (a) claims under Bankruptcy Code Section 502(d), and (b) prosecute avoidance actions such as those set forth in the Examiner s Report. Claims 7. Based upon information received to date from the Debtors and the Plan Administrator, more than 1,700 proofs of claim were filed in the Plan Debtors' chapter 11 cases (see Extension Motion, 7-9, 11 (defined herein)). Combined with approximately 200 additional claims identified by the Debtors in their schedules of assets and liabilities and statements of financial affairs, the nearly 2,000 claims together assert liabilities in excess of $9 billion (see Extension Motion, 7-9, 11). Out of the total number of filed and scheduled claims, in excess of 800 alleged Mezzanine Facilities Claims. 00004499-1 3
Pg 4 of 12 First Extension Request 8. On November 19, 2010, the Debtors, on behalf of themselves, the Litigation Trustee, Newco and the Reorganized Debtors, filed a motion [Docket No. 1333] (the "First Extension Motion") requesting (i) authority for these parties to file omnibus claims objections; and (ii) an extension of time for these parties to file omnibus claims objections for an additional sixty (60) days. The hearing to consider the First Extension Motion was scheduled for December 14, 2010. 9. By Order dated December 16, 2010 [Docket No. 1356] ("First Extension Order"), the Bankruptcy Court granted the First Extension Motion. The First Extension Order was without prejudice to the right of the parties to request further extensions (see First Extension Order, p. 2). First Omnibus Objection to Claims 10. On February 4, 2011, the Plan Administrator and Plan Debtors filed the First Omnibus Objection to Claims [Docket No. 1383] ("First Omnibus Claims Objection") in which they objected to a combined total of 199 Administrative Expense Claims and Priority Claims. Second Extension Request 11. On February 18, 2011, the Trustee filed a motion [Docket No. 1392] (the "Second Extension Motion") requesting, among other things, an additional extension of time for the Trustee to file objections with respect to certain General Unsecured Claims and Mezzanine Facilities Claims until and including September 2, 2011. The Second Request Motion was necessitated by, among other things, the Trustee's ongoing investigation and evaluation of Litigation Trust Assets and analysis of potential causes of action, including those under Bankruptcy Code Section 502(d). 00004499-1 4
Pg 5 of 12 12. By order dated March 23, 2011 [Docket No. 1419] ("Second Extension Order"), the Bankruptcy Court granted the Second Extension Motion, and extended the deadline for the Trustee to object to the allowance of General Unsecured Claims and Mezzanine Facilities Claims until September 2, 2011 (see Second Extension Order, p. 2). The Second Extension Order was without prejudice to the parties to request further extensions (see Second Extension Order, p. 2). Third Extension Request 13. On August 23, 2011, the Trustee filed a motion [Docket No. 1473] (the Third Extension Motion ) requesting, among other things, an additional extension of time for the Trustee to file objections with respect to certain General Unsecured Claims and Mezzanine Facilities Claims through September 7, 2012. The Third Request Motion was necessitated by, among other things, the Trustee's ongoing investigation and evaluation of Litigation Trust Assets and the institution of complex lawsuits 1 (the Lawsuits ) seeking recovery of billions of dollars for the Litigation Trust Beneficiaries and disallowance of claims under Bankruptcy Code Section 502(d). 14. Bank of America, N.A. ( Bank of America ) filed a Limited Objection to the Third Extension Motion [Docket No. 1485] (the Objection to the Third Request Motion ), which was joined by various other entities claiming to be holders of Mezzanine Facilities Claims (the Joinders ). [See, Docket Nos. 1490; 1496; and 1502). 1 The lawsuits are Walker, Truesdell, Roth & Associates, et at. v. The Blackstone Group, L.P. et al., Adv. Pro. No. 11-2254 (IMP); Walker, Truesdell, Roth & Associates, et al. v. The Blackstone Group, L.P. et al., Adv. Pro. No. 11-2255 (IMP); Walker, Truesdell, Roth & Associates, et al, v. Lightstone Holdings, LLC, et al., Adv. Pro. No. 11-2256 (IMP); and Walker, Truesdell, Roth & Associates, et al. v. Archon Group, L.P., et al., Adv. Pro. No. 11-2259(JMP). Walker, Truesdell, Roth & Associates, et at. v. The Blackstone Group, L.P. et al., Adv. Pro. No. 11-2398(JMP), was initially filed the Supreme Court of New York, New York County and subsequently removed to the Bankruptcy Court. 00004499-1 5
Pg 6 of 12 15. The Trustee filed a Reply to the Objection to the Third Request Motion and the Joinders on October 10, 2011 (the Reply ) along with a Declaration from Sharon Roth [Docket No. 1508, 1517]. 16. In the Reply, the Trustee stated that the investigation of the claims remained ongoing and complicated by a host of factors, including a large number of unliquidated claims, multiple identical and duplicative claims, conflicting claims, claims filed without supporting documentation and claims that do not clearly set forth the identities of the appropriate creditors. 17. The Trustee also acknowledged that while $3.3 billion in principal amount of mezzanine debt was incurred by the Debtors, the claims register reflected approximately 800 mezzanine claims filed by thirty-five entities. Those claims totaled at least $9.8 billion, a number far in excess of $3.3 billion. Many of those claims were also filed as unliquidated and often without documentation, and were either conflicting or duplicative. 18. The Trustee also stated that the effort to obtain additional information from the creditors and the mezzanine claims in particular was ongoing. The Trustee noted occasions of egregious lacks of documentation including, for example Bank of America s filing of seventy claims, substantially all without documentation, in unliquidated amounts, and devoid of any evidentiary support. Similarly, the Trustee noted the conflicting claims filed with regard to the same tiers of Mezzanine Debt, again without a shred of documentation or substantiation. 19. Instead, of responding meaningfully to the Trustee s repeated requests for information and documents, certain mezzanine claimants filed a Stipulation to which the Trustee is not a party purporting to fix and allow billions of dollars in claims without the input or review of the Trustee. 00004499-1 6
Pg 7 of 12 20. By order dated October 19, 2011 [Docket No. 1521] ("Third Extension Order"), the Bankruptcy Court granted the Third Extension Motion, extending the deadline for the Trustee to object to the allowance of General Unsecured Claims and Mezzanine Facilities Claims until January 18, 2012 (see Third Extension Order, p. 3). The Order also was without prejudice to the parties to request further extensions (see Third Extension Order, p. 3). The Stipulation 21. On November 29, 2011, counsel for Wachovia Bank, N.A. ( Wachovia ) filed a Notice of Presentment of the Stipulation signed by Wachovia, Bank of America and twenty-one other entities claiming to be all of the holders of The Allowed Class 4B Mezzanine Facilities Claims (the Stipulating Parties ). The Trustee is concerned that the Stipulation has the effect, if not the intent, to impair his rights and obligations without his consent. 22. The Stipulation purports to deem the Stipulating Parties to hold Allowed Claims notwithstanding the fact that the Trustee is still investigating the claims, has not received sufficient information to justify or support the clandestine reconciliation, and has challenged and objected to the extent and validity of the claims in the Lawsuits as he has the right to do so under the Plan, Confirmation Order and Litigation Trust Agreement. 23. The Stipulation deems the amount of the Allowed Claims to be at least $3.3 billion without any precision as to the actual amount of the aggregate of said claims. The Stipulation does not properly address the fact that while the Plan acknowledge principal mezzanine debt in the amount of $3.3 billion, the Plan further provided that such an acknowledgment was to be litigation neutral as to the Trustee s objection and avoidance rights, which were expressly preserved. 00004499-1 7
Pg 8 of 12 24. The Stipulation deems to have the claims allowed in the principal amounts listed in Exhibit A [to the Stipulation], plus any additional fees, costs and interest due to each of the Claimants in accordance with the terms of their applicable loan agreements, related credit documents or as otherwise allowed by law (emphasis added). However, the Stipulation does not identify the nature or extent of such additional amounts or provide for any meaningful review of such amounts. 25. The Stipulation vaguely states that the Stipulating Parties are asserting positions solely in capacity as a claim holder. There is no explanation of what this means. 26. The Stipulation provides that each of the Stipulating Parties proofs of claim are withdrawn to the extent that they contradict the details of the Stipulation. But, the Stipulation is so vague and incomplete that it is virtually impossible to determine what it means, let alone to compare it against the myriad of mezzanine debt proofs of claim. 27. The Stipulation preserves the rights of the Stipulating Parties with respect to any proof of claim... that does not relate to the Allowed Class 4B Mezzanine Facilities Claims, or any claim...with respect to any guaranty by a non-debtor relating to the Mezzanine Debt. (see Stipulation at pages 3-4). It does not, however, preserve the Trustee s rights under the Confirmation Order, the Plan or the Trust Agreement. LIMITED OBJECTION TO THE STIPULATION 28. The Stipulation was filed with this Court without any consultation with the Trustee, without any of the further documentation detailing the claims previously promised by the Stipulating Parties, and without any opportunity for the Trustee or other creditors not a party to the Stipulation to review the records upon which the Stipulation is based. 2 2 Other parties competing for the same funds that are not named in the Stipulation include: (a)fif V ESA LLC; (b) 00004499-1 8
Pg 9 of 12 29. The Stipulating Parties claim that they have reconciled the Allowed Class 4B Mezzanine Facilities Claims. However, they have not provided the Trustee with any documentation detailing how such claims were reconciled. 30. Similarly, the Stipulating Parties have not provided information or documentation sufficient for the Trustee to acknowledge that the reconciliation is accurate. 31. The Stipulating Parties have provided no proof that they are entitled to the principal amounts asserted. Indeed, the amount claimed is not even liquidated it is at least $3.3 billion but could be greatly higher. Further, the Stipulating Parties have provided no proof of the nature, extent, or entitlement to additional fees, costs and interest. 32. The Stipulating Parties have not addressed the resolution of apparently conflicting claims filed by other entities holding a portion of the Allowed Class 4B Mezzanine Facilities Claims or as to why the Stipulating Entities are otherwise entitled to have their clandestine reconciliation deemed binding on the Trustee, the Court and other third parties. 33. The Stipulating Parties have not explained why certain claimants (i.e. Archon Group, L.P.) are not parties to the Stipulation whereas new claimants (i.e. Goldman Sachs Mortgage Co. ESH Owners LLC (which is scheduled at zero) and WRP ESH, LLC (which is also scheduled at zero)) suddenly become holders of Allowed Claims. Further, the allowed claims do not provide identification of claim numbers making it difficult for the claims agent to determine what claims have been expunged. Gramercy Warehouse Funding LLC; and (c) Merrill Lynch Mortgage Lending Inc. (although this claimant may have been subsumed into Bank of America, N.A.). Additionally, while Bank of America, N.A. is included in the stipulation, claims were filed for Bank of America Securities LLC and Bank of America Securities LLC Real Estate Structured Finance. Further, JP Morgan Chase Bank, N.A. filed claims on its own behalf and as an administrator. The stipulation is unclear as to whether JP Morgan entered into the stipulation on behalf of the entities for which it acts as an administrator. 00004499-1 9
Pg 10 of 12 34. The Stipulating Parties do not acknowledge the Trustee s right (or obligation) to further review these reconciled claims and to raise objections to said claims as appropriate under the terms of the Plan and Confirmation Order that incorporated the causes of action identified in the Examiner s Report which formed a basis for the Lawsuits. 35. The Stipulating Parties do not reserve the right of the Trustee to amend the lawsuits to substitute parties based upon the reconciliation, or otherwise indicate the Stipulation is without prejudice to the rights of the Trustee or of other conflicting claimants. 36. The Plan, Confirmation Order, and Litigation Trust Agreement were to be litigation neutral. Section 4.5(a) of the Plan states that Class 4B consists of the Mezzanine Facilities Claims, which shall be Allowed Claims in the aggregate amount of at least $3,300,000,000. However, the right to challenge such claims under Section 502(d) of the Bankruptcy Code, and to assert other potential claims, causes of actions, charges, suits or rights of recovery referenced in the Examiner s Report were expressly preserved as Litigation Trust Assets. See, e.g., Plan at Section 1.89 [docket no. 1172, page 83]. Accordingly, paragraph seventy-five of the Confirmation Order provides that: Nothing in the Plan, this Order, the ESI Settlement or the ESI Settlement Order [Docket No. 1170] will have the effect of impairing, enhancing, or altering either (i) the rights, remedies or defenses (or the enforceability thereof) of any defendant with respect to any rights, remedies, claims, causes of action (or interests therein) that are transferred to the Litigation Trust, or (ii) the rights, remedies, claims or causes of action (or interests therein) of any Debtor or ESI that are so transferred; it being understood that the effect of the Plan, this Order, the ESI Settlement and the ESI Settlement Order is to be litigation neutral with respect to all such rights, remedies, defenses, claims and causes of action. Confirmation Order at par. 75 [docket no. 1172, page 93]. 37. Based upon the foregoing, the Stipulation is objectionable to the extent it can be deemed to constitute a means to circumvent, or avoid entirely, the panoply of rights reserved to 00004499-1 10
Pg 11 of 12 the Trustee including those involving: (a) the claims resolution process contemplated by the Bankruptcy Code and Rules of Procedure and the express terms of the Plan, the Confirmation Order, and the litigation trustee agreement; (b) the Trustee s rights and duties to pursue causes of action indentified above; (c) the Trustee s right to object to claims. 38. The Trustee does not object to the Stipulating Parties formally withdrawing claims that are duplicative, inaccurate, or otherwise objectionable. The Trustee also does not object to bona fide attempts by the Stipulating Parties to assist the Trustee in reviewing claims and challenging them when appropriate. However, the Trustee does object to the entry of the Stipulation to the extent that it purports to allow claims in an unlimited amount, inclusive of charges that are not ascertainable or even appropriate based solely upon a private agreement of the Stipulating Parties. The Trustee must be afforded the right to review the documentation and proofs allegedly justifying the stipulated claims and to have the right to submit objections as appropriate. The creditors cannot agree away the Trustee s right and obligation to examine and object to claims. Similarly, and equally important, while the Stipulation does explicitly preserve some of the parties rights, the Stipulation does not explicitly preserve the Trustee s rights under the Plan, the Confirmation Order, or the trust agreement with regard to the Lawsuits. Simply put, the Stipulation should not be allowed to be used to prejudice the Trustee s current claims against the Stipulating Parties. While the Trustee has no quarrel with the Stipulating Parties agreeing among themselves how claims are to be divided among them, such Stipulation cannot prejudice either the Trustee s rights to examine those claims in the context of the universe of claims filed and in connection with the litigation filed against certain of the Stipulating Parties or third parties rights to challenge the entitlement to any distribution that may conflict with such third parties claims. 00004499-1 11
Pg 12 of 12 WHEREFORE the Trustee respectfully requests that the Court: (i) deny the Stipulation to the extent that it purports to: (a) affect the Trustee s rights to object to the mezzanine or other claims, or (b) otherwise fail to preserve the Litigation Trustee s rights in the Lawsuits and under the terms of the Confirmation Order, the Plan and the Litigation Trust Agreement; (ii) deny the Stipulation to the extent it purports to adversely affect other claims by other claimants to the $3.3 billion; and (iii) grant such other and further relief as the Court deems just and proper. Dated: New York, New York December 13, 2011 Respectfully submitted, FORMAN, HOLT, ELIADES & RAVIN, LLC By: /s/ Michael J. Connolly Michael J. Connolly mconnolly@formanlaw.com Andrew Karas akaras@formanlaw.com Joseph Cerra jcerra@formanlaw.com 80 Route 4 East, Suite 290 Paramus, NJ 07652 (201) 845-1000 (phone) (201) 845-9112 (fax) Attorneys for Plaintiffs Walker, Truesdell, Roth & Associates and Hobart Truesdell, as Trustees for and on behalf of the Extended Stay Litigation Trust, and the Extended Stay Litigation Trust 00004499-1 12