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In re Innkeepers USA Tr. - 442 B.R. 227 (Bankr. S.D.N.Y. 2010)


In applying heightened scrutiny, courts are concerned with the integrity and entire fairness of the transaction at issue, typically examining whether the process and price of a proposed transaction not only appear fair but are fair and whether fiduciary duties were properly taken into consideration. The business judgment rule's presumption shields corporate decision makers and their decisions from judicial second-guessing.


The PSA supported a plan term sheet that provided, among other things, for Lehman to receive, in satisfaction of its secured mortgage claims of approximately $238 million in floating mortgage loan debt (comprised of approximately $220 million in prepetition debt and an anticipated $17.5 million in DIP financing), 100% of the issued and outstanding new shares of common stock to be issued by the reorganized Debtors. The new shares would include all equity in all ninety-two of the Debtors, notwithstanding that Lehman currently was secured by collateral of only twenty of the Debtors. Under the plan term sheet, the remaining property level secured lenders would receive new secured notes with a value that is not less than the value of the collateral securing their prepetition debt. The plan dictated by the PSA proposes to assign a value to those secured notes, providing Midland, for example, with a $550 million note on account of its approximately $825 million secured claim. Section 6 of the PSA set that upon the occurrence of select Termination Events, the PSA forces the Debtors to choose between (a) immediate stay relief in favor of Lehman (which would permit it to exercise any and all remedies with respect to the Floating Rate Collateral without further Court approval) or (b) a section 363 sale of the Floating Rate Collateral at which Lehman would have the right to credit bid the unpaid balance of the Floating Rate Mortgage Loan. Chapter 11 debtors filed a motion for an order authorizing the debtors to assume a plan support agreement (PSA) with one of its creditors. Objections were filed by several parties in interest.


Should the debtors be allowed to assume the plan support agreement (PSA) with one of the creditors?




The court denied the motion. The court held that the debtors had failed to meet their burden for assumption of the PSA under either "heightened scrutiny" or under the less stringent "business judgment" test. The court could not conclude that the PSA was entered into with "due care" in light of the substantial limitations in the PSA on the debtors' ability to engage in discussions regarding a restructuring with any of their other major creditors. The court also found that the debtors had not shown that they acted good faith in (i) making the decision to enter into the PSA and (ii) providing transparency to their creditors. Finally, the court held that the PSA afforded minimal benefit to the debtors.

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