NEW YORK (Reuters) – The U.S. trustee overseeing Extended Stay America Inc’s bankruptcy case urged a judge on Wednesday to reject the hotel chain’s plan to reorganize, saying it shortchanges creditors.
In a filing with the U.S. bankruptcy court in Manhattan, acting U.S. Trustee Tracy Hope Davis said parts of Extended Stay’s chapter 11 reorganization plan improperly offer “non-debtors” broad protection from lawsuits and other legal action.
Davis said the court lacked the ability to grant such protection, which would prevent lawsuits against Lightstone Holdings and its founder, David Lichtenstein. Lightstone bought Extended Stay in a leveraged buyout in 2007.
“The plan offers blanket releases that enjoin claims that do not affect the debtors’ property or the administration of its estates,” Davis wrote. “The court does not have jurisdiction to grant such releases.”
Non-debtor releases can also be called third-party releases.
Under the plan, Lichtenstein would receive $40 million in exchange for his interest in HVM Manager, LLC, which oversees HVM, the company that manages Extended Stay’s more than 680 hotels across 44 U.S. states and Canada, according to the filing.
Davis said unsecured creditors would recover more if the Spartanburg, South Carolina-based company were to liquidate under Chapter 7 of the U.S. bankruptcy code, rather than reorganize under Chapter 11.
“The law presents hurdles for (debtors) to be able to get third-party releases, particularly if there are objections,” said David Neff, an attorney with Perkins Coie LLP, who is not involved in the case.
He added the reorganization’s success hinges on whether Extended Stay is willing to go forward without those protections in the plan.
“There is usually substantial momentum to confirm Chapter 11 plans in these large cases,” Neff said.
A lawyer for Extended Stay was not immediately available for comment. The company filed for court protection in June 2009 under the weight of more than $7 billion in debt after the 2008 financial crisis caused business and leisure travel to decline.
$3.93 BILLION TAKEOVER
Extended Stay’s plan calls for private equity firms Centerbridge Partners LP, hedge fund firm Paulson & Co and Blackstone Group LP (BX.N) to take over the company for $3.93 billion, a bid accepted at a court-supervised auction.
But Davis said that, by shielding non-debtors from a range of potential claims, the plan improperly limits the ability of creditors to recover. She said it also bars some creditor claims that have nothing to do with Extended Stay’s property.
“A plan may be confirmed only if every nonassenting creditor receives at least as much value as if a Chapter 7 liquidation had taken place,” Davis concluded.
If Peck “is inclined to confirm the plan,” Davis said, he should reject the non-debtor releases.
Neff said other objections are likely to follow.
“If Lichtenstein is walking away with $40 million and the (mezzanine) creditors are only going to get a hope and a prayer, I think you can bet that there will be other objections filed,” he said.
Peck approved the disclosure statement on June 23 and set a July 20 hearing to confirm the Chapter 11 plan.
The case is In Re: Extended Stay Inc, U.S. Bankruptcy Court, Southern District of New York, No. 09-13764. (Reporting by Deepa Seetharaman; additional reporting by Jonathan Stempel; editing by Leslie Gevirtz and Andre Grenon)