Innkeepers Files Complaint Against Chatham, Cerberus Over $1.1B Deal

Just steps from emerging from Chapter 11, Innkeepers suffered a major blow when a joint venture of Chatham and Cerberus Series terminated a $1.1 billion contract, but Innkeepers plans to fight the hit in court.

August 31, 2011
By Barbra Murray, Contributing Editor

The Residence Inn, Garden Grove, Calif.

Just steps from emerging from Chapter 11, Innkeepers USA Trust recently suffered a major blow when a joint venture consisting of Chatham Lodging Trust and Cerberus Series Four Holdings L.L.C. terminated a $1.1 billion contract to acquire 64 Innkeepers properties. But the hotel REIT does not plan to take the hit lying down. Innkeepers has gone to court — the U.S. Bankruptcy Court for the Southern District of New York — and filed a complaint against Chatham and Cerberus for breach of contract.

Overwhelmed by funded secured debt totaling approximately $1.4 billion, Innkeepers filed for bankruptcy protection in July 2010. In late June of this year, the Bankruptcy Court signed off on the REIT’s plan of reorganization, which involved an agreement with Chatham and Cerberus to acquire the 64-hotel portfolio — the joint venture partners ponied up a $20 million deposit — and a separate agreement with Chatham to buy another five properties encompassing 764 guestrooms for $195 million. The latter transaction closed in July, about five weeks before Chatham and Cerberus walked away from the deal involving the 64 Innkeepers hotels that included the Residence Inn in Garden Grove, Calif., pictured.

The partners explained their about-face in a press release. “Chatham and Cerberus jointly determined to terminate the agreement in accordance with the terms of the agreement as a result of the occurrence of a condition, change or development that could reasonably be expected to have a material adverse effect on Innkeepers’ business, assets, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects,” it read in part.

Innkeepers begs to differ on the point of any such condition, change or development. In its preliminary statement in the complaint, the REIT asserts that the joint venture’s termination of the agreement was “based on an unidentified and unexplained ‘material adverse effect,'” and that there was no such clause regarding a market material adverse effect in the agreement, as Chatham and Cerberus claim. Innkeepers adds that despite numerous attempts to make contact to achieve clarity on the point of the adverse event, the partners have made no response.

Innkeepers has its own assessment of the reasons behind the contract termination, and offers its inferred explanation in the court filing. “The Defendants’ last minute change of heart has nothing to do with any change in the performance or prospects of the Fixed/Floating Debtors’ business and everything to do with a calculated effort to renegotiate the terms of the parties’ deal.”

But monetary recompense is not Innkeepers main goal in filing the complaint. The REIT is seeking “specific performance of the Defendants’ binding and irrevocable commitments,” however, in lieu of a renewal of the agreement, will settle for “substantial monetary damages.”