## Facts

- Innkeepers USA Trust and 91 affiliates operated a hotel portfolio with multiple layers of secured mortgage and mezzanine debt.
- Prepetition, the debtors entered into a plan support agreement (PSA) with Lehman ALI Inc., a secured creditor holding about $238 million in debt against only about 20 of the 92 debtor entities.
- Other secured creditors, including a constituency led by Midland Loan Services (special servicer), held roughly $1.2 billion in secured debt and objected that the PSA would shift value to Lehman at their expense.
- The PSA contemplated a chapter 11 plan sponsored by Lehman under which Lehman would receive all equity in the reorganized enterprise in exchange for its secured claim.
- The PSA imposed aggressive plan milestones, multiple termination events, and a restrictive fiduciary-out that effectively limited the debtors’ ability to consider alternative restructuring proposals unless they yielded Lehman a superior result.
- The debtors’ chief restructuring officer did not perform an independent valuation, did not test the deal in the market, and directed the investment banker not to solicit or pursue other bids; objectors also asserted inadequate disclosure and engagement with affected secured creditors.
- The debtors moved to assume the PSA under 11 U.S.C. § 365 as an executory contract, arguing it was a proper exercise of business judgment; secured creditors objected.

## Issues

1. What standard governs a debtor’s motion to assume a plan-shaping PSA under § 365: ordinary business judgment or heightened scrutiny where conflicts or process constraints are present?
2. Under the applicable standard(s), did the debtors carry their burden to show that assuming the PSA was a reasonable, informed exercise of fiduciary duties and beneficial to the estates?

## Decision

- The court denied the motion to assume the PSA.
- The court applied heightened scrutiny given the PSA’s effect on the plan process and creditor value allocation, and found the debtors did not satisfy that standard.
- The court also found the debtors failed to justify assumption even under the business judgment standard because the decision was not supported by an informed, value-maximizing process.

## Legal Principles

- A debtor may assume an executory contract under § 365 only if assumption reflects a reasonable exercise of judgment and benefits the estate.
- Where an agreement effectively dictates plan structure, constrains consideration of alternatives, or suggests conflicted decision-making, the court may apply heightened scrutiny focused on procedural and substantive fairness.
- A debtor in possession must preserve flexibility to fulfill fiduciary obligations to the estates and creditor body; it cannot contract away meaningful ability to evaluate and pursue better alternatives through overly restrictive milestones, termination rights, or fiduciary-out provisions.
- Lack of valuation work, lack of market testing, and limited transparency with materially affected creditors can defeat a request to assume, even if the debtor asserts the agreement represents the best available deal.

## Conclusion

The court refused to approve assumption of a restructuring PSA that entrenched one secured creditor as plan sponsor, limited the debtors’ ability to consider competing transactions, and was adopted without adequate valuation, market testing, or a demonstrably fair allocation of value across affected creditor constituencies.


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