Extended Stay committee looks to solicit alternate plan proposals

By Caroline Salls

Pittsburgh, March 12 - Extended Stay Inc.'s official committee of unsecured creditors has asked the U.S. Bankruptcy Court for the Southern District of New York to allow its financial adviser to solicit alternative plan of reorganization proposals using the company's confidential information, according to a Thursday court filing.

The committee also objected to Extended Stay's motion to enter into a proposed investment and standby purchase agreement with Centerbridge Partners, LP and Paulson & Co. Inc.

According to the filing, the investment agreement is opposed by essentially all of Extended Stay's creditors and does not maximize the value from the sale of the company's business.

In addition, the committee said the investment agreement "represents the end-product of potential self-dealing and other conflicts of interest on the part of the debtors' management."

The committee said approval of the investment agreement "will likely result in the investors grabbing the debtors' business at a fire sale price." The creditor group said the likely $320 million cash portion of the transaction to be provided by the investors "represents a mere fraction of the debtors' own low-ball estimate of the company's enterprise value," which is estimated between $2.8 billion to $3.6 billion.

The committee also said a conflict of interest is embedded in the ownership and control structure between Extended Stay, HVM LLC, HVM Manager, LLC, Extended Stay president David Lichtenstein and The Lightstone Group.

The Extended Stay entities are owned by affiliates of The Lightstone Group and managed by HVM, according to the filing. In turn, Lichtenstein owns The Lightstone Group.

Specifically, the committee said the investment agreement transactions will give Lichtenstein at least $130 million in consideration, including $30 million from the sale of HVM Manager to the investors and termination of his obligations under a $100 million "bad boy" guarantee.

The committee said it also believes that a number of Extended Stay's current directors and officers will receive significant payments arising from change-in-control agreements, but will still be employed by the investors.

Additionally, the committee said the investment agreement is based on a plan of reorganization that is unconfirmable because "it gerrymanders the impaired classes of claims, seeks improper substantive consolidation [and] grants inappropriate releases to Lichtenstein and other individuals.

The committee said the proposed plan also transfers all of the causes of action and their proceeds that belong to Extended Stay's estates to the new company that will run its business.

The creditor group said the company has abused its fiduciary obligations, and, in the process, has "transformed what was collateral heat in the wings into a full-blown conflagration."

A hearing on the company's investment and standby purchase agreement motion is scheduled for March 16, and a hearing on the committee's solicitation motion will be held on April 8.

Extended Stay, a New York-based owner and operator of mid-priced extended stay hotels, filed for bankruptcy on June 15, 2009. Its Chapter 11 case number is 09-13764.

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