Extended Stay Bankruptcy Examiner Mabey Files Report Under Seal

Extended Stay Hotels Inc.’s examiner filed under seal his report addressing claims that two private-equity firms schemed with the hotel chain’s senior lenders to push out junior debt holders and take over the company by bankrupting it.

Ralph Mabey, a former bankruptcy judge, filed his report under seal yesterday in Extended Stay’s case docket. U.S. Bankruptcy Judge James M. Peck in Manhattan on March 10 granted Mabey’s request to keep the report under wraps temporarily. Mabey said he needs to get permission to disclose information he received under confidentiality agreements. His deadline for filing the report was yesterday.

“The examiner believes that his entire report, including all of its exhibits and appendices, should be made public,” Margreta Morgulas, counsel to Mabey, wrote in the March 9 sealing request.

Extended Stay, based in Spartanburg, South Carolina, filed the largest bankruptcy case by a U.S. hotel owner in June. Real- estate owner Lightstone Group LLC bought the company in 2007, relying on more than $7 billion in debt financing to complete the $8 billion deal just weeks before the leveraged-buyout market imploded.

Mabey, of Stutman, Treister & Glatt PC in Salt Lake City, was appointed in September to examine the accusation by two mezzanine lenders, Deuce Properties Ltd. and Line Trust Corp., about a scheme to take over the company’s 680 properties.

‘Serious Questions’

In requesting an examiner, U.S. Trustee Diana Adams, the government’s representative in the bankruptcy case, cited “serious questions and concerns” about the deals Extended Stay used to acquire most of the assets now in bankruptcy.

“In total, the examiner conducted over 25 interviews and collected over 20,000 documents comprised of over 513,000 pages,” Morgulas wrote in court papers.

Deuce and Line Trust claim Cerberus Capital Management LP and Centerbridge Partners LP, private-equity firms in New York, agreed to a plan to indemnify Lightstone Group’s David Lichtenstein against $100 million in liabilities that he faced if the hotel went into bankruptcy.

The plan also called for him to be given equity in the restructured entities and a $5 million litigation fund to fight claims by the junior lenders, Line Trust and Deuce said.

Extended Stay blamed its bankruptcy filing, with $7.6 billion in debt, on decreased business-travel spending. The U.S. government is among its biggest creditors, with more than $1 billion in claims from a trust created for the collapsed bank Bear Stearns Cos.

Mezzanine loans rank in a capital structure between secured debt such as mortgages and ownership equity.

The case is In re Extended Stay Inc. 09-13764, U.S. Bankruptcy Court, Southern District of New York (Manhattan).