Cerberus, Partner Sued For Nixing $1.12B Deal

Innkeepers USA Trust has sued Cerberus Capital Management LP and Chatham Lodging Trust over their decision to call off their $1.12 billion purchase out of bankruptcy of 64 of its hotels, according to sister news service Reuters.

In an adversary proceeding filed Aug. 29 in the U.S. bankruptcy court in Manhattan, Innkeepers rejected the defendants’ determination that a “material adverse change” had taken place, allowing them to back out of a May 16 purchase agreement. Innkeepers said no such change had taken place and that Cerberus and Chatham could not back out of the purchase based on any change in “general market conditions” alone.

Innkeepers said invoking the clause was a ruse to renegotiate the purchase at a lower price. It wants Cerberus and Chatham to continue with the purchase, or pay “substantial” monetary damages and let it keep their $20 million deposit. “At most, Cerberus and Chatham have suggested that global financial market volatility may somehow constitute a ‘material adverse effect’ and allow them to back out of the deal at the last moment,” Innkeepers said in the complaint.

“The defendants’ last minute change of heart,” it added, is part of “a calculated effort to renegotiate the terms of the parties’ deal.” Cerberus is one of the world’s most prominent private equity firms, while Chatham is a real estate investment trust.

Mark Neporent, Cerberus’ chief operating officer, said in a statement the buyers will pursue their claim “in an appropriate manner,” and that Innkeepers’ only remedy for a breach of contract is to keep the deposit. Neither company has publicly specified the material adverse change they claimed to have identified at Innkeepers, though credit conditions have tightened in recent weeks amid concern about the health of the global economy.

According to Innkeepers’ complaint, Cerberus and Chatham appeared ready to close on Aug. 5, only to suddenly require a three-day delay. In the interim, Standard & Poor’s downgraded the United States’ credit rating, triggering a stock market sell-off.

Innkeepers said that by Aug. 9, Cerberus was questioning whether equity market conditions had caused a material adverse change. Ten days later, after Innkeepers had at least twice rejected requests for a price cut, Cerberus and Chatham backed out of the purchase, the complaint said. The $1.12 billion purchase price was to have included about $700 million of debt.

Innkeepers has operated hotels for chains including Hilton, Hyatt and Marriott. It filed for Chapter 11 bankruptcy protection in July 2010, burdened by too much debt from its 2007 takeover by Apollo Investment Corp., a business development company affiliate of Apollo Global Management LP that Invests in distressed debt.

(Jonathan Stempel is a correspondent for Reuters in New York.)