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In re Extended Stay

November 10, 2011

WALKER, TRUESDELL, ROTH & ASSOCIATES, AS TRUSTEE FOR AND ON BEHALF OF THE EXTENDED STAY LITIGATION TRUST, HOBART TRUESDELL, AS TRUSTEE FOR AND ON BEHALF OF THE EXTENDED STAY LITIGATION TRUST, AND THE EXTENDED STAY LITIGATION TRUST, PLAINTIFFS,
v.
THE BLACKSTONE GROUP, L.P., BLACKSTONE HOLDINGS I L.P., BLACKSTONE HOLDINGS II L.P., BLACKSTONE HOLDINGS III L.P., BLACKSTONE HOLDINGS IV L.P., BLACKSTONE HOLDINGS V L.P., BLACKSTONE HOLDINGS I/II GP, INC., BLACKSTONE HOLDINGS III GP L.L.C., BLACKSTONE HOLDINGS IV GP L.P., BLACKSTONE HOLDINGS V GP L.P., BLACKSTONE REAL ESTATE PARTNERS IV L.P., BLACKSTONE CAPITAL PARTNERS IV L.P., BHAC IV, LLC, BRE/HV HOLDINGS LLC, BLACKSTONE HOSPITALITY ACQUISITIONS, LLC, PRIME HOSPITALITY, LLC, DL-DW HOLDINGS, LLC, LIGHTSTONE HOLDINGS LLC, THE LIGHTSTONE GROUP, LLC, PGRT ESH INC., LIGHTSTONE COMMERCIAL MANAGEMENT, ARBOR ESH II, LLC, ARBOR COMMERCIAL MORTGAGE, LLC, PRINCETON ESH LLC, ATMAR ASSOCIATES, LLC, GLIDA ONE LLC, RON INVEST LLC, POLAR EXTENDED: STAY (USA) L.P., BHAC CAPITAL IV, LLC, BRE/ESH HOLDINGS, LLC, ABT-ESI LLC, MERICASH FUNDING LLC, PARK AVENUE FUNDING LLC, BANK OF AMERICA, N.A., CITIGROUP GLOBAL MARKETS INC., EBURY FINANCE LIMITED, BANC OF AMERICA SECURITIES LLC, DAVID LICHTENSTEIN, BRUNO DE VINCK, PEYTON "CHIP" OWEN, JR., GUY R. MILONE, JR., JOSEPH CHETRIT, JOSESPH TEICHMAN, JOSEPH MARTELLO, F. JOSEPH ROGERS, DAVID KIM, GARY DELAPP, JONATHAN D. GRAY, WILLIAM STEIN, MICHAEL CHAE, ROBERT L. FRIEDMAN, THOMAS BURDI, GARY SUMERS, DENNIS J. MCDONAUGH, ALAN MIYASAKI, AND JOHN DOES 1 THROUGH 100, INCLUSIVE, DEFENDANTS. WALKER, TRUESDELL, ROTH & ASSOCIATES, AS TRUSTEE FOR AND ON BEHALF OF THE EXTENDED STAY LITIGATION TRUST, HOBART TRUESDELL, AS TRUSTEE FOR AND ON BEHALF OF THE EXTENDED STAY LITIGATION TRUST, AND THE EXTENDED STAY LITIGATION TRUST, PLAINTIFFS,
v.
LIGHTSTONE HOLDINGS, LLC, LIGHTSTONE COMMERCIAL MANAGEMENT, DL-DW HOLDINGS, LLC, BHAC CAPITAL IV, LLC, ARBOR COMMERCIAL MORTGAGE, LLC, ABT-ESI LLC, MERICASH FUNDING, LLC, PARK AVENUE FUNDING LLC, PRINCETON ESH LLC, BANK OF AMERICA, N.A., J.P. MORGAN COMMERCIAL MORTGAGE INC., ASHFORD HOSPITALITY FINANCE LP, ATLAS VENTURES I LLC, BARTON EQUITIES LLC, BK ESH LLC, CL VENTURES LLC, DEUCE PROPERTIES LIMITED, EBURY FINANCE LIMITED, ESH FUNDING LLC, FIF V ESA HOLDINGS LLC, FIF V ESA LLC, FOA ESH LLC, GF ESH LLC, GRAMERCY WAREHOUSE FUNDING IV LLC, HOSPITALITY F, LLC, JPMORGAN CHASE BANK, N.A., INDIVIDUALLY AND IN ITS CAPACITY AS ADMINISTRATOR, J.P. MORGAN CLEARING CORP., LEGACY ESH LLC, LINE TRUST CORPORATION LIMITED, MERRILL LYNCH MORTGAGE LENDING, INC., MERRILL LYNCH & CO., INC., SFF ESH LLC, SW ESH LLC, SL GREEN FUNDING LLC, WRP ESH LLC, AND DOES 1 THROUGH 100, INCLUSIVE, DEFENDANTS.
WALKER, TRUESDELL, ROTH & ASSOCIATES, AS TRUSTEE FOR AND ON BEHALF OF THE EXTENDED STAY LITIGATION TRUST, HOBART TRUESDELL, AS TRUSTEE FOR AND ON BEHALF OF THE EXTENDED STAY LITIGATION TRUST, AND THE EXTENDED STAY LITIGATION TRUST, PLAINTIFFS,
v.
THE BLACKSTONE GROUP, L.P., BLACKSTONE HOLDINGS I L.P., BLACKSTONE HOLDINGS II L.P., BLACKSTONE HOLDINGS III L.P., BLACKSTONE HOLDINGS IV L.P., BLACKSTONE HOLDINGS V L.P., BLACKSTONE HOLDINGS I/II GP, INC., BLACKSTONE HOLDINGS III GP L.L.C., BLACKSTONE HOLDINGS IV GP L.P., BLACKSTONE HOLDINGS V GP L.P., BLACKSTONE REAL ESTATE PARTNERS IV L.P., BLACKSTONE CAPITAL PARTNERS IV L.P., BHAC IV, LLC, BRE/HV HOLDINGS LLC, BLACKSTONE HOSPITALITY ACQUISITIONS, LLC, PRIME HOSPITALITY, LLC, DL-DW HOLDINGS, LLC, CITIGROUP GLOBAL MARKETS, INC., BANK OF AMERICA, N.A., AND DOES 1 THROUGH 100, INCLUSIVE, DEFENDANTS.
WALKER, TRUESDELL, ROTH & ASSOCIATES, AS TRUSTEE FOR AND ON BEHALF OF THE EXTENDED STAY LITIGATION TRUST, HOBART TRUESDELL, AS TRUSTEE FOR AND ON BEHALF OF THE EXTENDED STAY LITIGATION TRUST, AND THE EXTENDED STAY LITIGATION TRUST, PLAINTIFFS,
v.
THE BLACKSTONE GROUP, L.P., BLACKSTONE HOLDINGS I L.P., BLACKSTONE HOLDINGS II L.P., BLACKSTONE HOLDINGS III L.P., BLACKSTONE HOLDINGS IV L.P., BLACKSTONE HOLDINGS V L.P., BLACKSTONE HOLDINGS I/II GP, INC., BLACKSTONE HOLDINGS III GP L.L.C., BLACKSTONE HOLDINGS IV GP L.P., BLACKSTONE HOLDINGS V GP L.P., BLACKSTONE REAL ESTATE PARTNERS IV L.P., BLACKSTONE CAPITAL PARTNERS IV L.P., BHAC IV, LLC, BRE/HV HOLDINGS LLC, BLACKSTONE HOSPITALITY ACQUISITIONS, LLC, PRIME HOSPITALITY, LLC, DL-DW HOLDINGS, LLC, LIGHTSTONE HOLDINGS: LLC, THE LIGHTSTONE GROUP, LLC, PGRT ESH INC., LIGHTSTONE COMMERCIAL MANAGEMENT, ARBOR ESH II, LLC, ARBOR COMMERCIAL MORTGAGE, LLC, PRINCETON ESH LLC, ATMAR ASSOCIATES, LLC, GLIDA ONE LLC, RON INVEST LLC, POLAR EXTENDED: STAY (USA) L.P., BHAC CAPITAL IV, LLC, BRE/ESH HOLDINGS, LLC, ABT-ESI LLC, MERICASH FUNDING LLC, PARK AVENUE FUNDING LLC, BANK OF AMERICA, N.A., CITIGROUP GLOBAL MARKETS INC., EBURY FINANCE LIMITED, BANC OF AMERICA SECURITIES LLC, DAVID LICHTENSTEIN, BRUNO DE VINCK, PEYTON "CHIP" OWEN, JR., GUY R. MILONE, JR., JOSEPH CHETRIT, JOSESPH TEICHMAN, JOSEPH MARTELLO, F. JOSEPH ROGERS, DAVID KIM, GARY DELAPP, JONATHAN D. GRAY, WILLIAM STEIN, MICHAEL CHAE, ROBERT L. FRIEDMAN, THOMAS BURDI, GARY SUMERS, DENNIS J. MCDONAUGH, ALAN MIYASAKI, AND JOHN DOES 1 THROUGH 100, INCLUSIVE, DEFENDANTS.
WALKER, TRUESDELL, ROTH & ASSOCIATES, AS TRUSTEE FOR AND ON BEHALF OF THE EXTENDED STAY LITIGATION TRUST, HOBART TRUESDELL, AS TRUSTEE FOR AND ON BEHALF OF THE EXTENDED STAY LITIGATION TRUST, AND THE EXTENDED STAY LITIGATION TRUST, PLAINTIFFS,
v.
ARCHON GROUP, L.P., INDIVIDUALLY AND AS SERVICER, STARWOOD CAPITAL GROUP GLOBAL, L.P., DEBT U ESH, L.P., DEBT II ESH, L.P., WACHOVIA BANK, NATIONAL ASSOCIATION, SQUARE MILE CAPITAL MANAGEMENT, LLC, ESH OWNER, LLC, KEYBANK, NATIONAL ASSOCIATION, U.S. : BANK NATIONAL ASSOCIATION, NOT INDIVIDUALLY BUT SOLELY AS TRUSTEE FOR MAIDEN LANE COMMERCIAL MORTGAGE-BACKED SECURITIES TRUST 2008-1, MAIDEN LANE COMMERCIAL MORTGAGE-BACKED SECURITIES TRUST 2008-1 AND THE FEDERAL RESERVE BANK OF NEW YORK, AND DOES 1 THROUGH 100, INCLUSIVE, DEFENDANTS.



Adv. Pro. No. 11-2256 Adv. Pro. No. 11-2255 Adv. Pro. No. 11-2254 Adv. Pro. No. 11-2259

The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.:

Chapter 11 Case No. 09-13764 (JMP)

OPINION AND ORDER

I. INTRODUCTION

Plaintiffs, Walker, Truesdell, Roth & Associates and Hobart Truesdell, as Trustees for and on behalf of the Extended Stay Litigation Trust (the "Trust"), and the Trust bring these motions to withdraw the reference, pursuant to section 157(d) of Title 28 of the United States Code, of five adversary actions filed in connection with the bankruptcy of Extended Stay, Inc., and its affiliated entities, from the United States Bankruptcy Court to this Court. Plaintiffs argue that all five cases meet the standards for mandatory and permissive withdrawal of the reference. The gravamen of plaintiffs' argument is that an Article III court must adjudicate these adversary actions under the Supreme Court's recent decision in Stern v. Marshall.*fn1 Defendants argue that withdrawal of the reference is neither required by the mandatory withdrawal standard nor appropriate under the permissive withdrawal standard. For the reasons set forth below, plaintiffs' motions to withdraw the reference are denied.

II. BACKGROUND

A. The Extended Stay LBO and Bankruptcy

Extended Stay, Inc. and affiliated entities (the "Debtors" or "Extended Stay") "owned the leading mid-priced extended-stay hotel business in the U.S., with 684 hotels located in 44 states."*fn2 On April 12, 2007, Lightstone Holdings LLC and affiliated entities offered to purchase the Debtors in a leveraged buyout ("LBO") for eight billion dollars, comprised of $7.4 billion of debt, four-hundred million dollars of cash, and two-hundred million dollars of rollover equity.*fn3

Before the LBO, the "Debtors' business was encumbered by secured debt totaling approximately $3.3 billion and mezzanine debt totaling approximately $1.9 billion."*fn4 The LBO closed on June 11, 2007.*fn5

A little over two years later, on June 15, 2009, the Debtors filed for chapter 11 bankruptcy protection.*fn6 In July 2010, the bankruptcy court confirmed the Extended Stay Plan of Reorganization (the "Plan").*fn7 The Confirmation Order created the Trust to bring claims on behalf of the Debtors.*fn8 The bankruptcy court retained jurisdiction over "any matters . . . arising in or related to the Chapter 11

Cases of the Plan,"*fn9 including any claims by the Trustee "to recover assets for the benefit of the Debtors' estates."*fn10

B. The Five Adversary Actions

Plaintiffs bring five separate actions, for the benefit of the Debtors' creditors, to recover billions of dollars that defendants allegedly destroyed in Debtors' value. These claims essentially fall into two categories: (1) "At the LBO's closing, the pre-sale officers and directors allowed Blackstone to siphon $2.1 billion of value from the debtors"; and (2) "After the LBO, the post-sale buyer's officers, directors and members allowed the systematic draining of over $100 million through the continuous payment of improper dividends and distributions to post-LBO equity holders and their affiliates."*fn11

First, on June 14, 2011, plaintiffs filed a complaint against the entities that consumated the LBO (the "LBO Complaint.").*fn12 The defendants in this action include (1) the LBO sellers and their affiliated entities, (2) the LBO buyer and its related entities, and (3) the professionals who assisted with the LBO. The LBO Complaint (1) seeks avoidance and recovery of fraudulent transfers and subsequent transfers made in connection with the LBO under the Bankruptcy Code, (2) seeks disallowance of claims under section 502(d) of the Bankruptcy Code, and (3) alleges causes of action under federal securities laws.*fn13

Second, on the same date, plaintiffs filed another LBO-based Complaint against various entities that continue to receive payments and benefits as a result of the LBO (the "Post-LBO Complaint").*fn14 The defendants are (1) lenders and entities that received payments on the debt the Debtors incurred in connection with the LBO, and (2) entities affiliated with the LBO buyer that received similar benefits and payments. The Post-LBO Complaint seeks (1) the avoidance and recovery of fraudulent transfers and subsequent transfers made post- LBO, and (2) the disallowance of claims.*fn15

Third, on the same date, plaintiffs filed a Complaint in the Supreme Court of the Stateof New York, County of New York (the "State Court Complaint"),*fn16 which the Blackstone Defendants*fn17 removed to federal court on July 1, 2011. This action was referred to the bankruptcy court on July 12, 2011.*fn18

Plaintiffs, in a separate motion, seek to remand this action to the Supreme Court of the State of New York. The State Court Complaint asserts state law causes of action for breaches of fiduciary duty, corporate waste, aiding and abetting breaches of fiduciary duty, unjust enrichment and illegal dividends and other distributions. The defendants are (1) former directors, officers or other persons controlling the Debtors immediately prior to the LBO; (2) former directors, officers or other persons controlling the Debtors after the LBO closed; and (3) certain advisors involved in consummating the LBO.

Fourth, on the same date, plaintiffs filed a Complaint in the bankruptcy court that is largely identical to the State Court Complaint (the "Mirror Image Complaint").*fn19 Plaintiffs filed this Complaint to "avoid any risk of a statute of limitations defense were a New York Supreme Court [Justice] to conclude the Plan . . . provisions deprive the State of New York of subject matter jurisdiction and then dismiss that action, rather than transferring it to federal court."*fn20

Plaintiffs will only proceed with either the State Court Complaint or the Mirror Image Complaint, depending on court rulings.*fn21

Fifth, on June 15, 2011, plaintiffs filed a Complaint against various lenders by separate plaintiffs' counsel due to a potential conflict of interest (the "Conflicts Complaint").*fn22 Like the post-LBO Complaint, the Conflicts Complaint seeks (1) the avoidance and recovery of fraudulent transfers and subsequent transfers made post-LBO, and (2) the disallowance of claims.

III. APPLICABLE LAW

A. Withdrawal of the Reference

1. Mandatory Withdrawal

Section 157(d) mandates that the district court withdraw a proceeding referred to the bankruptcy court if "resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce." The Second Circuit Court of Appeals construes this provision "narrowly," requiring withdrawal of the reference only if "substantial and material consideration of non-Bankruptcy Code federal [law] is necessary for the resolution of the proceeding."*fn23 In construing the phrase "substantial and material consideration," "courts have held [such] consideration arises when a determination of issues requires 'significant interpretation of federal laws that [C]ongress would have intended to have decided by a district judge rather than a bankruptcy judge . . . .'"*fn24 Withdrawal of the reference is mandated where "issues arising under non-title 11 laws dominate[] those arising under title 11 . . . ."*fn25

Mandatory withdrawal is therefore appropriate where the case would require "the bankruptcy court to engage itself in the intricacies" of non-bankruptcy law, as opposed to "routine application" of that law*fn26 or the "straightforward application of a federal statute to a particular set of facts."*fn27 The "bare contention" that ...


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