| CONTINGENCIES AND COMMITMENTS | 8. CONTINGENCIES AND COMMITMENTS
Guarantees
We have historically issued guarantees to certain lenders in
connection with the provision of third-party financing for our sale
of vacation ownership products for the North America and Asia
Pacific segments. The terms of these guarantees generally require
us to fund if the purchaser fails to pay under the term of its note
payable. Prior to the Spin-Off, Marriott International guaranteed
our performance under these arrangements, and following the
Spin-Off continues to hold a standby letter of credit related to
the Asia Pacific segment guarantee. If Marriott International is
required to fund any draws by lenders under this letter of credit
it would seek recourse from us. Marriott International no longer
guarantees our performance with respect to third-party financing
for sales of products in the North America segment. We are entitled
to recover any payments we make to third-party lenders under these
guarantees through reacquisition and resale of the financed
vacation ownership product. Our commitments under these guarantees
expire as the underlying notes mature or are repaid. The terms of
the underlying notes extend to 2022.
The following table shows the maximum potential amount of future
fundings for financing guarantees where we are the primary obligor
and the carrying amount of the liability for expected future
fundings, which is included on our Balance Sheet in the Other
caption within Liabilities.
($ in
thousands)
Maximum Potential
Liability for Expected Future Fundings
Segment
Asia Pacific $
6,769 $
66
North America
2,846
196
Total guarantees where we are the primary obligor $
9,615 $
262
Commitments and Letters of Credit
In addition to the guarantees we describe in the preceding
paragraphs, as of June 19, 2015, we had the following
commitments outstanding:
• We have various contracts for the use
of information technology hardware and software that we use in the
normal course of business. Our aggregate commitments under these
contracts were $31.0 million, of which we expect $10.3 million,
$6.6 million, $5.8 million, $2.7 million, $1.5 million and $4.1
million will be paid in 2015, 2016, 2017, 2018, 2019 and
thereafter, respectively.
• We have commitments of $3.2 million
to subsidize vacation ownership associations, which we expect to
pay in the second half of 2015.
• We have a commitment of $75.5 million
to purchase vacation ownership units located in Miami, Florida,
contingent upon satisfactory completion of construction and receipt
of a certificate of occupancy, for use in our MVCD program. We made
a deposit of $3.8 million in connection with this commitment in
2014, and we are committed to make an additional deposit of $3.8
million upon the seller’s receipt of a temporary certificate
of occupancy and the remaining payment of $67.9 million upon
acquisition of the units, which we expect to occur within one year.
We are currently evaluating the use of a capital efficient
arrangement to delay the timing of this capital investment.
•
We have a commitment of $38.5 million to purchase vacation
ownership units located on the Big Island of Hawaii, for use in our
MVCD program, contingent upon the seller subjecting the units to a
condominium regime prior to our purchase. We made a deposit of $1.5
million in connection with this commitment in 2014, and we are
committed to make the remaining payment of $37.0 million upon
satisfaction of the condition that the seller subject the units to
a condominium regime, which we expect to occur within one year.
Upon acquisition, we are committed to renovate the units pursuant
to a property improvement plan to be agreed upon at a later date,
for which an additional $45.0 million to $55.0 million will be
required to be funded. We are currently evaluating the use of a
capital efficient arrangement to delay the timing of this capital
investment.
• We have a commitment of $137.1
million to purchase vacation ownership units located in Marco
Island, Florida, of which we expect $33.3 million, $50.0 million
and $53.8 million will be paid in 2017, 2018 and 2019,
respectively. See Footnote No. 5, “Acquisitions and
Dispositions,” for additional information on this
transaction.
• We have a commitment of AUD $84.5
million ($65.8 million) to purchase an operating hotel located in
Surfers Paradise, Australia. We made a deposit of AUD $8.5 million
($6.5 million) in connection with this commitment during the second
quarter of 2015, and we expect to acquire the operating hotel and
pay the remaining AUD $76.0 million ($59.3 million) in the third
quarter of 2015.
Surety bonds issued as of June 19, 2015 totaled $77.9 million,
the majority of which were requested by federal, state or local
governments related to our operations.
Additionally, as of June 19, 2015, we had $3.3 million of
letters of credit outstanding under our $200 million revolving
credit facility (the “Revolving Corporate Credit
Facility”).
Loss Contingencies
In December 2012, Jon Benner, an owner of fractional interests
at The Ritz-Carlton Club and Residences, San Francisco (the
“RCC San Francisco”), filed suit in Superior Court for
the State of California, County of San Francisco, against us and
certain of our subsidiaries on behalf of a putative class
consisting of all owners of fractional interests at the RCC San
Francisco who allegedly did not receive proper notice of their
payment obligations under California’s Mello-Roos Community
Facilities Act of 1982 (the “Mello-Roos Act”). The
plaintiff alleged that the disclosures made about bonds issued for
the project under this Act and the payment obligations of
fractional interest purchasers with respect to such bonds were
inadequate, and this and other alleged statutory violations
constituted intentional and negligent misrepresentation, fraud and
fraudulent concealment. The relief sought included damages in an
unspecified amount, rescission of the purchases, restitution and
disgorgement of profits. In September 2014, we reached an agreement
to settle the Benner action on the basis of a stipulated class,
which was approved by the court on March 31, 2015. At
June 19, 2015, we had an accrual of $2.9 million related to
the settlement.
In April 2013, Krishna and Sherrie Narayan and other owners of 12
residential units at the resort formerly known as The Ritz-Carlton
Residences, Kapalua Bay (“Kapalua Bay”) filed an
amended complaint related to a suit originally filed in Circuit
Court for Maui County, Hawaii in June 2012 against us, certain of
our subsidiaries, Marriott International, certain of its
subsidiaries, and the joint venture in which we have an equity
investment that developed and marketed vacation ownership and
residential products at Kapalua Bay (the “Joint
Venture”). In the original complaint, the plaintiffs alleged
that defendants mismanaged funds of the residential owners
association (the “Kapalua Bay Association”), created a
conflict of interest by permitting their employees to serve on the
Kapalua Bay Association’s board, and failed to disclose
documents to which the plaintiffs were allegedly entitled. The
amended complaint alleges breach of fiduciary duty, violations of
the Hawaii Unfair and Deceptive Trade Practices Act and the Hawaii
condominium statute, intentional misrepresentation and concealment,
unjust enrichment and civil conspiracy. The relief sought in the
amended complaint includes injunctive relief, repayment of all sums
paid to us and our subsidiaries and Marriott International and its
subsidiaries, compensatory and punitive damages, and treble damages
under the Hawaii Unfair and Deceptive Trade Practices Act. We
dispute the material allegations in the amended complaint and
continue to defend against this action vigorously. We filed a
motion in the Circuit Court to compel arbitration of
plaintiffs’ claims. That motion was denied, but on appeal the
Hawaii Intermediate Court of Appeals reversed. The Hawaii Supreme
Court, on June 3, 2015, reversed the decision of the
Intermediate Court of Appeals and reinstated the action in Circuit
Court. Additionally, in 2014, owners of two residential units
agreed to release their claims in this action. Given the inherent
uncertainties of litigation, we cannot estimate a range of the
potential liability, if any, at this time.
In June 2013, Earl C. and Patricia A. Charles, owners of a
fractional interest at Kapalua Bay, together with owners of
38 other fractional interests at Kapalua Bay, filed an amended
complaint in the Circuit Court of the Second Circuit for the State
of Hawaii against us, certain of our subsidiaries, Marriott
International, certain of its subsidiaries, the Joint Venture, and
other entities that have equity investments in the Joint Venture.
The plaintiffs allege that the defendants failed to disclose the
financial condition of the Joint Venture and the commitment of the
defendants to the Joint Venture, and that defendants’ actions
constituted fraud and violated the Hawaii Unfair and Deceptive
Trade Practices Act, the Hawaii Condominium Property Act and the
Hawaii Time Sharing Plans statute. The relief sought includes
compensatory and punitive damages, attorneys’ fees,
pre-judgment interest, declaratory relief, rescission and treble
damages under the Hawaii Unfair and Deceptive Trade Practices Act.
The complaint was subsequently further amended to add owners of two
additional fractional interests as plaintiffs. The Circuit Court
granted our motion to compel arbitration of the claims asserted by
the plaintiffs. Plaintiffs appealed that decision to the Hawaii
Intermediate Court of Appeals and also initiated arbitration.
Following the decision of the Hawaii Supreme Court in the Narayan
action, the Maui Circuit Court stayed all arbitration and
litigation proceedings in the Charles matter pending the decision
of the Intermediate Court of Appeals. We dispute the material
allegations in the amended complaint and in the statement of claim
filed in the arbitration and intend to defend against this action
vigorously. Given the early stages of the action and the inherent
uncertainties of litigation and arbitration, we cannot estimate a
range of the potential liability, if any, at this time.
Additionally, owners of two fractional interests have since agreed
to release their claims in this action, and the owners of another
fractional interest, who are not parties to the Charles action,
have agreed to release similar claims, in each instance for nominal
sums.
In August 2014, Michael and Marla Flynn, owners of weeks-based
Marriott Vacation Club vacation ownership products at two of our
resorts in Hawaii, filed a claim with the American Arbitration
Association on behalf of a putative class consisting of themselves
and all others similarly situated. The claimants alleged that the
introduction of the MVCD program caused an actionable decrease in
the value of their vacation ownership interests. The relief sought
includes compensatory and exemplary damages, restitution,
injunctive relief, interest and attorneys’ fees pursuant to
applicable timeshare and unfair trade practices acts and common-law
theories of breach of contract and breach of an implied covenant of
good faith and fair dealing. On March 30, 2015, the arbitrator
ruled that the Flynns’ claims are not subject to arbitration,
and dismissed the Flynn proceeding.
In August 2014, William Sterman, an owner of a weeks-based Marriott
Vacation Club vacation ownership product at our resort in
Massachusetts, filed a claim with the American Arbitration
Association on behalf of a putative class consisting of himself and
all others similarly situated. The claims alleged and the relief
sought are substantially similar to the claims alleged and the
relief sought by the Flynns. On June 15, 2015, the arbitrator
granted our motion to dismiss in part and denied it in part, and
denied Mr. Sterman’s request to proceed with a class
action. On July 7, 2015, the parties filed a stipulation of
dismissal with prejudice as to the remaining claim in arbitration,
and also filed a joint motion to dismiss our appeal that was
pending in the Eleventh Circuit of the decision by the District
Court that the arbitrability of Mr. Sterman’s claims
must be resolved by an arbitrator.
On January 29, 2015, Norman and Carreen Abramson, owners of
weeks-based Marriott Vacation Club vacation ownership products at
one of our resorts in California and of our points-based Marriott
Vacation Club vacation ownership product, filed an action in the
United States District Court for the Central District of California
on behalf of a putative class consisting of themselves and all
others similarly situated. The claims alleged and the relief sought
are substantially similar to the claims alleged and the relief
sought by the Flynns. On March 30, 2015, we filed a motion to
dismiss the Abramson action, which remains pending. On
June 30, 2015, Mr. Abramson filed a motion for class
certification. On July 10, 2015, we filed a motion requesting
that proceedings on the class certification motion be deferred
until after resolution of our motion to dismiss and the taking of
discovery on Mr. Abramson’s class claims, which motion
also remains pending. We dispute the material allegations in the
California action and intend to defend against them vigorously.
Given the early stages of the action and the inherent uncertainties
of litigation, we cannot estimate a range of potential liability,
if any, at this time.
On May 26, 2015, we and certain of our subsidiaries were named
as defendants in an action filed in the Superior Court of San
Francisco County, California, by William and Sharon Petrick and
certain other present and former owners of fractional interests at
the RCC San Francisco. The case is not filed as a putative class
action. The plaintiffs allege that the affiliation of the RCC San
Francisco with the Marriott Vacation Club, certain alleged sales
practices, and other alleged acts of Marriott Vacations Worldwide
and the other defendants caused an actionable decrease in the value
of their fractional interests. The relief sought includes, among
other things, compensatory and punitive damages, rescission, and
pre- and post-judgment interest. We dispute the material
allegations in the complaint and intend to defend against the
action vigorously. Given the early stages of the action and the
inherent uncertainties of litigation, we cannot estimate a range of
the potential liability, if any, at this time.
Other
We estimate the cash outflow associated with completing the phases
of our existing portfolio of vacation ownership projects currently
under development will be approximately $10.2 million, of which
$4.4 million is included within liabilities on our Balance Sheet at
June 19, 2015. This estimate is based on our current
development plans, which remain subject to change, and we expect
the phases currently under development will be completed by
2017.
During the second quarter of 2014, we agreed to settle a dispute
with a service provider relating to services provided to us prior
to 2011. In connection with the settlement, we received a one-time
payment of $7.6 million from the service provider, which no longer
provides services to us. We recorded a gain of $7.6 million as a
result of the settlement, which is included in the Litigation
settlement line on the Statements of Income for the twelve and
twenty-four weeks ended June 20, 2014. |
