| 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. 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. At June 17, 2016, the maximum potential amount of future
fundings for financing guarantees where we are the primary obligor
was $7.0 million and the carrying amount of the liability for
expected future fundings, which is included in our Balance Sheet in
the Other caption within Liabilities, was $0.2 million.
Commitments and Letters of Credit
In addition to the guarantees we describe in the preceding
paragraphs, as of June 17, 2016, 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 $24.3 million, of which we expect $6.9 million, $7.3
million, $3.7 million, $1.9 million, $1.7 million and $2.8 million
will be paid in 2016, 2017, 2018, 2019, 2020 and thereafter,
respectively.
• We have commitments of $2.0 million
to subsidize vacation ownership associations, which we expect to
pay in 2016.
• We have a commitment to purchase an
operating property located in New York, New York for $158.5
million. We expect to acquire the units in the property, in their
current form, over time, and we expect to make payments for these
units of $96.8 million and $61.7 million in 2018 and 2019,
respectively. We are currently managing this property, which we
have rebranded as Marriott Vacation Club Pulse, New York City. In
connection with this commitment, we entered into a capital lease
arrangement for ancillary and operations space. See Footnote
No. 13, “Variable Interest Entities,” for
additional information on this transaction.
•
We have commitments to purchase vacation ownership
units located in two resorts in Bali, Indonesia in two separate
transactions, contingent upon completion of construction at agreed
upon standards within specified timeframes, for use in our Asia
Pacific segment. We expect to complete the acquisition of 51
vacation ownership units in 2017 pursuant to one of the
commitments, and to make remaining payments with respect to these
units, when specific construction milestones are completed, as
follows: $2.3 million in 2016 and $19.0 million in 2017. We expect
to complete the acquisition of 88 vacation ownership units in 2019
pursuant to the other commitment, and to make payments with respect
to these units, when specific construction milestones are
completed, as follows: $7.8 million in 2016, $5.9 million in 2018,
and $25.4 million in 2019.
• 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 $91.1 million
to purchase vacation ownership units located on the Big Island of
Hawaii, contingent upon the completion of renovations to the
vacation ownership units. We expect to acquire the completed
vacation ownership units in 2017 and to pay the purchase price as
follows: $27.5 million in 2017, $32.7 million in 2018 and $30.9
million in 2019.
• We have new commitments under
operating leases that expire at various dates through 2027. Our
aggregate minimum lease payments under these contracts were $23.0
million, of which we expect $0.2 million, $1.6 million, $1.9
million, $2.1 million, $2.4 million and $14.8 million will be paid
in 2016, 2017, 2018, 2019, 2020 and thereafter, respectively.
Surety bonds issued as of June 17, 2016 totaled $56.2 million,
the majority of which were requested by federal, state or local
governments in connection with our operations.
Additionally, as of June 17, 2016, we had $3.3 million of
letters of credit outstanding under our Revolving Corporate Credit
Facility.
Loss Contingencies
In April 2013, Krishna and Sherrie Narayan and other owners of 12
residential units (owners of two of which subsequently agreed to
release their claims) 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 the 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
reversed the decision of the Intermediate Court of Appeals and
reinstated the action in Circuit Court, which set the case for
trial beginning September 6, 2016. We filed a petition with
the United States Supreme Court seeking review of the Hawaii
Supreme Court’s decision. On January 11, 2016, the U.S.
Supreme Court issued an order vacating the Hawaii Supreme
Court’s decision and remanding the case with instructions to
reconsider its ruling in light of a recent U.S. Supreme Court
decision reiterating the obligation of courts to enforce
arbitration agreements. On January 27, 2016, we filed a motion
to stay proceedings in the Circuit Court based on the order of the
U.S. Supreme Court. Plaintiffs opposed the motion. The Circuit
Court stayed proceedings until August 26, 2016, and set a
hearing for that date. 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 (owners of two of which
subsequently agreed to release their claims) 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. On July 24, 2015, the Intermediate
Court of Appeals reversed the decision of the Circuit Court and
directed that the action be reinstated in the Circuit Court, based
on the Hawaii Supreme Court’s decision in the Narayan case
discussed above, which has since been vacated by the U.S. Supreme
Court. We dispute the material allegations in the amended 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.
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 our points-based MVCD program caused an actionable
decrease in the value of their vacation ownership interests. The
relief sought included 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. On
October 2, 2015, Michael and Marla Flynn, joined by Patrick
and Mary Flynn as Trustees of the Flynn Family Trust, filed a civil
action in the United States District Court for the District of
Hawaii, asserting similar claims and seeking similar relief on
behalf of themselves and a putative class consisting of themselves
and all others similarly situated. On December 24, 2015, we
filed a motion to dismiss. On February 29, 2016, the Court
granted the motion in part and denied it in part. On June 28,
2016, the parties executed a settlement agreement by which the
plaintiffs agreed to release all claims in exchange for a nominal
sum.
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 our points-based MVCD program, certain alleged sales
practices, and other acts we and the other defendants allegedly
took 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. Plaintiffs filed amended complaints on
October 9, 2015 and April 25, 2016. We filed a motion to
dismiss, and the Court has set a hearing on that motion for
August 17, 2016. We dispute the material allegations in the
amended 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.
On July 18, 2016, RCHFU, L.L.C. and other owners of 50 fractional
interests at The Ritz-Carlton Club, Aspen Highlands
(“RCC-Aspen Highlands”) filed an amended complaint in
the U.S. District Court for the District of Colorado against us and
certain of our subsidiaries. The amended complaint alleges
that the plaintiffs’ fractional interests were devalued by
the affiliation of RCC-Aspen Highlands and other Ritz-Carlton Clubs
with our points-based MVCD program. The relief sought
includes, among other things, unspecified damages, pre- and
post-judgment interest, and attorneys’ fees. The amended
complaint also drops all class action allegations that were
asserted in prior versions of the complaint. We dispute the
material allegations in the amended 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.
On May 20, 2016, we and certain of our subsidiaries were named
as defendants in an action filed in the United States District
Court for the Middle District of Florida by Anthony and Beth
Lennen. The case is filed as a putative class action; the
plaintiffs seek to represent a class consisting of themselves and
all other purchasers of MVCD points, from inception of the MVCD
program in June 2010 to the present, as well as all individuals who
own or have owned weeks in any resorts for which weeks have been
added to the MVCD program. Plaintiffs challenge the
characterization of the beneficial interests in the MVCD trust that
are sold to customers as real estate interests under Florida law.
They also challenge the structure of the trust and associated
operational aspects of the trust product. The relief sought
includes, among other things, declaratory relief, an unwinding of
the MVCD product, and punitive damages. Our response to the
complaint is due September 16, 2016. 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 $2.1 million, of which $1.7
million is included within liabilities on our Balance Sheet at
June 17, 2016. 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
2016. |
