Bondholders who sued Marriott Corp. after the Bethesda hotel giant announced plans to split into two companies have won an important round in their legal battle, as a federal judge refused a request to dismiss the lawsuit.
The denial of Marriott's motion for summary judgment sets the stage for a jury trial between Marriott and a group of 16 bondholders, led by PPM America Inc., who claim they lost $30 million after Marriott disclosed its plans in October 1992 to split itself into Marriott International Inc. and Host Marriott Corp.
U.S. District Judge Alexander Harvey II's 46-page order, issued Monday in Baltimore, does not say either side is right about the key issues in the case, which alleges that Marriott broke federal securities fraud laws. Instead, the order says that there is enough evidence to justify sending the case to a jury.
"The burden on [Marriott, as the side that asked for summary judgment] is to show that no genuine issue of fact exists and that [Marriott] is entitled to judgment as a matter of law," Judge Harvey wrote. "The facts, and the inference to be drawn from the facts, must be viewed in the light most favorable to [PPM]."
Marriott's original plan to split into two companies called for loading nearly all of the original company's $3 billion in debt onto smaller, financially weaker Host Marriott. The value of the plaintiffs' bonds fell sharply when the plan was announced in October 1992, because the risk of Host Marriott failing to repay the debt was much greater than the risk of a Marriott Corp. default.
The bonds fell in value by about 30 percent, but rebounded so sharply as interest rates fell last year that 13 of the 16 plaintiffs eventually recovered their losses on the Marriott bonds.
A settlement last year of another suit by different bondholders shifted some of the debt to Marriott International. The split took effect in October 1993.
The bondholders claim that Marriott already was far enough advanced in planning the split that it should have disclosed its deliberations when it sold about $120 million in bonds to the PPM group in April 1992.
"Because they were considering changing a well-known strategy, that consideration was a material fact that had to be disclosed whether they ever [split] or not," said Lawrence Kill, a New York attorney representing PPM America.
"A reasonable investor would want to know."
Judge Harvey wrote that evidence indicated that Marriott Chief Financial Officer Stephen Bollenbach, now the chief executive of Host Marriott, began considering the split as soon as five days after joining the company on March 1, 1992.
At the time, company documents show, the split was only one of several options Marriott was considering, in a bid to recover from the real estate depression.
Other Marriott financial executives had begun researching a similar plan in January 1992, and Mr. Bollenbach had executed a restructuring of another hotel company that the PPM group contends was nearly identical to the eventual Marriott deal.
Marriott spokesman Terry Souers said that the company did not decide to move forward on the plan until after the bond sale and that the company remains confident it will prevail at trial.
"We know what the facts are," Mr. Souers said. "If a jury is presented with them, they will rule in our favor."
Most securities fraud cases settle before trial. Mr. Kill would not speculate on whether the Marriott case will be settled.