After years of legal maneuvering, a lawsuit filed on behalf of investors who lost money in Marriott hotel partnerships is finally headed for a courtroom in Texas.
Come September, an innovative state court judge in San Antonio plans to give attorneys for the investors and Marriott one day each to tell their side of the story to a jury.
The jurors will deliver a verdict, but it won't really count. It'll be a nonbinding declaration of what a bunch of ordinary citizens think of the claim that Marriott cheated investors out of more than $1 billion when it sold them hotel partnerships more than a decade ago.
The jury's opinion won't be made public either, because disclosing it could bias the jury that will make a decision if the case ever does go to trial.
The unusual procedure, known as a summary jury trial, is Judge Michael Peden's latest attempt to provoke a settlement in the long and costly litigation, which so far has returned no more money for investors than their hotel partnerships.
If the jury comes back and says that the lawsuit against Marriott is, in Texas parlance, "a dog that don't hunt," the company's resistance will be stiffened. On the other hand, if the jurors don't like the smell of the hotel partnership deal, the pressure will be on the company to come up with some kind of settlement.
The case involves several hundred investors who bought interests in 1987 in Courtyard by Marriott II Limited Partnership, which owned 70 Courtyard hotels. Sold by several brokerage firms, the partnerships were exempt from Securities and Exchange Commission registration requirements because they were only offered to "qualified investors," who were supposed to be wealthy, sophisticated people.
By becoming landlords for Marriott, the investors hoped to share in the profits of the hotels the company built and managed. But a dozen years later, the partnership investors have yet to earn back their initial investment, let alone make a profit.
Lawyers representing the partnership members say the investment flopped because of fraud by Marriott, which they contend inflated the value of the hotels and gave investors the short end of the stick on contracts for managing the properties.
They're suing Marriott International Inc. and Host Marriott Corp. (which were one company at the time of the original deal), a couple of Marriott subsidiaries, and Stephen Rushmore, a prominent hotel industry consultant who set the value of the hotels when the partnership was created.
Marriott officials say the courts, not columns like this, are the place to debate lawsuits. They deny any wrongdoing and say answers to the specific allegations in the lawsuits will be given as the legal proceedings unfold. Marriott's chief attorney in the case, Tom Cunningham of Houston's Cunningham, Darlow, Zook and Chapoton, said the company "has a 70-year history of honesty, integrity and high quality."
"Marriott senior executives personally invested substantially in the Courtyard partnerships and are as disappointed as anyone that the results were not as anticipated. Courtyards are outstanding, award-winning hotels, and Marriott has managed the Courtyard partnership investments honestly and prudently. Allegations by trial lawyers on contingent fees are totally untrue, and we will prove it in court," he said.
Cunningham's strategy is to cite Marriott's reputation, defend the company's actions and attack the plaintiffs' attorneys.
The strategy of Jim Moriarty, the lead attorney for the partners, is to accuse Marriott of using its reputation to lure unsuspecting investors into a bad deal and to try to hold key players personally responsible. "These are some of the smartest people I've ever seen," Moriarty said. "What they did to these investors is scandalous."
His Houston firm, Moriarty & Associates, is one of 10 representing various partners in the case. Court filings show six firms working on behalf of Marriott, and two more have been brought in recently.
The armies of lawyers are not only a sign of how high the stakes are in the case but also an indication of how billion-dollar cases are handled these days.
The attorneys for the partners produce a regular newsletter to keep their clients informed about developments in the case. They recently distributed a CD-ROM with copies of court filings, charts and graphs showing what went wrong with the partnerships, even including video clips of scenes from depositions given in the case.
There's no better way to show your clients you're on the job than to give them a video of top Marriott executives squirming under tough questioning.
The executive the partners' attorneys most want to make squirm is J.W. "Bill" Marriott Jr., chairman of Marriott International. They plan to go to court today in an attempt to make Bill Marriott sit down for a long series of questions about what he had to do with the Courtyard partnerships.
Lawyers on both sides say the demand for his deposition is more than just a routine procedure -- it's an effort to put the heat on the Marriott CEO in hopes of pressuring him into coming up with a settlement in the case.
In court filings, Marriott lawyers say Bill Marriott is willing to testify -- but not now. They say it is premature to depose him at this stage in the case, when there is other evidence that has yet to be obtained. The partners' attorneys respond that Marriott is trying to avoid giving his deposition before the September mini-trial because it will back up their claim that top executives knew the partnerships were ill-fated.
Besides targeting Marriott, the plaintiffs have gone after Rushmore, whose Long Island firm, Hospital Valuation Services, appraised the Courtyard hotels that were sold to the partnership. At the time he was hired to give an independent assessment of the fair value of the hotels, Rushmore was a part-owner of two large and successful Marriott hotels, a connection that was never disclosed to investors.
Moriarty calls Rushmore's relationship with Marriott "an obvious conflict of interest." A lawyer representing Rushmore said it was not improper and did not violate the ethics of the appraisal industry.
The main reason partners have never made any money is that the hotels were worth much less than the $643 million the partnerships paid for them, the lawsuit contends. They say Marriott and Rushmore came up with the inflated price by overestimating the rates the hotels would be able to charge. They say company documents show Marriott knew a hotel slump was coming and the hotels would not be able to charge the projected rates.
A second reason the partnerships haven't proved profitable, the lawsuits contend, is that investors were sold only the buildings, not the land under them. Rents on the ground were set so high that they drained off profits.
The third factor in the failure, the partners say, was that Marriott charged 6 percent for managing the hotels. They say the industry standard was only 3 percent of revenue -- citing books written by Marriott's own appraiser, Steve Rushmore.
Finally Marriott set aside 6 percent of Courtyard's profits to pay for routine upgrades of the property; that, too, was twice the going rate, the unhappy investors complain.
Adding up $252 million in overcharges for the hotels, $91 million in excess management fees, $46 million in excess ground rents and $61 million in excess reserves, the plaintiffs' attorneys come up with damages of about $450 million. That's not including interest since the partnerships began, which brings the total to around $1 billion. And Marriott will make $247 million more in excess future profit, they say. Total: $1.25 billion.
That's a lot of money, even for Marriott International and Host Marriott, whose combined market value is close to $12 billion. It's enough to keep the partnership investors irate even after a dozen years. And enough to encourage both sides to pay their lawyers whatever it costs to win the case.