Sturm v. Marriott Marquis Corp.

• Decision Date: 16 November 1998
• Docket Number: No. Civ.A. 1:97-CV-3706-TWT.,Civ.A. 1:97-CV-3706-TWT.
• Parties: Hiram and Ruth STURM, as Joint Tenants, on their own behalf, on behalf of all others similarly situated and derivatively on behalf of the Nominal Defendant, Plaintiffs, v. MARRIOTT MARQUIS CORP., Host Marriott Corporation, Bruce F. Stemerman, Robert E. Parsons and Christopher G. Townsend, Defendants, and Atlanta Marriott Marquis Limited Partnership, Nominal Defendant.
• Court: U.S. District Court — Northern District of Georgia

Page 1358

26 F.Supp.2d 1358

Hiram and Ruth STURM, as Joint Tenants, on their own behalf, on behalf of all others similarly situated and derivatively on behalf of the Nominal Defendant, Plaintiffs, v. MARRIOTT MARQUIS CORP., Host Marriott Corporation, Bruce F. Stemerman, Robert E. Parsons and Christopher G. Townsend, Defendants and Atlanta Marriott Marquis Limited Partnership, Nominal Defendant.

No. Civ.A. 1:97-CV-3706-TWT.

United States District Court, N.D. Georgia, Atlanta Division.

November 16, 1998.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Robert J. Abrams, Office of Robert J. Abrams, Atlanta, GA, Lawrence P. Kolker, phv, Robert Abrams, Wolf Haldenstein Adler Freeman & Herz, New York City, NY, Martin D. Chitwood, Cheryl L. Jenkins, Chitwood & Harley, Atlanta, GA, for Hiram Sturm, Ruth Sturm.

George Conley Ingram, Todd Richard David, Teresa Thebaut Bonder, Alston & Bird, Atlanta, GA, Tom Alan Cunningham phv, Debbie Darlow, phv, Cunningham Darlow Zook & Chapoton, Houston, TX, for Marriott Marquis Corporation, Host Marriott Corporation, Bruce F. Stemerman, Robert E. Parsons, Christopher G. Townsend, Atlanta Marriott Marquis Limited Partnership.

ORDER

THRASH, District Judge.

This case is before the Court on Defendants' Motion to Dismiss [12-1] and the Individual Defendants' Motion to Dismiss for Lack of Personal Jurisdiction [13-1]. For the reasons set forth below, the Defendants' Motion to Dismiss is granted as to the Plaintiffs federal securities law claims and denied as to the Plaintiffs' state law claim for breach of fiduciary duty. The Individual Defendants' Motion to Dismiss is denied.

I. FACTS

The Atlanta Marriott Marquis Hotel is a 1,671 room full service luxury hotel located in Atlanta, Georgia. The Hotel is located on about 3.6 acres of land in downtown Atlanta. The Ivy Street Hotel Limited Partnership developed and owns the Hotel. Defendant Host Marriott Corporation is a Delaware corporation and is one of the largest owners of lodging properties in the world. Marriott International Corporation manages hotels. It has a contract with Ivy Street Hotel Limited Partnership to manage the Hotel. Prior to 1995, Marriott International Corporation and Host Marriott were subsidiaries of the same corporate parent.

In the late 1980s, Marriott sponsored a number of Limited Partnerships which were formed to acquire, own and operate certain hotel properties. The Atlanta Marriott Marquis Limited Partnership [hereinafter "Original Limited Partnership"] was created in 1985 for the purpose of acquiring an 80% interest in the Ivy Street Hotel Limited Partnership. In 1985, the Original Limited Partnership purchased the land on which the hotel sits, and leased it to the Ivy Street Hotel Limited Partnership under a long term lease.

The Original Limited Partnership sold 530 Class A partnership interests for $100,000 each [hereinafter "Class A Units"] to 720 Limited Partners. The Plaintiffs bought one unit. The Limited Partners of the Original Limited Partnership owned 99% of the Class A Units. In addition, the Original Limited Partnership issued Class B partnership interests with no value. Prior to investing in the Original Limited Partnership each Limited Partner certified that he or she was a sophisticated investor. Defendant Marriott Marquis Corporation [hereinafter the "General Partner"] is a subsidiary of Defendant Host Marriott and was the General Partner of the Original Limited Partnership. The General Partner owned 1% of the Class A Units and 100% of the Class B Units. Defendants Bruce E. Stemerman, Robert E. Parsons, Jr., and Christopher G. Townsend [hereinafter the "Individual Defendants"] are all members of the General Partner's Board of Directors and are all officers of Defendant Host Marriott. Defendants Stemerman and Townsend are also the President and Vice-President of the General Partner, respectively.

For a variety of reasons, the hotel and the Original Limited Partnership did not perform as anticipated. Although the investment benefitted the Limited Partners with certain tax losses, cash distributions were less than hoped for and came primarily from the land lease rather than from positive cash flow from hotel operations. Hotel operations improved in the 1990s. However, by this time the Hotel needed comprehensive renovations. In addition, the Hotel's $217 million mortgage debt was due in July, 1997. The maturity date was extended to February 2, 1998. The Defendants undertook extensive efforts to locate funds for renovations and to refinance the mortgage debt.

The Atlanta Marriott Marquis Limited Partnership II [hereinafter the "New Limited Partnership"] is a Delaware Limited Partnership created in 1997. Defendant Marriott Marquis Corporation is the General Partner of the New Limited Partnership. In November of 1997, the General Partner mailed a Consent Solicitation and Prospectus [hereinafter the "Solicitation"] to the Limited Partners of the Original Limited Partnership. The Solicitation sought approval to merge the Original Limited Partnership into the New Limited Partnership. The proposed merger would result in a one for one exchange of all Class A Units of the Original Limited Partnership for Class A Units of the New Limited Partnership. As a result, the Limited Partners would continue to hold 99% of all Class A Units and the General Partner would hold 1%.

The purpose of the merger, as stated in the Solicitation, was to facilitate the refinancing of the existing mortgage on the hotel and avert foreclosure or a forced sale of the Hotel. In the Solicitation, the Limited Partners were informed of (1) the rationale for the restructuring; (2) the numerous risk factors, including the conflicts of interest and the probability of significantly reduced cash distributions to the Limited Partners; (3) the details of the transactions and restated agreements; and (4) the potential results of either a positive or negative vote by the Limited Partners. In connection with the restructuring, Marriott proposed to contribute an additional $75 million in equity. The General Partner proposed the merger because it did not believe that enough Limited Partners would agree with the restructuring of the Limited Partnership as desired by the General Partner to allow the amendment of the Original Limited Partnership Agreement. A majority of the holders of Class A Units approved the merger as set forth in the Solicitation. The proposed merger was closed and the Original Limited Partnership no longer exists.

The New Limited Partnership is governed by a partnership agreement that is substantially different from that of the Original Limited Partnership. Under the Original Limited Partnership Agreement the rental payments received by the Limited Partnership were automatically distributed to the holders of Class A Units. These payments have accounted for 92% of all distributions actually made to the Limited Partners. In 1994, 1995, and 1996, these payments were $1,869,000, $2,526,000, and $2,806,000, respectively. Under the Original Limited Partnership Agreement, Ivy Street had an option to purchase the land from the Limited Partnership at a set price. As a result of the restructuring, the Limited Partnership conveyed the land to Ivy Street in exchange for a capital credit equal to the exercise price of Ivy Street's option. Following the restructuring, Ivy Street Limited Partnership no longer makes rental payments to the Limited Partnership. Instead of rent payments, the New Limited Partnership is entitled to a 10% compounding preferred return in its Ivy Street capital account. In reality, this means that the Limited Partners get an accounting entry in the capital account that may never result in an actual distribution of funds.

Under the Original Limited Partnership Agreement, holders of Class A Units were entitled to a 10% priority return on their investment. Under the New Limited Partnership Agreement, that is reduced to a subordinated 5% return that is paid at the sole discretion of the General Partner. Under the Original Limited Partnership Agreement holders of Class B Units were not entitled to any priority returns. Under the New Limited Partnership Agreement the Holders of Class B units are entitled to a 13.5% preferred, cumulative, compounded return. The restructuring converted Defendant Host's 20-year non-interest-bearing loan to Ivy Street into a 15-year loan with a 9% interest rate for the first five years. Furthermore, repayment of this loan is prioritized over payments to the New Limited Partnership. Therefore, the cash flow from the Hotel that previously went first to holders of Class A Units (by way of rents under the Original Limited Partnership distribution scheme) now first goes to repay Defendant Host's new interest bearing loan and then to the holders of Class B Units. In addition, as part of the restructuring, Defendant Host was released from its guarantee of up to $50 million on the original mortgage. All of these changes in the rights of the Limited Partners were disclosed in the Solicitation.

Under the Original Limited Partnership Agreement neither the General Partner nor its affiliates were allowed to vote its Units. Under the New Limited Partnership Agreement, the General Partner and its affiliates have the same voting rights as other holders of Class A Units. Under the Original Limited Partnership Agreement a majority of the holders of Class A Units had to consent before the General Partner could sell the Hotel or the land. Under the New Limited Partnership Agreement, the General Partner can sell the Hotel without the consent of any of the holders of Class A Units as long as the buyer is not an affiliate of the General Partner. Under the Original Limited Partnership Agreement, the General Partner could not amend any agreement between the partnership and the General Partner or its affiliates without the consent of a majority of the holders of Class A Units. Furthermore, the...