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Commitments and Contingencies
6 Months Ended
Jun. 30, 2016
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
Restricted Cash—Under certain management and debt agreements for our hotel properties existing at June 30, 2016, escrow payments are required for insurance, real estate taxes, and debt service. In addition, for certain properties based on the terms of the underlying debt and management agreements, we escrow 4% to 5% of gross revenues for capital improvements.
Management Fees—Under management agreements for our hotel properties existing at June 30, 2016, we pay a) monthly property management fees equal to the greater of $10,000 (CPI adjusted since 2003) or 3% of gross revenues, or in some cases 3% to 7% of gross revenues, as well as annual incentive management fees, if applicable, b) market service fees on approved capital improvements, including project management fees of up to 4% of project costs, for certain hotels, and c) other general fees at current market rates as approved by our independent directors, if required. These management agreements expire from May 31, 2023, through December 31, 2065, with renewal options. If we terminate a management agreement prior to its expiration, we may be liable for estimated management fees through the remaining term, liquidated damages or, in certain circumstances, we may substitute a new management agreement.
Litigation—On February 3, 2016, Sessa Capital (Master), L.P. (“Sessa”) filed an action (the “Maryland Action”) in the Circuit Court for Baltimore City, Maryland, captioned Sessa Capital (Master) L.P. v. Bennett, et al., Case No. 24-C-16-000557 (Baltimore City Cir. Ct. 2016), against Ashford Prime, the members of the Ashford Prime board of directors, Ashford LLC and Ashford Inc. The Maryland Action generally alleged that the directors of Ashford Prime breached their fiduciary duties in connection with the June 2015 amendments to the Company’s advisory agreement with Ashford LLC. The Maryland Action also alleged that Ashford Inc. aided and abetted those breaches of fiduciary duties. On February 29, 2016, the Company filed a motion to dismiss the Maryland Action. On March 14, 2016, Sessa voluntarily dismissed the Maryland Action.
On February 25, 2016, Ashford Prime filed a lawsuit (the “Texas Federal Action”) in the United States District Court for the Northern District of Texas, captioned Ashford Hospitality Prime, Inc. v. Sessa Capital (Master), L.P., et al., No. 16-cv-00527 (N.D. Texas 2016) (DCG), against Sessa, related entities, and Sessa’s proposed director nominees John E. Petry, Philip B. Livingston, Lawrence A. Cunningham, Daniel B. Silvers and Chris D. Wheeler. The Texas Federal Action generally alleges that the defendants violated federal securities laws because Sessa’s proxy materials contain numerous false claims, material misrepresentations and omissions relating to, among other things, the proposed nominees, the financial risks associated with Sessa’s efforts to gain control of the board and Sessa’s plans and strategy for the Company and its assets. Among other remedies, the Texas Federal Action seeks to enjoin Sessa from proceeding with its proxy contest. The outcome of this action is pending.
On March 8, 2016, Ashford Prime filed a lawsuit (the “Texas State Action”) in the District Court of Dallas County, Texas, captioned Ashford Hospital Prime, Inc. v. Sessa Capital (Master) L.P., et al., Cause No. DC-16-02738, against Sessa, related entities, and Sessa’s proposed director nominees John E. Petry, Philip B. Livingston, Lawrence A. Cunningham, Daniel B. Silvers and Chris D. Wheeler. The Texas State Action generally alleges that Sessa’s purported notice of proposed nominees for election to the Ashford Prime board of directors is invalid due to numerous failures by the defendants to comply with material provisions in the Company’s bylaws. Among other things, the Texas State Action seeks a declaratory judgment confirming the inability of Sessa’s proposed director nominees to stand for election at the 2016 annual meeting of stockholders. On March 14, 2016, Sessa removed the Texas State Action from state court to the U.S. District Court for the Northern District of Texas with Cause No. 16-cv-00713. The outcome of this action is pending.
On March 14, 2016, Sessa filed counterclaims and a motion for a preliminary injunction in the Texas Federal Action. These counterclaims include substantially the same claims as previously asserted by Sessa in the Maryland Action, and also allege that the directors of Ashford Prime breached their fiduciary duties in connection with the approval of the Series C Preferred Stock for issuance and the February 2016 amendments to the Amended Partnership Agreement (as defined below). Among other things, Sessa seeks an injunction prohibiting the issuance of shares of Series C Preferred Stock and requiring the board to approve the Sessa candidates, or in the alternative, prohibiting the solicitation of proxies until the board approves the Sessa candidates. On April 2, 2016, Sessa amended its counterclaims alleging that the Company had violated federal proxy solicitation laws by, among other things, stating that Sessa had not complied with the Company’s bylaws and that its purported director nominations are invalid. On April 6, 2016, the Court granted expedited discovery in connection with Sessa’s motion for preliminary injunction and the Company’s anticipated motion for preliminary injunction in the Texas State Action. On April 8, 2016, the Company notified the court that Sessa’s claims relating to the Series C Preferred Stock were moot after the Company unwound the OP Unit enfranchisement preferred equity transaction for the Company’s OP unitholders. On April 13, 2016, the Company filed its motion for preliminary injunction seeking an order declaring that Sessa’s slate of nominees is invalid and enjoining Sessa from submitting the nominees to stockholders for election to the Board. On May 20, 2016, the court denied Sessa’s motion for a preliminary injunction and granted the Company’s motion for a preliminary injunction. Sessa appealed the district court’s decision to the United States Court of Appeals for the Fifth Circuit on May 23, 2016. Sessa’s appeal is fully briefed and the court heard oral argument on August 2, 2016. There are currently no claims for monetary damages, but Sessa seeks reimbursement for its attorneys’ fees and costs.
We are engaged in other various legal proceedings which have arisen but have not been fully adjudicated. The likelihood of loss for these legal proceedings, based on definitions within the contingency accounting literature, ranges from remote to reasonably possible and to probable. Based on estimates of the range of potential losses associated with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the consolidated financial position or results of operations. However, the final results of legal proceedings cannot be predicted with certainty and if we fail to prevail in one or more of these legal matters, and the associated realized losses exceed our current estimates of the range of potential losses, our consolidated financial position or results of operations could be materially adversely affected in future periods.