How does Hawthorn Suites By Wyndham revise its accruals for legal contingencies?
Hawthorn_Suites_By_Wyndham Franchise · 2025 FDDAnswer from 2025 FDD Document
ruptcy proceedings involving efforts to collect receivables from a debtor in bankruptcy, employment matters, claims of infringement upon third parties' intellectual property rights, claims relating to information security, privacy and consumer protection, fiduciary duty/trust claims, tax claims, environmental claims and landlord/tenant disputes. Along with many of its competitors, the Company and/or certain of its subsidiaries have been named as defendants in litigation matters filed in state and federal courts, alleging statutory and common law claims related to purported incidents of sex trafficking at certain franchised and managed hotel facilities. Many of these matters are in the pleading or discovery stages at this time. In certain matters, discovery has closed and the parties are engaged in dispositive motion practice. As of December 31, 2024, the Company is aware of approximately 50 pending matters filed naming the Company and/or subsidiaries. Due to the cadence of litigation filings, dismissals and settlements, including litigants attempting to preserve claims by filing within applicable statutory limitations periods, the number of pending matters may fluctuate from time to time. Based upon the status of these matters, the Company has not made a determination as to the likelihood of any probable loss of any one of these matters and is unable to estimate a range of losses at this time.
The Company records an accrual for legal contingencies when it determines, after consultation with outside counsel, that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In making such determinations, the Company evaluates, among other things, the degree of probability of an unfavorable outcome, and when it is probable that a liability has been incurred, its ability to make a reasonable estimate of loss. The Compan
Source: Item 23 — RECEIPTS (FDD pages 92–402)
What This Means (2025 FDD)
According to Hawthorn Suites By Wyndham's 2025 Franchise Disclosure Document, the company revises its accruals for legal contingencies each reporting period. These revisions are based on changes in facts and circumstances, which include adjustments to the company's strategy in dealing with these legal matters.
The company initially records an accrual for legal contingencies when, after consulting with outside counsel, it determines that a liability is probable and the loss amount can be reasonably estimated. This determination involves evaluating the probability of an unfavorable outcome and the ability to reasonably estimate the potential loss.
As of December 31, 2024, Hawthorn Suites By Wyndham had reserves of $3 million for such matters, compared to $7 million as of December 31, 2023. Additionally, the company had receivables for certain matters covered by insurance, which were immaterial as of December 31, 2024, and $4 million as of December 31, 2023. The FDD notes that litigation is inherently unpredictable, and unfavorable results could occur, potentially leading to claims exceeding the accrued amounts. The potential exposure from adverse outcomes of legal proceedings could range up to approximately $11 million in excess of recorded accruals as of December 31, 2024. However, the company believes that the impact of such litigation will not result in a material liability to the company in relation to its combined financial position or liquidity.