More than three years after being spun off as an independent company, Realogy Corp. remains saddled by an agreement to cover the lion’s share of some unresolved liabilities of its former parent, Cendant Corp., including legal judgments and a potential $476 million back-tax bill.

In a regulatory filing detailing the company’s second-quarter results, Realogy said it recently paid $62 million of a $98 million legal judgment against Cendant, as required by separation and distribution agreements between Cendant and three companies it spun off in 2006. Cendant became Avis Budget Group Inc. after the reorganization.

The judgment was the result of a lawsuit alleging breach of contract and fraud in Cendant’s 1998 acquisition of Credentials Services International, a direct marketer of credit report information to consumers. The deal closed just before Cendant reported potential accounting irregularities in a merger with CUC International Inc., Realogy said.

"This case and its unfortunate outcome were unrelated to Realogy, or any action on the part of our management, and was solely a legacy issue," Realogy Chief Financial Officer Tony Hull said in a webcast discussion of second-quarter results.

Because Realogy had previously posted a $68 million letter of credit while appealing the decision, the payment had no impact on Realogy’s liquidity, Hull said.

But Realogy also warned it could face another hit of up to $365 million to its bottom line next year, depending on the outcome of an ongoing Internal Revenue Service audit of Cendant’s tax filings from 2003-06 — and the company is already burdened with billions in debt from a highly leveraged buyout in 2007.

Cendant and Realogy "believe there is appropriate support for the positions taken on Cendant’s tax returns," Realogy said. But under the terms of the agreement between Cendant and its spin-offs, Realogy is obligated to pay 62.5 percent of any settlement with the IRS.

Realogy — with company-owned and franchise real estate brands include Century 21, Coldwell Banker and ERA, among others — said it expects the IRS to complete its audit of Cendant’s tax filings during the first half of next year.

Cendant’s successor company, Avis Budget Group, says the "current best estimates of the probable outcome" of the case is that it will be asked to pay $476 million in additional taxes.

Realogy said it has recorded a potential $365 million tax liability on its consolidated balance sheet, and warned it "may not have sufficient cash resources available or borrowing capacity" to pay its share of any Cendant back taxes.

The company could be required to take on additional debt, and the inability to obtain financing would have "a material negative impact on our operations, liquidity and our financial condition," Realogy said in a Securities and Exchange Commission filing.

Realogy spokesman Mark Panus said the company "has an obligation to disclose all material risks in its filings with the SEC. We are currently working to resolve the legacy Cendant tax matter at a level that does not pose a problem for the company, and we are proceeding on that basis." …CONTINUED

Cendant became Avis Budget Group after spinning off Realogy, Wyndham Worldwide Corp. and Travelport Inc. in July and August 2006.

After a short stint as a publicly traded company, Realogy was in turn acquired by an affiliate of Apollo Management LP in April 2007, in a deal that left the company highly leveraged and the subject of speculation about its long-term prospects.

In announcing a $15 million second-quarter loss Tuesday, Realogy said its $3.4 billion in senior secured debt remains within the maximum 5.35-to-1 ratio stipulated in its credit agreement (see story).

Under a separation and distribution agreement, Realogy assumed 62.5 percent and Wyndham 37.5 percent of some unresolved Cendant corporate liabilities and contingencies that are mostly unrelated to Realogy, Wyndham, Travelport or Avis’ vehicle rental operations.

Panus noted that the agreement can also have a positive impact on the company’s bottom line, because it also entitles Realogy and Wyndham to an identical percentage of proceeds from the sale of some of Cendant’s contingent assets.

On June 26, for example, Wright Express Corp. paid Realogy $51 million to prepay its obligations under a 2005 tax receivable agreement with Cendant. Cendant sold Wright Express in an initial public offering in February 2005, which increased the tax basis of the company’s assets to fair market value.

Wright Express, which provides payment processing and information management services to the vehicle fleet industry, had originally agreed to pay Cendant 85 percent of the tax savings it would achieve through the increased tax basis of the assets and their related amortization over a 15-year period.

When Wright decided to prepay its obligations to Cendant, Realogy was entitled to a 62.5 percent cut, the company said in disclosing the payment.

In its latest report to investors, Avis Budget Group noted that if Realogy or Wyndham were to default on payments of any assumed liabilities, Avis would be responsible for 50 percent of the defaulting party’s obligation. But Avis said it would then have the right to use the defaulting party’s share of the proceeds from the sale of any assumed assets to offset that obligation.

In its latest regulatory filing, Realogy also disclosed that it received an $11 million payment in April, the proceeds of a legal settlement that resolves Cendant and Realogy’s liability in a potentially costly class-action lawsuit filed more than seven years ago by investors in a former business partner, (now Move Inc.).

The lawsuit, against and 26 other defendants including Cendant, has produced $120 million in settlements to date.

The latest settlement in the case, finalized in March, released Cendant from claims by other investors, and allowed the company to collect $11 million paid by other defendants in the lawsuit. In return, Cendant relinquished at least $4 million in additional settlement funds it might have been entitled to if it had refused to settle and ultimately been dismissed from the case.


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