Contract analysis

1. Verimark Hospitality Group Inc. ("Verimark") is a corporation duly organized and existing under the laws of the State of Delaware, with its principal place of business located at 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, Florida 33301. Verimark is a publicly traded company, and its common stock is listed on the Nasdaq Stock Market under the ticker symbol "VHMK." Complaint ¶ 1; Answer ¶ 1 (admitted

2. Verimark operates and franchises approximately 340 branded hotels across the southeastern United States under three distinct flags: "Verimark Suites," "Verimark Select," and "Verimark Grand." In fiscal year 2021, Verimark reported consolidated revenue of approximately $1.42 billion, with franchise segment revenue of approximately $218 million. Pl. Ex. 1 (Verimark Hospitality Group Inc., Annual Report on Form 10-K

3. Renata Solis-Vega serves as Senior Vice President and General Counsel of Verimark Hospitality Group Inc. Complaint ¶ 5; Answer ¶ 5 (admitted).

4. Deidre Langston serves as Senior Vice President of Franchise Operations for Verimark and is responsible for franchise compliance, quality assurance, and auditing across Verimark's franchise portfolio. Pl. Ex. 2 (Declaration of Deidre Langston, dated August 14, 2023, ¶ 2).

5. Coastal Palms Franchise Holdings LLC ("Coastal Palms") is a limited liability company organized and existing under the laws of the State of Florida, with its principal office located at 9500 Gulf Shore Drive, Suite 450, Naples, Florida 34108. Its registered agent is Garrison Registered Agents LLC, located at 100 S. Ashley Drive, Suite 600, Tampa, Florida 33602. Complaint ¶ 6; Answer ¶ 6 (admitted); Pl. Ex. 3 (Flor

6. Randall "Randy" Brecker is the Managing Member and holds a 60% equity interest in Coastal Palms. Brecker also serves as the President of Suncoast Room Management Inc. Brecker Dep. Day 1, 18:3–12, 22:7–14; RFA Resp. No. 1 (admitted).

7. Theresa Brecker is a Member of Coastal Palms holding a 15% equity interest. She is the spouse of Randall Brecker and manages payroll and human resources for the Coastal Palms hotel portfolio. Brecker Dep. Day 1, 24:1–10; Answer ¶ 8 (admitted).

8. Nolan Prescott is a Member of Coastal Palms holding a 25% equity interest. Prescott is a retired commercial real estate developer and has characterized himself as a passive investor in the Coastal Palms enterprise. Prescott Dep. 12:4–18; RFA Resp. No. 2 (admitted).

9. Gulf Breeze Hospitality LLC is a limited liability company organized and existing under the laws of the State of Florida. Gulf Breeze Hospitality LLC owns and operates six Verimark Suites hotel properties in Southwest Florida. Randall Brecker serves as its Managing Member and exercises operational control over its affairs. Brecker Dep. Day 1, 28:2–11; Pl. Ex. 4 (Operating Agreement of Gulf Breeze Hospitality LLC,

10. Savannah Lodging Partners LLC is a limited liability company organized and existing under the laws of the State of Georgia. Savannah Lodging Partners LLC owns and operates four Verimark Suites hotel properties in coastal Georgia. Randall Brecker serves as its Managing Member and exercises operational control over its affairs. Brecker Dep. Day 1, 29:5–14; Pl. Ex. 5 (Operating Agreement of Savannah Lodging Partners

11. Suncoast Room Management Inc. ("Suncoast") is a corporation organized and existing under the laws of the State of Florida, with Randall Brecker as its President and sole director. Suncoast was established as an affiliated management company that, among other functions, collected revenues from certain booking channels on behalf of the Coastal Palms hotel portfolio, including walk-in bookings, corporate-direct cont

12. At all times relevant to this action, Randall Brecker exercised operational control over Coastal Palms Franchise Holdings LLC, Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and Suncoast Room Management Inc. Brecker directed the financial reporting, revenue-collection practices, and franchise-compliance activities of each of these entities. Brecker Dep. Day 1, 30:12–31:5; Kerrigan Dep. 44:8–22; Presc

II. THE FRANCHISE LICENSE AGREEMENTS

13. On June 15, 2007, Coastal Palms entered into its first Franchise License Agreement ("FLA") with Verimark for a single Verimark Suites hotel property located in Naples, Florida. This FLA was duly executed by Randall Brecker on behalf of Coastal Palms as its Managing Member and by an authorized representative of Verimark. Pl. Ex. 8 (Franchise License Agreement No. 1, executed June 15, 2007); Brecker Dep. Day 1, 36:

14. Over the next twelve years, between 2007 and 2019, Coastal Palms executed a total of 22 individual FLAs with Verimark for hotel properties located in Florida and Georgia. The most recent FLA in the portfolio was executed on September 3, 2019. Pl. Exs. 8–29 (all 22 FLAs); Brecker Dep. Day 1, 38:4–39:2; RFA Resp. Nos. 3–4 (admitted).

15. The 22 franchised properties comprise 18 hotels operating under the "Verimark Suites" brand and 4 hotels operating under the "Verimark Select" brand, encompassing a total of approximately 3,740 guest rooms across the portfolio. Pl. Ex. 30 (Verimark franchise portfolio summary for Coastal Palms Franchise Holdings LLC, compiled from franchise records); Brecker Dep. Day 1, 40:1–8.

16. Each of the 22 FLAs provides for a 20-year initial term, is governed by the laws of the State of Florida, and contains a mandatory venue provision designating Broward County, Florida, as the exclusive venue for any disputes arising under or relating to the FLA. FLA § 17.4 (representative: Pl. Ex. 8); RFA Resp. No. 5 (admitted).

17. Section 4.1 of each FLA requires the franchisee to pay a royalty to Verimark equal to 5% of "Gross Room Revenue," as defined therein, for each applicable franchised property. FLA § 4.1 (Pl. Ex. 8); RFA Resp. No. 6 (admitted).

18. Section 4.1 of each FLA defines "Gross Room Revenue" or "GRR" as "all revenues derived from or attributable to the rental of guest rooms at the Hotel, including revenues from any booking channel, direct or indirect, and regardless of the entity collecting such revenue." FLA § 4.1 (Pl. Ex. 8); identical language appears in each of the 22 FLAs (Pl. Exs. 8–29).

19. The GRR definition contained in Section 4.1 of each FLA expressly encompasses revenues "regardless of the entity collecting such revenue." This language applies without limitation to revenues collected by the franchisee, any affiliate of the franchisee, or any third party acting on behalf of the franchisee. FLA § 4.1 (Pl. Ex. 8).

20. Section 4.2 of each FLA requires the franchisee to pay a marketing-fund contribution to Verimark equal to 2.5% of GRR, calculated using the same GRR definition set forth in Section 4.1. FLA § 4.2 (Pl. Ex. 8); RFA Resp. No. 7 (admitted).

21. Section 4.3 of each FLA requires the franchisee to pay a technology fee of $12.50 per available room per month. The technology fee is subject to annual adjustment based on the Consumer Price Index ("CPI") but is capped at an increase of no more than 3% per year. FLA § 4.3 (Pl. Ex. 8).

22. Section 4.6 of each FLA provides that any late payments by the franchisee shall accrue interest at a rate of 1.5% per month, compounded monthly, from the date due until the date paid in full. FLA § 4.6 (Pl. Ex. 8); RFA Resp. No. 8 (admitted).

23. Under each FLA, the franchisee is required to report GRR to Verimark on a monthly basis, on or before the fifteenth day of the month following the reporting period. The monthly GRR report must set forth total GRR by booking channel and must be certified as accurate by an authorized representative of the franchisee. FLA § 4.4 (Pl. Ex. 8); Brecker Dep. Day 1, 52:11–19.

24. Section 8.2 of each FLA grants Verimark the right to audit the franchisee's books and records upon 10 business days' written notice. The FLA further provides that if an audit reveals an underpayment exceeding 2% of reported GRR for the audited period, the franchisee shall bear all reasonable costs of the audit, in addition to the obligation to promptly remit any underpaid amounts with interest. FLA § 8.2 (Pl. Ex.

25. Section 14.1 of each FLA provides the franchisee with a cure period of 30 days from receipt of written notice from Verimark of a material breach, during which the franchisee may cure the breach and avoid termination of the FLA. FLA § 14.1 (Pl. Ex. 8).

26. Section 14.2(c) of each FLA provides that "systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure." This provision overrides the general 30-day cure period set forth in Section 14.1 with respect to the specific category of systematic GRR underreporting. FLA § 14.2(c) (Pl. Ex. 8); identical language appears in all 22 FLAs (Pl. Exs. 8–29); RFA Resp. No. 10 (admi

27. Section 15.3 of each FLA provides for liquidated damages upon termination of the FLA for cause, calculated as three times the trailing-twelve-month royalties paid or payable for each terminated property. The FLA provides that such liquidated damages represent a reasonable estimate of the damages Verimark would suffer from premature termination and are not a penalty. FLA § 15.3 (Pl. Ex. 8).

28. Randall Brecker personally signed each of the 22 FLAs on behalf of Coastal Palms in his capacity as its Managing Member. Each signature page identifies Brecker by name and title and bears his original or electronic signature. Pl. Exs. 8–29 (signature pages of all 22 FLAs); Brecker Dep. Day 1, 50:8–14; RFA Resp. No. 11 (admitted).

29. At his deposition, Brecker testified that he read and understood the terms of each FLA, including specifically the definition of Gross Room Revenue in Section 4.1, prior to executing each agreement. Brecker further confirmed that he had access to legal counsel during the negotiation and execution of each FLA. Brecker Dep. Day 1, 51:3–52:4.

30. At his deposition, Brecker specifically acknowledged that the GRR definition in Section 4.1 states that revenues are included "regardless of the entity collecting such revenue." When asked whether he understood that language at the time of execution, Brecker testified: "I understood what it said, but I didn't think it covered a separate management company." Brecker Dep. Day 1, 55:18–56:9.

31. The language of Section 4.1, including the definition of GRR, did not change in any material respect across any of the 22 FLAs executed between 2007 and 2019. A comparison chart prepared by Verimark's counsel confirms the uniformity of the relevant contractual provisions. Pl. Exs. 8–29 (the 22 FLAs); Pl. Ex. 31 (comparison chart of FLA § 4.1 language across all 22 agreements); Brecker Dep. Day 1, 53:2–8.

32. Each of the 22 FLAs contains an integration clause, set forth in Section 17.1, which provides that the FLA "constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior oral or written agreements, representations, and understandings." FLA § 17.1 (Pl. Ex. 8).

33. Each of the 22 FLAs contains a non-waiver clause, set forth in Section 17.3, providing that "no waiver of any breach or default hereunder shall be deemed a waiver of any subsequent breach or default, whether of the same or a different provision." FLA § 17.3 (Pl. Ex. 8).

34. Coastal Palms did not at any time seek a written modification or amendment to any FLA to alter the definition of GRR or to exclude revenues collected by affiliated entities from the GRR calculation. Nor did Coastal Palms request any side letter, addendum, or supplemental agreement addressing the treatment of revenues collected through Suncoast or any other affiliated entity. Brecker Dep. Day 1, 58:14–22; RFA Resp

III. ESTABLISHMENT AND OPERATION OF SUNCOAST ROOM MANAGEMENT INC.

35. Suncoast Room Management Inc. was incorporated under the laws of the State of Florida on or about December 14, 2012. Randall Brecker served as its sole incorporator, and upon incorporation, Brecker was appointed as President and sole director of Suncoast. Brecker remains the President and sole director of Suncoast to the present day. Pl. Ex. 6 (Suncoast Articles of Incorporation, filed December 14, 2012); Brecker

36. Beginning no later than January 2013, Suncoast commenced operations as an affiliated management entity that collected revenues from direct bookings at Coastal Palms hotel properties. The booking channels handled by Suncoast included walk-in guests who arrived at the front desk without a prior reservation, corporate-direct contracts negotiated by Brecker with local and regional businesses, and bookings made throug

37. The website gulfcoastrooms.com was registered by Suncoast and operated under Brecker's direction to generate direct-booking revenue for Coastal Palms hotel properties. The website did not identify the listed properties as Verimark-branded hotels. Instead, the website listed properties by location and amenities without reference to any Verimark brand, flag, or trademark. Archived screenshots of the website confirm

38. Suncoast entered into written "Management Services Agreements" with each of the property-level entities in the Coastal Palms portfolio, including Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and other property-level limited liability companies. Under these agreements, Suncoast was authorized to collect revenues from direct bookings made through Suncoast's booking channels (walk-ins, corporate-direc

39. The 12% management fee retained by Suncoast was not reported to Verimark as part of GRR. Because Suncoast retained the fee before remitting the balance to the property-level entities, and because the property-level entities reported only the amounts they received (rather than the gross amount collected from guests), the management fee was effectively excluded from the GRR calculation in its entirety. Brecker Dep.

40. The revenues collected by Suncoast from direct bookings, in their entirety — that is, prior to deduction of the 12% management fee — were not included in the monthly GRR reports submitted by Coastal Palms to Verimark. The property-level entities reported only revenues received through Verimark's central reservation system and through OTA channels (and even OTA revenues were improperly netted, as discussed below).

41. At his deposition, Brecker admitted that he personally directed property-level controllers, including Janet Kerrigan, to exclude revenues collected through Suncoast from the monthly GRR reports submitted to Verimark. Brecker testified that he believed this exclusion was justified because Suncoast was a "separate entity" from Coastal Palms and the property-level LLCs. Brecker Dep. Day 1, 74:8–75:16; Brecker Dep. D

42. Janet Kerrigan, who served as Regional Controller for Coastal Palms from approximately March 2015 until her termination in October 2021, testified at her deposition that Brecker instructed her and other property-level controllers that "Suncoast revenue is separate" and should not be included in the GRR reports submitted to Verimark. Kerrigan testified that these instructions were communicated orally during confer

43. Kerrigan further testified that Brecker told her on multiple occasions that the Suncoast booking channel was "none of Verimark's business" and that the management company's revenue was "our money, not theirs." Kerrigan recounted that Brecker expressed frustration with the royalty and marketing-fund obligations under the FLAs and viewed the Suncoast structure as a legitimate way to reduce those obligations. Kerrig

44. Multiple property-level managers and accountants employed at various Coastal Palms hotel properties confirmed in their depositions that they received instructions from "corporate" — meaning Brecker and his central management team — to route walk-in and corporate-direct bookings through the Suncoast channel and to exclude those revenues from the GRR reports submitted to Verimark. These witnesses included front-des

45. In addition to excluding direct-booking revenues collected by Suncoast, Coastal Palms also underreported revenue from third-party online travel agency ("OTA") channels by classifying net-rate OTA payments as "commissions receivable" and netting those commissions against GRR, rather than reporting the gross OTA revenue. This netting practice reduced the reported GRR by the amount of the OTA commissions and booking

46. The GRR definition in FLA § 4.1 encompasses "all revenues derived from or attributable to the rental of guest rooms" and does not authorize or permit the netting of commissions, booking fees, or any other deductions before reporting GRR. The definition contains no exclusion for commissions paid to OTAs or any other intermediary. FLA § 4.1 (Pl. Ex. 8).

47. At his deposition, Brecker acknowledged that the revenues collected by Suncoast derived from the rental of guest rooms at Verimark-branded hotel properties operated by entities within the Coastal Palms portfolio. Brecker did not contend that the Suncoast revenues came from any source other than guest-room rentals at the franchised properties. Brecker Dep. Day 2, 115:4–116:2.

48. Brecker further acknowledged that the guest rooms booked through gulfcoastrooms.com and through walk-in channels at Coastal Palms properties were the same physical rooms covered by the FLAs — that is, rooms at Verimark-branded hotels subject to the franchise royalty and marketing-fund obligations. There were no separate, non-franchised rooms at these properties. Brecker Dep. Day 2, 117:8–118:3.

49. Suncoast maintained bank accounts separate from those of the property-level entities. Revenues from direct bookings processed through Suncoast's channels were deposited into Suncoast's accounts at Ironclad National Bank before the net-of-fee balance (88% of gross collections) was transferred to the respective property-level LLCs. This two-step process — deposit into Suncoast's account followed by transfer to the

50. Coastal Palms did not disclose the existence of Suncoast's revenue-collection role or the gulfcoastrooms.com booking channel in any of the monthly GRR reports submitted to Verimark during the 2013–2021 period. The GRR reports submitted to Verimark identified revenue by booking channel (e.g., "CRS," "Aldermere Technologies," "Bramwell Holdings"), but no line item for "Suncoast," "direct bookings," "walk-ins," "cor

51. Coastal Palms did not notify Verimark at any time that it had established a separate management entity — Suncoast — to collect guest-room revenues from booking channels other than Verimark's central reservation system, notwithstanding the FLA's requirement that GRR reports encompass "all revenues … regardless of the entity collecting such revenue." No written or oral notification to Verimark regarding Suncoast's

52. Verimark was not aware of Suncoast's role in collecting guest-room revenues until the whistleblower complaint filed by Janet Kerrigan on November 8, 2021. Prior to that date, Verimark's franchise operations team had no knowledge that a significant portion of guest-room revenues at Coastal Palms properties was being collected through a separate entity and excluded from GRR reports. Pl. Ex. 56 (Kerrigan whistleblow

53. Although certain property-management agreements submitted during the franchise-application process for some of the later FLAs referenced Suncoast Room Management Inc., those documents identified Suncoast only as providing "back-office support services," including payroll processing, accounts payable, and vendor-contract management. The franchise-application materials did not disclose that Suncoast would collect g

IV. THE REVENUE UNDERREPORTING SCHEME — SCOPE AND DURATION

54. The practice of excluding Suncoast-collected revenues from GRR reports submitted to Verimark began no later than January 2013, coinciding with the commencement of Suncoast's revenue-collection operations, and continued through at least December 2021, encompassing a period of no less than nine years. Kettlewell Rep. ¶¶ 28–32; Brecker Dep. Day 1, 76:8–77:2; Kerrigan Dep. 74:6–75:3.

55. The underreporting practice was applied systematically across all 22 franchised hotel properties in the Coastal Palms portfolio. No property was excluded from the scheme. Every property in the portfolio had a portion of its guest-room revenue collected through Suncoast's booking channels, and in every case, those revenues were excluded from the monthly GRR reports submitted to Verimark. Kettlewell Rep. ¶¶ 33–36;

56. For fiscal year 2021, Coastal Palms reported aggregate GRR of $112.4 million across all 22 franchised properties. This figure was reflected in Coastal Palms' 2021 annual GRR summary report submitted to Verimark. Pl. Ex. 59 (2021 annual GRR summary report submitted by Coastal Palms to Verimark); RFA Resp. No. 15 (admitted).