Contract analysis

I. Purpose and Scope of Memorandum This memorandum analyzes the key contractual provisions in the Franchise License Agreements ("FLAs") between Verimark Hospitality Group Inc. ("Verimark" or "VHG") and Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "CPFH") that bear on Verimark's audit rights, franchisee breach and cure obligations, and liquidated-damages remedies. The memorandum is intended to provide the

II. Background — Revenue Obligations Under the FLAs Before turning to the audit, breach, and damages provisions, it is necessary to establish the revenue-reporting obligations that Coastal Palms owes under the FLAs. These obligations form the substantive predicate for any breach claim and are essential to understanding the magnitude of the alleged underreporting. A. Gross Room Revenue Definition (§ 4.1)

Section 4.1 of each FLA defines the term "Gross Room Revenue" (or "GRR") as follows: "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." This definition is intentionally and expansively drafted. It encompasses, without limitation, the following categories of room re

1. Royalty (§ 4.1): The franchisee is obligated to pay a royalty equal to five percent (5%) of GRR, payable monthly. This is the core franchise fee and the primary revenue stream that Verimark derives from each franchise relationship.

2. Marketing-Fund Contribution (§ 4.2): The franchisee is obligated to contribute two and one-half percent (2.5%) of GRR to the Verimark National Marketing Fund. These contributions support brand-wide advertising, digital marketing, loyalty-program administration, and other centralized marketing activities that benefit all franchised properties in the Verimark system.

3. Technology Fee (§ 4.3): The franchisee is obligated to pay a technology fee of $12.50 per available room per month, subject to annual adjustment based on the Consumer Price Index ("CPI"), with such adjustment capped at three percent (3%) per year. The technology fee supports the Verimark central reservations system, the PMS platform, revenue-management tools, and other technology infrastructure provided to franchi

Section 4.6 of each FLA provides that interest on late or underpaid amounts accrues at a rate of one and one-half percent (1.5%) per month, compounded monthly. This interest provision has two important features: First, the interest rate is applied on a compounding basis, meaning that unpaid interest is added to the outstanding principal balance at the end of each month, and subsequent interest accrues on the increase

III. Analysis of § 8.2 — Audit Rights A. Text and Operation of § 8.2

Section 8.2 of each FLA grants Verimark the right to audit the books and records of the franchisee and the hotel. The operative provisions of § 8.2 establish the following framework: Notice Requirement. Verimark is entitled to conduct an audit upon ten (10) business days' written notice to the franchisee. The notice must specify the properties to be audited and the general scope of the audit. The ten-business-day not

Section 8.2 contains a cost-shifting mechanism that operates as follows: if an audit reveals an underpayment exceeding two percent (2%) of the GRR as reported by the franchisee for the audited period, the franchisee is obligated to bear all costs of the audit, including fees and expenses of the auditing firm. Several aspects of this provision warrant attention: Baseline Measurement. The two-percent threshold is measu

Section 8.2 does not limit the audit to the franchisee entity itself. Rather, it covers "books and records of the Hotel" and, in a separate clause, extends to "all entities under common control with Franchisee that collect, receive, or account for revenues attributable to the Hotel." This "common control" language is the key provision. Suncoast Room Management Inc. satisfies the "common control" requirement on multip

IV. Analysis of § 14.1 — Cure Period for Material Breach A. Text and Mechanics

Section 14.1 of each FLA establishes the procedural framework for the franchisor to declare a material breach and provides the franchisee with an opportunity to cure. The provision operates as follows: Written Notice. Verimark must provide written notice of material breach to the franchisee specifying the nature of the breach. This notice must be delivered in accordance with the general notice provisions of the FLA (

V. Analysis of § 14.2(c) — Systematic Underreporting as Incurable Material Breach A. Text of the Provision

Section 14.2 of each FLA identifies certain categories of material breach that are deemed "incapable of cure" — meaning that the thirty-day cure period provided by § 14.1 does not apply. Subsection (c) of § 14.2 provides: "Systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure." This provision is unambiguous in its effect: when the franchisee's breach takes the fo

1. Duration. The scheme has been in operation since at least January 2013 — a period of approximately nine years. This extended duration is inconsistent with an isolated error or temporary oversight and is powerful evidence of a deliberate, ongoing plan.

2. Purpose-Built Infrastructure. Suncoast Room Management Inc. was specifically established to collect direct-booking revenues through an unbranded website (gulfcoastrooms.com), walk-in bookings processed outside the Verimark PMS, and corporate-direct contracts. The creation of a separate corporate entity and an unbranded website for the specific purpose of channeling revenue away from Verimark's reporting system is

3. Revenue-Siphoning Structure. Revenue collected by Suncoast was subject to a twelve-percent "management fee" retention before the balance was remitted to property-level operating entities. This management-fee structure operated as an additional layer of revenue extraction, further reducing the amounts that could flow into GRR reporting. The design of this fee structure — with a fixed percentage retention before any

4. Portfolio-Wide Scope. The underreporting was consistent across multiple properties — all twenty-two hotels in Coastal Palms' Florida and Georgia portfolio. The scheme was not limited to one location or one market but was implemented across the entire franchise relationship. This geographic breadth is a hallmark of systematic conduct.

5. Consistency and Magnitude. The estimated underreporting percentage ranged from approximately twenty-two percent (22%) to thirty-one percent (31%) across the portfolio, varying by property and year. The consistency of the underreporting percentages across different properties and time periods is indicative of a centrally directed scheme rather than a collection of unrelated errors.

6. Direct Management Involvement. Whistleblower Janet Kerrigan has stated — in her initial compliance-hotline report and in subsequent interviews with Verimark's compliance counsel — that Randall Brecker personally directed regional controllers to exclude Suncoast-collected revenues from the monthly GRR reports submitted to Verimark. This direct involvement of the managing member in instructing subordinates to underr

VI. Analysis of § 15.3 — Liquidated Damages upon Termination for Cause A. Text and Formula

Section 15.3 of each FLA provides for the payment of liquidated damages upon termination of the agreement for cause. The operative text establishes the following formula: Upon termination of this Agreement for cause pursuant to Article 14, Franchisee shall pay to Franchisor, as liquidated damages and not as a penalty, an amount equal to three (3) times the trailing-twelve-month royalties for the Hotel. The term "trai

VII. Interaction Among the Provisions — Recommended Enforcement Roadmap The provisions analyzed in Sections III through VI above operate as an integrated enforcement framework. The following roadmap sets forth the recommended sequence for exercising Verimark's contractual rights. A. Step 1: Exercise Audit Rights Under § 8.2 The first step in the enforcement process is the formal exercise of Verimark's audit rights un

1. Breach of Contract — for unpaid royalties, marketing-fund contributions, and technology fees arising from the systematic underreporting of GRR in violation of §§ 4.1, 4.2, and 4.3 of each FLA;

2. Breach of the Implied Covenant of Good Faith and Fair Dealing — for Coastal Palms' deliberate undermining of the parties' franchise relationship through the revenue-diversion scheme;

3. Fraudulent Concealment — for Coastal Palms' active concealment of the Suncoast revenue-diversion scheme, including the suppression of information that Verimark was entitled to receive under the FLAs;

4. Declaratory Relief — seeking a judicial declaration that (a) the revenues collected by Suncoast constitute GRR under § 4.1, (b) Coastal Palms' underreporting constitutes a material breach incapable of cure under § 14.2(c), and (c) Verimark is entitled to terminate the FLAs and recover liquidated damages under § 15.3;

5. Civil Conspiracy — against Coastal Palms, Suncoast Room Management Inc., Randall Brecker individually, and potentially other conspirators, for the coordinated scheme to divert revenues from GRR reporting; and

6. Unjust Enrichment — in the alternative, to the extent any revenues fall outside the strict terms of the GRR definition (which we do not believe is the case, but which should be pleaded in the alternative as a precaution). Defendants. The complaint should name Coastal Palms Franchise Holdings LLC as the primary defendant. It should also name Suncoast Room Management Inc. as a defendant (for conspiracy and unjust en

VIII. Additional Considerations A. Statute of Limitations Florida's statute of limitations for breach of a written contract is five years. Fla. Stat. § 95.11(2)(b). The statute runs from the date the cause of action accrues, which is generally the date of the breach. The preliminary investigation indicates that the underreporting scheme began in or about January 2013. If suit is filed in early 2022 — as recommended i