Contract analysis

I. Executive Summary On November 8, 2021, Janet Kerrigan, a former regional controller for Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "CPFH"), contacted the compliance hotline maintained by Verimark Hospitality Group Inc. ("Verimark" or "VHG") and reported that Coastal Palms has been systematically underreporting Gross Room Revenue ("GRR") to Verimark over an extended period. Ms. Kerrigan's allegations

II. Background: The Franchise Relationship A. Parties and Corporate Structure An understanding of the relevant entities and their interrelationships is essential to analyzing the whistleblower's allegations. The franchise relationship at issue involves a publicly traded franchisor, a multi-property franchisee holding company, various property-level operating entities, and an affiliated management company that is alle

§ 4.1 — Royalty. Each FLA requires the franchisee to pay Verimark a continuing royalty equal to 5% of Gross Room Revenue. Critically, GRR is defined broadly 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." This expansive definition appears to have been drafted

§ 4.2 — Marketing-Fund Contribution. Each franchisee is required to contribute 2.5% of GRR to Verimark's brand marketing fund. This contribution is calculated on the same GRR base as the royalty, meaning that any underreporting of GRR would proportionally reduce both the royalty payment and the marketing-fund contribution.

§ 4.3 — Technology Fee. Each franchisee pays a technology fee of $12.50 per available room per month, subject to annual adjustment by the Consumer Price Index, capped at 3% per year. This fee funds the maintenance and enhancement of Verimark's proprietary property-management system, central reservation system, and guest loyalty platform. The fee is calculated based on the number of "available rooms" as defined in eac

§ 4.6 — Late-Payment Interest. All amounts not paid when due accrue interest at the rate of 1.5% per month, compounded monthly, from the date originally due until the date of payment. This compounding interest provision is a standard feature of Verimark's FLAs and, given the nine-year duration of the alleged scheme (2013–2021), could produce interest charges that are very substantial — potentially exceeding the princ

§ 8.2 — Audit Rights. Verimark is entitled to audit the franchisee's books and records upon 10 business days' written notice. The audit may cover any period within the preceding 36 months (or longer in the case of fraud or intentional misrepresentation). If the audit reveals an underpayment exceeding 2% of reported GRR for any audited period, the franchisee is required to bear all costs associated with the audit, inc

§ 14.1 — Cure Period. Upon written notice of a breach of any provision of the FLA, the franchisee has 30 days to cure the breach. If the breach is cured within the 30-day period, Verimark may not terminate the FLA on the basis of that breach.

§ 14.2(c) — Incurable Breach. Notwithstanding the general cure provision in § 14.1, the FLA identifies certain breaches that are "incapable of cure" and therefore permit termination without a cure period. Specifically, § 14.2(c) provides that "[s]ystematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure." This provision is directly on point with the whistleblower's al

§ 15.3 — Liquidated Damages. Upon termination of an FLA for cause, the franchisee is required to pay Verimark liquidated damages equal to 3× the trailing-twelve-month royalties for the terminated property. The parties have agreed that actual damages in the event of early termination would be difficult to calculate with certainty, and that the liquidated-damages amount represents a reasonable estimate of Verimark's ac

III. The Whistleblower: Janet Kerrigan A. Identity and Position Janet Kerrigan served as Regional Controller for Coastal Palms Franchise Holdings LLC. In that capacity, she oversaw financial reporting and accounting for a cluster of properties within the Coastal Palms portfolio. While the exact number and identity of the properties under her supervision have not yet been confirmed, her title and described responsibil

IV. Analysis of the Alleged Revenue Diversion Scheme A. The Suncoast Channel The core of the alleged scheme is the use of Suncoast Room Management Inc. as an intermediary to collect guest-room revenue that is never reported to Verimark as GRR. Under this arrangement, revenues from walk-in guests, corporate-direct contracts, and bookings through the unbranded website gulfcoastrooms.com are invoiced and collected by Su

V. Preliminary Estimate of Financial Exposure A. Scope of Potential Underreporting The following estimates are preliminary and subject to significant uncertainty. They are based on the limited information currently available — principally Ms. Kerrigan's hotline statements and Verimark's internal data on reported GRR — and should not be relied upon for purposes of financial reporting, public disclosure, or litigation

VI. Key Contractual Provisions and Litigation Considerations A. Material Breach Under § 14.2(c) FLA § 14.2(c) provides that "[s]ystematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure." This provision is directly on point with the whistleblower's allegations and, if the allegations are substantiated, would provide Verimark with the contractual right to terminate any

1. Breach of Contract — Claims for underpayment of 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. This is the primary claim and is supported by the plain language of the FLA's GRR definition.

2. Breach of the Implied Covenant of Good Faith and Fair Dealing — Under Florida law, every contract includes an implied covenant of good faith and fair dealing. The establishment of Suncoast as a vehicle to divert revenue away from the GRR reporting obligation, if proven, would constitute a paradigmatic violation of this covenant, as it would reflect an intentional effort to deprive Verimark of the benefit of its ba

3. Fraudulent Concealment — Coastal Palms' alleged concealment of the Suncoast arrangement and the true amount of GRR from Verimark may support a claim for fraudulent concealment under Florida law. The elements of this claim — a duty to disclose, suppression of a material fact, intent to deceive, and resulting damage — appear to be present based on the whistleblower's allegations.

4. Negligent Misrepresentation — The submission of monthly GRR reports that materially understated actual revenue may support a claim for negligent misrepresentation, to the extent that Coastal Palms owed a duty of care in the preparation and submission of those reports.

5. Unjust Enrichment — As an alternative theory, Verimark may assert that Coastal Palms and its principals have been unjustly enriched by retaining revenues that should have been reported as GRR and upon which franchise fees should have been calculated.

6. Declaratory Judgment — Verimark may seek a declaratory judgment confirming its right to terminate some or all of the 22 FLAs for cause based on the systematic underreporting of GRR, pursuant to § 14.2(c).

7. Accounting — Verimark may seek an equitable accounting of all revenues collected by Suncoast, all amounts received through gulfcoastrooms.com, and all GRR from OTA channels that was subject to the netting practice, in order to determine the full extent of the underreporting.

8. Civil Conspiracy — To the extent that Randall Brecker, Suncoast Room Management Inc., and potentially other individuals or entities acted in concert to perpetrate the revenue diversion scheme, Verimark may assert a claim for civil conspiracy. This theory would permit Verimark to pursue personal liability against Brecker individually and to reach assets held by Suncoast that might not otherwise be available to sati

VII. Potential Counterparty Considerations A. Coastal Palms' Financial Position and Collectibility Any recovery strategy must account for the practical question of collectibility. Coastal Palms' 22 hotel properties represent substantial real estate assets, but they are understood to be subject to significant mortgage debt. Based on publicly available information, including mortgage recordings in the applicable county

VIII. Recommendations Based on the analysis set forth above, we recommend the following next steps. These recommendations are prioritized in order of urgency and are designed to advance the investigation while preserving Verimark's litigation options and maintaining the confidentiality of the inquiry. A. Engagement of Independent Auditor We recommend that Verimark promptly engage an independent forensic accounting fi