Contract analysis

I. EXECUTIVE SUMMARY This memorandum assesses Pellegrino Capital Group LLC's ("PCG") exposure to a bad-faith penalty under Section 12.7 of the Second Amended and Restated Operating Agreement (the "Operating Agreement" or "OA") of Palmetto Grand Ventures LLC ("PGV"), dated June 15, 2017, in connection with PCG's exercise of the call option under OA Section 12.4 on January 9, 2023. This assessment is prepared in the co

II. CONTRACTUAL FRAMEWORK: OA SECTION 12.7 A. Text of the Provision The operative penalty provision is found in Section 12.7 of the Operating Agreement, titled "Bad-Faith Penalty." The full text of the relevant provision reads as follows: "If the Manager exercises the call option under Section 12.4 in bad faith or with the intent to materially understate Fair Market Value, the purchase price for the redeemed interest

Section 12.4(c) of the Operating Agreement provides a contractual mechanism for resolving appraisal divergence. Specifically, if the two party-commissioned appraisals diverge by more than ten percent (10%), the parties are required to jointly retain a third, neutral MAI-certified appraiser. Fair Market Value is then determined as the average of the two closest appraisals among the three. The divergence between the Wh

III. MSH'S THEORY OF BAD FAITH A. Summary of MSH's Allegations (Per Demand for Arbitration and Subsequent Filings) MSH, represented by Hargrove, Dunlap & Castillo LLP, with Victoria Castillo serving as lead counsel, has set forth its bad-faith theory in its Demand for Arbitration (filed March 27, 2023), its Statement of Claims (filed May 15, 2023), and its subsequent discovery motions and pre-hearing briefs. MSH's al

IV. ANALYSIS OF BAD-FAITH STANDARD UNDER FLORIDA LAW A. Florida's Implied Covenant of Good Faith and Fair Dealing Under Florida law, every contract includes an implied covenant of good faith and fair dealing. This covenant is a foundational principle of Florida contract law, recognized by the Florida Supreme Court and consistently applied by Florida's appellate courts. See, e.g., Centurion Partners Holdings LLC v. Wa

V. EVALUATION OF MSH'S SPECIFIC BAD-FAITH ARGUMENTS We turn now to an evaluation of each of MSH's five principal bad-faith arguments, assessing the legal and factual strength of each and identifying the key risk factors that could affect the outcome. A. Selection of Whitfield Realty Advisors LLC MSH alleges that PCG's selection of Whitfield was an act of "appraiser shopping" designed to produce a below-market valuati

Section 12.4 of the Operating Agreement expressly grants PCG the right to select the appraiser who will initially determine Fair Market Value. This right is not subject to MSH's approval or consent and is not conditioned on any requirement that PCG select a particular type of appraiser, consult with MSH about the selection, or justify its choice. The sole contractual requirement is that the appraiser be "independent"

VI. QUANTIFICATION OF POTENTIAL PENALTY EXPOSURE A. Maximum Exposure Under Various Valuation Scenarios We present below PCG's maximum penalty exposure under three valuation scenarios, reflecting the three appraisals that may inform the arbitrator's determination of Fair Market Value. In each scenario, we calculate the maximum 25% penalty on both (i) the equity value of MSH's 35% interest alone and (ii) the equity val

VII. IMPACT OF DISCOVERY ON BAD-FAITH RISK A. Motion to Compel — Investment Committee Memoranda On November 6, 2023, MSH filed a motion to compel production of PCG's internal investment-committee memoranda relating to the call-option exercise and the valuation of PGV's assets. The motion sought production of all investment committee minutes, memoranda, presentations, and related correspondence from January 2022 throu

1. Gerald K. Whitfield (Whitfield Realty Advisors LLC) — Deposed September 18, 2023

2. Dr. Priya Ramanathan (Beacon Capital Valuation LLC) — Deposed September 18, 2023

3. Dominic R. Pellegrino (Managing Member, PCG) — Deposed October 10, 2023

4. Nathaniel Cordero (Managing Partner, MSH) — Deposed October 10, 2023 The key issues arising from these depositions, which should be assessed in conjunction with the complete deposition transcripts and testimony summaries being prepared separately by our team, include the following: Whitfield deposition: Did Mr. Whitfield testify credibly about the independence of his engagement? Did he confirm that he was not dire