Contract analysis

I. Executive Summary Calderwood & Harkness LLP was engaged on March 22, 2023 to represent Pellegrino Capital Group LLC ("PCG") in connection with a buyout-valuation dispute initiated by Meridian Shores Hospitality LLC ("MSH"). This memorandum provides our initial case assessment based on our review to date of the governing Operating Agreement of Palmetto Grand Ventures LLC ("PGV"), the Whitfield and Beacon appraisals

II. Background and Factual Summary A. The Joint Venture and the Property Palmetto Grand Ventures LLC ("PGV") was formed on June 15, 2017 as a limited liability company organized under the laws of the State of Florida. The Operating Agreement of PGV (the "Operating Agreement" or "OA") was executed and became effective on the same date. PGV is governed by the Florida Revised Limited Liability Company Act, Chapter 605 o

Section 12.4 of the Operating Agreement grants PCG, as Manager, the right to exercise a call option to purchase MSH's entire membership interest in PGV at any time after the fifth anniversary of the date of the Operating Agreement — that is, at any time on or after June 15, 2022. The purchase price for the redeemed interest is to be the "Fair Market Value" of the redeemed interest, as determined in accordance with th

III. Analysis of MSH's Claims MSH's Demand for Arbitration asserts three principal claims, each of which is analyzed in turn below. A. Claim 1: Bad-Faith Valuation Under OA Section 12.7 MSH's primary claim is that PCG exercised the call option in bad faith or with the intent to materially understate Fair Market Value, triggering the penalty provision set forth in Section 12.7 of the Operating Agreement. The Contractu

IV. PCG's Defenses and Counterclaim A. Affirmative Defenses Based on our analysis of the claims and the governing documents, PCG intends to assert the following affirmative defenses:

1. Good-Faith Exercise of Call Option. PCG exercised its call option in strict compliance with the procedures set forth in Section 12.4 of the Operating Agreement. PCG retained a qualified, independent, MAI-certified appraiser — Gerald K. Whitfield — who employed recognized industry-standard valuation methodologies, including both the income approach and the sales comparison approach. The Whitfield appraisal was prep

2. Contractual Compliance. PCG followed the Operating Agreement's prescribed valuation process in all material respects. The Operating Agreement establishes a multi-step mechanism for resolving valuation disputes, including the party-appointed appraiser process, the 10% divergence threshold, and the neutral third-appraiser mechanism under Section 12.4(c). This mechanism exists precisely for situations in which the pa

3. Section 12.7 Penalty Inapplicable. A reasonable divergence between two independent appraisals does not constitute "bad faith" or "intent to materially understate" Fair Market Value within the meaning of Section 12.7. The bad-faith standard requires more than a disagreement over valuation inputs or methodology; it requires proof of a dishonest purpose or conscious intent to deprive MSH of the fair value of its inte

4. Fiduciary Duty Claims Preempted by Operating Agreement. The Operating Agreement's valuation mechanism, set forth in Article XII, is the exclusive contractual framework for determining the buyout price in connection with the exercise of the call option. Section 9.2(b) of the Operating Agreement provides that the Manager's duties "with respect to the valuation and redemption of Member interests under Article XII sha

5. Deferred Maintenance. PCG maintained the Hotel in a manner consistent with Section 8.3 of the Operating Agreement and with industry standards for comparable luxury resort properties. PGV invested $24.3 million in a comprehensive renovation during 2017–2019, and subsequent annual maintenance budgets were adequate and consistent with standard capital reserve practices for properties of this type and quality. The ite

6. Failure to Mitigate. MSH failed to exercise its own contractual remedies in a timely manner. The Operating Agreement provides MSH with specified rights and remedies with respect to capital expenditures, including consent rights over capital calls exceeding $2.0 million and the right to raise maintenance concerns through the consultative process set forth in Section 8.5. MSH did not exercise these rights or raise a

V. Risk Exposure Analysis A. Maximum Exposure PCG's maximum exposure in this arbitration is defined by MSH's full demand of $70.0 million. This figure consists of the following components: If the arbitrator were to award $70.0 million — which we regard as an unlikely worst-case scenario — PCG's incremental exposure beyond the $41.3 million already tendered would be $28.7 million. In addition to the incremental buyout

VI. Insurance Coverage PCG has tendered the MSH claim to Atlantic Omnivrel Insurance Company ("Atlantic Fidelity") under its managers' liability and wrongful acts insurance policy, Policy No. AFML-2022-08745. The policy provides coverage for claims arising from "wrongful acts" committed by the insured in its capacity as a manager of a covered entity, subject to certain exclusions and conditions. The policy limits are

VII. Preliminary Strategic Recommendations A. Arbitration Strategy Based on our analysis of the claims, defenses, and risk exposure, we recommend the following arbitration strategy:

1. Response and Counterclaim. PCG filed its Response and Counterclaim on April 5, 2023, as described in Section IV.B above. No further action is required on this item.

2. Third-Appraiser Appointment. We recommend that PCG promptly initiate the process of jointly retaining a neutral, MAI-certified appraiser under OA Section 12.4(c). This is PCG's single most important procedural tool. The appointment of a credible, independent neutral appraiser shifts the focus of the proceeding from the bad-faith narrative — which is inherently subjective and unpredictable — to an objective, third-

3. Discovery. We recommend conducting targeted discovery designed to achieve two objectives: (a) developing the factual record necessary to defend against the bad-faith claim, and (b) identifying weaknesses in MSH's appraisal and damages theories. Specific areas of focus include: (a) MSH's communications with Beacon Valuation Group regarding valuation targets, assumptions, or desired outcomes; (b) The factual and doc

4. Expert Preparation. We recommend working closely with Gerald K. Whitfield to strengthen the defensibility of the Whitfield appraisal in advance of the final hearing. Specifically, we recommend commissioning an independent market survey of capitalization rates and discount rates for Gulf Coast luxury hotel transactions closed during the 2021–2022 period. This survey will provide objective market data to contextuali

5. Deposition Strategy. We recommend depositions of the following individuals: (a) Nathaniel Cordero — MSH's principal or authorized representative. We will seek testimony regarding Mr. Cordero's understanding of the Operating Agreement's valuation mechanism, MSH's expectations regarding the call option, and any pre-existing intent to challenge a call-option exercise. We will also explore MSH's own internal analyses

VIII. Engagement Team and Next Steps A. Engagement Team The following Calderwood & Harkness LLP professionals are assigned to this matter: All team members will be available to the client for questions, updates, and strategic consultations throughout the course of the engagement. Francesca Morano and Simone Laroche will serve as the primary client contacts and will attend all arbitration proceedings and substantive c

1. Prepare for Preliminary Arbitration Conference. The preliminary conference with Arbitrator Chen is anticipated for mid-May 2023. We will prepare a proposed scheduling order and brief on threshold procedural issues, including the timing of the third-appraiser appointment, the scope of permissible discovery, and any early dispositive motions.

2. Verify Accrued Preferred Return Calculation. Coordinate with Grantham, Pryce & Associates CPAs (Howard Grantham, engagement partner) to independently verify the $17.01 million accrued prefe