Contract analysis

I. Introduction and Purpose This memorandum summarizes and analyzes the key provisions of the Operating Agreement of Palmetto Grand Ventures LLC ("PGV" or the "JV"), dated June 15, 2017 (the "Operating Agreement" or "OA"), that are directly at issue in the buyout-valuation dispute initiated by Meridian Shores Hospitality LLC ("MSH") against our client, Pellegrino Capital Group LLC ("PCG"), JAMS Ref. No. 1440032871. T

II. Section 12.4 — Call Option A. Grant of the Call Option

Section 12.4 of the Operating Agreement grants PCG, in its capacity as the majority member and sole Manager of PGV, the unilateral right to purchase all (but not less than all) of MSH's 35% membership interest in PGV. The call option is a put/call mechanism commonly used in joint venture structures to provide the controlling party with a mechanism for consolidating ownership, and it reflects the parties' original agr

Section 12.4(b)(ii) of the Operating Agreement provides that, upon receipt of the call-option exercise notice and the PCG-selected appraiser's report, MSH has the right (but not the obligation) to retain its own independent MAI-certified appraiser at MSH's sole cost and expense. The OA grants MSH 60 days from receipt of the initial appraisal to deliver a competing appraisal. If MSH does not deliver a competing apprai

III. Section 12.4(c) — Third Appraiser Mechanism A. Triggering the Third Appraiser

Section 12.4(c) of the Operating Agreement provides a safeguard mechanism for situations in which the two party-retained appraisals diverge by more than a specified threshold. Specifically, if the two appraisals differ by more than 10% (measured as a percentage of the lower appraisal), either party has the right to demand the appointment of a neutral third MAI-certified appraiser. This mechanism reflects the parties'

Section 12.4(c) provides that the third appraiser must meet three qualifications: (i) the appraiser must hold the MAI designation from the Appraisal Institute; (ii) the appraiser must be independent of both parties, meaning no prior engagement by, or financial relationship with, either PCG or MSH; and (iii) the appraiser must be jointly selected by the parties. If the parties cannot agree on the selection of the thir

Section 12.4(c) provides a specific formula for determining the final FMV once all three appraisals have been completed. Upon receipt of all three appraisals, the FMV shall be determined as the average of the two appraisals that are closest to each other in value. The third appraisal — the outlier — is effectively disregarded. This "closest-two" averaging mechanism is the dispositive valuation formula under the OA. A

IV. Section 12.5 — Closing Mechanics A. Payment Timeline

Section 12.5 governs the mechanics of closing the redemption of MSH's membership interest following determination of the final FMV. Once FMV is finally determined — whether by agreement of the parties, by operation of the two-appraisal averaging mechanism set forth in Section 12.4(c), or by the arbitrator's award in the event of a dispute — the closing of the redemption must occur within 90 calendar days of the date

Section 12.5 sets forth several conditions precedent to closing, all of which must be satisfied or waived prior to or simultaneously with the closing of the redemption: (a) Payment of Purchase Price. PCG must deliver the full purchase price to MSH by wire transfer of immediately available funds at closing. There is no financing contingency — PCG bears the risk of sourcing the funds necessary to complete the redemptio

V. Section 12.7 — Bad Faith Penalty A. Text and Trigger

Section 12.7 of the Operating Agreement contains an unusual but significant provision addressing the exercise of the call option in bad faith. The relevant text provides, in pertinent part: "If the Manager exercises the Call Option in bad faith or with the intent to materially understate Fair Market Value, the Purchase Price for the Redeemed Interest shall include a penalty of up to twenty-five percent (25%) of the d

VI. Section 8.3 — Capital Expenditure Obligations A. Manager's Obligations

Section 8.3 of the Operating Agreement imposes on the Manager (PCG) the affirmative obligation to "maintain the Property in first-class condition consistent with the standards of a luxury hotel resort." This standard is broad and inherently subjective, leaving room for reasonable disagreement about the scope and timing of required capital expenditures. The OA does not define "first-class condition" or provide specifi

VII. Section 15.2 — Dispute Resolution A. Binding Arbitration

Section 15.2 of the Operating Agreement contains a broad mandatory arbitration clause requiring that all disputes arising out of or relating to the OA, the formation, operation, or termination of PGV, or the rights and obligations of the members thereunder, be resolved by binding arbitration administered by JAMS (Judicial Arbitration and Mediation Services) in accordance with JAMS' Comprehensive Arbitration Rules and

Section 15.2(b) provides for a single arbitrator, to be mutually selected by the parties. If the parties cannot agree on the selection of an arbitrator within 21 days of the filing of the demand for arbitration, the arbitrator is to be appointed by JAMS in accordance with its procedures, which typically involve the striking and ranking of candidates from a JAMS-provided list. In this case, the parties were unable to