1021-00006 · Client 1021 · Client Reporting

quarterly-status-report-q2-2022.docx DOCUMENT Litigation

3 / 75 ← → ✕

PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

MEMORANDUM

FROM: Priya Anand, Partner, Calderwood & Harkness LLP

TO: Renata Solis-Vega, Senior Vice President & General Counsel, Verimark Hospitality Group Inc.

DATE: July 5, 2022

RE: Quarterly Litigation Status Report — Q2 2022 Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC et al., Case No. 1021-00006, Circuit Court of the 17th Judicial Circuit, Broward County, Florida

CC: Douglas Carmichael, Billing Partner, Calderwood & Harkness LLP Martin Holcomb, Executive Vice President & Chief Financial Officer, Verimark Hospitality Group Inc. Deidre Langston, Senior Vice President, Franchise Operations, Verimark Hospitality Group Inc. Yuki Nakamura, Lead Associate, Calderwood & Harkness LLP

PRIVILEGE LEGEND: This memorandum is a privileged and confidential attorney-client communication and constitutes attorney work product prepared in anticipation of litigation. It is intended solely for the use of the addressee(s) and the individuals listed on the copy line and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. Inadvertent disclosure of this memorandum does not constitute a waiver of any applicable privilege or protection.

Right-click to update Table of Contents

I. Executive Summary

The purpose of this memorandum is to provide Verimark Hospitality Group Inc.'s ("Verimark" or the "Company") legal and executive team with a comprehensive update on the status of the litigation against Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "CPFH"), Randall Brecker ("Brecker"), and Suncoast Room Management Inc. ("Suncoast") through the end of the second quarter of 2022, covering the period from April 1 through June 30, 2022.

As previously reported, this action was filed on March 7, 2022 in the Circuit Court of the 17th Judicial Circuit, in and for Broward County, Florida, and was assigned Case No. 1021-00006. The matter has been assigned to the Honorable Richard M. Calloway, Circuit Judge. The Complaint asserts ten causes of action arising from Defendants' systematic underreporting of Gross Room Revenue ("GRR") over a nine-year period spanning 2013 through 2021, which resulted in the substantial underpayment of contractually required royalties, marketing-fund contributions, and technology fees. Verimark seeks approximately $150 million in total damages, inclusive of direct underpayments, contractual late-payment interest, and liquidated damages.

The following key developments occurred during Q2 2022:

1. Answer, Affirmative Defenses, and Counterclaim. On April 18, 2022, Coastal Palms, through its counsel Whitfield, Barrow & Crane LLP, filed its Answer, Affirmative Defenses, and Counterclaim. The Counterclaim seeks $12 million in damages based on Verimark's alleged failure to maintain brand standards and adequate reservation-system uptime. We address the substance of the pleading in detail in Section III.B below.

2. Verimark's Answer to Counterclaim. On May 2, 2022, Verimark filed its Answer to the Counterclaim, denying all material allegations and asserting several affirmative defenses, including failure to mitigate, estoppel, and unclean hands.

3. Case Management Conference. On June 14, 2022, the Court held its initial Case Management Conference before Judge Calloway. The Court set a trial date in February 2024 (specific date to be confirmed by subsequent order), acknowledged the anticipated complexity and volume of discovery, and encouraged the parties to adopt e-discovery protocols and to consider mediation at an appropriate stage.

4. discovery Plan. Following the Case Management Conference, the parties executed a Joint E-discovery Protocol Stipulation on June 20, 2022, which was filed with the Court. A comprehensive written discovery plan has been developed, with service of Plaintiff's first sets of interrogatories and requests for production to Defendants Coastal Palms and Randall Brecker scheduled for July 11, 2022.

The matter is currently tracking within the preliminary budget estimate of $4.5 million to $7.5 million through trial, as set forth in the Matter Budget Memorandum dated March 10, 2022. The most significant cost drivers — large-scale document review, fact depositions, and forensic accounting expert fees — are anticipated in subsequent quarters.

The next major milestone is the service of Plaintiff's First Set of Interrogatories and First Request for Production to Defendant Coastal Palms, as well as Plaintiff's First Set of Interrogatories to Defendant Randall Brecker, all scheduled for service on July 11, 2022.

II. Background and Nature of Claims

A. The Parties

Plaintiff. Verimark Hospitality Group Inc. ("Verimark" or "VHG") is a Delaware corporation publicly traded on the Nasdaq Stock Market under the ticker symbol VHMK. Verimark maintains its principal executive offices at 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, Florida 33301. The Company operates and franchises approximately 340 branded hotel properties across the southeastern United States under three distinct flags: Verimark Suites, Verimark Select, and Verimark Grand. For fiscal year 2021, Verimark reported consolidated revenue of approximately $1.42 billion, of which franchise segment revenue accounted for approximately $218 million.

Defendants. Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "CPFH") is a Florida limited liability company with its principal office located at 9500 Gulf Shore Drive, Suite 450, Naples, Florida 34108. Coastal Palms is Verimark's largest single franchise operator, holding franchise rights to twenty-two (22) hotel properties — comprising eighteen (18) Verimark Suites locations and four (4) Verimark Select locations — situated across the State of Florida and the State of Georgia. Together, these twenty-two properties encompass approximately 3,740 guest rooms.

Randall "Randy" Brecker is the Managing Member and sixty percent (60%) equity holder of Coastal Palms Franchise Holdings LLC. Mr. Brecker also serves as President of Suncoast Room Management Inc., the affiliated management company through which the revenue diversion scheme described herein was effectuated. Mr. Brecker exercised operational control over all twenty-two franchised properties and directed the GRR reporting practices that are at the heart of this litigation.

Suncoast Room Management Inc. ("Suncoast") is a Florida corporation established by Brecker for the purported purpose of providing management services to the Coastal Palms hotel portfolio. As detailed below, Suncoast served as the principal vehicle through which revenues were diverted and excluded from GRR calculations reported to Verimark.

Other Relevant Coastal Palms Members

The remaining equity interests in Coastal Palms are held by Theresa Brecker (15%), who is Randy Brecker's spouse, and Nolan Prescott (25%), a passive investor and retired commercial real estate developer. While neither Ms. Brecker nor Mr. Prescott is named as a defendant in this action, their roles and knowledge may become relevant during discovery, and both are anticipated deposition witnesses.

Property-Level Entities. In addition to the holding-company structure, the Coastal Palms portfolio is organized through property-level entities, the most significant of which are:

• Gulf Breeze Hospitality LLC, which holds six (6) Verimark Suites properties in southwest Florida; and

• Savannah Lodging Partners LLC, which holds four (4) Verimark Suites properties in coastal Georgia.

Both entities are managed by Brecker and are subject to the respective Franchise License Agreements at issue in this litigation.

Defense Counsel. Defendants are represented by Whitfield, Barrow & Crane LLP ("WBC"), located at 1221 Brickell Avenue, Suite 3000, Miami, Florida 33131. The defense team is led by Nathan Whitfield III, Senior Partner, who serves as lead counsel. Gabriela Montes, Partner, is handling discovery and motions practice. Ethan Doyle, Associate, provides additional litigation support. We have found WBC to be competent and well-organized adversaries who should be expected to pursue an aggressive defense strategy.

B. Franchise Relationship Overview

The commercial relationship between Verimark and Coastal Palms spans approximately fifteen years. The first Franchise License Agreement ("FLA") was executed on June 15, 2007 for a single Verimark Suites property located in Naples, Florida. Following the successful launch of this initial property, Coastal Palms rapidly expanded its Verimark-branded portfolio, ultimately entering into a total of twenty-two (22) separate FLAs with Verimark, with the most recent FLA dated September 3, 2019.

Each FLA has a twenty (20)-year initial term, is governed by the laws of the State of Florida, and contains a mandatory venue provision designating the Circuit Court for Broward County, Florida (or, if applicable, the United States District Court for the Southern District of Florida) as the exclusive forum for the resolution of disputes arising under or related to the agreement.

The following financial provisions of the FLAs are central to the claims asserted in this action:

Royalty Fee (§ 4.1): Each franchisee is required to pay Verimark a continuing royalty equal to five percent (5%) of Gross Room Revenue ("GRR"). Section 4.1 defines GRR 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 definition is intentionally broad and was designed to capture all room-rental revenue irrespective of the method of collection or the identity of the collecting entity.

Marketing-Fund Contribution (§ 4.2): Each franchisee is required to contribute two and one-half percent (2.5%) of GRR to the Verimark National Marketing Fund, which supports brand-level advertising, digital marketing, and promotional initiatives that benefit all Verimark-branded properties.

Technology Fee (§ 4.3): Each franchisee is required to pay a monthly technology fee of $12.50 per available room, subject to annual adjustment based on the Consumer Price Index ("CPI"), with a cap of three percent (3%) per year. This fee supports the Verimark Central Reservation System, property-management-system integration, and related technology infrastructure.

Late-Payment Interest (§ 4.6): Any amounts not paid when due accrue interest at the rate of one and one-half percent (1.5%) per month, compounded monthly. This provision is a significant component of the damages calculation given the nine-year duration of the underreporting scheme.

Liquidated Damages on Termination for Cause (§ 15.3): In the event of termination for cause, the franchisee is required to pay liquidated damages equal to three times (3×) the trailing-twelve-month royalties attributable to the terminated property. This provision was negotiated and agreed upon as a reasonable estimate of the damages Verimark would sustain from early termination, including brand disruption, lost revenue, and market-share impact.

Audit Rights (§ 8.2): Verimark retains the right, upon ten (10) business days' written notice, to audit the franchisee's books and records related to GRR and fee calculations. If such an audit reveals an underpayment exceeding two percent (2%) of reported GRR, the franchisee bears all costs of the audit, including reasonable fees of Verimark's auditors and accountants.

Cure Period and Incurable Breaches (§§ 14.1, 14.2(c)): Section 14.1 provides a thirty (30)-day cure period for material breaches. However, Section 14.2(c) expressly provides that "systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure." This provision is of critical importance to Verimark's termination and liquidated-damages claims, as it eliminates the cure-period defense and establishes an independent contractual basis for treating the breach as incapable of remedy.

C. The Revenue Diversion Scheme

Based on our pre-litigation investigation and the information obtained to date, the revenue diversion scheme operated as follows:

Beginning no later than January 2013, Coastal Palms established Suncoast Room Management Inc. as a separate Florida corporation controlled by Randall Brecker. Suncoast was positioned as the collection point for revenues generated through certain booking channels — specifically, walk-in guests, corporate-direct booking contracts, and an unbranded website operated at the domain gulfcoastrooms.com. By channeling these bookings through Suncoast rather than through the property-level entities that reported GRR to Verimark, Coastal Palms was able to exclude a substantial portion of room-rental revenue from its GRR reports.

The mechanics of the scheme involved two primary components:

First, Suncoast retained a twelve percent (12%) "management fee" on all bookings processed through its channels before remitting the remaining balance to the applicable property-level LLCs (e.g., Gulf Breeze Hospitality LLC or Savannah Lodging Partners LLC). Neither the revenues collected by Suncoast nor the management fee retained by Suncoast were included in the GRR reports submitted to Verimark. This had the effect of reducing reported GRR by the full amount of revenue processed through Suncoast, not merely by the management-fee component.

Second, Coastal Palms systematically underreported revenue attributable to third-party Online Travel Agency ("OTA") channels — such as Aldermere Technologies, Bramwell Holdings, and Drayton Software — by classifying net-rate OTA payments as "commissions receivable" and netting those commissions against reported GRR. Under the FLA's definition of GRR in Section 4.1, which encompasses "all revenues derived from or attributable to the rental of guest rooms," the gross revenue from OTA bookings — not the net-of-commission amount — should have been reported. By netting OTA commissions, Coastal Palms further reduced its reported GRR and the resulting fees payable to Verimark.

The combined effect of these two practices was a systematic and substantial understatement of GRR across all twenty-two franchised properties over a nine-year period.

The scheme was uncovered when Janet Kerrigan, a former regional controller for Coastal Palms, contacted Verimark's compliance hotline on November 8, 2021. Ms. Kerrigan had been terminated from her position at Coastal Palms in October 2021 and, following her departure, disclosed detailed information regarding the revenue-diversion practices. Ms. Kerrigan's disclosures prompted the compliance audit described below and ultimately led to the commencement of this litigation.

D. Pre-Litigation Investigation

Following receipt of Ms. Kerrigan's whistleblower report, Verimark promptly retained Thornbury & Associates CPAs LLP, a nationally recognized accounting firm with significant franchise-audit experience, to conduct a franchise-compliance audit of Coastal Palms' operations. The engagement was formalized on November 22, 2021, with Malcolm Thornbury, CPA, designated as the Lead Audit Partner. The initial scope of the engagement covered Coastal Palms' ten (10) highest-revenue properties.

On January 18, 2022, Thornbury & Associates delivered its preliminary findings. The audit revealed that the ten audited properties had underreported GRR by approximately twenty-six percent (26%) for the three-year period spanning 2019 through 2021. This underreporting was consistent with the revenue-diversion mechanisms described by Ms. Kerrigan and confirmed the existence of both the Suncoast-related diversion and the OTA net-rate netting practice.

Based on the Thornbury preliminary findings and available financial data, Verimark's internal finance team extrapolated the underreporting across all twenty-two (22) franchised properties and the full nine-year period from 2013 through 2021. This extrapolation yielded an estimated total underreported GRR of approximately $197.8 million. While the extrapolation is necessarily preliminary — and will be refined through the forensic accounting analysis to be performed by our retained expert — it provides a reasonable basis for the damages claimed in the Complaint.

Verimark issued a formal Notice of Material Breach to Coastal Palms on February 4, 2022, invoking Sections 14.1 and 14.2(c) of the FLAs and detailing the preliminary audit findings. Coastal Palms' counsel, Whitfield, Barrow & Crane LLP, responded by letter dated February 28, 2022, denying the existence of any material breach and asserting that Suncoast revenues were "properly excluded" from GRR under the FLA's definitional framework. Coastal Palms did not tender any cure or remedial payment.

The thirty (30)-day cure period under Section 14.1 of the FLAs expired on March 6, 2022 with no cure tendered. However, as noted above, Section 14.2(c) independently provides that systematic underreporting of GRR constitutes a material breach that is incapable of cure. Accordingly, the expiration of the cure period without remedial action confirmed Verimark's right to terminate the FLAs and pursue all available contractual and equitable remedies. This action was filed the following day.

E. Damages Summary

The following table summarizes the damages claimed in the Complaint, based on the preliminary audit findings and extrapolation described above:

Several observations regarding these figures merit emphasis. The contractual late-payment interest calculation of $28.4 million reflects the compounding effect of the 1.5% monthly rate over a nine-year period. The liquidated damages component of $105.5 million is the single largest element of the claimed damages and is calculated using corrected (i.e., actual) royalty figures rather than the underreported amounts previously submitted by Coastal Palms. We anticipate that the liquidated-damages figure will be a significant area of contention, as Defendants will likely challenge both the enforceability of the liquidated-damages provision and the use of corrected royalty figures as the calculation base.

The damages figures set forth above remain preliminary estimates subject to refinement through forensic accounting analysis. As discussed in Section V.C below, we anticipate retaining Ridgeline Forensic Advisory LLC to conduct a comprehensive damages quantification.

III. Pleadings Phase — Summary of Filings

A. Complaint (Filed March 7, 2022)

On March 7, 2022, Verimark filed its ten-count Complaint in the Circuit Court of the 17th Judicial Circuit, in and for Broward County, Florida. The action was assigned Case No. 1021-00006 and was subsequently assigned to the Honorable Richard M. Calloway, Circuit Judge. A Civil Cover Sheet was filed concurrently with the Complaint.

The Complaint asserts the following ten causes of action:

Count I — Breach of Contract (Royalties). This count alleges that Defendants breached Section 4.1 of each of the twenty-two FLAs by systematically underreporting GRR and thereby underpaying the five percent (5%) royalty fee. Damages sought under this count total approximately $9.89 million in underpaid royalties, plus contractual interest.

Count II — Breach of Contract (Marketing-Fund Contributions). This count alleges breach of Section 4.2 of the FLAs through underpayment of the two and one-half percent (2.5%) marketing-fund contribution resulting from the same GRR underreporting. Damages sought total approximately $4.945 million, plus contractual interest.

Count III — Breach of Contract (Technology Fees). This count alleges breach of Section 4.3 of the FLAs through underpayment of technology fees attributable to 214 rooms that were added to the portfolio without proper notice to Verimark and without corresponding technology-fee payments. Damages sought total approximately $1.26 million, plus contractual interest.

Count IV — Breach of Implied Covenant of Good Faith and Fair Dealing. This count alleges that Defendants' deliberate establishment and use of Suncoast as a vehicle to divert revenues away from GRR reporting constituted a violation of the implied covenant of good faith and fair dealing inherent in each FLA. The claim seeks damages commensurate with the direct underpayment amounts.

Count V — Fraudulent Concealment. This count alleges that Defendants knowingly and intentionally concealed the existence and operation of the revenue-diversion scheme from Verimark, including by failing to disclose Suncoast's revenue-collection activities and by affirmatively submitting GRR reports that Defendants knew to be materially false and misleading. This count is significant for statute-of-limitations purposes, as it supports a fraudulent-concealment tolling argument for pre-2017 underreporting claims.

Count VI — Negligent Misrepresentation. In the alternative to Count V, this count alleges that Defendants negligently misrepresented GRR figures in their periodic reports to Verimark, upon which Verimark relied in calculating franchise fees and in making business decisions regarding the franchise relationship.

Count VII — Unjust Enrichment (Alternative). Pleaded in the alternative to the breach-of-contract counts, this count alleges that Defendants were unjustly enriched by retaining the benefit of the Verimark brand, marketing infrastructure, and reservation system while failing to pay the contractually required fees on their full room revenues.

Count VIII — Declaratory Judgment (FLA Termination). This count seeks a declaratory judgment that Verimark's termination of each of the twenty-two FLAs was proper and effective under Section 14.2(c), confirming Verimark's right to liquidated damages under Section 15.3.

Count IX — Accounting. This count seeks an order requiring Defendants to provide a full and complete accounting of all revenues derived from or attributable to the rental of guest rooms at each of the twenty-two franchised properties for the period January 2013 through the date of termination, including all revenues collected by or through Suncoast Room Management Inc.

Count X — Civil Conspiracy. This count alleges that Defendants Randall Brecker and Suncoast Room Management Inc. conspired with Coastal Palms to defraud Verimark through the establishment and operation of the revenue-diversion scheme. The civil-conspiracy count provides an independent basis for joint and several liability among the individual and corporate Defendants.

Total damages sought across all counts are approximately $150 million. Summonses were issued for each of the three named Defendants. Service on Coastal Palms Franchise Holdings LLC was accomplished through Garrison Registered Agents LLC, located at 100 S. Ashley Drive, Suite 600, Tampa, Florida 33602, which serves as Coastal Palms' registered agent in the State of Florida. Service on Randall Brecker was accomplished individually, and service on Suncoast Room Management Inc. was completed through its registered agent on file with the Florida Division of Corporations. All three Defendants were properly served within the time periods prescribed by the Florida Rules of Civil Procedure.

B. Defendants' Answer, Affirmative Defenses, and Counterclaim (Filed April 18, 2022)

On April 18, 2022, Coastal Palms Franchise Holdings LLC, Randall Brecker, and Suncoast Room Management Inc., acting through their counsel Whitfield, Barrow & Crane LLP, filed a consolidated Answer, Affirmative Defenses, and Counterclaim. The filing was timely under the Florida Rules of Civil Procedure. The pleading is summarized below.

Answer. Defendants denied all material allegations of the Complaint, including the allegation that GRR was systematically underreported. With respect to the factual narrative, Defendants admitted the existence of the franchise relationship, the execution of the twenty-two FLAs, and the existence of Suncoast Room Management Inc. as a management entity. However, Defendants denied that Suncoast's revenue-collection activities fell within the scope of the GRR definition under Section 4.1 of the FLAs.

Affirmative Defenses. Defendants asserted the following principal affirmative defenses:

First, that the GRR definition in Section 4.1 of the FLAs is ambiguous as applied to revenues collected by a separate management entity (Suncoast) that is not itself a party to the FLAs. Defendants contend that the phrase "regardless of the entity collecting such revenue" was intended to address situations in which the franchisee itself collects revenue through multiple internal channels, not situations in which an independent third-party management company collects revenue pursuant to a separate management agreement. We view this argument as meritless given the plain language of Section 4.1, but it will require briefing at the summary-judgment stage.

Second, that Verimark was aware of Suncoast's role because Suncoast was identified in certain property-management agreements that were submitted by Coastal Palms during the franchise-application process. This defense appears to be premised on the theory that Verimark's acceptance of the franchise applications constituted implicit approval of the exclusion of Suncoast revenues from GRR. We have reviewed the franchise-application files and have found no evidence that Verimark approved or was made aware of the specific revenue-diversion practices at issue.

Third, estoppel and waiver, based on Verimark's alleged failure to conduct franchise-compliance audits or to object to the reported GRR figures for a nine-year period. Defendants will argue that Verimark's inaction created a reasonable expectation that the reporting methodology was acceptable. This defense is undercut by the affirmative concealment of the scheme and by the FLA's express provision (Section 8.4) that the failure to exercise audit rights does not constitute a waiver.

Fourth, a statute-of-limitations defense as to older underreporting claims. Florida's statute of limitations for breach of a written contract is five years (Fla. Stat. § 95.11(2)(b)). Defendants will argue that any claims for underreporting prior to March 7, 2017 (five years before the filing of the Complaint) are time-barred. As discussed in Section X.B below, we intend to counter this defense through fraudulent-concealment tolling and the discovery rule.

Counterclaim. Defendants filed a single-count Counterclaim seeking $12 million in damages based on Verimark's alleged failure to maintain brand standards across the Verimark Suites and Verimark Select systems. Specifically, the Counterclaim alleges the following:

(a) Verimark failed to enforce consistent maintenance and renovation standards at other franchised properties within the Verimark Suites and Verimark Select systems, resulting in brand dilution that adversely affected Coastal Palms' occupancy rates and revenue per available room ("RevPAR").

(b) The Verimark Central Reservation System experienced excessive downtime, particularly during peak booking periods, causing lost reservations and revenue for Coastal Palms' properties. The Counterclaim alleges 47 instances of system downtime exceeding two hours during the period 2018–2021.

(c) Verimark failed to invest adequate resources in national marketing campaigns, resulting in diminished brand awareness relative to competing hotel brands in the southeastern United States.

We believe the Counterclaim is primarily a tactical pleading intended to create litigation leverage and to complicate the damages analysis. However, the allegations will require factual development and response, and we will need to coordinate with Deidre Langston and the Verimark franchise operations team to gather responsive documentation.

C. Verimark's Answer to Counterclaim (Filed May 2, 2022)

On May 2, 2022, Verimark filed its Answer to the Counterclaim, denying all material allegations. Verimark's Answer was accompanied by the following affirmative defenses:

Failure to Mitigate. Verimark asserted that Coastal Palms failed to mitigate any alleged damages by failing to utilize available dispute-resolution mechanisms under the FLAs, including the franchisee advisory council and the brand-standards committee, to address its purported concerns regarding maintenance standards and reservation-system performance.

Estoppel. Verimark asserted that Coastal Palms is estopped from claiming brand-standard violations because it continued to expand its franchise portfolio — executing new FLAs as recently as September 2019 — during the same period in which it now claims brand standards were inadequate.

Unclean Hands. Verimark asserted that Coastal Palms' own misconduct — specifically, the systematic underreporting of GRR and the diversion of revenue through Suncoast — bars it from obtaining equitable relief. A party that has itself engaged in fraudulent conduct with respect to the very contractual relationship at issue cannot seek equitable remedies arising from that same relationship.

With the filing of Verimark's Answer to the Counterclaim, the pleadings phase of the litigation is now complete. All parties have been joined, all claims and counterclaims have been asserted, and the case is now positioned for the discovery phase.

IV. Case Management Conference — June 14, 2022

The Court held its initial Case Management Conference on June 14, 2022 before the Honorable Richard M. Calloway, Circuit Judge. All parties were represented at the conference.

Appearances. Calderwood & Harkness LLP appeared on behalf of Plaintiff Verimark through the undersigned, Priya Anand (Partner, appearing in person), and Yuki Nakamura (Lead Associate, appearing in person). Whitfield, Barrow & Crane LLP appeared on behalf of Defendants through Nathan Whitfield III (Senior Partner) and Gabriela Montes (Partner).

Key Rulings and Scheduling. The following key matters were addressed during the conference:

Trial Date. The Court set this matter for trial in February 2024. A specific trial date will be fixed by subsequent scheduling order, and the Court indicated its intention to issue that order once the parties submit their joint discovery plan. The Court noted that its February 2024 trial calendar has sufficient availability to accommodate this matter.

Estimated Trial Duration. The parties jointly estimated that trial would require ten to fourteen (10–14) days, based on the number of anticipated witnesses, the complexity of the damages issues, and the volume of documentary evidence. The Court accepted this estimate and indicated that it would block an appropriate trial period.

discovery. The Court directed the parties to submit a joint discovery plan within thirty (30) days of the Case Management Conference (i.e., by July 14, 2022). The Court acknowledged the complexity of the matter and the volume of discovery anticipated, noting that the case involves financial records spanning twenty-two hotel properties over a nine-year period. The Court specifically encouraged the parties to utilize e-discovery protocols, including technology-assisted review, to manage the volume of electronic discovery efficiently.

Mediation. The Court encouraged counsel to consider mediation at an appropriate stage of the proceedings. The Court did not order mediation at this time but indicated that it would revisit the issue at a future status conference if the parties have not engaged in voluntary mediation. We recommend that any mediation be deferred until after the completion of initial document production and key fact depositions, at which point both parties will have a more informed basis for evaluating settlement.

E-discovery Protocol. The Court was informed that the parties had already begun negotiating a joint e-discovery protocol. The Court expressed approval and noted that it expects the parties to cooperate on ESI matters to the extent reasonably possible.

No motions were argued or decided at the Case Management Conference. No further status conferences have been scheduled at this time, though the Court indicated it would schedule additional conferences as needed to monitor discovery progress.

V. Discovery Plan and Strategy

A. E-discovery Protocol

Following productive negotiations between Calderwood & Harkness LLP and Whitfield, Barrow & Crane LLP, the parties executed a Joint E-discovery Protocol Stipulation on June 20, 2022. The stipulation was filed with the Court on the same date.

The agreed-upon protocol addresses the following key areas:

ESI Production Format. All electronically stored information shall be produced in TIFF image format with extracted or OCR text, unitized at the document level. Load files shall conform to the concordance/relativity standard format, including standard metadata fields (custodian, date created, date modified, author, file path, file type, and Bates number range).

De-Duplication Standards. Each producing party may de-duplicate documents at the custodian level. Cross-custodian de-duplication is not permitted; if a document is responsive as to multiple custodians, it shall be produced as to each custodian.

Privilege Log Requirements. Privilege logs shall be produced on a rolling basis, no less frequently than every sixty (60) days during active production periods. Logs shall identify each withheld document by date, author, recipient(s), document type, and the specific privilege or protection asserted (attorney-client privilege, work product, or both).

Clawback Provisions. The parties agreed to a clawback provision pursuant to Florida Rule of Civil Procedure 1.285, providing that the inadvertent production of privileged or protected material does not constitute a waiver of the applicable privilege or protection, provided the producing party asserts the privilege or protection within thirty (30) days of discovering the inadvertent production.

Search Methodology. The parties agreed to negotiate and exchange keyword search terms and custodian lists prior to the commencement of document review, and to meet and confer in good faith regarding the reasonableness of proposed search parameters.

E-discovery Vendor. Calderwood & Harkness has retained Nexagen Document Solutions LLC, located at 400 Northpark Town Center, Suite 500, Atlanta, Georgia 30328, to handle document hosting, processing, and analytics for Verimark's side of the e-discovery effort. Based on our preliminary assessment, we anticipate that Verimark's document universe will encompass approximately 2.3 million documents totaling approximately 1.1 terabytes. This estimate includes franchise-compliance records, correspondence, financial reports, audit workpapers, and internal communications related to the Coastal Palms franchise relationship. Nexagen has been briefed on the scope and timeline of the matter and has confirmed capacity to handle the anticipated volume.

B. Written discovery — Planned Service

The following written discovery requests have been finalized and are scheduled for service on the dates indicated:

Plaintiff's First Set of Interrogatories to Defendant Coastal Palms Franchise Holdings LLC (25 Interrogatories). This set of interrogatories targets the core factual issues underlying Verimark's claims, including: (i) Coastal Palms' revenue-reporting practices for each of the twenty-two franchised properties; (ii) the establishment, operations, and financial activities of Suncoast Room Management Inc.; (iii) the methodology used by Coastal Palms to calculate GRR for purposes of fee payments to Verimark; (iv) the identity and role of all persons involved in GRR calculation and reporting; (v) the booking channels through which room-rental revenue was collected at each property; (vi) Coastal Palms' knowledge and interpretation of the GRR definition in Section 4.1 of the FLAs; and (vii) the factual basis for each affirmative defense asserted in Defendants' Answer. This interrogatory set is scheduled for service on July 11, 2022.

Plaintiff's First Request for Production to Defendant Coastal Palms Franchise Holdings LLC (147 Requests). This comprehensive request for production seeks the following categories of documents, among others:

• Complete financial records (general ledgers, trial balances, income statements, and balance sheets) for each of the twenty-two franchised properties for the period January 1, 2013 through December 31, 2021;

• All GRR reports and fee calculations submitted to Verimark during the same period;

• All agreements, contracts, and communications between Coastal Palms and Suncoast Room Management Inc.;

• Suncoast's financial records, including revenue ledgers, management-fee calculations, bank statements, and tax returns;

• All OTA contracts, rate agreements, and booking-channel data for each franchised property;

• Bank statements for all accounts held by Coastal Palms, its property-level entities, and Suncoast;

• Federal and state tax returns for Coastal Palms, its property-level entities, and Suncoast;

• All communications (email, text messages, instant messages, and written correspondence) among Coastal Palms principals, Suncoast personnel, and property-level managers regarding revenue reporting, GRR calculation, and the Verimark franchise relationship;

• Documents relating to the establishment of gulfcoastrooms.com and all booking data associated with that website;

• All documents relating to the termination of Janet Kerrigan;

• All documents relating to the Counterclaim allegations, including brand-standard complaints, reservation-system outage logs, and marketing-spend data.

This request for production is scheduled for service on July 11, 2022.

Plaintiff's First Set of Interrogatories to Defendant Randall Brecker (15 Interrogatories). This set of interrogatories is directed to Brecker in his individual capacity and targets his personal role in: (i) the establishment and incorporation of Suncoast Room Management Inc.; (ii) his direction to exclude Suncoast revenues from GRR reports to Verimark; (iii) his knowledge and understanding of the GRR definition in the FLAs; (iv) his role as Managing Member of Coastal Palms and President of Suncoast; and (v) the factual basis for the civil-conspiracy defense. This interrogatory set is scheduled for service on July 11, 2022.

Subpoena Duces Tecum to Ironclad National Bank. We plan to serve a subpoena duces tecum on Ironclad National Bank in August 2022, directed to Devon Schultz, Senior Vice President, Commercial Real Estate Lending. The subpoena will seek loan documents and financial statements submitted by Coastal Palms and its affiliated entities in connection with approximately $94 million in aggregate outstanding mortgage loans on eighteen (18) of the twenty-two franchised properties. The financial statements submitted to Ironclad are expected to reflect actual revenue figures — including revenue processed through Suncoast — that may differ materially from the GRR reports submitted to Verimark. Any such discrepancies would provide compelling evidence of intentional underreporting.

C. Discovery Strategy Overview

Our discovery strategy is organized into five phases, designed to build the evidentiary record systematically while managing costs effectively:

Phase 1 — Q3 2022 (Written discovery and Initial Production). The immediate priority is to serve comprehensive written discovery and to obtain Coastal Palms' initial document production. Upon receipt of the production, we will assess completeness, identify gaps, and prepare deficiency correspondence as warranted. Our particular focus during this phase will be on obtaining Suncoast Room Management Inc.'s financial records, which are essential to quantifying the scope of the revenue-diversion scheme. We will also begin processing and reviewing produced documents through the Nexagen platform.

Phase 2 — Q4 2022 (Supplemental discovery and Motions Practice). Based on our assessment of Coastal Palms' initial production, we anticipate the need for supplemental discovery requests and, potentially, motions to compel the production of documents that Defendants may resist producing. As discussed in Section V.D below, we expect particular resistance regarding Suncoast financial records. During this phase, we also plan to formally retain our forensic accounting expert, Ridgeline Forensic Advisory LLC.

Phase 3 — Q1 2023 (Fact Depositions). We anticipate conducting fourteen (14) or more fact depositions during this phase, including:

• Randall Brecker (Managing Member, Coastal Palms; President, Suncoast)

• Theresa Brecker (Member, Coastal Palms)

• Nolan Prescott (Member, Coastal Palms)

• Janet Kerrigan (former Regional Controller, Coastal Palms; whistleblower)

• Property-level general managers (up to 6 witnesses, selected based on document review)

• Property-level accounting personnel (up to 3 witnesses)

• Devon Schultz (SVP, Ironclad National Bank, if needed)

Phase 4 — Q2 2023 (Expert Retention, Reports, and Expert Depositions). Ridgeline Forensic Advisory LLC has been identified as Verimark's forensic accounting and damages-quantification expert. Dr. Sharon Kettlewell, CPA/CFF, CFE, a principal of Ridgeline, will serve as the testifying expert. Dr. Kettlewell has extensive experience in franchise-fee disputes and revenue-underreporting cases, having served as a testifying expert in over thirty (30) franchise-related litigations. Formal retention is anticipated in Q4 2022, with expert report preparation commencing upon completion of the fact-discovery phase. Expert depositions are expected to occur in Q2 or early Q3 2023.

Phase 5 — Q3–Q4 2023 (Dispositive Motions and Trial Preparation). The final pre-trial phase will focus on dispositive motions practice — including any motion for partial summary judgment on the GRR-definition issue and on the enforceability of the liquidated-damages provision — as well as comprehensive trial preparation, including witness preparation, exhibit designation, motions in limine, and trial-presentation development.

D. Anticipated discovery Challenges

We anticipate the following discovery challenges based on our interactions with defense counsel to date and our assessment of the Defendants' litigation posture:

Suncoast Financial Records. We expect significant resistance from Coastal Palms and defense counsel regarding the production of Suncoast Room Management Inc.'s financial records. Defense counsel's February 28, 2022 pre-litigation response letter articulated the position that Suncoast revenues are "properly excluded" from GRR, and it is foreseeable that Defendants will argue that Suncoast's internal financial records are not relevant or are outside the scope of permissible discovery. We are prepared to file a motion to compel if Defendants do not voluntarily produce these records. We believe a motion to compel would be well-grounded in the FLA's broad GRR definition and in the broad scope of discovery under Florida Rule of Civil Procedure 1.280.

OTA Net-Rate Data. Quantifying the OTA net-rate netting component of the underreporting scheme may require third-party subpoenas to online travel agencies such as Hollowell Industries, Ridgeway & Co., and their subsidiaries. These entities maintain records of gross booking revenues and commissions for hotel properties participating in their platforms, and their data would allow an independent reconstruction of gross OTA revenue attributable to the Coastal Palms properties.

Volume and Complexity. The sheer volume of financial records across twenty-two properties over a nine-year period presents a significant document-review challenge. We anticipate that Coastal Palms' production will encompass tens of thousands to hundreds of thousands of documents. To manage this volume efficiently, we will employ technology-assisted review ("TAR") through the Nexagen platform, supplemented by targeted manual review of key custodian files and priority document categories. We will also deploy contract attorneys for first-level review, using the blended rate described in Section VII below.

VI. Insurance Coverage Update

Verimark notified Pinnacle Indemnity Insurance Co. of this litigation on March 14, 2022, one week after the filing of the Complaint. The notification was made pursuant to Policy No. PLI-VHG-2021-08874, which provides commercial general liability and franchise-litigation coverage for claims arising from Verimark's franchise operations.

The primary contact at Pinnacle Indemnity is Arthur Baines, Claims Counsel, who acknowledged receipt of the notification and confirmed that the claim is under review for coverage determination. Pinnacle has not yet issued a formal coverage determination, but its acknowledgment letter did not assert any reservation of rights or coverage defenses.

Pinnacle has requested ongoing copies of significant pleadings and court orders filed in the litigation. We have provided copies of the Complaint, the Defendants' Answer and Counterclaim, and Verimark's Answer to the Counterclaim. We will continue to furnish copies of material filings on a rolling basis. We recommend that Verimark's in-house legal team maintain direct communication with Mr. Baines to ensure timely coordination on coverage issues.

It should be noted that the policy's applicability to the affirmative claims asserted by Verimark (as plaintiff) may be limited, as the policy is primarily designed to cover defense costs and indemnity for claims asserted against Verimark. However, the Counterclaim asserted by Coastal Palms may trigger defense-cost coverage under the policy. We will provide a more detailed coverage analysis upon receipt of Pinnacle's formal coverage determination.

VII. Staffing

The following attorneys are currently assigned to this matter:

Priya Anand serves as the Responsible Partner for the engagement. Ms. Anand has primary responsibility for overall case strategy, key depositions, court appearances, and client interface. She has extensive experience in complex commercial litigation, franchise disputes, and fraud cases in the Florida state and federal courts.

Douglas Carmichael serves as the Billing Partner. Mr. Carmichael is responsible for budget management, fee-arrangement oversight, and provides strategic input on damages analysis and settlement posture. Mr. Carmichael maintains ongoing communication with Verimark's CFO, Martin Holcomb, regarding budgetary matters.

Yuki Nakamura serves as the Lead Associate and is responsible for day-to-day management of discovery, briefing, correspondence with opposing counsel, and coordination of the document-review effort with Nexagen Document Solutions. Ms. Nakamura will serve as the primary point of contact for routine case-management matters and will prepare the first drafts of all substantive filings.

Carlos Espinoza serves as a Working Associate and will focus on deposition preparation, damages-analysis support, legal research, and drafting. Mr. Espinoza has particular expertise in franchise law and commercial contract disputes.

Additional support will be provided by Calderwood & Harkness's litigation paralegals and, as the document-review phase intensifies in Q3 and Q4 2022, by contract attorneys retained through the firm's established contract-review program. The blended rate for paralegal and contract-attorney support is approximately $285 per hour.

We will reassess staffing needs as the matter progresses through the discovery and expert phases. If the volume of depositions exceeds current projections, or if significant motions practice is required, we may recommend the addition of a second working associate or a senior associate with franchise-litigation experience.

VIII. Budget Tracking

A. Preliminary Budget Estimate

As set forth in the Matter Budget Memorandum dated March 10, 2022, which was reviewed and approved by Renata Solis-Vega and Martin Holcomb, the preliminary litigation budget through trial was estimated at $4.5 million to $7.5 million. This range reflects the inherent uncertainty associated with a complex, multi-defendant commercial case involving extensive document discovery, numerous fact and expert depositions, and a trial of two or more weeks' duration.

The budget was broken down by phase as follows:

B. Fees and Costs Incurred Through Q2 2022

During the period from March 7 through June 30, 2022, the following fees and costs were incurred:

Calderwood & Harkness LLP Legal Fees. Total legal fees for the pleadings phase and early case management — including Complaint preparation and filing, review and analysis of Defendants' Answer and Counterclaim, preparation of Verimark's Answer to the Counterclaim, Case Management Conference preparation and attendance, and discovery-plan development — totaled approximately $387,500. This amount is within the pleadings-phase budget allocation of $350,000 to $475,000.

Nexagen Document Solutions LLC. Early-stage costs for e-discovery platform setup, data mapping, and initial processing readiness totaled approximately $42,000. These costs represent platform configuration and licensing fees; the substantially larger costs associated with full production processing, hosting, and analytics are anticipated to commence in Q3 2022 upon receipt of Coastal Palms' initial document production.

Other Costs. Court filing fees totaled $1,895. Service of process costs (including fees payable to Garrison Registered Agents LLC and process server fees for individual service on Brecker) totaled $1,340. Miscellaneous costs (courier, copying, and travel for Case Management Conference) totaled approximately $2,800.

Assessment. The matter is tracking within the low end of the preliminary budget estimate for the pleadings and case-management phase. Total fees and costs incurred through the end of Q2 2022 are approximately $435,535. The most significant cost drivers — large-scale document review, fact depositions, and expert fees — are anticipated in subsequent quarters, and spending will increase materially beginning in Q3 2022.

C. Projected Cost Drivers for Q3–Q4 2022

The following cost drivers are anticipated during Q3 and Q4 2022:

Document Review. Upon receipt of Coastal Palms' initial document production (expected in August 2022), substantial document-review resources will be required. Based on our experience with similar franchise-litigation matters and the anticipated volume of production, we estimate that the initial production from Coastal Palms could encompass 75,000 to 250,000 documents. First-level review will be conducted by contract attorneys at the blended rate of approximately $285 per hour, with second-level review and substantive analysis performed by the Calderwood & Harkness team.

Motion to Compel. If Coastal Palms does not voluntarily produce Suncoast Room Management Inc.'s financial records in response to our First Request for Production, we will need to prepare and file a motion to compel. Based on our assessment of defense counsel's pre-litigation position, we believe there is a meaningful probability that motion practice will be required. Estimated cost for motion-to-compel briefing and related meet-and-confer efforts: $45,000 to $85,000.

Third-Party Subpoenas. Preparation and service of the subpoena duces tecum to Ironclad National Bank, along with potential subpoenas to OTA platforms, will require coordination with third-party counsel and compliance with applicable notice provisions. Estimated cost: $25,000 to $50,000.

Forensic Accounting Expert Engagement. We anticipate formally retaining Ridgeline Forensic Advisory LLC (Dr. Sharon Kettlewell, CPA/CFF, CFE) in Q4 2022. Ridgeline has provided a preliminary fee estimate of approximately $1.85 million for its full engagement through trial, covering damages quantification, forensic analysis of Coastal Palms and Suncoast financial records, expert report preparation, deposition preparation and testimony, and trial testimony. This estimate is consistent with expert-fee budgets in comparable franchise-underreporting cases and has been incorporated into the overall preliminary budget.

IX. Upcoming Key Dates and Milestones

The following table summarizes the key dates and milestones anticipated over the next several months:

We will provide updated milestone dates in the Q3 2022 Quarterly Litigation Status Report, which is anticipated to be delivered in early October 2022.

X. Preliminary Case Assessment and Risk Factors

A. Strengths

We believe Verimark's claims are well-supported by the available evidence and by the contractual framework. The following factors strengthen Verimark's position:

Unambiguous GRR Definition. Section 4.1 of the FLAs defines Gross Room Revenue 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." The final clause — "regardless of the entity collecting such revenue" — directly addresses and forecloses the defense argument that revenues collected by Suncoast fall outside the definition. This language was carefully drafted to prevent precisely the type of revenue-diversion scheme employed by Coastal Palms.

Whistleblower Testimony. Janet Kerrigan, the former Coastal Palms regional controller who contacted Verimark's compliance hotline on November 8, 2021, is expected to provide powerful testimony corroborating the intentional nature of the revenue-diversion scheme. Ms. Kerrigan had direct knowledge of the GRR reporting practices, including the establishment of the Suncoast revenue channel and the direction from Brecker to exclude Suncoast revenues from reports to Verimark. As a former insider with no continuing economic ties to Coastal Palms, Ms. Kerrigan's testimony should be highly credible to the trier of fact. We note that defense counsel may attempt to undermine her credibility based on the circumstances of her termination from Coastal Palms; we will address this through thorough deposition preparation and corroborating documentary evidence.

Preliminary Audit Findings. Thornbury & Associates' preliminary audit findings — establishing approximately twenty-six percent (26%) underreporting of GRR across the ten audited properties for 2019–2021 — provide a strong foundation for the forensic expert analysis to be conducted by Ridgeline Forensic Advisory. The Thornbury findings are based on an examination of actual financial records and provide an independent, third-party validation of the underreporting allegations.

Contractual Incurable Breach Provision. Section 14.2(c) of the FLAs expressly classifies "systematic underreporting of Gross Room Revenue" as a "material breach that is incapable of cure." This provision is of particular importance because it: (i) eliminates the defense argument that Verimark should have provided additional notice or opportunity to cure; (ii) establishes that the parties themselves agreed, at the time of contracting, that systematic GRR underreporting is qualitatively distinct from other breaches and warrants immediate termination rights; and (iii) strengthens the enforceability of the liquidated-damages provision under Section 15.3 by demonstrating that the parties contemplated the severity of such a breach.

Documentary Record. The revenue-diversion scheme necessarily generated a substantial paper trail — including Suncoast bank accounts, management-fee invoices, the gulfcoastrooms.com website, OTA rate sheets, and internal communications directing the exclusion of revenues from GRR reports. This documentary evidence, once obtained through discovery, should provide compelling proof of the scheme's existence and scope.

B. Risks

While we are confident in the overall strength of Verimark's position, the following risk factors should be noted:

GRR Ambiguity Argument. Although we view the GRR definition as unambiguous, Defendants' argument that Section 4.1 was not intended to encompass revenues collected by a separate management entity (Suncoast) introduces some uncertainty at the summary-judgment stage. If the Court were to find the GRR definition ambiguous, the issue could proceed to trial as a question of fact, increasing litigation costs and introducing jury uncertainty. We will develop parol-evidence and course-of-dealing arguments to support the plain-language reading if necessary.

Counterclaim. The $12 million Counterclaim for alleged brand-standard violations will require factual development and responsive evidence from Verimark's franchise operations team. While we believe the Counterclaim lacks merit and is primarily tactical in nature, it imposes a burden on Verimark to demonstrate compliance with its own brand-standard obligations. We will need to coordinate closely with Deidre Langston and the Verimark franchise operations team to identify, preserve, and produce internal records relating to brand-standard maintenance, reservation-system uptime logs, and marketing expenditures. Any demonstrated deficiency in these areas — even if not rising to the level of an actionable claim — could be used by Defendants to create trial sympathy or settlement leverage.

Collectibility. A material risk factor is the collectibility of any judgment obtained against Defendants. Ironclad National Bank holds first-lien mortgages on eighteen (18) of the twenty-two Coastal Palms properties, with an aggregate outstanding balance of approximately $94 million. The total claimed damages of approximately $150 million significantly exceed the likely available equity in the Coastal Palms portfolio. A collectibility analysis should be updated as financial discovery progresses, with particular attention to: (i) the current appraised value of the eighteen mortgaged properties versus outstanding mortgage balances; (ii) the equity position and personal assets of Randall Brecker; (iii) the financial condition and asset base of Suncoast Room Management Inc.; and (iv) the four unmortgaged properties and their unencumbered value. Collectibility considerations may influence settlement strategy and the appropriate settlement range.

Statute of Limitations. Florida's five-year statute of limitations for breach of a written contract (Fla. Stat. § 95.11(2)(b)) presents a risk to Verimark's recovery for underreporting that occurred prior to March 7, 2017 (five years before the filing of the Complaint). The pre-2017 underreporting represents a substantial portion of the total claimed damages. We intend to counter the statute-of-limitations defense through two doctrines: (i) fraudulent concealment, arguing that Defendants' active concealment of the revenue-diversion scheme tolled the limitations period until Verimark discovered or should have discovered the fraud; and (ii) the discovery rule, arguing that the limitations period did not commence until Verimark had notice of the underreporting (November 2021 at the earliest). The strength of these tolling arguments depends in part on Verimark's ability to demonstrate that it could not reasonably have discovered the underreporting earlier — a factual issue that will be developed through discovery. We note that Defendants may argue that Verimark's failure to exercise its audit rights under Section 8.2 for nine years undermines the discovery-rule argument. We are prepared to respond that the FLA itself (Section 8.4) provides that the failure to exercise audit rights does not constitute a waiver, and that Defendants' affirmative concealment negated any duty of inquiry on Verimark's part.

Complexity of Nine-Year Damages Analysis. The scope of the damages analysis — encompassing twenty-two properties over nine years, across multiple booking channels and revenue-collection entities — is inherently complex. This complexity could create opportunities for Defendants to challenge the reliability of Verimark's damages calculation, particularly if gaps exist in the historical financial records. A robust forensic accounting analysis by Ridgeline Forensic Adv

PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
MEMORANDUM
FROM: Priya Anand, Partner, Calderwood & Harkness LLP
TO: Renata Solis-Vega, Senior Vice President & General Counsel, Verimark Hospitality Group Inc.
DATE: July 5, 2022
RE: Quarterly Litigation Status Report — Q2 2022 Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC et al., Case No. 1021-00006, Circuit Court of the 17th Judicial Circuit, Broward County, Florida
CC: Douglas Carmichael, Billing Partner, Calderwood & Harkness LLP Martin Holcomb, Executive Vice President & Chief Financial Officer, Verimark Hospitality Group Inc. Deidre Langston, Senior Vice President, Franchise Operations, Verimark Hospitality Group Inc. Yuki Nakamura, Lead Associate, Calderwood & Harkness LLP
PRIVILEGE LEGEND: This memorandum is a privileged and confidential attorney-client communication and constitutes attorney work product prepared in anticipation of litigation. It is intended solely for the use of the addressee(s) and the individuals listed on the copy line and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. Inadvertent disclosure of this memorandum does not constitute a waiver of any applicable privilege or protection.
Right-click to update Table of Contents
I. Executive Summary
The purpose of this memorandum is to provide Verimark Hospitality Group Inc.'s ("Verimark" or the "Company") legal and executive team with a comprehensive update on the status of the litigation against Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "CPFH"), Randall Brecker ("Brecker"), and Suncoast Room Management Inc. ("Suncoast") through the end of the second quarter of 2022, covering the period from April 1 through June 30, 2022.
As previously reported, this action was filed on March 7, 2022 in the Circuit Court of the 17th Judicial Circuit, in and for Broward County, Florida, and was assigned Case No. 1021-00006. The matter has been assigned to the Honorable Richard M. Calloway, Circuit Judge. The Complaint asserts ten causes of action arising from Defendants' systematic underreporting of Gross Room Revenue ("GRR") over a nine-year period spanning 2013 through 2021, which resulted in the substantial underpayment of contractually required royalties, marketing-fund contributions, and technology fees. Verimark seeks approximately $150 million in total damages, inclusive of direct underpayments, contractual late-payment interest, and liquidated damages.
The following key developments occurred during Q2 2022:
1. Answer, Affirmative Defenses, and Counterclaim. On April 18, 2022, Coastal Palms, through its counsel Whitfield, Barrow & Crane LLP, filed its Answer, Affirmative Defenses, and Counterclaim. The Counterclaim seeks $12 million in damages based on Verimark's alleged failure to maintain brand standards and adequate reservation-system uptime. We address the substance of the pleading in detail in Section III.B below.
2. Verimark's Answer to Counterclaim. On May 2, 2022, Verimark filed its Answer to the Counterclaim, denying all material allegations and asserting several affirmative defenses, including failure to mitigate, estoppel, and unclean hands.
3. Case Management Conference. On June 14, 2022, the Court held its initial Case Management Conference before Judge Calloway. The Court set a trial date in February 2024 (specific date to be confirmed by subsequent order), acknowledged the anticipated complexity and volume of discovery, and encouraged the parties to adopt e-discovery protocols and to consider mediation at an appropriate stage.
4. discovery Plan. Following the Case Management Conference, the parties executed a Joint E-discovery Protocol Stipulation on June 20, 2022, which was filed with the Court. A comprehensive written discovery plan has been developed, with service of Plaintiff's first sets of interrogatories and requests for production to Defendants Coastal Palms and Randall Brecker scheduled for July 11, 2022.
The matter is currently tracking within the preliminary budget estimate of $4.5 million to $7.5 million through trial, as set forth in the Matter Budget Memorandum dated March 10, 2022. The most significant cost drivers — large-scale document review, fact depositions, and forensic accounting expert fees — are anticipated in subsequent quarters.
The next major milestone is the service of Plaintiff's First Set of Interrogatories and First Request for Production to Defendant Coastal Palms, as well as Plaintiff's First Set of Interrogatories to Defendant Randall Brecker, all scheduled for service on July 11, 2022.
II. Background and Nature of Claims
A. The Parties
Plaintiff. Verimark Hospitality Group Inc. ("Verimark" or "VHG") is a Delaware corporation publicly traded on the Nasdaq Stock Market under the ticker symbol VHMK. Verimark maintains its principal executive offices at 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, Florida 33301. The Company operates and franchises approximately 340 branded hotel properties across the southeastern United States under three distinct flags: Verimark Suites, Verimark Select, and Verimark Grand. For fiscal year 2021, Verimark reported consolidated revenue of approximately $1.42 billion, of which franchise segment revenue accounted for approximately $218 million.
Defendants. Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "CPFH") is a Florida limited liability company with its principal office located at 9500 Gulf Shore Drive, Suite 450, Naples, Florida 34108. Coastal Palms is Verimark's largest single franchise operator, holding franchise rights to twenty-two (22) hotel properties — comprising eighteen (18) Verimark Suites locations and four (4) Verimark Select locations — situated across the State of Florida and the State of Georgia. Together, these twenty-two properties encompass approximately 3,740 guest rooms.
Randall "Randy" Brecker is the Managing Member and sixty percent (60%) equity holder of Coastal Palms Franchise Holdings LLC. Mr. Brecker also serves as President of Suncoast Room Management Inc., the affiliated management company through which the revenue diversion scheme described herein was effectuated. Mr. Brecker exercised operational control over all twenty-two franchised properties and directed the GRR reporting practices that are at the heart of this litigation.
Suncoast Room Management Inc. ("Suncoast") is a Florida corporation established by Brecker for the purported purpose of providing management services to the Coastal Palms hotel portfolio. As detailed below, Suncoast served as the principal vehicle through which revenues were diverted and excluded from GRR calculations reported to Verimark.
Other Relevant Coastal Palms Members
The remaining equity interests in Coastal Palms are held by Theresa Brecker (15%), who is Randy Brecker's spouse, and Nolan Prescott (25%), a passive investor and retired commercial real estate developer. While neither Ms. Brecker nor Mr. Prescott is named as a defendant in this action, their roles and knowledge may become relevant during discovery, and both are anticipated deposition witnesses.
Property-Level Entities. In addition to the holding-company structure, the Coastal Palms portfolio is organized through property-level entities, the most significant of which are:
• Gulf Breeze Hospitality LLC, which holds six (6) Verimark Suites properties in southwest Florida; and
• Savannah Lodging Partners LLC, which holds four (4) Verimark Suites properties in coastal Georgia.
Both entities are managed by Brecker and are subject to the respective Franchise License Agreements at issue in this litigation.
Defense Counsel. Defendants are represented by Whitfield, Barrow & Crane LLP ("WBC"), located at 1221 Brickell Avenue, Suite 3000, Miami, Florida 33131. The defense team is led by Nathan Whitfield III, Senior Partner, who serves as lead counsel. Gabriela Montes, Partner, is handling discovery and motions practice. Ethan Doyle, Associate, provides additional litigation support. We have found WBC to be competent and well-organized adversaries who should be expected to pursue an aggressive defense strategy.
B. Franchise Relationship Overview
The commercial relationship between Verimark and Coastal Palms spans approximately fifteen years. The first Franchise License Agreement ("FLA") was executed on June 15, 2007 for a single Verimark Suites property located in Naples, Florida. Following the successful launch of this initial property, Coastal Palms rapidly expanded its Verimark-branded portfolio, ultimately entering into a total of twenty-two (22) separate FLAs with Verimark, with the most recent FLA dated September 3, 2019.
Each FLA has a twenty (20)-year initial term, is governed by the laws of the State of Florida, and contains a mandatory venue provision designating the Circuit Court for Broward County, Florida (or, if applicable, the United States District Court for the Southern District of Florida) as the exclusive forum for the resolution of disputes arising under or related to the agreement.
The following financial provisions of the FLAs are central to the claims asserted in this action:
Royalty Fee (§ 4.1): Each franchisee is required to pay Verimark a continuing royalty equal to five percent (5%) of Gross Room Revenue ("GRR"). Section 4.1 defines GRR 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 definition is intentionally broad and was designed to capture all room-rental revenue irrespective of the method of collection or the identity of the collecting entity.
Marketing-Fund Contribution (§ 4.2): Each franchisee is required to contribute two and one-half percent (2.5%) of GRR to the Verimark National Marketing Fund, which supports brand-level advertising, digital marketing, and promotional initiatives that benefit all Verimark-branded properties.
Technology Fee (§ 4.3): Each franchisee is required to pay a monthly technology fee of $12.50 per available room, subject to annual adjustment based on the Consumer Price Index ("CPI"), with a cap of three percent (3%) per year. This fee supports the Verimark Central Reservation System, property-management-system integration, and related technology infrastructure.
Late-Payment Interest (§ 4.6): Any amounts not paid when due accrue interest at the rate of one and one-half percent (1.5%) per month, compounded monthly. This provision is a significant component of the damages calculation given the nine-year duration of the underreporting scheme.
Liquidated Damages on Termination for Cause (§ 15.3): In the event of termination for cause, the franchisee is required to pay liquidated damages equal to three times (3×) the trailing-twelve-month royalties attributable to the terminated property. This provision was negotiated and agreed upon as a reasonable estimate of the damages Verimark would sustain from early termination, including brand disruption, lost revenue, and market-share impact.
Audit Rights (§ 8.2): Verimark retains the right, upon ten (10) business days' written notice, to audit the franchisee's books and records related to GRR and fee calculations. If such an audit reveals an underpayment exceeding two percent (2%) of reported GRR, the franchisee bears all costs of the audit, including reasonable fees of Verimark's auditors and accountants.
Cure Period and Incurable Breaches (§§ 14.1, 14.2(c)): Section 14.1 provides a thirty (30)-day cure period for material breaches. However, Section 14.2(c) expressly provides that "systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure." This provision is of critical importance to Verimark's termination and liquidated-damages claims, as it eliminates the cure-period defense and establishes an independent contractual basis for treating the breach as incapable of remedy.
C. The Revenue Diversion Scheme
Based on our pre-litigation investigation and the information obtained to date, the revenue diversion scheme operated as follows:
Beginning no later than January 2013, Coastal Palms established Suncoast Room Management Inc. as a separate Florida corporation controlled by Randall Brecker. Suncoast was positioned as the collection point for revenues generated through certain booking channels — specifically, walk-in guests, corporate-direct booking contracts, and an unbranded website operated at the domain gulfcoastrooms.com. By channeling these bookings through Suncoast rather than through the property-level entities that reported GRR to Verimark, Coastal Palms was able to exclude a substantial portion of room-rental revenue from its GRR reports.
The mechanics of the scheme involved two primary components:
First, Suncoast retained a twelve percent (12%) "management fee" on all bookings processed through its channels before remitting the remaining balance to the applicable property-level LLCs (e.g., Gulf Breeze Hospitality LLC or Savannah Lodging Partners LLC). Neither the revenues collected by Suncoast nor the management fee retained by Suncoast were included in the GRR reports submitted to Verimark. This had the effect of reducing reported GRR by the full amount of revenue processed through Suncoast, not merely by the management-fee component.
Second, Coastal Palms systematically underreported revenue attributable to third-party Online Travel Agency ("OTA") channels — such as Aldermere Technologies, Bramwell Holdings, and Drayton Software — by classifying net-rate OTA payments as "commissions receivable" and netting those commissions against reported GRR. Under the FLA's definition of GRR in Section 4.1, which encompasses "all revenues derived from or attributable to the rental of guest rooms," the gross revenue from OTA bookings — not the net-of-commission amount — should have been reported. By netting OTA commissions, Coastal Palms further reduced its reported GRR and the resulting fees payable to Verimark.
The combined effect of these two practices was a systematic and substantial understatement of GRR across all twenty-two franchised properties over a nine-year period.
The scheme was uncovered when Janet Kerrigan, a former regional controller for Coastal Palms, contacted Verimark's compliance hotline on November 8, 2021. Ms. Kerrigan had been terminated from her position at Coastal Palms in October 2021 and, following her departure, disclosed detailed information regarding the revenue-diversion practices. Ms. Kerrigan's disclosures prompted the compliance audit described below and ultimately led to the commencement of this litigation.
D. Pre-Litigation Investigation
Following receipt of Ms. Kerrigan's whistleblower report, Verimark promptly retained Thornbury & Associates CPAs LLP, a nationally recognized accounting firm with significant franchise-audit experience, to conduct a franchise-compliance audit of Coastal Palms' operations. The engagement was formalized on November 22, 2021, with Malcolm Thornbury, CPA, designated as the Lead Audit Partner. The initial scope of the engagement covered Coastal Palms' ten (10) highest-revenue properties.
On January 18, 2022, Thornbury & Associates delivered its preliminary findings. The audit revealed that the ten audited properties had underreported GRR by approximately twenty-six percent (26%) for the three-year period spanning 2019 through 2021. This underreporting was consistent with the revenue-diversion mechanisms described by Ms. Kerrigan and confirmed the existence of both the Suncoast-related diversion and the OTA net-rate netting practice.
Based on the Thornbury preliminary findings and available financial data, Verimark's internal finance team extrapolated the underreporting across all twenty-two (22) franchised properties and the full nine-year period from 2013 through 2021. This extrapolation yielded an estimated total underreported GRR of approximately $197.8 million. While the extrapolation is necessarily preliminary — and will be refined through the forensic accounting analysis to be performed by our retained expert — it provides a reasonable basis for the damages claimed in the Complaint.
Verimark issued a formal Notice of Material Breach to Coastal Palms on February 4, 2022, invoking Sections 14.1 and 14.2(c) of the FLAs and detailing the preliminary audit findings. Coastal Palms' counsel, Whitfield, Barrow & Crane LLP, responded by letter dated February 28, 2022, denying the existence of any material breach and asserting that Suncoast revenues were "properly excluded" from GRR under the FLA's definitional framework. Coastal Palms did not tender any cure or remedial payment.
The thirty (30)-day cure period under Section 14.1 of the FLAs expired on March 6, 2022 with no cure tendered. However, as noted above, Section 14.2(c) independently provides that systematic underreporting of GRR constitutes a material breach that is incapable of cure. Accordingly, the expiration of the cure period without remedial action confirmed Verimark's right to terminate the FLAs and pursue all available contractual and equitable remedies. This action was filed the following day.
E. Damages Summary
The following table summarizes the damages claimed in the Complaint, based on the preliminary audit findings and extrapolation described above:
Several observations regarding these figures merit emphasis. The contractual late-payment interest calculation of $28.4 million reflects the compounding effect of the 1.5% monthly rate over a nine-year period. The liquidated damages component of $105.5 million is the single largest element of the claimed damages and is calculated using corrected (i.e., actual) royalty figures rather than the underreported amounts previously submitted by Coastal Palms. We anticipate that the liquidated-damages figure will be a significant area of contention, as Defendants will likely challenge both the enforceability of the liquidated-damages provision and the use of corrected royalty figures as the calculation base.
The damages figures set forth above remain preliminary estimates subject to refinement through forensic accounting analysis. As discussed in Section V.C below, we anticipate retaining Ridgeline Forensic Advisory LLC to conduct a comprehensive damages quantification.
III. Pleadings Phase — Summary of Filings
A. Complaint (Filed March 7, 2022)
On March 7, 2022, Verimark filed its ten-count Complaint in the Circuit Court of the 17th Judicial Circuit, in and for Broward County, Florida. The action was assigned Case No. 1021-00006 and was subsequently assigned to the Honorable Richard M. Calloway, Circuit Judge. A Civil Cover Sheet was filed concurrently with the Complaint.
The Complaint asserts the following ten causes of action:
Count I — Breach of Contract (Royalties). This count alleges that Defendants breached Section 4.1 of each of the twenty-two FLAs by systematically underreporting GRR and thereby underpaying the five percent (5%) royalty fee. Damages sought under this count total approximately $9.89 million in underpaid royalties, plus contractual interest.
Count II — Breach of Contract (Marketing-Fund Contributions). This count alleges breach of Section 4.2 of the FLAs through underpayment of the two and one-half percent (2.5%) marketing-fund contribution resulting from the same GRR underreporting. Damages sought total approximately $4.945 million, plus contractual interest.
Count III — Breach of Contract (Technology Fees). This count alleges breach of Section 4.3 of the FLAs through underpayment of technology fees attributable to 214 rooms that were added to the portfolio without proper notice to Verimark and without corresponding technology-fee payments. Damages sought total approximately $1.26 million, plus contractual interest.
Count IV — Breach of Implied Covenant of Good Faith and Fair Dealing. This count alleges that Defendants' deliberate establishment and use of Suncoast as a vehicle to divert revenues away from GRR reporting constituted a violation of the implied covenant of good faith and fair dealing inherent in each FLA. The claim seeks damages commensurate with the direct underpayment amounts.
Count V — Fraudulent Concealment. This count alleges that Defendants knowingly and intentionally concealed the existence and operation of the revenue-diversion scheme from Verimark, including by failing to disclose Suncoast's revenue-collection activities and by affirmatively submitting GRR reports that Defendants knew to be materially false and misleading. This count is significant for statute-of-limitations purposes, as it supports a fraudulent-concealment tolling argument for pre-2017 underreporting claims.
Count VI — Negligent Misrepresentation. In the alternative to Count V, this count alleges that Defendants negligently misrepresented GRR figures in their periodic reports to Verimark, upon which Verimark relied in calculating franchise fees and in making business decisions regarding the franchise relationship.
Count VII — Unjust Enrichment (Alternative). Pleaded in the alternative to the breach-of-contract counts, this count alleges that Defendants were unjustly enriched by retaining the benefit of the Verimark brand, marketing infrastructure, and reservation system while failing to pay the contractually required fees on their full room revenues.
Count VIII — Declaratory Judgment (FLA Termination). This count seeks a declaratory judgment that Verimark's termination of each of the twenty-two FLAs was proper and effective under Section 14.2(c), confirming Verimark's right to liquidated damages under Section 15.3.
Count IX — Accounting. This count seeks an order requiring Defendants to provide a full and complete accounting of all revenues derived from or attributable to the rental of guest rooms at each of the twenty-two franchised properties for the period January 2013 through the date of termination, including all revenues collected by or through Suncoast Room Management Inc.
Count X — Civil Conspiracy. This count alleges that Defendants Randall Brecker and Suncoast Room Management Inc. conspired with Coastal Palms to defraud Verimark through the establishment and operation of the revenue-diversion scheme. The civil-conspiracy count provides an independent basis for joint and several liability among the individual and corporate Defendants.
Total damages sought across all counts are approximately $150 million. Summonses were issued for each of the three named Defendants. Service on Coastal Palms Franchise Holdings LLC was accomplished through Garrison Registered Agents LLC, located at 100 S. Ashley Drive, Suite 600, Tampa, Florida 33602, which serves as Coastal Palms' registered agent in the State of Florida. Service on Randall Brecker was accomplished individually, and service on Suncoast Room Management Inc. was completed through its registered agent on file with the Florida Division of Corporations. All three Defendants were properly served within the time periods prescribed by the Florida Rules of Civil Procedure.
B. Defendants' Answer, Affirmative Defenses, and Counterclaim (Filed April 18, 2022)
On April 18, 2022, Coastal Palms Franchise Holdings LLC, Randall Brecker, and Suncoast Room Management Inc., acting through their counsel Whitfield, Barrow & Crane LLP, filed a consolidated Answer, Affirmative Defenses, and Counterclaim. The filing was timely under the Florida Rules of Civil Procedure. The pleading is summarized below.
Answer. Defendants denied all material allegations of the Complaint, including the allegation that GRR was systematically underreported. With respect to the factual narrative, Defendants admitted the existence of the franchise relationship, the execution of the twenty-two FLAs, and the existence of Suncoast Room Management Inc. as a management entity. However, Defendants denied that Suncoast's revenue-collection activities fell within the scope of the GRR definition under Section 4.1 of the FLAs.
Affirmative Defenses. Defendants asserted the following principal affirmative defenses:
First, that the GRR definition in Section 4.1 of the FLAs is ambiguous as applied to revenues collected by a separate management entity (Suncoast) that is not itself a party to the FLAs. Defendants contend that the phrase "regardless of the entity collecting such revenue" was intended to address situations in which the franchisee itself collects revenue through multiple internal channels, not situations in which an independent third-party management company collects revenue pursuant to a separate management agreement. We view this argument as meritless given the plain language of Section 4.1, but it will require briefing at the summary-judgment stage.
Second, that Verimark was aware of Suncoast's role because Suncoast was identified in certain property-management agreements that were submitted by Coastal Palms during the franchise-application process. This defense appears to be premised on the theory that Verimark's acceptance of the franchise applications constituted implicit approval of the exclusion of Suncoast revenues from GRR. We have reviewed the franchise-application files and have found no evidence that Verimark approved or was made aware of the specific revenue-diversion practices at issue.
Third, estoppel and waiver, based on Verimark's alleged failure to conduct franchise-compliance audits or to object to the reported GRR figures for a nine-year period. Defendants will argue that Verimark's inaction created a reasonable expectation that the reporting methodology was acceptable. This defense is undercut by the affirmative concealment of the scheme and by the FLA's express provision (Section 8.4) that the failure to exercise audit rights does not constitute a waiver.
Fourth, a statute-of-limitations defense as to older underreporting claims. Florida's statute of limitations for breach of a written contract is five years (Fla. Stat. § 95.11(2)(b)). Defendants will argue that any claims for underreporting prior to March 7, 2017 (five years before the filing of the Complaint) are time-barred. As discussed in Section X.B below, we intend to counter this defense through fraudulent-concealment tolling and the discovery rule.
Counterclaim. Defendants filed a single-count Counterclaim seeking $12 million in damages based on Verimark's alleged failure to maintain brand standards across the Verimark Suites and Verimark Select systems. Specifically, the Counterclaim alleges the following:
(a) Verimark failed to enforce consistent maintenance and renovation standards at other franchised properties within the Verimark Suites and Verimark Select systems, resulting in brand dilution that adversely affected Coastal Palms' occupancy rates and revenue per available room ("RevPAR").
(b) The Verimark Central Reservation System experienced excessive downtime, particularly during peak booking periods, causing lost reservations and revenue for Coastal Palms' properties. The Counterclaim alleges 47 instances of system downtime exceeding two hours during the period 2018–2021.
(c) Verimark failed to invest adequate resources in national marketing campaigns, resulting in diminished brand awareness relative to competing hotel brands in the southeastern United States.
We believe the Counterclaim is primarily a tactical pleading intended to create litigation leverage and to complicate the damages analysis. However, the allegations will require factual development and response, and we will need to coordinate with Deidre Langston and the Verimark franchise operations team to gather responsive documentation.
C. Verimark's Answer to Counterclaim (Filed May 2, 2022)
On May 2, 2022, Verimark filed its Answer to the Counterclaim, denying all material allegations. Verimark's Answer was accompanied by the following affirmative defenses:
Failure to Mitigate. Verimark asserted that Coastal Palms failed to mitigate any alleged damages by failing to utilize available dispute-resolution mechanisms under the FLAs, including the franchisee advisory council and the brand-standards committee, to address its purported concerns regarding maintenance standards and reservation-system performance.
Estoppel. Verimark asserted that Coastal Palms is estopped from claiming brand-standard violations because it continued to expand its franchise portfolio — executing new FLAs as recently as September 2019 — during the same period in which it now claims brand standards were inadequate.
Unclean Hands. Verimark asserted that Coastal Palms' own misconduct — specifically, the systematic underreporting of GRR and the diversion of revenue through Suncoast — bars it from obtaining equitable relief. A party that has itself engaged in fraudulent conduct with respect to the very contractual relationship at issue cannot seek equitable remedies arising from that same relationship.
With the filing of Verimark's Answer to the Counterclaim, the pleadings phase of the litigation is now complete. All parties have been joined, all claims and counterclaims have been asserted, and the case is now positioned for the discovery phase.
IV. Case Management Conference — June 14, 2022
The Court held its initial Case Management Conference on June 14, 2022 before the Honorable Richard M. Calloway, Circuit Judge. All parties were represented at the conference.
Appearances. Calderwood & Harkness LLP appeared on behalf of Plaintiff Verimark through the undersigned, Priya Anand (Partner, appearing in person), and Yuki Nakamura (Lead Associate, appearing in person). Whitfield, Barrow & Crane LLP appeared on behalf of Defendants through Nathan Whitfield III (Senior Partner) and Gabriela Montes (Partner).
Key Rulings and Scheduling. The following key matters were addressed during the conference:
Trial Date. The Court set this matter for trial in February 2024. A specific trial date will be fixed by subsequent scheduling order, and the Court indicated its intention to issue that order once the parties submit their joint discovery plan. The Court noted that its February 2024 trial calendar has sufficient availability to accommodate this matter.
Estimated Trial Duration. The parties jointly estimated that trial would require ten to fourteen (10–14) days, based on the number of anticipated witnesses, the complexity of the damages issues, and the volume of documentary evidence. The Court accepted this estimate and indicated that it would block an appropriate trial period.
discovery. The Court directed the parties to submit a joint discovery plan within thirty (30) days of the Case Management Conference (i.e., by July 14, 2022). The Court acknowledged the complexity of the matter and the volume of discovery anticipated, noting that the case involves financial records spanning twenty-two hotel properties over a nine-year period. The Court specifically encouraged the parties to utilize e-discovery protocols, including technology-assisted review, to manage the volume of electronic discovery efficiently.
Mediation. The Court encouraged counsel to consider mediation at an appropriate stage of the proceedings. The Court did not order mediation at this time but indicated that it would revisit the issue at a future status conference if the parties have not engaged in voluntary mediation. We recommend that any mediation be deferred until after the completion of initial document production and key fact depositions, at which point both parties will have a more informed basis for evaluating settlement.
E-discovery Protocol. The Court was informed that the parties had already begun negotiating a joint e-discovery protocol. The Court expressed approval and noted that it expects the parties to cooperate on ESI matters to the extent reasonably possible.
No motions were argued or decided at the Case Management Conference. No further status conferences have been scheduled at this time, though the Court indicated it would schedule additional conferences as needed to monitor discovery progress.
V. Discovery Plan and Strategy
A. E-discovery Protocol
Following productive negotiations between Calderwood & Harkness LLP and Whitfield, Barrow & Crane LLP, the parties executed a Joint E-discovery Protocol Stipulation on June 20, 2022. The stipulation was filed with the Court on the same date.
The agreed-upon protocol addresses the following key areas:
ESI Production Format. All electronically stored information shall be produced in TIFF image format with extracted or OCR text, unitized at the document level. Load files shall conform to the concordance/relativity standard format, including standard metadata fields (custodian, date created, date modified, author, file path, file type, and Bates number range).
De-Duplication Standards. Each producing party may de-duplicate documents at the custodian level. Cross-custodian de-duplication is not permitted; if a document is responsive as to multiple custodians, it shall be produced as to each custodian.
Privilege Log Requirements. Privilege logs shall be produced on a rolling basis, no less frequently than every sixty (60) days during active production periods. Logs shall identify each withheld document by date, author, recipient(s), document type, and the specific privilege or protection asserted (attorney-client privilege, work product, or both).
Clawback Provisions. The parties agreed to a clawback provision pursuant to Florida Rule of Civil Procedure 1.285, providing that the inadvertent production of privileged or protected material does not constitute a waiver of the applicable privilege or protection, provided the producing party asserts the privilege or protection within thirty (30) days of discovering the inadvertent production.
Search Methodology. The parties agreed to negotiate and exchange keyword search terms and custodian lists prior to the commencement of document review, and to meet and confer in good faith regarding the reasonableness of proposed search parameters.
E-discovery Vendor. Calderwood & Harkness has retained Nexagen Document Solutions LLC, located at 400 Northpark Town Center, Suite 500, Atlanta, Georgia 30328, to handle document hosting, processing, and analytics for Verimark's side of the e-discovery effort. Based on our preliminary assessment, we anticipate that Verimark's document universe will encompass approximately 2.3 million documents totaling approximately 1.1 terabytes. This estimate includes franchise-compliance records, correspondence, financial reports, audit workpapers, and internal communications related to the Coastal Palms franchise relationship. Nexagen has been briefed on the scope and timeline of the matter and has confirmed capacity to handle the anticipated volume.
B. Written discovery — Planned Service
The following written discovery requests have been finalized and are scheduled for service on the dates indicated:
Plaintiff's First Set of Interrogatories to Defendant Coastal Palms Franchise Holdings LLC (25 Interrogatories). This set of interrogatories targets the core factual issues underlying Verimark's claims, including: (i) Coastal Palms' revenue-reporting practices for each of the twenty-two franchised properties; (ii) the establishment, operations, and financial activities of Suncoast Room Management Inc.; (iii) the methodology used by Coastal Palms to calculate GRR for purposes of fee payments to Verimark; (iv) the identity and role of all persons involved in GRR calculation and reporting; (v) the booking channels through which room-rental revenue was collected at each property; (vi) Coastal Palms' knowledge and interpretation of the GRR definition in Section 4.1 of the FLAs; and (vii) the factual basis for each affirmative defense asserted in Defendants' Answer. This interrogatory set is scheduled for service on July 11, 2022.
Plaintiff's First Request for Production to Defendant Coastal Palms Franchise Holdings LLC (147 Requests). This comprehensive request for production seeks the following categories of documents, among others:
• Complete financial records (general ledgers, trial balances, income statements, and balance sheets) for each of the twenty-two franchised properties for the period January 1, 2013 through December 31, 2021;
• All GRR reports and fee calculations submitted to Verimark during the same period;
• All agreements, contracts, and communications between Coastal Palms and Suncoast Room Management Inc.;
• Suncoast's financial records, including revenue ledgers, management-fee calculations, bank statements, and tax returns;
• All OTA contracts, rate agreements, and booking-channel data for each franchised property;
• Bank statements for all accounts held by Coastal Palms, its property-level entities, and Suncoast;
• Federal and state tax returns for Coastal Palms, its property-level entities, and Suncoast;
• All communications (email, text messages, instant messages, and written correspondence) among Coastal Palms principals, Suncoast personnel, and property-level managers regarding revenue reporting, GRR calculation, and the Verimark franchise relationship;
• Documents relating to the establishment of gulfcoastrooms.com and all booking data associated with that website;
• All documents relating to the termination of Janet Kerrigan;
• All documents relating to the Counterclaim allegations, including brand-standard complaints, reservation-system outage logs, and marketing-spend data.
This request for production is scheduled for service on July 11, 2022.
Plaintiff's First Set of Interrogatories to Defendant Randall Brecker (15 Interrogatories). This set of interrogatories is directed to Brecker in his individual capacity and targets his personal role in: (i) the establishment and incorporation of Suncoast Room Management Inc.; (ii) his direction to exclude Suncoast revenues from GRR reports to Verimark; (iii) his knowledge and understanding of the GRR definition in the FLAs; (iv) his role as Managing Member of Coastal Palms and President of Suncoast; and (v) the factual basis for the civil-conspiracy defense. This interrogatory set is scheduled for service on July 11, 2022.
Subpoena Duces Tecum to Ironclad National Bank. We plan to serve a subpoena duces tecum on Ironclad National Bank in August 2022, directed to Devon Schultz, Senior Vice President, Commercial Real Estate Lending. The subpoena will seek loan documents and financial statements submitted by Coastal Palms and its affiliated entities in connection with approximately $94 million in aggregate outstanding mortgage loans on eighteen (18) of the twenty-two franchised properties. The financial statements submitted to Ironclad are expected to reflect actual revenue figures — including revenue processed through Suncoast — that may differ materially from the GRR reports submitted to Verimark. Any such discrepancies would provide compelling evidence of intentional underreporting.
C. Discovery Strategy Overview
Our discovery strategy is organized into five phases, designed to build the evidentiary record systematically while managing costs effectively:
Phase 1 — Q3 2022 (Written discovery and Initial Production). The immediate priority is to serve comprehensive written discovery and to obtain Coastal Palms' initial document production. Upon receipt of the production, we will assess completeness, identify gaps, and prepare deficiency correspondence as warranted. Our particular focus during this phase will be on obtaining Suncoast Room Management Inc.'s financial records, which are essential to quantifying the scope of the revenue-diversion scheme. We will also begin processing and reviewing produced documents through the Nexagen platform.
Phase 2 — Q4 2022 (Supplemental discovery and Motions Practice). Based on our assessment of Coastal Palms' initial production, we anticipate the need for supplemental discovery requests and, potentially, motions to compel the production of documents that Defendants may resist producing. As discussed in Section V.D below, we expect particular resistance regarding Suncoast financial records. During this phase, we also plan to formally retain our forensic accounting expert, Ridgeline Forensic Advisory LLC.
Phase 3 — Q1 2023 (Fact Depositions). We anticipate conducting fourteen (14) or more fact depositions during this phase, including:
• Randall Brecker (Managing Member, Coastal Palms; President, Suncoast)
• Theresa Brecker (Member, Coastal Palms)
• Nolan Prescott (Member, Coastal Palms)
• Janet Kerrigan (former Regional Controller, Coastal Palms; whistleblower)
• Property-level general managers (up to 6 witnesses, selected based on document review)
• Property-level accounting personnel (up to 3 witnesses)
• Devon Schultz (SVP, Ironclad National Bank, if needed)
Phase 4 — Q2 2023 (Expert Retention, Reports, and Expert Depositions). Ridgeline Forensic Advisory LLC has been identified as Verimark's forensic accounting and damages-quantification expert. Dr. Sharon Kettlewell, CPA/CFF, CFE, a principal of Ridgeline, will serve as the testifying expert. Dr. Kettlewell has extensive experience in franchise-fee disputes and revenue-underreporting cases, having served as a testifying expert in over thirty (30) franchise-related litigations. Formal retention is anticipated in Q4 2022, with expert report preparation commencing upon completion of the fact-discovery phase. Expert depositions are expected to occur in Q2 or early Q3 2023.
Phase 5 — Q3–Q4 2023 (Dispositive Motions and Trial Preparation). The final pre-trial phase will focus on dispositive motions practice — including any motion for partial summary judgment on the GRR-definition issue and on the enforceability of the liquidated-damages provision — as well as comprehensive trial preparation, including witness preparation, exhibit designation, motions in limine, and trial-presentation development.
D. Anticipated discovery Challenges
We anticipate the following discovery challenges based on our interactions with defense counsel to date and our assessment of the Defendants' litigation posture:
Suncoast Financial Records. We expect significant resistance from Coastal Palms and defense counsel regarding the production of Suncoast Room Management Inc.'s financial records. Defense counsel's February 28, 2022 pre-litigation response letter articulated the position that Suncoast revenues are "properly excluded" from GRR, and it is foreseeable that Defendants will argue that Suncoast's internal financial records are not relevant or are outside the scope of permissible discovery. We are prepared to file a motion to compel if Defendants do not voluntarily produce these records. We believe a motion to compel would be well-grounded in the FLA's broad GRR definition and in the broad scope of discovery under Florida Rule of Civil Procedure 1.280.
OTA Net-Rate Data. Quantifying the OTA net-rate netting component of the underreporting scheme may require third-party subpoenas to online travel agencies such as Hollowell Industries, Ridgeway & Co., and their subsidiaries. These entities maintain records of gross booking revenues and commissions for hotel properties participating in their platforms, and their data would allow an independent reconstruction of gross OTA revenue attributable to the Coastal Palms properties.
Volume and Complexity. The sheer volume of financial records across twenty-two properties over a nine-year period presents a significant document-review challenge. We anticipate that Coastal Palms' production will encompass tens of thousands to hundreds of thousands of documents. To manage this volume efficiently, we will employ technology-assisted review ("TAR") through the Nexagen platform, supplemented by targeted manual review of key custodian files and priority document categories. We will also deploy contract attorneys for first-level review, using the blended rate described in Section VII below.
VI. Insurance Coverage Update
Verimark notified Pinnacle Indemnity Insurance Co. of this litigation on March 14, 2022, one week after the filing of the Complaint. The notification was made pursuant to Policy No. PLI-VHG-2021-08874, which provides commercial general liability and franchise-litigation coverage for claims arising from Verimark's franchise operations.
The primary contact at Pinnacle Indemnity is Arthur Baines, Claims Counsel, who acknowledged receipt of the notification and confirmed that the claim is under review for coverage determination. Pinnacle has not yet issued a formal coverage determination, but its acknowledgment letter did not assert any reservation of rights or coverage defenses.
Pinnacle has requested ongoing copies of significant pleadings and court orders filed in the litigation. We have provided copies of the Complaint, the Defendants' Answer and Counterclaim, and Verimark's Answer to the Counterclaim. We will continue to furnish copies of material filings on a rolling basis. We recommend that Verimark's in-house legal team maintain direct communication with Mr. Baines to ensure timely coordination on coverage issues.
It should be noted that the policy's applicability to the affirmative claims asserted by Verimark (as plaintiff) may be limited, as the policy is primarily designed to cover defense costs and indemnity for claims asserted against Verimark. However, the Counterclaim asserted by Coastal Palms may trigger defense-cost coverage under the policy. We will provide a more detailed coverage analysis upon receipt of Pinnacle's formal coverage determination.
VII. Staffing
The following attorneys are currently assigned to this matter:
Priya Anand serves as the Responsible Partner for the engagement. Ms. Anand has primary responsibility for overall case strategy, key depositions, court appearances, and client interface. She has extensive experience in complex commercial litigation, franchise disputes, and fraud cases in the Florida state and federal courts.
Douglas Carmichael serves as the Billing Partner. Mr. Carmichael is responsible for budget management, fee-arrangement oversight, and provides strategic input on damages analysis and settlement posture. Mr. Carmichael maintains ongoing communication with Verimark's CFO, Martin Holcomb, regarding budgetary matters.
Yuki Nakamura serves as the Lead Associate and is responsible for day-to-day management of discovery, briefing, correspondence with opposing counsel, and coordination of the document-review effort with Nexagen Document Solutions. Ms. Nakamura will serve as the primary point of contact for routine case-management matters and will prepare the first drafts of all substantive filings.
Carlos Espinoza serves as a Working Associate and will focus on deposition preparation, damages-analysis support, legal research, and drafting. Mr. Espinoza has particular expertise in franchise law and commercial contract disputes.
Additional support will be provided by Calderwood & Harkness's litigation paralegals and, as the document-review phase intensifies in Q3 and Q4 2022, by contract attorneys retained through the firm's established contract-review program. The blended rate for paralegal and contract-attorney support is approximately $285 per hour.
We will reassess staffing needs as the matter progresses through the discovery and expert phases. If the volume of depositions exceeds current projections, or if significant motions practice is required, we may recommend the addition of a second working associate or a senior associate with franchise-litigation experience.
VIII. Budget Tracking
A. Preliminary Budget Estimate
As set forth in the Matter Budget Memorandum dated March 10, 2022, which was reviewed and approved by Renata Solis-Vega and Martin Holcomb, the preliminary litigation budget through trial was estimated at $4.5 million to $7.5 million. This range reflects the inherent uncertainty associated with a complex, multi-defendant commercial case involving extensive document discovery, numerous fact and expert depositions, and a trial of two or more weeks' duration.
The budget was broken down by phase as follows:
B. Fees and Costs Incurred Through Q2 2022
During the period from March 7 through June 30, 2022, the following fees and costs were incurred:
Calderwood & Harkness LLP Legal Fees. Total legal fees for the pleadings phase and early case management — including Complaint preparation and filing, review and analysis of Defendants' Answer and Counterclaim, preparation of Verimark's Answer to the Counterclaim, Case Management Conference preparation and attendance, and discovery-plan development — totaled approximately $387,500. This amount is within the pleadings-phase budget allocation of $350,000 to $475,000.
Nexagen Document Solutions LLC. Early-stage costs for e-discovery platform setup, data mapping, and initial processing readiness totaled approximately $42,000. These costs represent platform configuration and licensing fees; the substantially larger costs associated with full production processing, hosting, and analytics are anticipated to commence in Q3 2022 upon receipt of Coastal Palms' initial document production.
Other Costs. Court filing fees totaled $1,895. Service of process costs (including fees payable to Garrison Registered Agents LLC and process server fees for individual service on Brecker) totaled $1,340. Miscellaneous costs (courier, copying, and travel for Case Management Conference) totaled approximately $2,800.
Assessment. The matter is tracking within the low end of the preliminary budget estimate for the pleadings and case-management phase. Total fees and costs incurred through the end of Q2 2022 are approximately $435,535. The most significant cost drivers — large-scale document review, fact depositions, and expert fees — are anticipated in subsequent quarters, and spending will increase materially beginning in Q3 2022.
C. Projected Cost Drivers for Q3–Q4 2022
The following cost drivers are anticipated during Q3 and Q4 2022:
Document Review. Upon receipt of Coastal Palms' initial document production (expected in August 2022), substantial document-review resources will be required. Based on our experience with similar franchise-litigation matters and the anticipated volume of production, we estimate that the initial production from Coastal Palms could encompass 75,000 to 250,000 documents. First-level review will be conducted by contract attorneys at the blended rate of approximately $285 per hour, with second-level review and substantive analysis performed by the Calderwood & Harkness team.
Motion to Compel. If Coastal Palms does not voluntarily produce Suncoast Room Management Inc.'s financial records in response to our First Request for Production, we will need to prepare and file a motion to compel. Based on our assessment of defense counsel's pre-litigation position, we believe there is a meaningful probability that motion practice will be required. Estimated cost for motion-to-compel briefing and related meet-and-confer efforts: $45,000 to $85,000.
Third-Party Subpoenas. Preparation and service of the subpoena duces tecum to Ironclad National Bank, along with potential subpoenas to OTA platforms, will require coordination with third-party counsel and compliance with applicable notice provisions. Estimated cost: $25,000 to $50,000.
Forensic Accounting Expert Engagement. We anticipate formally retaining Ridgeline Forensic Advisory LLC (Dr. Sharon Kettlewell, CPA/CFF, CFE) in Q4 2022. Ridgeline has provided a preliminary fee estimate of approximately $1.85 million for its full engagement through trial, covering damages quantification, forensic analysis of Coastal Palms and Suncoast financial records, expert report preparation, deposition preparation and testimony, and trial testimony. This estimate is consistent with expert-fee budgets in comparable franchise-underreporting cases and has been incorporated into the overall preliminary budget.
IX. Upcoming Key Dates and Milestones
The following table summarizes the key dates and milestones anticipated over the next several months:
We will provide updated milestone dates in the Q3 2022 Quarterly Litigation Status Report, which is anticipated to be delivered in early October 2022.
X. Preliminary Case Assessment and Risk Factors
A. Strengths
We believe Verimark's claims are well-supported by the available evidence and by the contractual framework. The following factors strengthen Verimark's position:
Unambiguous GRR Definition. Section 4.1 of the FLAs defines Gross Room Revenue 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." The final clause — "regardless of the entity collecting such revenue" — directly addresses and forecloses the defense argument that revenues collected by Suncoast fall outside the definition. This language was carefully drafted to prevent precisely the type of revenue-diversion scheme employed by Coastal Palms.
Whistleblower Testimony. Janet Kerrigan, the former Coastal Palms regional controller who contacted Verimark's compliance hotline on November 8, 2021, is expected to provide powerful testimony corroborating the intentional nature of the revenue-diversion scheme. Ms. Kerrigan had direct knowledge of the GRR reporting practices, including the establishment of the Suncoast revenue channel and the direction from Brecker to exclude Suncoast revenues from reports to Verimark. As a former insider with no continuing economic ties to Coastal Palms, Ms. Kerrigan's testimony should be highly credible to the trier of fact. We note that defense counsel may attempt to undermine her credibility based on the circumstances of her termination from Coastal Palms; we will address this through thorough deposition preparation and corroborating documentary evidence.
Preliminary Audit Findings. Thornbury & Associates' preliminary audit findings — establishing approximately twenty-six percent (26%) underreporting of GRR across the ten audited properties for 2019–2021 — provide a strong foundation for the forensic expert analysis to be conducted by Ridgeline Forensic Advisory. The Thornbury findings are based on an examination of actual financial records and provide an independent, third-party validation of the underreporting allegations.
Contractual Incurable Breach Provision. Section 14.2(c) of the FLAs expressly classifies "systematic underreporting of Gross Room Revenue" as a "material breach that is incapable of cure." This provision is of particular importance because it: (i) eliminates the defense argument that Verimark should have provided additional notice or opportunity to cure; (ii) establishes that the parties themselves agreed, at the time of contracting, that systematic GRR underreporting is qualitatively distinct from other breaches and warrants immediate termination rights; and (iii) strengthens the enforceability of the liquidated-damages provision under Section 15.3 by demonstrating that the parties contemplated the severity of such a breach.
Documentary Record. The revenue-diversion scheme necessarily generated a substantial paper trail — including Suncoast bank accounts, management-fee invoices, the gulfcoastrooms.com website, OTA rate sheets, and internal communications directing the exclusion of revenues from GRR reports. This documentary evidence, once obtained through discovery, should provide compelling proof of the scheme's existence and scope.
B. Risks
While we are confident in the overall strength of Verimark's position, the following risk factors should be noted:
GRR Ambiguity Argument. Although we view the GRR definition as unambiguous, Defendants' argument that Section 4.1 was not intended to encompass revenues collected by a separate management entity (Suncoast) introduces some uncertainty at the summary-judgment stage. If the Court were to find the GRR definition ambiguous, the issue could proceed to trial as a question of fact, increasing litigation costs and introducing jury uncertainty. We will develop parol-evidence and course-of-dealing arguments to support the plain-language reading if necessary.
Counterclaim. The $12 million Counterclaim for alleged brand-standard violations will require factual development and responsive evidence from Verimark's franchise operations team. While we believe the Counterclaim lacks merit and is primarily tactical in nature, it imposes a burden on Verimark to demonstrate compliance with its own brand-standard obligations. We will need to coordinate closely with Deidre Langston and the Verimark franchise operations team to identify, preserve, and produce internal records relating to brand-standard maintenance, reservation-system uptime logs, and marketing expenditures. Any demonstrated deficiency in these areas — even if not rising to the level of an actionable claim — could be used by Defendants to create trial sympathy or settlement leverage.
Collectibility. A material risk factor is the collectibility of any judgment obtained against Defendants. Ironclad National Bank holds first-lien mortgages on eighteen (18) of the twenty-two Coastal Palms properties, with an aggregate outstanding balance of approximately $94 million. The total claimed damages of approximately $150 million significantly exceed the likely available equity in the Coastal Palms portfolio. A collectibility analysis should be updated as financial discovery progresses, with particular attention to: (i) the current appraised value of the eighteen mortgaged properties versus outstanding mortgage balances; (ii) the equity position and personal assets of Randall Brecker; (iii) the financial condition and asset base of Suncoast Room Management Inc.; and (iv) the four unmortgaged properties and their unencumbered value. Collectibility considerations may influence settlement strategy and the appropriate settlement range.
Statute of Limitations. Florida's five-year statute of limitations for breach of a written contract (Fla. Stat. § 95.11(2)(b)) presents a risk to Verimark's recovery for underreporting that occurred prior to March 7, 2017 (five years before the filing of the Complaint). The pre-2017 underreporting represents a substantial portion of the total claimed damages. We intend to counter the statute-of-limitations defense through two doctrines: (i) fraudulent concealment, arguing that Defendants' active concealment of the revenue-diversion scheme tolled the limitations period until Verimark discovered or should have discovered the fraud; and (ii) the discovery rule, arguing that the limitations period did not commence until Verimark had notice of the underreporting (November 2021 at the earliest). The strength of these tolling arguments depends in part on Verimark's ability to demonstrate that it could not reasonably have discovered the underreporting earlier — a factual issue that will be developed through discovery. We note that Defendants may argue that Verimark's failure to exercise its audit rights under Section 8.2 for nine years undermines the discovery-rule argument. We are prepared to respond that the FLA itself (Section 8.4) provides that the failure to exercise audit rights does not constitute a waiver, and that Defendants' affirmative concealment negated any duty of inquiry on Verimark's part.
Complexity of Nine-Year Damages Analysis. The scope of the damages analysis — encompassing twenty-two properties over nine years, across multiple booking channels and revenue-collection entities — is inherently complex. This complexity could create opportunities for Defendants to challenge the reliability of Verimark's damages calculation, particularly if gaps exist in the historical financial records. A robust forensic accounting analysis by Ridgeline Forensic Adv

PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

MEMORANDUM

Record

Parties

Dates

Amounts