ATTORNEY WORK PRODUCT — PRIVILEGED AND CONFIDENTIAL
MEMORANDUM
Date: April 26, 2024
FROM: Yuki Nakamura, Lead Associate, Litigation (General) Calderwood & Harkness LLP (FL Bar No. 0119644)
TO: Renata Solis-Vega, SVP & General Counsel, Verimark Hospitality Group Inc. Deidre Langston, SVP, Franchise Operations, Verimark Hospitality Group Inc.
CC: Priya Anand, Responsible Partner, Calderwood & Harkness LLP (FL Bar No. 0087451) Douglas Carmichael, Billing Partner, Calderwood & Harkness LLP (FL Bar No. 0093217)
RE: Post-Settlement Compliance Monitoring — Recommended Internal Procedures for Monitoring Coastal Palms Franchise Holdings LLC's Compliance with the Settlement Agreement and Mutual Release Dated April 22, 2024
MATTER: 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
FILING REFERENCE: Joint Stipulation of Dismissal with Prejudice filed April 26, 2024; matter now closed at Calderwood & Harkness LLP
I. PURPOSE AND EXECUTIVE SUMMARY
This memorandum provides Verimark Hospitality Group Inc. ("Verimark" or "VHG") with a comprehensive framework of recommended internal procedures for monitoring Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "CPFH") and its principals' compliance with the Settlement Agreement and Mutual Release executed on April 22, 2024 (the "Settlement Agreement"). While the litigation is now formally concluded — the Joint Stipulation of Dismissal with Prejudice having been filed with the Circuit Court of the 17th Judicial Circuit, Broward County, Florida today — Verimark's obligations and rights under the Settlement Agreement will extend for several years and require diligent, systematic monitoring to protect the Company's interests.
The Settlement Agreement resolved Verimark's approximately $150 million breach-of-contract action arising from Coastal Palms' systematic underreporting of Gross Room Revenue ("GRR") over a nine-year period spanning from 2013 through 2021. As established through discovery and the Court's partial summary judgment ruling, Coastal Palms operated a revenue-diversion structure using its affiliated entity, Suncoast Room Management Inc., to collect direct bookings, retain a 12% management fee, and exclude those revenues from GRR reports submitted to Verimark. This conduct resulted in the underpayment of royalties, marketing-fund contributions, and technology fees across Coastal Palms' 22-hotel portfolio of approximately 3,740 total rooms.
The settlement was reached for a total value of $87.5 million, comprised of the following components:
• $25 million in cash at closing, funded via wire transfer from an Ironclad National Bank escrow account on April 22, 2024 (receipt confirmed); and
• $62.5 million in eight (8) semi-annual structured installments of $7,812,500 each, commencing October 22, 2024 and concluding April 22, 2028.
In addition to the monetary terms, the Settlement Agreement contains several critical non-monetary obligations requiring ongoing monitoring:
• Franchise Surrender of 14 Properties: Fourteen of Coastal Palms' 22 hotel properties will surrender their Verimark franchise, with a 120-day de-identification deadline of August 20, 2024 by which all Verimark branding, proprietary systems, and trademarks must be removed.
• Enhanced Audit Protocol for 8 Retained Properties: The remaining eight properties will continue to operate under new 10-year Franchise License Agreements ("FLAs") subject to a significantly enhanced quarterly audit protocol for a minimum of five years.
• Personal Guaranties: Randall Brecker (Managing Member, 60% equity interest in CPFH) and Nolan Prescott (Member, 25% equity interest in CPFH) have executed personal guaranties making them jointly and severally liable for all remaining structured-payment obligations.
• First-Priority Security Interest: Verimark holds a first-priority security interest on eight (8) unencumbered hotel properties with an aggregate appraised value of $71.2 million, secured by a UCC-1 Financing Statement filed with the Florida Secured Transaction Registry.
This memorandum is organized into five primary compliance-monitoring areas:
1. Structured Payment Tracking (Section III)
2. Franchise Surrender and De-Identification Compliance (Section IV)
3. Enhanced Audit Protocol for Retained Properties (Section V)
4. Acceleration-Event Monitoring and Enforcement Triggers (Section VI)
5. Ongoing Coordination with Calderwood & Harkness LLP (Section VIII)
Additionally, the memorandum addresses Verimark's own obligations under the Settlement Agreement, particularly those relating to confidentiality and non-disparagement (Section VII), and provides a consolidated compliance calendar summarizing all key dates and milestones (Section IX).
We recommend designating a single internal compliance coordinator to oversee implementation of the procedures outlined herein and to serve as the central point of contact for all compliance-related matters. Given her role as Senior Vice President, Franchise Operations, and her familiarity with the Coastal Palms portfolio, we suggest that Deidre Langston serve as the lead compliance coordinator, with quarterly reporting to Renata Solis-Vega (SVP & General Counsel) and Martin Holcomb (EVP & Chief Financial Officer). This centralized structure will help ensure that no compliance deadlines or monitoring obligations fall through the cracks, and that any potential issues are escalated promptly and appropriately.
II. BACKGROUND AND SETTLEMENT OVERVIEW
A. Litigation Summary
On March 7, 2022, Verimark filed its Complaint in the Circuit Court of the 17th Judicial Circuit, Broward County, Florida, asserting ten (10) counts against Coastal Palms Franchise Holdings LLC, Suncoast Room Management Inc., Randall Brecker, and related entities. The counts included:
• Counts I–III: Breach of Contract for underpayment of royalties, marketing-fund contributions, and technology fees, respectively, under the Franchise License Agreements ("FLAs");
• Counts IV–V: Fraudulent concealment and fraud in the inducement relating to Coastal Palms' deliberate misrepresentation of GRR in its periodic financial reports to Verimark;
• Count VI: Civil conspiracy involving Randall Brecker, Nolan Prescott, and Suncoast Room Management Inc. in the design and operation of the revenue-diversion scheme;
• Counts VII–VIII: Breach of the implied covenant of good faith and fair dealing and unjust enrichment;
• Count IX: Violation of the Florida Deceptive and Unfair Trade Practices Act, Fla. Stat. § 501.204; and
• Count X: Trademark infringement and misuse of the Verimark brand arising from Coastal Palms' operation of properties under the Verimark name while engaging in systematic contractual violations.
The core factual allegation underlying all counts was that Coastal Palms, through its Managing Member Randall Brecker, deliberately structured its operations to divert revenue away from the reporting channels specified in the FLAs. Specifically, Coastal Palms caused Suncoast Room Management Inc. — an affiliated management company controlled by Brecker — to collect direct bookings from corporate clients, event groups, and walk-in guests. Suncoast retained a 12% management fee on these bookings and excluded the underlying guest-room revenues from GRR reports submitted to Verimark. This arrangement was not disclosed to Verimark and directly contravened the definition of "Gross Room Revenue" set forth in FLA § 4.1, which expressly includes "all revenues derived from or attributable to the rental of guest rooms at the Hotel, regardless of the source or method of booking."
Through discovery and forensic analysis conducted by Dr. Sharon Kettlewell of Ridgeline Forensic Advisory LLC, in conjunction with a preliminary audit by Thornbury & Associates CPAs LLP, Verimark established that Coastal Palms had understated GRR by an estimated 22% to 31% across its 22-hotel portfolio during the period 2013 through 2021. The total underreported GRR for this period was approximately $197.8 million.
Based on the underreported revenue, Verimark's claimed damages totaled approximately $150 million, comprised of:
• $16.095 million in direct underpayments of royalties, marketing-fund contributions, and technology fees;
• $28.4 million in contractual late-payment interest at 1.5% per month, compounded, as provided under FLA § 4.6; and
• $105.5 million in liquidated damages under FLA § 15.3, which provides for liquidated damages in the amount of 36 months' average royalties upon a material breach resulting in franchise termination.
On February 9, 2024, the Honorable Richard M. Calloway, Circuit Judge, granted Verimark's Motion for Partial Summary Judgment on Counts I (Breach of Contract – Royalties) and II (Breach of Contract – Marketing Fund). In his order, Judge Calloway found that Coastal Palms' exclusion of Suncoast-collected revenues from GRR constituted a material breach of FLA §§ 4.1 and 4.2, and that no genuine issue of material fact existed as to liability on those counts. The Court reserved the question of damages for trial. This ruling substantially strengthened Verimark's negotiating position in the settlement discussions that followed.
Subsequently, the parties agreed to participate in a two-day mediation before the Honorable Patricia Everwood (Ret.) at Everwood Dispute Resolution PLLC, Coral Gables, Florida, on March 14–15, 2024. After extensive negotiations, the parties reached a tentative settlement on the evening of March 15, 2024. A binding term sheet was executed on March 22, 2024, and the final Settlement Agreement and Mutual Release was executed by all parties on April 22, 2024. Today, April 26, 2024, the Joint Stipulation of Dismissal with Prejudice has been filed with the Court, formally closing the litigation.
B. Key Settlement Terms Requiring Ongoing Monitoring
The Settlement Agreement is a comprehensive document consisting of 47 sections and six (6) exhibits. For purposes of this compliance-monitoring memorandum, the key provisions and exhibits requiring ongoing attention are summarized below.
Settlement Agreement Exhibits:
Key Non-Monetary Provisions:
• Counterclaim Dismissal: Coastal Palms' counterclaim in the amount of $12 million, alleging that Verimark had failed to maintain adequate brand standards and had imposed unreasonable renovation requirements on the Coastal Palms portfolio, was dismissed with prejudice as part of the settlement. This eliminates any residual exposure for Verimark on these claims.
• Mutual Release: The mutual release became effective as of April 22, 2024 and covers all claims arising from or related to the FLAs through the effective date. Critically, the release expressly excludes "all obligations, covenants, representations, and warranties set forth in this Agreement," meaning that the Settlement Agreement itself — including the payment obligations, de-identification requirements, enhanced audit protocol, personal guaranties, and security interest — remains fully enforceable notwithstanding the release.
• Confidentiality Obligations: The settlement amount and terms are confidential as between the parties, subject to Verimark's obligations as a publicly traded company under the Securities Exchange Act of 1934. Verimark will disclose the settlement as a "material litigation settlement" in its Q2 2024 Form 10-Q filing with the Securities and Exchange Commission. The specific settlement amount and detailed terms need not be disclosed unless required by applicable SEC rules or accounting standards (GAAP). Coordination with Martin Holcomb (EVP & CFO) and Verimark's outside securities counsel regarding the appropriate scope and language of this disclosure is recommended.
• Non-Disparagement Clause: The Settlement Agreement includes a mutual non-disparagement provision with a three-year term, expiring on April 22, 2027. During this period, neither party (nor their respective officers, directors, employees, agents, or representatives) may make any public or private statements that are derogatory, defamatory, or disparaging regarding the other party, its principals, its properties, or the terms or circumstances of the settlement. This provision applies to all forms of communication, including social media, press releases, industry conferences, and communications with other franchisees.
III. STRUCTURED PAYMENT MONITORING
A. Payment Schedule
The Settlement Agreement provides for a total monetary settlement of $87,500,000, payable as follows: a $25,000,000 lump-sum closing payment (already received) and eight (8) semi-annual structured installments of $7,812,500 each over a four-year period. The complete payment schedule, as set forth in Settlement Agreement Exhibit A, is as follows:
Total Structured Payments: $62,500,000.00 (principal only), plus accrued simple interest at 6.5% per annum on the outstanding principal balance as described below.
In addition to the principal installment amounts, Settlement Agreement § 8.3 provides that simple interest at the rate of 6.5% per annum shall accrue on the outstanding principal balance from the Settlement Agreement effective date (April 22, 2024) until each installment is paid in full. This interest is calculated on a simple (non-compounded) basis and must be paid together with each semi-annual installment. We recommend that Martin Holcomb's finance team maintain an internal tracking spreadsheet to monitor payment dates and calculate expected interest amounts. All payment dates should be calendared with both 30-day and 15-day advance reminders to ensure that any late payment is immediately identified and addressed.
B. Payment Mechanics and Verification
All structured payments are required to be made by wire transfer to Verimark's designated account, the details of which were provided to Coastal Palms' counsel in the Settlement Agreement. The same wire instructions used for the closing payment will govern all subsequent installments unless Verimark provides updated instructions in writing at least ten (10) business days prior to a payment date.
We recommend the following verification procedures for each payment:
1. Same-Day/Next-Business-Day Confirmation: On each payment due date (or the next business day if the due date falls on a weekend or federal holiday), Verimark's treasury department should confirm whether the wire transfer has been received. If receipt is not confirmed by the close of business on the first business day after the due date, Renata Solis-Vega and Deidre Langston should be immediately notified, and Calderwood & Harkness LLP should be contacted for guidance on next steps.
2. Interest Calculation Verification: For each payment, Verimark's finance team should independently calculate the accrued simple interest at 6.5% per annum on the remaining principal balance for the applicable period and confirm that the total amount received (principal installment plus interest) matches the expected amount. Any discrepancy should be documented and communicated to Coastal Palms' counsel promptly.
3. Running Payment Ledger: Verimark should maintain a running ledger documenting: (a) the date each payment was due; (b) the date each payment was received; (c) the principal amount received; (d) the interest amount received; (e) the total amount received; (f) the remaining outstanding principal balance; and (g) any discrepancy or late-payment notation.
To assist with interest verification, the following illustrative interest-calculation table shows the expected amounts for the first four payments:
Note: Interest calculations above are based on a 365-day year and the actual number of days in each semi-annual period. Coastal Palms may use a 360-day convention; the finance team should confirm the applicable convention under Settlement Agreement § 8.3 and adjust calculations accordingly. Any discrepancy between conventions should be resolved prior to the first payment date.
C. Late Payment Protocol
Settlement Agreement § 8.5 provides that if any semi-annual installment is not received by the applicable due date, Coastal Palms shall have a cure period (the length of which is specified in the Settlement Agreement) during which it may tender payment without triggering an acceleration event. However, late-payment interest at a default rate (specified in the Settlement Agreement) may apply during the cure period. We recommend the following protocol in the event of a late payment:
• Day 1 (Due Date — No Payment Received): Verimark's treasury department confirms non-receipt and notifies Renata Solis-Vega and Deidre Langston. The finance team should also confirm that no wire was initiated but delayed in processing (contact Verimark's banking relationship manager at the receiving institution if needed).
• Day 1–2 (Informal Inquiry): Renata Solis-Vega or her designee contacts Coastal Palms' counsel, Nathan Whitfield III, at Whitfield, Barrow & Crane LLP (1221 Brickell Avenue, Suite 3000, Miami, FL 33131; telephone: (305) 555-7800) to inquire about the status of the payment. This contact should be made by telephone in the first instance, followed by a confirming email. All communications should be documented in writing and retained in the compliance file.
• Day 5 (Formal Written Demand): If payment has not been received or a satisfactory explanation and commitment to pay have not been provided, Verimark should cause Calderwood & Harkness LLP to send a formal written demand to Coastal Palms and its counsel, citing the specific payment obligation, the amount due (including accrued interest), the applicable Settlement Agreement provisions, and a demand for immediate payment.
• Day 15 (Acceleration Evaluation): If payment remains outstanding fifteen (15) days after the due date, Verimark should convene its internal decision-makers (Solis-Vega, Holcomb, and, if appropriate, Verimark's Board of Directors) to evaluate whether to exercise its acceleration rights under the Settlement Agreement. Calderwood & Harkness LLP should provide a written assessment of the legal options and risks associated with acceleration. See Section VI below for a detailed discussion of acceleration events and enforcement mechanics.
Throughout this process, Verimark should maintain contemporaneous written records of all payment-related communications, including telephone call logs (noting date, time, participants, and substance of discussion), email correspondence, and formal written notices. These records will be critical evidence in the event enforcement action becomes necessary.
D. Security Interest Monitoring
The Settlement Agreement is secured by a first-priority lien on eight (8) unencumbered hotel properties owned by Coastal Palms or its property-level subsidiaries, with an aggregate appraised value of $71.2 million as of the Settlement Agreement effective date. The security interest was perfected through the filing of a UCC-1 Financing Statement with the Florida Secured Transaction Registry, naming the following:
• Debtor: Coastal Palms Franchise Holdings LLC, 9500 Gulf Shore Drive, Suite 450, Naples, FL 34108
• Secured Party: Verimark Hospitality Group Inc., 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, FL 33301
We recommend the following procedures to protect Verimark's security interest:
1. Annual UCC Search: At least once per year, Verimark should conduct a UCC search against Coastal Palms Franchise Holdings LLC (and any property-level entities that own collateral properties) to confirm that (a) Verimark's UCC-1 filing remains active and in first-priority position, and (b) no intervening liens, security interests, or judgments have been filed against any of the collateral properties. This search should be conducted through the Florida Secured Transaction Registry and, to the extent any collateral properties are located outside Florida, through the applicable state filing offices. Calderwood & Harkness LLP can assist with or arrange these searches upon request.
2. UCC-1 Continuation Statement: UCC-1 Financing Statements are effective for a period of five (5) years from the date of filing under Florida's Uniform Commercial Code (Fla. Stat. § 679.5151). Accordingly, a continuation statement must be filed within six months before the expiration of the initial filing to maintain perfection. The filing was made on or about April 22, 2024; therefore, the continuation statement must be filed no later than approximately October 22, 2028 (but no earlier than approximately October 22, 2028). However, given that the final structured payment is due on April 22, 2028, the UCC-1 filing should remain effective through the entire payment period. In the event any payment dispute or acceleration extends beyond April 2029, a continuation statement should be filed promptly. This date should be calendared.
3. Monitoring for Unauthorized Encumbrances: The Settlement Agreement contains a covenant by Coastal Palms prohibiting the sale, transfer, refinancing, or further encumbrance of any of the eight (8) collateral properties without Verimark's prior written consent. Verimark should monitor for any indication that Coastal Palms is attempting to sell, refinance, or encumber any collateral property. Potential monitoring mechanisms include:
(a) Periodic review of public real property records in the counties where the collateral properties are located (Collier County, Lee County, and Hillsborough County, Florida) for any recorded mortgages, deeds of trust, lis pendens, or conveyances affecting the collateral properties;
(b) Maintaining open lines of communication with Ironclad National Bank regarding any refinancing activity involving the Coastal Palms portfolio (see below); and
(c) Monitoring industry and news sources for any announced sale or acquisition activity involving Coastal Palms properties.
4. Personal Guaranties: The personal guaranties executed by Randall Brecker and Nolan Prescott are critical components of the security package. These guaranties provide that Mr. Brecker and Mr. Prescott are jointly and severally liable for all remaining structured-payment obligations under the Settlement Agreement. Verimark should:
(a) Confirm that the executed original guaranty instruments have been received and placed in secure storage (Renata Solis-Vega's office or Verimark's corporate records vault);
(b) Maintain copies of the guaranties in the compliance file and provide copies to Calderwood & Harkness LLP for the firm's matter file; and
(c) Monitor publicly available information regarding Mr. Brecker's and Mr. Prescott's financial condition, including any bankruptcy filings, liens, judgments, or other adverse financial events. While Verimark is not obligated to conduct ongoing credit monitoring of the guarantors, awareness of any significant adverse change in their financial condition may be relevant to Verimark's enforcement strategy.
5. Coordination with Ironclad National Bank: Ironclad National Bank holds first-lien mortgage loans on eighteen (18) of the twenty-two (22) Coastal Palms properties, with an aggregate outstanding balance of approximately $94 million. The eight (8) collateral properties securing Verimark's UCC-1 lien are unencumbered by Ironclad's mortgages — that is, they are the four (4) properties in the portfolio that were owned free and clear of mortgage debt as of the settlement date. On April 24, 2024, Calderwood & Harkness LLP sent a letter to Devon Schultz, Senior Vice President, Commercial Real Estate Lending, at Ironclad National Bank, notifying Ironclad of the settlement and Verimark's security interest in the eight unencumbered properties and requesting Ironclad's acknowledgment. Verimark should follow up to confirm receipt of Ironclad's acknowledgment and should maintain an ongoing relationship with Mr. Schultz to stay informed of any developments affecting the Coastal Palms portfolio.
IV. FRANCHISE SURRENDER AND DE-IDENTIFICATION COMPLIANCE
A. Surrendered Properties — Identification
Pursuant to Settlement Agreement § 12 and Exhibit B, Coastal Palms is required to surrender the franchise rights for fourteen (14) of its twenty-two (22) hotel properties. Individual franchise-surrender notices for all fourteen properties were sent on April 25, 2024 using the template approved by Calderwood & Harkness LLP. Delivery receipts should be confirmed and retained in the compliance file.
The fourteen (14) surrendered properties are as follows:
Total rooms across surrendered properties: approximately 1,960
Note that five of the fourteen surrendered properties (Nos. 10–14) are operated by Savannah Lodging Partners LLC, a property-level entity affiliated with Coastal Palms. De-identification obligations extend to Savannah Lodging Partners LLC to the same extent as to Coastal Palms, and Coastal Palms is contractually responsible for ensuring compliance by all property-level operators.
B. De-Identification Requirements
Settlement Agreement § 12.3 provides that Coastal Palms must complete full de-identification of all fourteen surrendered properties within 120 calendar days of the Settlement Agreement effective date, resulting in a deadline of August 20, 2024. The de-identification requirements are comprehensive and include, without limitation:
• Exterior and Interior Signage: Complete removal of all Verimark-branded signage, including but not limited to building-mounted signage, monument signs, directional signs, lobby signage, room-door plaques, elevator signage, parking-area signage, and pool/amenity-area signage bearing the Verimark Suites or Verimark Select name, logo, or trade dress.
• Proprietary Color Schemes and Trade Dress: Removal or alteration of all Verimark proprietary color schemes applied to building exteriors, lobby areas, guest rooms, and common areas, including the Verimark "coastal blue and pearl" color palette, as well as all Verimark-branded design elements such as carpeting patterns, wall treatments, and decorative features bearing Verimark trademarks or trade dress.
• Central Reservation System disconnection: Complete disconnection from Verimark's central reservation system ("CRS"), including removal of all CRS terminals, software, and connectivity at each property. As of the de-identification deadline, no reservations may be made or accepted through the Verimark CRS for any surrendered property.
• Proprietary Technology Systems: Removal of all Verimark proprietary technology systems, including property-management-system interfaces, point-of-sale integrations, guest Wi-Fi portal branding, in-room entertainment system branding, and mobile-app connectivity. Verimark retains ownership of all proprietary hardware and software deployed at surrendered properties.
• Trademark and Trade Name Cessation: Complete cessation of all use of Verimark trademarks, trade names, service marks, domain names, social media handles, and other intellectual property. This includes the removal of Verimark branding from all printed materials, stationery, uniforms, amenity items (e.g., toiletries, key cards), guest-room directories, and digital properties (websites, social media profiles, online travel agency listings).
Settlement Agreement § 12.5 specifies the consequences of non-compliance with the de-identification requirements. Any continued use of Verimark branding, trademarks, or proprietary systems after the August 20, 2024 deadline shall constitute trademark infringement actionable under the Lanham Act (15 U.S.C. § 1114) and applicable state law, independent of the Settlement Agreement's enforcement provisions. Additionally, the Settlement Agreement provides for daily penalties in the amount of $2,500 per property per day for each day of continued non-compliance beyond the deadline. Verimark retains an independent enforcement right to seek injunctive relief in addition to monetary damages.
C. Monitoring and Inspection Protocol
We recommend that Deidre Langston's franchise operations team implement the following phased inspection protocol to monitor Coastal Palms' compliance with the de-identification requirements:
Phase 1 — 30-Day Progress Check (May 25, 2024):
At the 30-day mark, Verimark should confirm that Coastal Palms has commenced de-identification efforts at all fourteen surrendered properties. This phase need not involve physical site inspections but should include: (a) a written request to Coastal Palms' counsel (Nathan Whitfield III) for a progress report detailing the de-identification activities undertaken or planned for each property; (b) confirmation that Coastal Palms has engaged contractors or vendors for signage removal, technology-system disconnection, and re-branding; and (c) verification that the process of removing properties from Verimark's CRS has been initiated by Verimark's IT department in coordination with the surrendered properties.
Phase 2 — 60-Day Mid-Point Inspection (June 24, 2024):
At the 60-day mark, Verimark should conduct physical site inspections of a representative sample of the surrendered properties — at minimum, one property in each geographic market (Sarasota, Fort Myers, Jacksonville, Savannah, and Brunswick). These inspections should verify that: (a) exterior signage removal has commenced or been completed; (b) CRS disconnection is in progress or completed; (c) Verimark-branded amenity items and printed materials have been removed from guest rooms and public areas; and (d) there is no ongoing marketing or advertising using Verimark trademarks or trade dress. The inspections should be documented with time-stamped photographs and a written inspection report for each property visited.
Phase 3 — 90-Day Near-Completion Inspection (July 24, 2024):
At the 90-day mark, Verimark should conduct a more comprehensive inspection to confirm that de-identification is substantially complete at all surrendered properties. This inspection should cover: (a) complete removal of all exterior and interior signage; (b) confirmation that all Verimark proprietary technology systems have been removed or disconnected; (c) verification that the proprietary color schemes and trade dress have been altered or are in the process of being altered; and (d) confirmation that all digital properties (websites, OTA listings, social media profiles) have been updated to remove Verimark branding. Any deficiencies identified at this stage should be communicated immediately to Coastal Palms' counsel with a demand for remediation before the 120-day deadline.
Phase 4 — 120-Day Final Verification (August 20, 2024):
On or before the 120-day deadline, Verimark should conduct final verification inspections of all fourteen (14) surrendered properties. These inspections must be comprehensive and should document, with photographs and written reports, either (a) full compliance with all de-identification requirements or (b) any remaining instances of non-compliance. The results of these final inspections should be compiled into a formal compliance report and provided to Renata Solis-Vega. Any property found to be non-compliant should be immediately referred to Calderwood & Harkness LLP for assessment of enforcement options, including the imposition of daily penalties and potential injunctive relief.
To facilitate these inspections, we recommend the following operational measures:
• Designation of Regional Field Staff: Deidre Langston should designate specific franchise-operations field staff to conduct inspections in each geographic market. Ideally, the same inspector should be assigned to the same properties throughout the inspection cycle to ensure consistency and familiarity with progress (or lack thereof).
• Standardized Inspection Checklist: A standardized inspection checklist should be developed, cross-referencing each specific de-identification requirement set forth in Settlement Agreement Exhibit B. The checklist should include a line item for each category of branding, signage, technology system, and intellectual-property element to be removed, with fields for the inspector to note compliance status, photographic evidence taken, and any observations or concerns.
• Centralized Compliance File: All photographic evidence, written inspection reports, correspondence with Coastal Palms and its counsel, and related documentation should be maintained in a centralized compliance file, accessible to Renata Solis-Vega, Deidre Langston, and their respective teams.
If non-compliance is identified at any inspection milestone, Verimark should immediately notify Calderwood & Harkness LLP for assessment of enforcement options. Depending on the nature and severity of the non-compliance, available options may range from a formal demand letter to Coastal Palms' counsel to the institution of enforcement proceedings in Broward County, including a motion to enforce the settlement agreement or an independent trademark-infringement action.
D. Transition Coordination
In addition to monitoring Coastal Palms' de-identification compliance, Verimark must coordinate its own internal processes to ensure a smooth transition:
1. Proprietary System disconnection: Verimark's IT department should work with the franchise operations team to schedule the disconnection of all Verimark proprietary systems at the surrendered properties. This includes the orderly removal of CRS access, PMS interfaces, and guest-facing technology (Wi-Fi portals, in-room entertainment system integrations, mobile-app connectivity). The disconnection schedule should be coordinated with the de-identification timeline to avoid premature disconnection that could disrupt ongoing hotel operations or guest services before the property has been fully re-branded.
2. Pending Reservations Management: Verimark should work with Coastal Palms to identify any pending reservations at surrendered properties that were booked through the Verimark CRS or Verimark's website/app. These reservations should be managed in a manner consistent with Verimark's brand-reputation standards. Options include honoring the reservations through their completion, transferring them to nearby Verimark-branded properties (if available), or providing guests with advance notice and assistance in rebooking. This is an area where cooperation with Coastal Palms will be important, and Deidre Langston's team should coordinate directly with the property-level general managers.
3. Domain Name and Online Presence: Verimark should confirm that Coastal Palms ceases use of the domain name gulfcoastrooms.com — or any other domain name — for any bookings, marketing, or other online activity that references or implies an association with Verimark brands. To the extent that Coastal Palms has been using gulfcoastrooms.com as a direct-booking channel (which was one of the mechanisms underlying the revenue-diversion scheme), this usage must cease entirely with respect to any Verimark-branded content. Verimark's digital-marketing team should periodically check gulfcoastrooms.com and other associated URLs for any continued unauthorized use of Verimark intellectual property.
V. ENHANCED AUDIT PROTOCOL — RETAINED PROPERTIES
A. Retained Properties — Identification
Eight (8) of Coastal Palms' twenty-two (22) franchise properties will be retained under new ten-year Franchise License Agreements, the form of which is attached to the Settlement Agreement as Exhibit C. These eight properties are also the unencumbered properties serving as collateral for the security interest securing the structured-payment obligation:
Total rooms across retained properties: approximately 1,380 Aggregate appraised value: $71,200,000
These eight properties are concentrated in Southwest Florida (Naples and Marco Island) and the Tampa Bay area, representing Coastal Palms' highest-performing and most valuable assets. The retention of these properties under new FLAs reflects the parties' agreement that the ongoing franchise relationship can continue on a commercially reasonable basis, provided that robust audit and revenue-reporting safeguards are in place to prevent a recurrence of the revenue-diversion conduct that gave rise to the litigation.
B. Enhanced Audit Protocol Requirements (Settlement Agreement Exhibit D)
The Enhanced Audit Protocol set forth in Settlement Agreement Exhibit D imposes significantly more rigorous audit and revenue-reporting requirements than those contained in the original FLAs. The key elements of the protocol are as follows:
1. Quarterly Audits:
The original FLAs required annual audits of franchisee GRR reports, with Verimark having the right to conduct additional audits upon reasonable notice. Under the Enhanced Audit Protocol, Verimark is entitled to conduct quarterly audits of all eight retained properties for a minimum period of five (5) years from the Settlement Agreement effective date, through April 22, 2029. After the initial five-year period, the audit frequency may revert to the annual cycle specified in the new FLAs, subject to Verimark's discretion and any further agreement between the parties.
2. Audit Cost Allocation:
Under the original FLAs (§ 8.2), the franchisee was responsible for audit costs only if the audit revealed an underpayment exceeding 2% of reported GRR. Under the Enhanced Audit Protocol, Coastal Palms bears all audit costs for the full five-year enhanced audit period, regardless of the audit's findings. This provision reflects the recognition that the need for enhanced auditing arose directly from Coastal Palms' own misconduct and that Verimark should not bear the cost of the additional oversight required to ensure compliance.
3. Real-Time POS/PMS Integration:
Settlement Agreement Exhibit D requires Coastal Palms to install and maintain Verimark-approved point-of-sale ("POS") and property-management system ("PMS") interfaces at all eight retained properties. These systems must transmit daily room-revenue data directly to Verimark's central revenue-management systems. The integration must capture all revenue transactions, including guest-room charges, ancillary room-related charges, and any adjustments, credits, or refunds. The purpose of this requirement is to provide Verimark with real-time visibility into the revenue streams at each retained property, making it substantially more difficult for Coastal Palms to divert or underreport revenue through off-platform channels.
4. Comprehensive Booking-Channel Capture:
The Enhanced Audit Protocol expressly requires that all booking channels be captured in the integrated PMS and reported as part of GRR under the FLA § 4.1 definition. This includes, without limitation:
(a) Walk-in guests;
(b) Corporate-direct contracts and negotiated-rate bookings;
(c) Online travel agency ("OTA") channels (e.g., Aldermere Technologies, Bramwell Holdings, Drayton Software);
(d) Direct-booking websites, including gulfcoastrooms.com or any successor domain;
(e) Group and event bookings;
(f) Government-rate and military-rate bookings; and
(g) Long-term stay and extended-stay bookings.
This provision is designed to close the specific loophole exploited by Coastal Palms through the Suncoast Room Management structure, which diverted corporate-direct and walk-in bookings outside of the PMS and excluded them from reported GRR.
5. Prohibition on Separate Management Entities:
The Enhanced Audit Protocol expressly prohibits Coastal Palms from using any separate management entity — such as the now-defunct Suncoast Room Management Inc. — to collect, process, or manage guest-room revenues outside of the integrated PMS. Any management-company arrangement for the retained properties must be disclosed to and approved by Verimark in advance, and all revenues collected by any management entity must flow through the integrated PMS and be reported as part of GRR.
6. Monthly GRR Certification:
In addition to the quarterly audits, the Enhanced Audit Protocol requires that Randall Brecker (or his designated senior officer, subject to Verimark's approval of the designee) execute a sworn monthly certification of reported GRR for each retained property. The certification must attest, under penalty of perjury, that:
(a) All revenues derived from or attributable to the rental of guest rooms at each property during the applicable month have been included in the GRR report;
(b) No revenues have been diverted, excluded, or otherwise withheld from the GRR report through any booking channel, management entity, or other mechanism;
(c) The integrated PMS has been operational and transmitting data to Verimark's systems without interruption during the applicable month; and
(d) There have been no material changes to the property's booking-channel structure, management arrangements, or revenue-collection practices since the prior certification.
The monthly certifications must be delivered to Verimark no later than the fifteenth (15th) day of the month following the reporting month (e.g., the certification for May 2024 must be delivered by June 15, 2024).
C. Audit Implementation Recommendations
To implement the Enhanced Audit Protocol effectively, we recommend the following:
1. Engagement of Independent Auditor: Verimark should engage an independent certified public accounting firm to perform the quarterly compliance audits. We recommend retaining Thornbury & Associates CPAs LLP for this engagement, given Malcolm Thornbury's familiarity with Coastal Palms' historical financial records and revenue-diversion practices from his work during the litigation. His firm's institutional knowledge of the Coastal Palms portfolio will enable more efficient and targeted audit procedures. If Thornbury & Associates is unavailable or if Verimark prefers a different firm, a comparably qualified hospitality-industry audit firm should be engaged.
2. First Quarterly Audit — Q2 2024: The first quarterly audit under the Enhanced Audit Protocol should cover the period from April 1, 2024 through June 30, 2024 (Q2 2024). This audit should be scheduled for approximately July 2024, allowing sufficient time after the quarter's close for Coastal Palms to prepare its records and for the POS/PMS integration to be fully operational.
3. Quarterly Audit Calendar: A comprehensive quarterly audit calendar should be established covering the full five-year enhanced audit period through April 2029. The audit schedule should be as follows (subject to adjustment based on operational considerations):
4. Audit Budget: Based on comparable audit engagements in the hospitality industry and the scope of work required under Exhibit D, we estimate that the annual cost of the quarterly audits will be approximately $150,000 to $200,000 per year. Under the Enhanced Audit Protocol, these costs are borne entirely by Coastal Palms. Verimark should confirm that invoices for audit costs are submitted to Coastal Palms promptly after each quarterly audit and that payment is received within the timeframe specified in Exhibit D.
5. Audit Scope: Each quarterly audit should include, at minimum:
(a) PMS-to-Bank Reconciliation: Reconciliation of PMS-reported room revenue with bank-deposit records for each retained property, identifying any discrepancies between the revenue recorded in the PMS and the funds actually deposited;
(b) Booking-Channel Verification: Verification that all booking channels (walk-ins, corporate-direct, OTA, direct-booking websites, group bookings) are flowing through the integrated PMS and being captured in reported GRR;
(c) Third-Party OTA Data Comparison: Where available, comparison of reported GRR to room-revenue data provided by third-party OTA platforms (Aldermere Technologies, Bramwell Holdings, etc.) to identify any bookings that may have been processed outside the PMS;
(d) Intercompany Payment Review: Review of any management-fee payments, intercompany transfers, or other payments between Coastal Palms and its affiliates or subsidiaries to identify any structures that could be used to divert revenue outside the PMS; and
(e) Monthly GRR Certification Review: Confirmation that all monthly GRR certifications for the audit period were timely submitted and properly executed by Randall Brecker (or his approved designee).
6. Franchise Compliance Analyst: We recommend that Deidre Langston appoint a dedicated franchise compliance analyst within the franchise operations department to serve as the primary point of contact for audit coordination and to review quarterly audit reports. This individual should have sufficient experience in hospitality finance or franchise compliance to identify potential issues in audit reports and to escalate concerns to Deidre Langston and Renata Solis-Vega as appropriate.
7. Underreporting Thresholds and Escalation: If any quarterly audit reveals underreporting of GRR — regardless of amount — the finding should be documented and reported to Renata Solis-Vega. If the underreporting exceeds any threshold specified in the Settlement Agreement or the new FLAs as constituting a material breach, the finding should be treated as a potential acceleration event under Section VI below, and Calderwood & Harkness LLP should be notified immediately.
D. POS/PMS Integration Monitoring
The effectiveness of the Enhanced Audit Protocol depends heavily on the reliable operation of the POS/PMS integration at all eight retained properties. We recommend the following monitoring procedures:
1. System Integration Verification: Verimark's IT department should confirm that the POS/PMS integration is fully operational at all eight retained properties before or concurrent with the execution of the new FLAs. A formal system-integration verification report should be prepared for each property, documenting that (a) the Verimark-approved POS and PMS interfaces have been installed, (b) daily room-revenue data is being transmitted to Verimark's central systems, and (c) all booking channels are being captured in the integrated PMS.
2. Automated Data-Feed Alerts: Verimark's IT department should establish automated alerts that trigger when: (a) the daily data feed from any retained property is interrupted for more than 24 hours; (b) there is a significant discrepancy between PMS-reported revenue and bank-deposit data (e.g., a variance exceeding 5%); or (c) there is evidence that bookings are being processed outside the integrated PMS (e.g., bookings appearing in OTA channel-manager reports that do not appear in the PMS).
3. Monthly Data-Feed Integrity Review: The franchise compliance analyst should conduct a monthly review of data-feed integrity reports generated by Verimark's revenue-management systems. This review should confirm that (a) daily data feeds from all eight retained properties have been received consistently throughout the month; (b) no data anomalies or suspicious patterns have been identified; and (c) the PMS-reported revenue is consistent with expectations based on historical performance, seasonal trends, and market conditions.
4. IT Security and Access Controls: Verimark should ensure that its POS/PMS integration protocols include appropriate security measures to prevent unauthorized access, modification, or deletion of revenue data by Coastal Palms personnel. This may include encryption of data feeds, access-control restrictions on the PMS, and audit trails that log all modifications to revenue records.
VI. ACCELERATION EVENTS AND ENFORCEMENT TRIGGERS
A. Defined Acceleration Events
The Settlement Agreement defines specific events that, if they occur, entitle Verimark to accelerate all remaining structured payments and pursue immediate enforcement of its security interest and personal guaranties. These acceleration events include, at minimum, the following:
1. Payment Default: Failure by Coastal Palms to make any semi-annual structured payment within the applicable grace period after written notice from Verimark. The grace period and notice requirements are specified in Settlement Agreement § 8.5 and should be strictly followed.
2. Audit Protocol Breach: Failure by Coastal Palms to submit to any quarterly audit under the Enhanced Audit Protocol, failure to maintain the required POS/PMS integration at any retained property, or failure by Randall Brecker (or his approved designee) to execute and deliver monthly GRR certifications within the required timeframe.
3. De-Identification Default: Failure by Coastal Palms to complete de-identification of all fourteen surrendered properties by the August 20, 2024 deadline, subject to any cure provisions in the Settlement Agreement.
4. Material Breach of New FLAs: A material breach by Coastal Palms of any of the new Franchise License Agreements for the eight retained properties that is not cured within the applicable cure period specified in the new FLAs.
5. Insolvency Events: The filing of a voluntary or involuntary petition in bankruptcy, the commencement of insolvency proceedings, the making of an assignment for the benefit of creditors, or the appointment of a receiver or trustee with respect to Coastal Palms Franchise Holdings LLC, any property-level entity (including Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC), or any personal guarantor (Randall Brecker or Nolan Prescott).
6. Unauthorized Disposition of Collateral: Any sale, transfer, conveyance, encumbrance, or other disposition of any of the eight collateral properties without Verimark's prior written consent, including any attempt to grant a mortgage, deed of trust, security interest, or other lien on any collateral property.
7. Renewed Revenue Diversion: discovery of additional unreported revenue or renewed revenue-diversion activity at any retained property, including the establishment or use of any management entity, booking channel, or other mechanism to collect or process guest-room revenues outside of the integrated PMS.
B. Acceleration Mechanics
Upon the occurrence and continuation of any acceleration event (and the expiration of any applicable cure period), Verimark has the contractual right to take the following enforcement actions:
1. Acceleration of Remaining Payments: Verimark may declare all remaining structured payments immediately due and payable. This means that the entire outstanding principal balance (less any payments already made), together with all accrued and unpaid interest at 6.5% per annum, becomes immediately due. For example, if an acceleration event occurs after the first three semi-annual installments have been paid, the remaining five installments totaling $39,062,500 in principal, plus accrued interest, would become immediately due.
2. Default Interest: Following acceleration, interest continues to accrue on the accelerated balance at the rate of 6.5% per annum (or at any higher default rate specified in the Settlement Agreement) until the balance is paid in full.
3. Enforcement of Security Interest: Verimark may exercise all remedies available to a secured party under Article 9 of the Uniform Commercial Code as adopted in Florida (Fla. Stat. §§ 679.6011–679.6281), including foreclosure on the eight unencumbered collateral properties. Given the aggregate appraised value of $71.2 million, the collateral should provide substantial coverage for any remaining structured-payment balance.
4. Pursuit of Personal Guaranties: Verimark may pursue Randall Brecker and Nolan Prescott, jointly and severally, under their personal guaranties for the full amount of the accelerated obligation. Enforcement of the guaranties may include the commencement of collection actions, the recording of judgment liens against the guarantors' personal assets, and such other remedies as may be available under applicable law.
5. Judicial Enforcement: Verimark may pursue judicial enforcement of the Settlement Agreement in the Circuit Court of the 17th Judicial Circuit, Broward County, Florida, consistent with the venue provisions of the original FLAs and the Settlement Agreement. Available judicial remedies may include an action to enforce the settlement agreement, a breach-of-contract action under the Settlement Agreement, a motion to reopen the dismissed case for enforcement purposes, or an independent action in equity.
C. Internal Escalation Protocol
Given the significant consequences of acceleration — both for Coastal Palms and for Verimark's ongoing collection and franchise relationships — the decision to accelerate should follow a structured internal escalation protocol:
1. Identification and Reporting: Any Verimark department or employee who identifies a potential acceleration event should immediately report the matter to Renata Solis-Vega (SVP & General Counsel) and Deidre Langston (SVP, Franchise Operations). This includes, without limitation, reports from the finance/treasury department (missed payments), the franchise operations team (de-identification non-compliance, audit-protocol breaches), the IT department (POS/PMS integration failures), or external sources (bankruptcy filings, news reports, market intelligence).
2. Legal Counsel Notification: Calderwood & Harkness LLP should be notified within 48 hours of the identification of any potential acceleration event. Counsel will conduct a legal assessment of whether the facts constitute a bona fide acceleration event under the Settlement Agreement, whether any cure period applies, and what enforcement options are available.
3. Internal Decision-Making: The decision to exercise acceleration rights should be made at the executive level, involving at a minimum:
(a) Renata Solis-Vega (SVP & General Counsel) — legal assessment and recommendation;
(b) Martin Holcomb (EVP & Chief Financial Officer) — financial impact analysis, including assessment of remaining payment exposure, collateral value, and the financial condition of Coastal Palms and the guarantors; and
(c) If the matter is of sufficient magnitude, Verimark's Board of Directors (or an authorized committee thereof) — ultimate approval of the acceleration decision.