CALDERWOOD & HARKNESS LLP 110 SE 6th Street, Suite 2800 Fort Lauderdale, FL 33301
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Priya Anand, Responsible Partner; Yuki Nakamura, Lead Associate
FROM: Carlos Espinoza, Working Associate
DATE: February 6, 2023
RE: Deposition Outline — Nolan Prescott, Member of Coastal Palms Franchise Holdings LLC
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
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I. INTRODUCTION AND PRELIMINARY NOTES
A. Witness Profile
Nolan Prescott is a sixty-seven-year-old individual who holds a twenty-five percent (25%) equity interest as a Member of Coastal Palms Franchise Holdings LLC ("Coastal Palms," "CPFH," or the "Company"). Mr. Prescott is a retired commercial real estate developer whose investment in CPFH is characterized — at least nominally — as passive in nature pursuant to the terms of the CPFH Operating Agreement. He does not hold the title of officer or manager in any Coastal Palms property-level entity, nor does he serve in any formal capacity with Suncoast Room Management Inc. ("Suncoast"). He is not employed by Coastal Palms in any day-to-day operational role.
The remaining equity in CPFH is held by Randall "Randy" Brecker, who controls sixty percent (60%) of the equity and serves as Managing Member, and Theresa Brecker, who holds the remaining fifteen percent (15%). It is Randy Brecker who exercises operational control over the Company and its property-level subsidiaries, and who serves as the sole president and controller of Suncoast.
Despite his self-characterization as a passive investor, Mr. Prescott's deposition is critical to our case for the reasons set forth in Section I.C below. The documents produced in this matter — particularly the quarterly financial summaries emailed by Brecker to Prescott — strongly suggest that Prescott was aware of, or at minimum willfully blind to, the systematic underreporting of Gross Room Revenue ("GRR") to our client, Verimark Hospitality Group Inc. ("Verimark").
B. Deposition Logistics
The deposition of Nolan Prescott is scheduled to take place on or about February 10, 2023, falling within the fact-deposition window of January 9 through March 17, 2023, as established by the Court's Case Management Order entered October 7, 2022.
Location: The deposition will be held at the offices of Calderwood & Harkness LLP, 110 SE 6th Street, Suite 2800, Fort Lauderdale, Florida 33301, or at such other location as may be agreed upon with defense counsel at Whitfield, Barrow & Crane LLP ("WBC").
Anticipated Duration: One full day, with an anticipated examination time of approximately four to six (4–6) hours. Given the scope of topics to be covered and the number of exhibits to be introduced, the examining attorney should pace the examination accordingly and prioritize the impeachment areas identified in Section XIII below.
Defense Counsel Expected: Gabriela Montes and/or Ethan Doyle of Whitfield, Barrow & Crane LLP, 1221 Brickell Avenue, Suite 3000, Miami, Florida 33131. Ms. Montes has served as lead defense counsel throughout the litigation, and Mr. Doyle has been present at all prior depositions as second chair. We should anticipate that Ms. Montes will be well-prepared with objections designed to protect Prescott from testifying about the substance of member communications that defense counsel may attempt to shield under a common-interest or joint-defense privilege theory.
Court Reporter: The court reporter will be arranged through our usual vendor, Accurate Reporting Services. A videographer should also be retained, as video may be useful at trial to capture Prescott's demeanor when confronted with the quarterly financial summaries containing Suncoast revenue line items.
C. Examination Objectives
The examination of Nolan Prescott is designed to accomplish the following objectives, which should be kept in mind throughout the deposition. The examining attorney should be flexible in the ordering of topics but should ensure that each of the following objectives is addressed before the conclusion of the examination:
1. Establish Prescott's knowledge of Coastal Palms' revenue-reporting practices and the systematic underreporting of Gross Room Revenue to Verimark. This is the central objective of the deposition. Even if Prescott did not participate directly in the preparation of GRR reports, his receipt of quarterly financial summaries that included Suncoast revenue lines is powerful evidence that he knew — or should have known — that not all guest-room revenue was being reported to Verimark.
2. Probe the extent to which Prescott received financial reports from Brecker that reflected or disclosed Suncoast revenue streams. The November 18, 2022 supplemental production of 312,000 documents includes quarterly financial summaries emailed by Brecker to Prescott. These documents are the linchpin of our examination. Each summary contains identifiable line items for Suncoast revenue. The examining attorney should walk Prescott through these documents methodically.
3. Determine Prescott's awareness of the existence and purpose of Suncoast, the gulfcoastrooms.com website, and off-platform booking channels. Even if Prescott professes ignorance of the technical details of Suncoast's operations, his knowledge that Suncoast existed and generated revenue from hotel operations is sufficient to establish that he was aware of a separate revenue stream not captured in GRR reporting.
4. Identify inconsistencies between Prescott's anticipated claims of ignorance and documents already produced showing he received quarterly financial summaries that included Suncoast revenue lines. This is the impeachment dimension of the deposition. Prescott's credibility will be tested against the documentary record. The examining attorney should be prepared to present specific exhibits and ask Prescott to read line items aloud and explain what he understood them to represent.
5. Establish Prescott's understanding of the Franchise License Agreement ("FLA") obligations, including the GRR definition, royalty requirements, and audit provisions. Even a passive investor with a 25% equity stake in a franchise holding company would be expected to have some basic understanding of the franchise relationship that generates his investment income.
6. Support the civil conspiracy count (Count X) by eliciting testimony on communications among Coastal Palms members regarding franchise-fee obligations. To sustain Count X, we must demonstrate that Prescott was, at minimum, aware of and acquiesced in the scheme to underreport GRR. His receipt of financial summaries reflecting Suncoast revenue, combined with his failure to object or inquire, supports an inference of agreement.
7. Lay groundwork for personal-guaranty and collectibility analysis by exploring Prescott's personal financial situation and knowledge of Ironclad National Bank's approximately $94 million lien position. Understanding Prescott's personal net worth, asset structure, and awareness of the Company's debt obligations is important for our damages analysis and for evaluating collection prospects in the event of a judgment.
D. Key Documents for Exhibit Binder
The following documents should be assembled into a comprehensive exhibit binder for use at the deposition. The exhibit binder should be organized in the order listed and tabbed for easy reference. Duplicate copies should be prepared for the witness, defense counsel, and the court reporter. The specific Bates-stamped versions of documents from the supplemental production should be identified by Carlos Espinoza and Yuki Nakamura in advance of the deposition.
• Coastal Palms Franchise Holdings LLC Operating Agreement — This is the foundational document establishing Prescott's 25% equity interest and defining his rights and obligations as a Member. Pay particular attention to provisions regarding financial reporting to Members, voting rights on major transactions, and any indemnification or contribution obligations.
• Representative Franchise License Agreement (FLA) — The FLA for the original Naples, Florida Verimark Suites property, dated June 15, 2007, should be used as the representative agreement. Key provisions to be marked and referenced during examination include:
• Section 4.1 — Definition of Gross Room Revenue ("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") and the 5% royalty obligation on GRR;
• Section 4.2 — The 2.5% marketing-fund contribution on GRR;
• Section 4.3 — The technology fee of $12.50 per room per month;
• Section 4.6 — Late-payment interest at 1.5% per month, compounded;
• Section 8.2 — Verimark's audit rights on 10 business days' notice; if underpayment exceeds 2% of reported GRR, the franchisee bears all audit costs;
• Section 14.1 — The 30-day cure period for material breaches;
• Section 14.2(c) — Systematic underreporting of GRR as an incurable material breach; and
• Section 15.3 — Liquidated damages upon termination for cause calculated as 3× trailing-twelve-month royalties per property.
• Most Recent FLA — The FLA dated September 3, 2019, representing the most recently executed franchise agreement in the portfolio, to demonstrate the continuity of the GRR definition and fee obligations over time.
• Quarterly Financial Summaries Emailed by Randall Brecker to Prescott — These documents were produced in the November 18, 2022 supplemental production as part of the 312,000-document production that included Suncoast records. A representative selection of nine (9) quarterly summaries, one from each year in the 2013–2021 period, should be identified and included. These are the most critical documents for the examination.
• Annual K-1 Tax Schedules for CPFH — Showing income allocated to Prescott for each tax year, to be cross-referenced against the quarterly financial summaries and the GRR figures reported to Verimark.
• Suncoast Room Management Inc. Articles of Incorporation and Organizational Documents — To establish the corporate existence, formation date, and control structure of Suncoast.
• Suncoast Management-Fee Invoices and Remittance Records — Demonstrating the 12% management-fee retention by Suncoast and the flow of funds from Suncoast to property-level LLCs.
• Member Distribution Records from CPFH Showing Payments to Prescott — For the period 2013–2021, to establish the correlation between total revenue (including Suncoast) and Prescott's distributions.
• Email Correspondence Between Prescott and Brecker Regarding CPFH Financial Performance — Selected emails reflecting discussions of the Company's financial condition, profitability, and performance metrics.
• Ironclad National Bank Loan Documents Listing CPFH as Borrower — Including financial covenants and any borrower financial statements submitted in connection with loan-compliance reporting.
• Janet Kerrigan Deposition Testimony (January 2023) — Relevant excerpts regarding direction from "corporate" (Brecker) to exclude direct-booking revenue from GRR reports submitted to Verimark. Ms. Kerrigan's testimony is critical to establishing the systematic nature of the underreporting and the direction from Brecker.
• Randall Brecker Deposition Transcript (Days 1 and 2, January 9–11, 2023) — Relevant excerpts regarding communications with Prescott, financial reporting to Members, and the Suncoast arrangement. Brecker's testimony should be carefully cross-referenced against Prescott's anticipated answers.
II. BACKGROUND AND PERSONAL HISTORY
A. Personal and Professional Background
The examination should begin with standard background questions designed to put the witness at ease while establishing his identity, education, and professional credentials. These questions also serve the important purpose of establishing Prescott's sophistication as a businessperson, which will be relevant to the impeachment strategy outlined in Section XIII.
The examining attorney should cover the following topics:
• Full legal name and identification. Confirm Prescott's full legal name, current residential address, and date of birth. Confirm that he is sixty-seven years of age.
• Educational background. Obtain details regarding Prescott's educational history, including any undergraduate, graduate, or professional degrees. If Prescott holds a degree in business, finance, real estate, or a related field, this will bolster the argument that he possessed the sophistication to understand the quarterly financial summaries he received.
• Career history in commercial real estate development. This is a critical area of background examination. The examining attorney should elicit a detailed chronology of Prescott's career in commercial real estate development, including:
• The types of projects he developed or invested in (office buildings, retail centers, multifamily residential, hospitality, mixed-use);
• The geographic locations of those projects;
• The approximate value and scale of those projects;
• His role in those projects (developer, investor, manager, partner);
• The timeline of his career, from entry into the industry through his retirement; and
• The approximate date of his retirement and the circumstances that led to it.
• Current business activities and investments beyond CPFH. Establish what other investments Prescott currently holds, whether he is involved in any other business ventures, and whether he has any ongoing involvement in the commercial real estate industry. This is relevant both to his sophistication and to the collectibility analysis.
• Familiarity with the hospitality industry prior to the Coastal Palms investment. Determine whether Prescott had any prior experience in the hotel or hospitality industry before investing in CPFH. If he did, this further undermines any claim that he lacked the ability to understand hospitality financial reporting. If he did not, explore what due diligence he conducted before committing capital to a hotel franchise holding company.
• Any prior franchise-related experience or investments. Determine whether Prescott has ever been involved in any other franchise relationship, either as a franchisee, a franchisee investor, or in any other capacity. Any prior franchise experience would be probative of his understanding of franchise-fee obligations and franchisor audit rights.
B. Relationship with Randall Brecker
The relationship between Prescott and Brecker is central to the civil conspiracy count and to the question of what Prescott knew and when he knew it. The examining attorney should explore:
• How and when Prescott first met Brecker. Establish the circumstances of their initial meeting — whether it was through a social connection, a business introduction, a mutual acquaintance, or some other channel. The nature of their initial contact may shed light on the basis for Prescott's trust in Brecker.
• The nature of the personal and business relationship. Determine whether Prescott and Brecker are personal friends in addition to business associates. Explore the depth and frequency of their social interactions and whether Prescott's relationship with Brecker extended beyond the four corners of the CPFH investment.
• Any prior business dealings before Coastal Palms. Determine whether Prescott and Brecker have ever been involved in any other business ventures together. If so, establish the nature, scope, and outcome of those ventures. Prior successful business dealings would suggest a higher level of trust and communication between the two.
• Social relationship with Brecker and/or Theresa Brecker. Explore whether the Prescotts and Breckers socialize together, vacation together, belong to the same clubs, or maintain any other personal connections. A close personal relationship increases the likelihood that Brecker would have discussed material aspects of the CPFH business with Prescott, even if their formal roles suggested otherwise.
III. INVESTMENT IN COASTAL PALMS FRANCHISE HOLDINGS LLC
A. Formation and Initial Investment
This section is designed to establish the foundational facts of Prescott's investment in CPFH and to lay the groundwork for later questioning about his knowledge of the franchise relationship and revenue-reporting practices.
• Timing of initial investment. Determine when Prescott first invested in CPFH. This is important to establish whether Prescott was an original member at the time of the Company's formation and the execution of the first FLA on June 15, 2007, for the single Verimark Suites property in Naples, Florida, or whether he joined the venture at a later date. If he was an original member, it becomes more difficult for him to claim complete ignorance of the franchise relationship and its terms.
• Whether Prescott was an original member or joined later. If Prescott joined after formation, establish the circumstances of his entry — who approached him, what information he was provided, what representations were made about the investment opportunity, and what due diligence he conducted.
• Capital contribution amount and structure. Establish the amount of Prescott's initial capital contribution and the form in which it was made (cash, promissory note, contribution of assets, or some combination). If the capital contribution was substantial, this reinforces the inference that Prescott would have been attentive to the financial performance of his investment.
• Prescott's 25% equity stake — confirm percentage and any changes over time. Confirm that Prescott holds a 25% equity interest in CPFH and determine whether that percentage has remained constant since his initial investment or has changed at any point. If there have been capital calls, dilutions, or transfers, explore those events.
• Equity distribution among members. Confirm Prescott's understanding that Randall Brecker holds 60% of the equity as Managing Member and Theresa Brecker holds 15%. Determine whether Prescott has any knowledge of the basis for this allocation and whether it has changed over time.
• Review of the CPFH Operating Agreement. Establish when Prescott first received the CPFH Operating Agreement, whether he read it before signing, and whether he retained independent legal counsel to review the agreement on his behalf. If he retained counsel, identify the attorney and the nature of the advice received. If he did not retain counsel, explore why a sophisticated commercial real estate developer would invest a significant sum in a holding company without independent legal review.
B. Role and Responsibilities
This section is designed to explore the tension between Prescott's anticipated characterization of himself as a purely passive investor and the documentary evidence suggesting he received and presumably reviewed detailed financial information about the Company's operations.
• Prescott's characterization of his role. Allow Prescott to describe, in his own words, his role as a "passive investor" in CPFH. Let him articulate the scope of his involvement, or lack thereof, before challenging him with documents that suggest a greater degree of awareness.
• Specific duties under the CPFH Operating Agreement. Walk Prescott through the relevant provisions of the Operating Agreement to determine whether the agreement assigns any specific duties or responsibilities to Members, as opposed to the Managing Member. Of particular interest are any provisions requiring Members to review financial reports, approve major transactions, or participate in decision-making regarding franchise agreements.
• Voting rights on major decisions. Determine whether Prescott holds voting rights on major decisions, including the acquisition of new properties, the execution of new franchise agreements, the incurrence of indebtedness, and the approval of annual budgets. If the Operating Agreement grants such voting rights, Prescott cannot credibly claim to have been entirely uninvolved in the Company's affairs.
• Member meetings. Determine whether Prescott ever attended CPFH member meetings, either in person or by telephone or video conference. Establish the frequency, format, and typical agenda of such meetings. If meetings occurred, determine whether financial performance, franchise-fee obligations, and revenue-reporting practices were discussed.
• Operational involvement. Determine whether Prescott was involved in any operational decisions regarding the 22 hotel properties in the portfolio. This includes decisions regarding property management, staffing, capital improvements, pricing strategies, and booking-channel utilization.
• Property visits. Determine whether Prescott ever visited any of the 22 franchised hotel properties. If so, identify which properties he visited, how often, and the purpose of each visit. Even social visits to the properties would provide an opportunity for Prescott to observe operations and speak with on-site personnel.
C. Growth of the Portfolio
This section is designed to establish the scope and scale of the Coastal Palms enterprise, which grew from a single property in 2007 to a portfolio of 22 hotels comprising approximately 3,740 rooms. The growth of the portfolio is relevant to the magnitude of the underreporting scheme and to the question of whether Prescott, as a 25% equity holder, was engaged in or informed about the expansion.
• Awareness of portfolio growth. Determine whether Prescott was aware that Coastal Palms grew from a single Verimark Suites property in Naples, Florida, in 2007 to a 22-hotel portfolio consisting of 18 Verimark Suites and 4 Verimark Select properties located across Florida and coastal Georgia, comprising approximately 3,740 total guest rooms.
• Involvement in franchise acquisitions. Determine whether Prescott approved or was consulted on each new franchise acquisition. If CPFH's Operating Agreement required member approval for the execution of new franchise agreements or the acquisition of new hotel properties, Prescott's signature or consent would demonstrate his direct involvement in the franchise relationship.
• Review or execution of FLAs. Determine whether Prescott personally reviewed or signed any of the 22 individual Franchise License Agreements with Verimark, including the most recent FLA dated September 3, 2019. If Prescott signed any FLAs, he cannot credibly claim complete ignorance of the GRR definition and royalty obligations contained therein.
• Understanding of franchise financial terms. Even if Prescott did not sign any FLAs, determine his general understanding of the financial terms of the franchise relationship — specifically, that Coastal Palms was required to pay royalties and other fees to Verimark based on a percentage of Gross Room Revenue.
IV. KNOWLEDGE OF FRANCHISE LICENSE AGREEMENTS
A. FLA Terms and Obligations
This section is designed to establish the baseline of Prescott's knowledge regarding the contractual obligations that Coastal Palms owed to Verimark under the Franchise License Agreements. The level of detail that Prescott can recall or acknowledge is directly relevant to both the breach-of-contract counts and the civil conspiracy count.
• Whether Prescott ever read any of the 22 FLAs. This is a threshold question. If Prescott admits to having read even one FLA, the examining attorney should establish which FLA he read, when, and what he recalls about its terms. If Prescott claims he never read any FLA, the examining attorney should probe why a 25% equity holder in a franchise holding company generating over $100 million in annual room revenue would not review the agreements that govern the Company's most important business relationship.
• Whether Prescott was provided copies of the FLAs. Determine whether copies of the FLAs were made available to Prescott, whether they were attached to the Operating Agreement, whether they were discussed at member meetings, or whether they were provided in connection with any specific transaction.
• Gross Room Revenue definition. Using the representative FLA (Naples property, dated June 15, 2007), direct Prescott to Section 4.1 and ask him to read aloud the definition of Gross Room Revenue: "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." Determine whether Prescott understands this definition and, critically, whether he understands that it captures all guest-room revenue regardless of the entity through which the revenue is collected — which would include revenue collected through Suncoast.
• 5% royalty obligation (§ 4.1). Confirm Prescott's understanding that Coastal Palms was required to pay a royalty equal to 5% of GRR to Verimark on a monthly basis.
• 2.5% marketing-fund contribution (§ 4.2). Confirm Prescott's understanding that Coastal Palms was required to contribute 2.5% of GRR to Verimark's system-wide marketing fund.
• Technology fee (§ 4.3). Confirm Prescott's understanding that Coastal Palms was required to pay a technology fee of $12.50 per room per month.
• Late-payment interest (§ 4.6). Determine whether Prescott understood that late payments of royalties, marketing contributions, and technology fees accrued interest at the rate of 1.5% per month, compounded. This provision is significant because late-payment interest constitutes approximately $28.4 million of Verimark's total damages claim.
• Audit provisions (§ 8.2). Determine whether Prescott was aware that Verimark had the right to audit Coastal Palms' books and records on 10 business days' notice, and that if an audit revealed an underpayment exceeding 2% of reported GRR, the franchisee would bear all costs of the audit. Knowledge of the audit provision is relevant because it establishes that Prescott knew — or should have known — that the accuracy of GRR reporting was subject to verification by the franchisor.
• Systematic underreporting as incurable breach (§ 14.2(c)). Determine whether Prescott was aware that the FLA classifies systematic underreporting of GRR as a material breach incapable of cure. This provision eliminates the 30-day cure period that would otherwise apply under § 14.1 and permits Verimark to terminate the franchise without providing an opportunity to remedy the default.
• Liquidated damages (§ 15.3). Determine whether Prescott understood the liquidated-damages provision, which provides for damages calculated as three times (3×) the trailing-twelve-month royalties per property upon termination for cause. This provision drives the largest component of Verimark's damages claim — approximately $105.5 million.
B. Reporting Obligations
• Monthly GRR reporting. Determine Prescott's understanding of the monthly reporting requirements imposed on Coastal Palms under the FLAs. Specifically, whether he understood that the franchisee was required to submit monthly reports of GRR to Verimark.
• Responsibility for GRR reporting. Determine whether Prescott was aware of who at Coastal Palms — or at what level within the organizational structure — was responsible for preparing and submitting the monthly GRR reports to Verimark. This may lead to testimony about Janet Kerrigan, the former Regional Controller, or other financial personnel.
• Discussions regarding GRR reporting. Determine whether Prescott ever discussed GRR reporting with Brecker, with Theresa Brecker, with any Coastal Palms employee, or with any third party. Even a single conversation touching on the subject of GRR reporting would undermine a claim of total ignorance.
V. RECEIPT OF FINANCIAL INFORMATION
A. Quarterly Financial Summaries
This is the most critical section of the deposition outline. The quarterly financial summaries emailed by Randall Brecker to Prescott represent the strongest documentary evidence that Prescott was aware of the Suncoast revenue stream. These documents were produced as part of the November 18, 2022 supplemental production, which included 312,000 documents encompassing Suncoast records. The examining attorney should approach this section methodically, building a foundation before introducing the key documents.
• Establish receipt of quarterly financial summaries. Begin by asking Prescott whether he received financial reports or summaries from Brecker regarding the performance of CPFH. Determine the frequency of these reports (quarterly), the format (email with attachments), and the approximate time period over which he received them. Allow Prescott to describe these reports in his own words before introducing the actual documents.
• Review upon receipt. Determine whether Prescott reviewed these summaries upon receipt. If he claims he did not, probe: Did he save them? Did he forward them to his accountant or financial advisor? Did he print them? Did he file them? Did he delete them?
• Discussion of contents. Determine whether Prescott discussed the contents of these summaries with Brecker, with his own financial advisor, with an accountant, or with anyone else.
• Suncoast revenue lines — the critical impeachment area. This is the heart of the examination. The quarterly financial summaries included line items for Suncoast revenue, variously labeled "Suncoast Room Management," "direct booking revenue," or similar designations. The examining attorney should:
(a) Select a specific quarterly financial summary from the exhibit binder (Exhibits 4–12);
(b) Show the document to Prescott and ask him to confirm that he received it;
(c) Direct Prescott to the page or section containing the Suncoast revenue line item;
(d) Ask Prescott to read the line item aloud;
(e) Ask Prescott to explain, in his own words, what he understood this line item to represent;
(f) If Prescott claims he did not notice the line item, ask him to identify the other line items on the same page and explain whether he noticed those;
(g) If Prescott claims he did not understand the line item, ask him what steps he took to seek clarification from Brecker or anyone else;
(h) Repeat the process with two or three additional quarterly summaries from different years to establish a consistent pattern.
• Inquiry to Brecker. Determine whether Prescott ever asked Brecker about the Suncoast revenue entries. If he did, establish what Brecker told him. If he did not, explore why a 25% equity holder receiving financial summaries containing an unfamiliar revenue line item would not inquire about it.
• Understanding of separate revenue streams. Determine whether Prescott understood that Suncoast revenues were being collected separately from the GRR reported to Verimark. If he claims he did not understand this, probe: Did he believe that all revenue shown in the quarterly summaries was being reported to Verimark? Did he ever compare the total revenue shown in the summaries against the GRR amounts reported to Verimark? Did he ever question why there appeared to be two distinct revenue streams — one reported to the franchisor and one flowing through a separate entity?
B. Annual Tax Documentation
• K-1 schedules. Confirm that Prescott received Schedule K-1 (Form 1065) from CPFH on an annual basis, as required for a member of a limited liability company taxed as a partnership. Establish the years for which K-1s were received.
• Consistency with quarterly summaries. Determine whether the income allocations reflected on Prescott's K-1s were consistent with the revenue levels shown in the quarterly financial summaries — inclusive of Suncoast revenue. If the K-1 income allocations reflect total revenue including Suncoast collections, then Prescott was receiving tax documents that, by their very nature, incorporated the revenue from the underreporting scheme.
• Personal tax returns. Determine whether Prescott's personal tax returns for each year in the 2013–2021 period reflected income from CPFH. Obtain approximate income amounts for each year. If Prescott reported income consistent with total CPFH revenue (including Suncoast), this is further evidence that he was aware of and benefiting from the full revenue stream.
• Accountant or tax preparer inquiries. Determine whether Prescott's personal accountant or tax preparer ever questioned the income figures reflected on the K-1s or the existence of Suncoast as a revenue source. A sophisticated tax preparer might have inquired about the nature of the Suncoast revenue, and any such inquiry would be relevant to Prescott's knowledge.
C. Member Distributions
• Frequency and amount of distributions. Establish the frequency with which Prescott received distributions from CPFH (monthly, quarterly, or otherwise) and the approximate amounts of those distributions over the 2013–2021 period. Distribution records (Exhibit 16) should be used to refresh Prescott's recollection if necessary.
• Correlation with revenue. This is an important analytical point. Determine whether distribution amounts correlated with reported GRR alone or with total revenue including Suncoast collections. If Prescott received distributions that tracked total revenue rather than the lower GRR figures reported to Verimark, this is compelling evidence that he was benefiting from the underreporting scheme and that the revenue flowing through Suncoast was being distributed to members.
• Comparison with franchise economics. Determine whether Prescott ever compared his distribution amounts against publicly available information about Verimark franchise economics, including the franchise disclosure document or comparable franchise-system financial data. A sophisticated investor might have benchmarked his returns against industry norms.
• Implied difference. Probe the difference between distributions consistent with a 25% share of profits from $112.4 million in reported GRR (FY 2021) versus distributions consistent with a 25% share of profits from the estimated true GRR of $145.6 million. The difference of $33.2 million in revenue for a single year would produce a meaningful difference in distributions. If Prescott's distributions were consistent with the higher figure, he cannot credibly claim that he believed all revenue was being reported to Verimark.
D. Other Financial Reports
• Annual financial statements. Determine whether Prescott received annual audited or unaudited financial statements for CPFH or for any of the property-level entities, including Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC. If so, determine whether those financial statements reflected total revenue, including Suncoast collections, and whether they were prepared by an independent accounting firm.
• Ironclad National Bank loan compliance reports. Determine whether Prescott received copies of any loan-compliance reports, covenant-compliance certificates, or borrowing-base certificates submitted by CPFH to Ironclad National Bank. This line of inquiry is significant because there may be a discrepancy between the revenue figures reported to the lender and the GRR figures reported to Verimark. If the financial statements submitted to Ironclad reflected total revenue inclusive of Suncoast collections — as one would expect, since a borrower has every incentive to maximize reported revenue for purposes of debt-service coverage ratios — then CPFH was simultaneously reporting higher revenue to its lender and lower revenue to its franchisor. If Prescott was aware of both sets of figures, his knowledge of the underreporting is established.
• Review or approval of Ironclad financials. Determine whether Prescott reviewed or approved any financial statements before they were submitted to Ironclad. If the Operating Agreement required member approval for financial submissions to lenders, or if Prescott was asked to sign any certification, this would be powerful evidence.
VI. KNOWLEDGE OF SUNCOAST ROOM MANAGEMENT INC.
A. Formation and Purpose
• When Prescott first became aware of Suncoast. This is a foundational question. Determine when Prescott first learned of the existence of Suncoast Room Management Inc. If he claims he was unaware, the quarterly financial summaries containing Suncoast revenue lines will be used to impeach that claim. If he acknowledges awareness, establish the date and circumstances under which he learned of Suncoast.
• Formation date. Determine whether Prescott knew that Suncoast was established no later than January 2013. The articles of incorporation (Exhibit 14) should be available for reference if Prescott claims uncertainty about the formation date.
• Prescott's understanding of Suncoast's purpose. Explore how Suncoast was described to Prescott, if at all. Was it characterized as a management company, a booking platform, a marketing vehicle, or something else? The answer to this question may reveal what Brecker told Prescott about Suncoast and may provide evidence of a cover story designed to obscure the true purpose of the entity.
• Brecker's control of Suncoast. Determine whether Prescott knew that Randall Brecker was the sole president and controller of Suncoast. If Prescott knew that Brecker — the same individual who served as Managing Member of CPFH and who controlled the Company's franchise relationship with Verimark — also controlled a separate entity that was collecting guest-room revenue, the inference of knowledge of the underreporting scheme is strengthened.
• Prescott's ownership interest in Suncoast. Confirm whether Prescott had any ownership interest, direct or indirect, in Suncoast Room Management Inc. If he did, the case for civil conspiracy is significantly strengthened. If he did not, explore whether he was aware of who owned Suncoast.
• Awareness of gulfcoastrooms.com. Determine whether Prescott was aware that Suncoast operated a website called gulfcoastrooms.com, which functioned as an unbranded direct-booking channel for the Coastal Palms hotel properties. The unbranded nature of the website is significant because it was designed to avoid detection by Verimark — guests booking through gulfcoastrooms.com would not know that they were booking at a Verimark-branded property, and the booking would not appear in any Verimark reservation system.
B. Suncoast Revenue Model
• Revenue collection methods. Explore Prescott's understanding of how Suncoast collected revenue. The three principal channels were walk-in guests who were booked through Suncoast rather than through the Verimark reservation system, corporate-direct contracts negotiated outside of Verimark's system, and online bookings through the gulfcoastrooms.com website. Determine whether Prescott was aware of any or all of these channels.
• 12% management fee. Determine whether Prescott knew that Suncoast retained a 12% "management fee" on direct bookings before remitting the balance to the property-level LLCs. The existence of this fee is significant because it demonstrates that Suncoast was structured as a revenue-extraction mechanism — Suncoast was not merely routing revenue but was retaining a substantial portion of it. The management-fee structure may have been disclosed to Prescott in financial summaries or discussed in communications with Brecker.
• Exclusion from GRR reports. Determine whether Prescott understood that neither Suncoast's collections nor its 12% management fee were included in the GRR reports submitted to Verimark. This is the central question: Did Prescott understand that the revenue flowing through Suncoast was not being reported to the franchisor for purposes of royalty calculations?
• Tax and franchise implications. Determine whether Prescott ever discussed the tax or franchise implications of routing revenue through Suncoast. A discussion of franchise implications would directly establish Prescott's awareness of the scheme. Even a discussion of tax implications might reveal awareness, because the tax treatment of Suncoast revenue would logically lead to questions about its franchise-fee treatment.
C. Suncoast in CPFH Financial Reporting
This subsection returns to the quarterly financial summaries for a deeper examination, building on the foundation laid in Section V.A above.
• Walk through specific documents. Using the quarterly financial summaries from the exhibit binder, walk through the specific documents that show Suncoast revenue lines. Identify the line item labels, the dollar amounts, and the context in which they appear within the financial summary.
• Pin Prescott on his understanding. The examining attorney should aim to pin Prescott on whether he understood that the Suncoast revenue entries in the quarterly financial summaries represented guest-room rental revenue that was not being reported to Verimark as GRR. This is the key factual question for the civil conspiracy count.
• If Prescott claims lack of understanding. If Prescott claims that he did not understand the significance of the Suncoast revenue entries, probe aggressively:
• What did he think the Suncoast revenue represented, if not guest-room rental revenue?
• Why was the Suncoast revenue listed separately from other revenue lines?
• Did he ask Brecker or anyone else about the separate listing?
• Did he ask his own financial advisor or accountant to explain the line items?
• Is it his testimony that he received quarterly financial summaries for nine consecutive years and never once inquired about a line item labeled "Suncoast Room Management"?
• If Prescott claims he never noticed. If Prescott claims that he never noticed the Suncoast revenue lines in the quarterly financial summaries, the examining attorney should impeach with the format and prominence of the entries. If the Suncoast line items were prominently displayed, represented a material percentage of total revenue, or were highlighted or discussed in any accompanying email text from Brecker, Prescott's claim of non-awareness will be severely undermined.
VII. KNOWLEDGE OF REVENUE-REPORTING PRACTICES
A. GRR Reporting to Verimark
• Awareness of monthly reporting. Determine whether Prescott was aware that CPFH reported GRR to Verimark on a monthly basis, as required by the FLAs.
• Knowledge of reported amounts. Determine whether Prescott was aware of the GRR amounts reported to Verimark for any year. For context, the reported GRR for FY 2021 was $112.4 million, while Verimark's forensic analysis estimates the true GRR — inclusive of all guest-room revenue, including Suncoast collections — at $145.6 million. This represents a gap of $33.2 million for 2021 alone.
• Review of GRR reports. Determine whether Prescott ever saw, reviewed, or received copies of the monthly GRR reports submitted to Verimark. If not, determine whether he was aware that such reports existed.
• Exclusion of Suncoast revenue. Determine whether Prescott was aware that the monthly GRR reports submitted to Verimark excluded revenue collected through Suncoast. This question should be asked directly and without preamble.
B. OTA Revenue Treatment
In addition to the Suncoast scheme, Coastal Palms engaged in a secondary revenue-manipulation practice involving the treatment of online travel agency ("OTA") revenue.
• Awareness of OTA classification practice. Determine whether Prescott was aware that Coastal Palms classified net-rate payments from OTAs as "commissions receivable" and netted them against GRR rather than reporting the gross amount of OTA revenue as required by the FLA definition.
• Understanding of the violation. Determine whether Prescott understood that this netting practice violated the FLA § 4.1 gross-revenue definition, which requires reporting all revenues "regardless of the entity collecting such revenue" and irrespective of commission arrangements.
• Discussions regarding OTA treatment. Determine whether Prescott discussed OTA revenue treatment with Brecker, with any Coastal Palms financial personnel, or with anyone else. While the OTA issue is secondary to the Suncoast scheme, it reinforces the pattern of systematic underreporting.
C. Cumulative Underreporting
This subsection is designed to establish the magnitude of the underreporting and to gauge Prescott's knowledge of it. The examining attorney should be aware of the following contextual information but should not disclose it to the witness at the outset:
Examiner's note: Cumulative underreported GRR is estimated at $197.8 million over the 2013–2021 period. The underreporting percentage ranged from approximately 22% to 31% across properties and years. These figures are derived from Verimark's forensic accounting analysis, which compared reported GRR to total guest-room revenue reconstructed from property-level PMS data, Suncoast records, OTA statements, and bank deposit records.
• Whether Prescott was ever told of the underreporting. Determine whether Brecker, Theresa Brecker, or any other person ever told Prescott that Coastal Palms was not reporting all guest-room revenue to Verimark. This is a direct question that should be asked clearly.
• Independent assessment. Determine whether Prescott ever independently assessed whether the revenue reported to Verimark was complete and accurate. A 25% equity holder with a background in commercial real estate development might reasonably be expected to perform some level of independent verification, particularly when receiving quarterly financial summaries that showed a separate revenue stream.
VIII. COMMUNICATIONS AMONG CPFH MEMBERS
A. Member Meetings and Discussions
• Frequency and mode of communication. Establish the frequency and mode of communication between Prescott and Brecker. Determine whether they communicated by phone, email, text message, in-person meetings, or some combination. Establish a general cadence — weekly, monthly, quarterly, or ad hoc.
• Typical topics of discussion. Determine the topics typically discussed in communications between Prescott and Brecker. Explore whether these discussions covered financial performance, property operations, franchise compliance, capital expenditures, debt service, distribution levels, or other subjects.
• Revenue reporting to Verimark. Determine specifically whether revenue reporting to Verimark was ever discussed between Prescott and Brecker. This is a direct question that should be asked in precisely these terms.
• Franchise-fee obligations. Determine whether franchise-fee obligations — including royalties, marketing contributions, and technology fees — were ever discussed. If Prescott and Brecker discussed the cost of franchise fees, this suggests awareness of the financial incentive to minimize them.
• Adequacy or accuracy of GRR reporting. Determine whether the adequacy or accuracy of GRR reporting was ever raised in any communication among CPFH members. This is distinct from whether Prescott himself raised the issue; the question is whether the topic was ever discussed in his presence or in a communication that included him.
B. Specific Communications of Interest
• Document cross-reference. The examining attorney should cross-reference Prescott's testimony against the email correspondence produced in discovery (Exhibit 17 and related documents). Where specific documents are available, they should be introduced and Prescott should be asked to authenticate them and explain their content.
• Brecker's description of Suncoast arrangement. Determine whether Brecker ever described the Suncoast arrangement to Prescott in any communication. If so, establish what Brecker said, when he said it, and Prescott's reaction.
• Franchise-fee reduction benefit. Determine whether Brecker ever described the financial benefit of routing revenue through Suncoast in terms of reducing franchise-fee payments to Verimark. This is the most damaging communication the examining attorney could elicit — an admission that Prescott was told, even in general terms, that the Suncoast arrangement reduced the Company's franchise-fee burden.
• Compliance concerns. Determine whether Prescott ever expressed concern — in any communication, to any person — about whether Coastal Palms was complying with its obligations under the Verimark FLAs. If Prescott did express such a concern, it establishes awareness of the risk and the failure to act on that awareness.
C. Communications Regarding Verimark Audit or Breach Notice
• Notice of Material Breach. Determine whether Prescott was informed about Verimark's Notice of Material Breach dated February 4, 2022. This is the formal notice that triggered the 30-day cure period under FLA § 14.1 (with the cure deadline of March 6, 2022). If Prescott was informed, establish when, by whom, and how (email, phone call, in-person meeting).
• Retention of defense counsel. Determine whether Prescott was involved in the decision to retain Whitfield, Barrow & Crane LLP as defense counsel. If Prescott participated in the decision to retain counsel rather than cure the breach, this suggests a deliberate choice to contest the allegations rather than acknowledge wrongdoing.
• Discussions with Brecker about breach allegations. Determine whether Prescott discussed the breach allegations with Brecker after receiving the Notice of Material Breach. If so, establish the substance of those discussions. Did Brecker deny the allegations? Did Brecker acknowledge any wrongdoing? Did Brecker explain the Suncoast arrangement? What was Prescott's reaction?