ATTORNEY-CLIENT PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 110 SE 6th Street, Suite 2800 Fort Lauderdale, Florida 33301
MEMORANDUM
FROM: Yuki Nakamura, Lead Associate, Calderwood & Harkness LLP (FL Bar No. 0119644)
TO: Renata Solis-Vega, Senior Vice President & General Counsel, Verimark Hospitality Group Inc.
CC: Priya Anand, Responsible Partner, Calderwood & Harkness LLP Douglas Carmichael, Billing Partner, Calderwood & Harkness LLP Deidre Langston, SVP, Franchise Operations, Verimark Hospitality Group Inc.
DATE: December 5, 2022
RE: discovery Status Update — 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
This memorandum constitutes a privileged and confidential attorney-client communication and reflects attorney work product prepared in anticipation of litigation. It is intended solely for the use of the addressees and persons copied herein. This memorandum should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP, as such disclosure may result in waiver of the attorney-client privilege and/or work-product protection.
I. Introduction and Purpose
The purpose of this memorandum is to provide Verimark Hospitality Group Inc. ("Verimark" or the "Company") with a comprehensive update on the status of discovery in the above-captioned litigation against Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "CPFH"), Randall Brecker ("Brecker"), and Suncoast Room Management Inc. ("Suncoast" and, together with Coastal Palms and Brecker, the "Defendants"). This memorandum covers the period from the service of Verimark's initial discovery requests on July 11, 2022 through the date of this memorandum, December 5, 2022.
During the approximately five months covered by this report, discovery has advanced through several key milestones. First, Verimark served comprehensive written discovery on all Defendants and received the initial production from Coastal Palms on August 22, 2022. Second, following the identification of significant deficiencies in that initial production — most notably the complete absence of Suncoast Room Management Inc. financial records — Calderwood & Harkness engaged in good-faith meet-and-confer efforts and, when those efforts proved unsuccessful, filed a Motion to Compel on September 15, 2022. Third, the Honorable Richard M. Calloway granted the Motion to Compel on October 28, 2022, ordering production of the Suncoast records within twenty-one days. Fourth, Coastal Palms complied with the Court's order by producing approximately 312,000 additional documents on November 18, 2022. Fifth, Verimark served a Subpoena Duces Tecum on Ironclad National Bank seeking financial documents that may independently corroborate the revenue underreporting at issue in this case. Sixth, Verimark served its Second Request for Production to Coastal Palms on November 28, 2022, targeting additional categories of Suncoast financial data and booking records.
Discovery is progressing on schedule toward the Court's trial setting, which was originally established for February 2024 at the Case Management Conference held on June 14, 2022 before Judge Calloway. All discovery to date has been governed by the E-discovery Protocol Joint Stipulation filed on June 20, 2022 (the "ESI Protocol"), which establishes the format, procedures, and technical specifications for the production of electronically stored information ("ESI") in this matter. The ESI Protocol has functioned effectively, and both sides have generally adhered to its provisions regarding production format and metadata fields, with the notable exception of the substantive disputes regarding scope discussed below.
This memorandum is organized as follows: Section II summarizes the discovery propounded by Verimark; Section III addresses the Defendants' responses and productions; Section IV identifies key documents discovered to date; Section V addresses upcoming Requests for Admission; Section VI sets forth the deposition schedule; Section VII discusses expert engagement; Section VIII covers e-discovery metrics and costs; Section IX addresses Coastal Palms' counterclaim; Section X identifies outstanding discovery issues and next steps; Section XI provides a budget update; and Section XII offers our conclusions and recommendations.
II. Discovery Propounded by Verimark
A. Written discovery to Coastal Palms Franchise Holdings LLC
Plaintiff's First Set of Interrogatories to Defendant Coastal Palms Franchise Holdings LLC. On July 11, 2022, Verimark served its First Set of Interrogatories (Nos. 1–25) on Coastal Palms. These twenty-five interrogatories were designed to establish the factual foundation of Verimark's claims and to compel Coastal Palms to commit to positions regarding key issues in the case. The interrogatories target the following subject areas:
• Revenue-reporting practices employed by Coastal Palms across all twenty-two franchised hotel properties, including the methodology used to calculate Gross Room Revenue ("GRR") under the applicable Franchise License Agreements ("FLAs");
• The operations, corporate structure, and purpose of Suncoast Room Management Inc., including its date of incorporation, its officers and directors, the nature and scope of its business activities, and its relationship to the franchised hotel properties;
• The specific methodology used by Coastal Palms to calculate GRR for purposes of royalty, marketing-fund, and technology-fee payments to Verimark, including whether and how revenues collected through Suncoast, gulfcoastrooms.com, and various Online Travel Agency ("OTA") channels were accounted for;
• The knowledge of Coastal Palms' officers, managers, controllers, and other personnel regarding the alleged underreporting of GRR, including any internal discussions, memoranda, or directives concerning the classification or exclusion of specific revenue streams from GRR calculations;
• The identification of all booking channels through which guest rooms at the franchised properties were made available for reservation, including but not limited to the Verimark central reservation system, OTAs (e.g., Aldermere Technologies, Bramwell Holdings, Drayton Software), gulfcoastrooms.com, walk-in bookings, and corporate-direct contracts.
Plaintiff's First Request for Production to Defendant Coastal Palms Franchise Holdings LLC. Simultaneously, on July 11, 2022, Verimark served its First Request for Production (Nos. 1–147) on Coastal Palms. This comprehensive set of one hundred forty-seven requests for production seeks documents spanning the full period of the franchise relationship and covering the following categories:
• Financial records for each of the twenty-two franchised hotel properties, including monthly and annual profit-and-loss statements, balance sheets, general ledger entries, and trial balances;
• Monthly GRR reports for all twenty-two franchised properties — comprising eighteen Verimark Suites-branded properties and four Verimark Select-branded properties — for the period 2013 through 2021;
• All agreements, amendments, and correspondence between Coastal Palms (or any related entity) and Suncoast Room Management Inc., including management agreements, service agreements, fee schedules, and commission structures;
• All agreements, amendments, and correspondence between Coastal Palms (or any related entity) and OTAs, including but not limited to Hollowell Industries, Ridgeway & Co., and Drayton Software, with particular emphasis on net-rate agreements, merchant-model agreements, and commission schedules;
• Booking-channel data from each property's Property Management System ("PMS"), identifying the source and amount of revenue generated through each booking channel on a monthly basis;
• Bank statements for all accounts held by Coastal Palms, its property-level subsidiary LLCs, and any related entity involved in the collection or receipt of guest-room revenue, for the period 2013 through 2021;
• Federal and state tax returns for Coastal Palms and its property-level subsidiary LLCs for the period 2013 through 2021;
• All communications — including emails, text messages, memoranda, and instant messages — between or among Coastal Palms personnel regarding the reporting of GRR to Verimark, the calculation of royalty and other franchise-fee payments, the operations of Suncoast Room Management Inc., and the classification of revenues from OTA, direct-booking, and walk-in channels.
Plaintiff's Second Request for Production to Defendant Coastal Palms Franchise Holdings LLC. Following the Court's October 28, 2022 order compelling production of Suncoast records, Verimark served its Second Request for Production (Nos. 148–181) on Coastal Palms on November 28, 2022. These thirty-four additional requests target documents and data that are now accessible as a result of the Court's ruling and are necessary to complete the documentary record regarding the revenue-diversion scheme. The Second Request for Production focuses on the following categories:
• Suncoast Room Management Inc. financial data, including complete general ledger records, accounts receivable and accounts payable ledgers, cash receipts journals, and monthly financial statements for the period 2013 through 2021;
• gulfcoastrooms.com booking logs, including reservation-level data showing guest name or identifier, property, check-in and check-out dates, room type, rate, and total charges;
• Website analytics data for gulfcoastrooms.com, including traffic data, conversion rates, and revenue attribution by property;
• OTA net-rate agreements, including any agreements pursuant to which Coastal Palms or Suncoast made rooms available to OTAs at a "net rate" (i.e., a wholesale rate below the published rate), with the OTA retaining the markup as its commission;
• Direct-booking corporate contracts, including any agreements between Suncoast or Coastal Palms and corporate clients for direct-booking arrangements at negotiated rates, including volume commitments and pricing terms.
B. Written discovery to Randall Brecker
Plaintiff's First Set of Interrogatories to Defendant Randall Brecker. On July 11, 2022, Verimark served its First Set of Interrogatories (Nos. 1–15) on Defendant Randall Brecker individually. These fifteen interrogatories focus on Brecker's personal role in the formation and operation of the revenue-diversion scheme, including:
• Brecker's role in establishing Suncoast Room Management Inc., including the date of formation, the business purpose as he understood it, and the identities of all persons involved in the decision to form the entity;
• Brecker's knowledge of the FLA provisions governing GRR calculation and reporting, including FLA § 4.1 (defining GRR as "all revenues derived from or attributable to the rental of guest rooms at the Hotel, including revenues from any booking channel, direct or indirect, and regardless of the entity collecting such revenue"), FLA § 4.2 (requiring marketing-fund contributions calculated as a percentage of GRR), and FLA § 4.3 (requiring technology-fee payments based on the number of guest rooms);
• Any direction, instruction, or communication from Brecker to property-level managers, accountants, controllers, or other personnel regarding the exclusion of Suncoast-collected revenues from GRR reports submitted to Verimark;
• Brecker's understanding of the relationship between Suncoast Room Management Inc. and Coastal Palms Franchise Holdings LLC, including whether Brecker considered Suncoast's revenues to be GRR under the FLAs;
• Brecker's role in the decision to create and operate gulfcoastrooms.com as an alternative booking channel outside of the Verimark central reservation system.
C. Third-Party Subpoena
Plaintiff's Subpoena Duces Tecum to Ironclad National Bank. On August 8, 2022, Verimark served a Subpoena Duces Tecum on Ironclad National Bank ("Ironclad"), directed to Devon Schultz, Senior Vice President, Commercial Real Estate Lending, at Ironclad's headquarters located at 225 Peachtree Street NE, Suite 2600, Atlanta, Georgia 30303. The subpoena was served in accordance with the applicable provisions of the Florida Rules of Civil Procedure and was accompanied by the required notice to all parties.
The subpoena seeks loan documents, financial statements, revenue reports, and related correspondence submitted by Coastal Palms or its property-level subsidiary LLCs to Ironclad in connection with approximately $94 million in first-lien mortgage loans secured by eighteen of the twenty-two franchised hotel properties. These loan documents are of critical significance to Verimark's case for the following reason: if Coastal Palms submitted financial statements to Ironclad reflecting revenue figures that exceed the GRR amounts reported to Verimark during the same periods, those documents would provide independent, third-party corroboration of the systematic underreporting at the heart of this litigation. Banks typically require borrowers to submit audited or certified financial statements on a periodic basis as a condition of their loan covenants, and such statements would have been prepared with an incentive to reflect the highest possible revenue figures — the opposite incentive from GRR reporting to a franchisor where royalties are calculated as a percentage of revenue.
As of the date of this memorandum, Ironclad has not yet completed its production in response to the subpoena. On October 15, 2022, Ironclad's outside counsel, Margaret Shin of Keller & Strauss LLP, communicated that the bank is in the process of collecting responsive documents from its commercial lending files and electronic records systems and anticipates completing production by approximately mid-December 2022. We are monitoring this timeline and will follow up promptly if the production is not received by December 16, 2022. No objections to the subpoena have been interposed by Ironclad or by any party.
III. Defendants' Productions and Responses
A. Initial Production (August 22, 2022)
On August 22, 2022, Coastal Palms served its objections and responses to Verimark's First Set of Interrogatories and First Request for Production. In conjunction with those responses, Coastal Palms produced approximately 84,000 documents in electronic format in accordance with the ESI Protocol. The production was processed and hosted by Nexagen Document Solutions LLC ("Nexagen"), the e-discovery vendor retained by the parties for processing, hosting, and analytics services in this matter. Nexagen's principal office is located at 400 Northpark Town Center, Suite 500, Atlanta, Georgia 30328.
The initial production included the following categories of documents: property-level GRR reports for the majority of the twenty-two franchised properties; select financial statements, primarily annual profit-and-loss statements and balance sheets for certain property-level LLCs; some booking-system data extracted from property management systems; and franchise correspondence between Coastal Palms and Verimark, including communications regarding property inspections, brand-standard compliance, and fee payment.
While the initial production contained useful documents, Calderwood & Harkness identified significant gaps and deficiencies that materially impaired Verimark's ability to evaluate the extent of GRR underreporting. On August 30, 2022, Yuki Nakamura sent a detailed discovery Deficiency Letter to Gabriela Montes at Whitfield, Barrow & Crane LLP, identifying twenty-three specific categories of deficient or missing production. The most critical deficiencies included:
• Complete absence of Suncoast Room Management Inc. financial records. The initial production contained no documents from or relating to Suncoast Room Management Inc. — no general ledger entries, no bank statements, no management-fee invoices, no booking data, and no correspondence. Given that Verimark's core claim is that Coastal Palms systematically diverted guest-room revenue through Suncoast to avoid reporting it as GRR, the absence of any Suncoast records from the initial production was the single most significant deficiency.
• No gulfcoastrooms.com booking logs or website analytics. The initial production did not include any booking data or analytics from the gulfcoastrooms.com website, a direct-booking platform operated by Suncoast that allowed guests to reserve rooms at the franchised properties outside of the Verimark central reservation system. Booking-log data from this channel is essential to quantifying the revenue diverted through this channel.
• Missing OTA reconciliation data and net-rate agreements. While the initial production included some OTA-related correspondence, it did not include reconciliation reports showing the gross booking amounts, net amounts remitted to Coastal Palms or its property-level entities, and the commissions or markups retained by the OTAs. The production also omitted net-rate agreements, which are critical to understanding how Coastal Palms was netting OTA commissions against GRR.
• Incomplete bank statements for property-level LLCs. Bank statements were produced for only a subset of the property-level LLCs and for only a portion of the relevant time period. Notably, bank statements for Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC — two of the larger property-holding entities — were either entirely absent or incomplete.
• No management-fee invoices between Suncoast and property entities. The initial production did not include any invoices or payment records reflecting management fees charged by Suncoast Room Management Inc. to the property-level LLCs, which are central to understanding the mechanics and economics of the revenue-diversion arrangement.
B. Motion to Compel — Suncoast Room Management Financial Records
Following the issuance of the discovery Deficiency Letter, Calderwood & Harkness engaged in good-faith efforts to resolve the discovery disputes without court intervention, as required by Florida Rule of Civil Procedure 1.380 and the Local Rules of the Seventeenth Judicial Circuit. On September 6, 2022, Yuki Nakamura and Gabriela Montes conducted a telephonic meet-and-confer conference during which the parties discussed each of the twenty-three identified deficiencies. During that conference, Coastal Palms' counsel agreed to supplement the production with respect to certain categories (including the incomplete bank statements) but took the position that Suncoast Room Management Inc.'s financial records were not subject to production.
On September 8, 2022, Yuki Nakamura sent a formal Meet-and-Confer Letter to Gabriela Montes memorializing the parties' respective positions and documenting Calderwood & Harkness's good-faith efforts to resolve the dispute. The letter set a deadline of September 12, 2022 for Coastal Palms to reconsider its position regarding the Suncoast records, after which Verimark would seek judicial relief.
Coastal Palms maintained its objection to producing Suncoast records, advancing the following arguments:
• Suncoast Room Management Inc. is a separate legal entity — a Florida corporation — that is not a party to the FLAs and is not a named defendant in this action (although Randall Brecker, its President, is individually named);
• As a separate entity, Suncoast's records are beyond the scope of permissible discovery from Coastal Palms, and Verimark would need to pursue a separate third-party subpoena if it wished to obtain Suncoast's records;
• Coastal Palms invoked a "separate-entity privilege," arguing that requiring Coastal Palms to produce Suncoast records would impermissibly pierce the corporate veil between two distinct entities.
Calderwood & Harkness rejected these arguments on multiple grounds:
• The FLA § 4.1 definition of GRR explicitly encompasses "all revenues derived from or attributable to the rental of guest rooms at the Hotel, including revenues from any booking channel, direct or indirect, and regardless of the entity collecting such revenue." The Suncoast records are thus directly relevant to the central issue in this litigation — the correct calculation of GRR — and fall squarely within the scope of discovery under Florida Rule of Civil Procedure 1.280(b)(1).
• Randall Brecker serves simultaneously as Managing Member (and 60% equity holder) of Coastal Palms Franchise Holdings LLC and as President of Suncoast Room Management Inc. This dual role gives Coastal Palms — through Brecker — practical control over Suncoast's records, making them producible in response to Verimark's discovery requests directed to Coastal Palms.
• The "separate-entity privilege" asserted by Coastal Palms has no basis in Florida law and is contrary to well-established principles governing the scope of discovery from parties that have control over documents held by non-party affiliates.
On September 15, 2022, Verimark filed its Motion to Compel Production of Suncoast Room Management Inc. Financial Records, accompanied by a Memorandum of Law in Support and the Declaration of Yuki Nakamura. The Declaration attached copies of the discovery Deficiency Letter, the Meet-and-Confer Letter, relevant excerpts of the FLAs (including § 4.1), and corporate records reflecting Brecker's dual role as Managing Member of Coastal Palms and President of Suncoast.
Coastal Palms filed its Response in Opposition on October 3, 2022, reiterating its separate-entity argument and further contending that production of Suncoast records would be unduly burdensome. Verimark filed its Reply in Support of the Motion to Compel on October 14, 2022, addressing each of Coastal Palms' arguments and attaching additional exhibits demonstrating Brecker's control over Suncoast.
On October 28, 2022, Judge Calloway held a hearing on the Motion to Compel and issued an oral ruling from the bench, subsequently memorialized in a written order filed the same day. The Court granted Verimark's Motion to Compel in its entirety, finding that:
• Suncoast Room Management Inc.'s financial records are directly relevant to the calculation of GRR under the FLAs and fall within the scope of permissible discovery under Rule 1.280(b)(1);
• Coastal Palms, through Randall Brecker, exercises sufficient control over Suncoast and its records to render those records producible in response to discovery requests directed to Coastal Palms;
• The "separate-entity privilege" asserted by Coastal Palms is without basis in Florida law and is particularly unavailing where, as here, the same individual serves as the principal executive of both entities;
• Production of the Suncoast records shall be completed within twenty-one days of the date of the order — i.e., by November 18, 2022.
The Court's ruling was a significant victory for Verimark. It established the legal principle — binding in this case and persuasive in future proceedings — that the separate-entity argument is meritless in the context of franchise-dispute discovery where the franchisor's FLA definition of GRR explicitly encompasses revenues collected by any entity, and where the franchisee's principal has dual control over both the franchisee entity and the entity alleged to have diverted revenue. This ruling effectively foreclosed any further attempts by Coastal Palms to shield Suncoast-related documents from discovery.
C. Supplemental Production (November 18, 2022)
Coastal Palms complied with the Court's October 28, 2022 order and produced approximately 312,000 additional documents on November 18, 2022 — the deadline established by the Court. This supplemental production substantially expanded the documentary record available to Verimark and includes the categories of Suncoast records that had been withheld from the initial production:
• Suncoast Room Management Inc. general ledger records for 2013 through 2021;
• Suncoast bank statements for all accounts for 2013 through 2021;
• Management-fee invoices issued by Suncoast to property-level LLCs, including Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC;
• OTA reconciliation reports showing gross booking amounts, net remittances, and commission calculations;
• gulfcoastrooms.com booking data, including reservation-level records showing property, dates of stay, rates, and total charges.
The combined total production from Defendants to date is approximately 396,000 documents (84,000 from the initial production plus 312,000 from the supplemental production). All documents have been processed and loaded into the Nexagen review platform.
On the Verimark side, the total document universe being processed and hosted by Nexagen for this litigation comprises approximately 2.3 million documents totaling approximately 1.1 terabytes of data. This figure includes documents collected from Verimark's own systems (franchise administration files, central reservation system data, compliance records, financial records, and communications) as well as the Defendants' productions.
As of the date of this memorandum, Calderwood & Harkness's document review team — which includes four full-time contract attorneys in addition to the core litigation team — has completed first-pass review of the initial 84,000-document production and is currently engaged in first-pass review of the 312,000-document supplemental production. We estimate that first-pass review of the supplemental production will be completed by mid-January 2023, with second-pass review and issue coding to follow.
IV. Key Documents Identified to Date
Based on the document review completed to date, Calderwood & Harkness has identified several categories of key documents that strongly support Verimark's claims. The following is a summary of the most significant documents and document categories identified through the initial production, the supplemental production, and Verimark's own internal records.
A. Revenue Diversion Evidence
The supplemental production has yielded substantial documentary evidence of the revenue-diversion scheme at the center of Verimark's claims:
• Suncoast Room Management Inc. general ledger entries (2013–2021). The general ledger records produced by Suncoast for the full nine-year period show collections from direct bookings across multiple channels, including walk-in guests, corporate-direct contracts, and reservations made through gulfcoastrooms.com. These entries are organized by property and by revenue category, enabling a property-by-property and channel-by-channel analysis of diverted revenue.
• Management-fee invoices. The supplemental production includes invoices reflecting Suncoast's retention of a 12% "management fee" on direct-booking revenues before remitting the balance to the property-level LLCs (Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC, among others). These invoices are significant because they reveal that Suncoast was not merely serving as a pass-through booking agent but was retaining a substantial fee — and the revenue reported to the property-level LLCs (and, in turn, to Verimark as GRR) was the net amount after deduction of this fee, further reducing the reported GRR.
• Bank statements confirming receipt of diverted revenues. Suncoast's bank statements confirm the receipt of revenues from guest-room rentals that were never included in the monthly GRR reports submitted to Verimark. By cross-referencing Suncoast's bank deposits with the GRR reports for corresponding periods, it is possible to quantify, on a month-by-month and property-by-property basis, the magnitude of the underreporting.
• gulfcoastrooms.com booking logs. The booking logs from gulfcoastrooms.com provide reservation-level detail — including property, dates of stay, room type, rate, and total charges — that enables a granular calculation of revenues generated through this channel. Preliminary analysis of these logs indicates that gulfcoastrooms.com was an active booking platform generating material revenue across the portfolio, particularly at higher-occupancy properties in the Verimark Suites tier.
B. OTA Revenue Netting
In addition to the Suncoast-related revenue diversion, the document review has identified evidence of a separate but related practice of improperly netting OTA commissions against GRR:
• Internal accounting memoranda. The initial production included internal memoranda from Coastal Palms' controllers directing the classification of net-rate OTA payments as "commissions receivable" and netting them against GRR, rather than reporting the gross booking amount as GRR. This practice appears to violate FLA § 4.1's definition of GRR, which encompasses gross revenue and does not permit deduction of OTA commissions or markups.
• OTA contracts. The OTA contracts produced in discovery show the gross booking amounts paid by guests through OTA platforms, alongside the net amounts remitted to Coastal Palms after deduction of the OTA's commission or markup. The difference between these figures — which Coastal Palms improperly deducted from reported GRR — represents an additional category of underreported revenue.
C. Communications Evidencing Knowledge and Intent
The document review has also identified communications that are relevant to establishing Brecker's knowledge of the underreporting and his intent to maintain the diversion scheme:
• Emails from Brecker to property-level managers and accountants. The production includes email communications from Randall Brecker to general managers and property-level accountants at multiple franchised properties directing the use of the Suncoast channel for walk-in guests and corporate-direct bookings. In several of these emails, Brecker instructs property-level personnel to route specific categories of bookings through Suncoast rather than through the Verimark central reservation system.
• Internal communications reflecting awareness of FLA obligations. Several internal communications among Coastal Palms' management and accounting personnel suggest an awareness that the revenues being excluded from GRR reports should, under the terms of the FLAs, have been reported. These communications reference the GRR definition in the FLAs and discuss the potential consequences of Verimark discovering the exclusion of Suncoast revenues.
• Communications between Brecker and Nolan Prescott. The production includes emails and text messages between Randall Brecker and Nolan Prescott, a 25% passive equity holder in Coastal Palms, in which Brecker references Suncoast revenue streams and provides Prescott with financial summaries that include Suncoast-collected revenues. These communications are significant because they demonstrate that the true revenue picture — including Suncoast revenues — was being reported internally and to equity holders, even as it was being concealed from Verimark.
D. Financial Statements Submitted to Ironclad National Bank
As discussed in Section II.C above, Verimark served a Subpoena Duces Tecum on Ironclad National Bank seeking financial statements and revenue reports submitted by Coastal Palms in connection with approximately $94 million in first-lien mortgage loans. Although the Ironclad production has not yet been received as of the date of this memorandum, these documents are expected to be of critical importance. Financial statements submitted to a senior secured lender in connection with loan covenants typically reflect the borrower's actual revenue, as borrowers have a strong incentive to present the most favorable financial picture possible to their lenders. If the revenue figures reported to Ironclad exceed the GRR figures reported to Verimark for the same properties and periods, those discrepancies will provide powerful independent corroboration of the underreporting scheme. We will provide a supplemental analysis of the Ironclad documents promptly upon their receipt.
E. Corroboration of Whistleblower Allegations
The documents identified in the initial and supplemental productions are consistent with and corroborate the allegations made by Janet Kerrigan, the former Regional Controller for Coastal Palms, who was terminated in October 2021 and subsequently contacted Verimark's compliance hotline on November 8, 2021. Ms. Kerrigan reported that Coastal Palms was systematically underreporting GRR by routing certain categories of guest-room revenue through Suncoast Room Management Inc. and excluding those revenues from the GRR reports submitted to Verimark. The documents produced in discovery confirm the existence of the Suncoast diversion channel, the 12% management-fee structure, and the exclusion of Suncoast-collected revenues from GRR reports, all of which align with Ms. Kerrigan's account.
The documents are also consistent with the preliminary audit findings delivered by Thornbury & Associates CPAs LLP on January 18, 2022. Thornbury's preliminary audit indicated an underreporting rate of approximately 26% for the top ten properties during the period 2019–2021. While the document review is still in progress, the revenue data extracted from the Suncoast general ledger and gulfcoastrooms.com booking logs for that same period appears to support an underreporting rate in the same general range, lending further credibility to both Ms. Kerrigan's allegations and Thornbury's preliminary findings.
F. Relevance to Damages Quantification
The documents identified to date are essential to quantifying Verimark's damages in this action. Based on Thornbury's preliminary audit findings extrapolated across the full twenty-two-property portfolio and the full 2013–2021 time period, Verimark estimates cumulative underreported GRR of approximately $197.8 million. The resulting damages include:
These documents — particularly the Suncoast general ledger records, bank statements, gulfcoastrooms.com booking logs, and OTA reconciliation reports — will be provided to Verimark's forensic accounting expert, Dr. Sharon Kettlewell, CPA/CFF, CFE, at Ridgeline Forensic Advisory LLC, who has been retained under a separate expert retention letter dated December 12, 2022. Dr. Kettlewell's engagement is discussed further in Section VII below. Her work will include a comprehensive GRR reconstruction across all twenty-two properties for the full 2013–2021 period, which will refine and validate the preliminary damages estimates set forth above.
V. Requests for Admission
Plaintiff's Requests for Admission to Defendant Coastal Palms Franchise Holdings LLC. Verimark intends to serve forty-eight Requests for Admission on Coastal Palms on January 30, 2023. These requests are being drafted to target admissions on issues that are critical to Verimark's case and that, if admitted, would simplify the issues for trial and support a motion for partial summary judgment. Specifically, the Requests for Admission will address:
• The definition of GRR under FLA § 4.1, including that the definition encompasses "all revenues derived from or attributable to the rental of guest rooms at the Hotel, including revenues from any booking channel, direct or indirect, and regardless of the entity collecting such revenue";
• The fact that Suncoast Room Management Inc. collected revenues from the rental of guest rooms at the franchised hotel properties through walk-in bookings, corporate-direct contracts, and gulfcoastrooms.com;
• The fact that revenues collected by Suncoast from guest-room rentals at the franchised properties were excluded from the monthly GRR reports submitted by Coastal Palms to Verimark;
• Randall Brecker's knowledge of the FLA provisions governing GRR reporting obligations, including his execution of each of the twenty-two FLAs in his capacity as Managing Member of Coastal Palms;
• The number of unreported guest rooms added across properties during the 2013–2021 period, including rooms added through renovations and expansions that were not reflected in Coastal Palms' technology-fee payments to Verimark.
We will circulate draft Requests for Admission to Verimark for review and input prior to service.
VI. Upcoming Deposition Schedule (January – March 2023)
A. Overview. Calderwood & Harkness has scheduled fourteen fact depositions to take place between January 9, 2023 and March 17, 2023. These depositions are a critical component of the discovery process and will serve to build the evidentiary record for both summary judgment proceedings and trial. All depositions will be reported by certified court reporters and videographed where appropriate. We estimate total deposition-related costs across the case — including court-reporter fees, videography, transcript costs, travel, and conference room rentals — of approximately $124,500.
B. Key Depositions — Principals
1. Randall "Randy" Brecker — Managing Member of Coastal Palms (60% Equity); President of Suncoast Room Management Inc.
Brecker's deposition is scheduled for two full days on January 9 and 10, 2023. This is the single most critical deposition in the case. Brecker is the central figure in the alleged revenue-diversion scheme — the individual who formed Suncoast Room Management Inc., established gulfcoastrooms.com, and directed property-level personnel to route certain categories of bookings through Suncoast rather than through the Verimark central reservation system.
The examination of Brecker will cover the following topics, among others:
• The formation of Suncoast Room Management Inc., including the date, purpose, and circumstances of its incorporation, and the identity of all persons involved in the decision to form the entity;
• The creation and operation of gulfcoastrooms.com, including its design, launch, marketing, and revenue-generating activities;
• Brecker's knowledge and understanding of the GRR reporting obligations under the FLAs, including FLA § 4.1's definition of GRR;
• Brecker's communications with property-level controllers, general managers, and accountants regarding revenue classification and GRR reporting;
• Brecker's direction — reflected in documentary evidence — to exclude Suncoast-collected revenues from GRR reports;
• Brecker's communications with Nolan Prescott regarding Suncoast revenue streams;
• The management-fee structure between Suncoast and the property-level LLCs;
• Brecker's role in submitting financial statements to Ironclad National Bank and any discrepancies between the revenue figures reported to Ironclad and those reported to Verimark.
Deposition outlines for both days of the Brecker deposition are being prepared by Priya Anand, who will conduct the examination.
2. Theresa Brecker — Member of Coastal Palms (15% Equity); Spouse of Randall Brecker
Theresa Brecker holds a 15% equity interest in Coastal Palms Franchise Holdings LLC and manages payroll and human resources for the portfolio. Her deposition is scheduled for a date to be determined in late January or February 2023. While Theresa Brecker's involvement in the day-to-day revenue-reporting practices may be more limited than her husband's, she is an important witness due to her equity interest, her access to financial information, and her potential knowledge of the Suncoast operations. Topics for her examination include:
• Her awareness of Coastal Palms' revenue-reporting practices and the existence of the Suncoast diversion channel;
• Her role in payroll administration for personnel who worked across both Coastal Palms and Suncoast entities;
• Her access to and review of financial reports, bank statements, and other documents reflecting the true revenue picture of the franchised properties;
• Her awareness of the FLA provisions governing GRR calculation and reporting.
3. Nolan Prescott — Member of Coastal Palms (25% Equity); Passive Investor
Nolan Prescott is a retired commercial real estate developer who holds a 25% equity interest in Coastal Palms as a passive investor. His deposition is scheduled for approximately February 2023. Prescott's testimony is relevant because the documentary record includes communications between Brecker and Prescott referencing Suncoast revenue streams, suggesting that Prescott may have had knowledge of the true revenue picture even if he was not directly involved in the revenue-reporting decisions. Topics for his examination include:
• His knowledge of Coastal Palms' revenue-reporting methodology to Verimark;
• The financial reports and communications he received from Brecker regarding the performance of the franchised properties;
• His awareness of Suncoast Room Management Inc., its operations, and the revenue it collected from guest-room rentals;
• His understanding of the FLA provisions and the obligations they imposed on Coastal Palms.
The deposition outline for Prescott is being prepared by Carlos Espinoza.
C. Key Deposition — Whistleblower
4. Janet Kerrigan — Former Regional Controller, Coastal Palms (Terminated October 2021); Whistleblower
Janet Kerrigan served as Regional Controller for Coastal Palms, overseeing financial reporting and accounting for a cluster of franchised properties, until her termination in October 2021. Approximately three weeks after her termination, on November 8, 2021, Ms. Kerrigan contacted Verimark's compliance hotline and reported the revenue-diversion scheme. Her report was the catalyst for Thornbury & Associates' preliminary audit and ultimately for this litigation.
Ms. Kerrigan's deposition is scheduled for approximately late January 2023. This will be a witness-friendly examination, as Ms. Kerrigan's testimony is expected to support Verimark's claims. The examination will cover the following topics:
• Her role and responsibilities as Regional Controller, including the properties she oversaw and the financial reports she prepared or supervised;
• Her firsthand observations of the revenue-diversion practices, including the routing of walk-in and corporate-direct bookings through Suncoast;
• Instructions she received from Randall Brecker or other Coastal Palms management to exclude Suncoast-collected revenues from GRR reports submitted to Verimark;
• Her knowledge of the gulfcoastrooms.com booking platform and the revenues it generated;
• The circumstances of her termination in October 2021, including any connection between her termination and her knowledge of or objection to the revenue-reporting practices;
• Her decision to contact Verimark's compliance hotline and the substance of the information she reported.
The deposition outline for Kerrigan is being prepared by Yuki Nakamura.
D. Property-Level Witnesses
5–14. Property-Level General Managers and Accountants
In addition to the four principal depositions described above, Calderwood & Harkness has scheduled depositions of ten property-level general managers and accountants from across the twenty-two-property portfolio. These depositions are scheduled between February and March 17, 2023 and will be conducted at locations convenient to the witnesses, with remote attendance by counsel where appropriate.
These property-level witnesses will be examined on the following topics:
• Day-to-day revenue collection practices at their respective properties, including how different types of guest-room revenue (walk-in, corporate-direct, OTA, central reservation system) were processed and recorded;
• The routing of bookings through different channels, including the Verimark central reservation system, OTA platforms, gulfcoastrooms.com, and walk-in/phone reservations;
• The preparation of monthly GRR reports for submission to Verimark, including the data sources used and any instructions received regarding what revenue categories to include or exclude;
• Directions received from "corporate" — i.e., from Randall Brecker or Coastal Palms' central management team — regarding the use of the Suncoast booking channel for walk-in guests and corporate-direct bookings;
• The Property Management System ("PMS") used at their respective properties and the extent to which PMS data captures booking-channel information.
Carlos Espinoza is coordinating the scheduling and logistics for these ten depositions, including the identification of specific witnesses, coordination with opposing counsel, and arrangement of court-reporter services.
E. Anticipated Defense Depositions of Verimark Personnel
We anticipate that Defendants' counsel at Whitfield, Barrow & Crane LLP — specifically, Nathan Whitfield III, Gabriela Montes, and Ethan Doyle — will notice depositions of Verimark personnel during the January–March 2023 deposition window or shortly thereafter. Based on the issues raised in Coastal Palms' counterclaim and the defenses asserted in the case, we expect that the defense will seek to depose, at a minimum, the following Verimark personnel:
• Deidre Langston, Senior Vice President, Franchise Operations — as the individual with primary operational oversight of the franchise relationships, Ms. Langston is a likely target for examination on Verimark's franchise-administration practices, brand-standard enforcement, and any communications with Coastal Palms regarding GRR reporting;
• Franchise-compliance staff — one or more members of Verimark's franchise-compliance team who had direct contact with Coastal Palms' properties during the relevant period.
We recommend that Verimark begin identifying the specific individuals who may be noticed for deposition and scheduling preliminary witness-preparation sessions with Calderwood & Harkness. Early preparation will ensure that Verimark's witnesses are well-prepared and that their testimony is consistent with the documentary record and Verimark's litigation positions. We would like to discuss this topic in greater detail during our next call or meeting with the litigation team.
VII. Expert Engagement Status
Verimark has retained Ridgeline Forensic Advisory LLC ("Ridgeline") as its forensic accounting expert in this matter. The engagement was formalized under an expert retention letter dated December 12, 2022. The lead expert is Dr. Sharon Kettlewell, CPA/CFF, CFE, a nationally recognized forensic accountant with extensive experience in franchise-fee disputes, revenue-underreporting cases, and complex commercial damages quantification.
Scope of Engagement. Dr. Kettlewell's engagement encompasses the following work:
• Comprehensive GRR reconstruction across all twenty-two franchised properties for the period 2013 through 2021, utilizing Suncoast financial records, OTA reconciliation data, PMS booking data, bank statements, and other relevant documents;
• Quantification of the underreported GRR, including analysis of revenue diverted through Suncoast, revenue improperly netted against OTA commissions, and revenue from unreported rooms;
• Calculation of late-payment interest under FLA § 4.5 at the contractual rate of 1.5% per month, compounded;
• Comprehensive damages analysis, including calculation of underpaid royalties, marketing contributions, and technology fees, as well as potential liquidated damages under FLA § 15.3.
Fee Arrangement. Dr. Kettlewell's hourly rate is $475. Staff members assisting on the engagement are billed at $325 per hour. The total engagement fee is estimated at $1.85 million, inclusive of expert report preparation and expert testimony preparation, subject to adjustment based on the scope and complexity of the analysis as it develops.
Coordination with Thornbury & Associates. Dr. Kettlewell's work will build upon the preliminary audit findings delivered by Thornbury & Associates CPAs LLP on January 18, 2022. Thornbury's lead audit partner, Malcolm Thornbury, is based at Thornbury's principal office at 1551 N. Flagler Drive, Suite 800, West Palm Beach, Florida 33401. Thornbury's preliminary audit found an underreporting rate of approximately 26% for the top ten properties during the period 2019–2021 and estimated total underreported GRR of approximately $197.8 million when extrapolated across the full portfolio and the full 2013–2021 period. Dr. Kettlewell will independently verify and refine these estimates using the expanded documentary record now available following the supplemental production.
Data Requests. Dr. Kettlewell has submitted her initial data requests, which include the Suncoast financial records, OTA reconciliation data, PMS data, and bank statements — all of which are now available as a result of the supplemental production received on November 18, 2022. Calderwood & Harkness is in the process of assembling and transmitting these documents to Ridgeline in a format suitable for Dr. Kettlewell's analysis.
Expert Report Deadline. Under the current discovery schedule, Verimark's expert report is anticipated for April 2023. Defendants' rebuttal expert report is anticipated for May 2023, with expert depositions to follow in approximately June 2023.
VIII. E-discovery Metrics and Costs
Nexagen Document Solutions LLC is serving as the e-discovery vendor for this matter, providing processing, hosting, analytics, and technology-assisted review ("TAR") services for both the Verimark document universe and the Defendants' productions.
The following table summarizes the current e-discovery metrics:
Calderwood & Harkness is utilizing technology-assisted review (TAR) to prioritize the review of the 312,000-document supplemental production. The TAR workflow uses a predictive coding model trained on attorney-reviewed seed sets to identify and prioritize the most likely relevant documents for early review, with the goal of enabling the review team to focus on the highest-value documents first. This approach is consistent with the ESI Protocol and is expected to yield significant efficiencies relative to a purely linear review methodology.
Current e-discovery costs incurred through the date of this memorandum total approximately $388,000 of the estimated ultimate total of $742,000. These costs encompass processing fees, hosting fees, analytics and TAR licensing, and vendor project-management support. We continue to manage these costs closely and will report any material variances from the projected total.
IX. Coastal Palms' Counterclaim
On April 18, 2022, Coastal Palms filed a counterclaim against Verimark seeking $12 million in damages. The counterclaim alleges that Verimark breached its obligations under the FLAs by failing to maintain brand standards at certain properties, failing to provide adequate marketing support, and over-billing Coastal Palms for technology fees and property-improvement plan ("PIP") costs.
Verimark filed its Answer to the Counterclaim on May 2, 2022, denying all allegations in the counterclaim and asserting the following affirmative defenses: failure to mitigate damages, estoppel (based on Coastal Palms' failure to timely assert brand-standard claims), and unclean hands (based on Coastal Palms' own breach of the FLAs through the GRR underreporting scheme).
Discovery on the counterclaim is proceeding in parallel with discovery on Verimark's affirmative claims. To date, Coastal Palms has produced only limited documents in support of its counterclaim, consisting primarily of internal correspondence regarding alleged brand-standard deficiencies at several properties, some photographs, and a handful of invoices relating to PIP costs. The production does not include any expert analysis, damages calculations, or other evidence quantifying the alleged $12 million in damages.
Based on our review of the documents produced and the allegations in the counterclaim, it is our current assessment that the counterclaim appears to be a defensive tactic rather than a substantive claim supported by strong evidence. The brand-standard allegations are largely conclusory and, to the extent they are based on specific incidents, many of those incidents were previously resolved through Verimark's standard franchise-compliance processes. The over-billing allegations are contradicted by the invoicing and payment records in Verimark's files. We will continue to monitor the counterclaim as discovery progresses and will provide a more detailed assessment as additional evidence is developed.
X. Outstanding discovery Issues and Next Steps
A. Immediate Action Items
The following action items require attention in the near term:
1. Complete first-pass review of supplemental production. The document review team is currently conducting first-pass review of the 312,000-document supplemental production received on November 18, 2022. Our target for completion of first-pass review is mid-January 2023. Second-pass review and issue coding will follow.
2. Finalize deposition outlines. Deposition outlines for Randall Brecker (Days 1 and 2), Janet Kerrigan, and Nolan Prescott must be finalized in advance of the January depositions. Priya Anand is leading the Brecker outline, Yuki Nakamura is leading the Kerrigan outline, and Carlos Espinoza is leading the Prescott outline.