insurance-coverage-notification-letter.docx

1021-00006 · Client 1021 · Engagement & Administration

insurance-coverage-notification-letter.docx DOCUMENT Litigation

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CALDERWOOD & HARKNESS LLP Attorneys & Counselors at Law 110 SE 6th Street, Suite 2800 Fort Lauderdale, Florida 33301 Telephone: (954) 761-8200 Facsimile: (954) 761-8201 www.calderwoodharkness.com

Priya Anand Partner Direct: (954) 761-8244 panand@calderwoodharkness.com FL Bar No. 0087451

March 14, 2022

VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED AND VIA EMAIL (arthur.baines@pinnacleindemnity.com)

Arthur Baines, Esq. Claims Counsel Pinnacle Indemnity Insurance Co. 300 Pearl Street, Suite 1500 Hartford, Connecticut 06103

Re: Notice of Litigation and Reservation of Rights — Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC, Randall Brecker, and Suncoast Room Management Inc.; Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida; Case No. 1021-00006

Policy No. PLI-VHG-2021-08874

Dear Mr. Baines:

I. Purpose of This Letter

This firm represents Verimark Hospitality Group Inc. ("Verimark" or "VHG"), a Delaware corporation publicly traded on the Nasdaq Stock Market under the ticker symbol VHMK, with its principal executive offices located at 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, Florida 33301. We write to provide formal and timely notice to Pinnacle Indemnity Insurance Co. ("Pinnacle Indemnity") of litigation filed by Verimark, as more fully described below, and to reserve all of Verimark's rights to claim coverage for litigation costs, defense expenses, and all related expenditures arising from or in connection with such litigation under Policy No. PLI-VHG-2021-08874 (the "Policy"), a commercial general liability and franchise-litigation coverage policy issued by Pinnacle Indemnity to Verimark.

This notice is provided in accordance with the notice provisions set forth in the Policy and is intended to satisfy all conditions precedent to coverage thereunder. Nothing contained in this letter, or in any subsequent communication by or on behalf of Verimark, shall be construed as a waiver of any right, remedy, or defense available to Verimark under the Policy, at law, or in equity.

II. Identification of the Insured

The Named Insured under the Policy is Verimark Hospitality Group Inc., a corporation organized and existing under the laws of the State of Delaware. Verimark's shares of common stock are publicly traded on the Nasdaq Stock Market under the ticker symbol VHMK. Verimark's principal business is the ownership, operation, and franchising of branded hotel properties across the southeastern United States. Verimark currently operates and franchises approximately 340 branded hotel properties under the "Verimark Suites," "Verimark Select," and "Verimark Grand" brand flags. For the fiscal year ended December 31, 2021, Verimark reported consolidated revenues of approximately $1.42 billion, of which the franchise segment contributed approximately $218 million.

Verimark's relevant officers for purposes of this matter are:

• Renata Solis-Vega, Senior Vice President and General Counsel; and

• Martin Holcomb, Executive Vice President and Chief Financial Officer.

Both individuals are authorized to communicate with Pinnacle Indemnity regarding coverage matters arising under the Policy, and each should be copied on all correspondence related to this claim, at the address set forth in Section IX below.

III. Description of the Litigation

A. Case Identification

On March 7, 2022, Verimark filed a ten-count Complaint in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida. The case has been assigned the following identifying information:

Caption: Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC, Randall Brecker, and Suncoast Room Management Inc.

Court: Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida

Case No.: 1021-00006

Assigned Judge: The Honorable Richard M. Calloway, Circuit Judge

Date Filed: March 7, 2022

A true and correct copy of the filed Complaint, together with the Civil Cover Sheet, is enclosed with this letter as Enclosures 1 and 2, respectively.

B. Identity of Defendants

The Complaint names three defendants:

1. Coastal Palms Franchise Holdings LLC ("Coastal Palms"). Coastal Palms is a Florida limited liability company with its principal office located at 9500 Gulf Shore Drive, Suite 450, Naples, Florida 34108. Coastal Palms is Verimark's single largest franchise operator, holding twenty-two (22) individual Franchise License Agreements covering branded hotel properties across the states of Florida and Georgia. These twenty-two franchised properties comprise eighteen (18) Verimark Suites locations and four (4) Verimark Select locations, totaling approximately 3,740 guest rooms. The franchise relationship between Verimark and Coastal Palms dates back to June 2007 and represents one of Verimark's most significant franchisee relationships.

2. Randall "Randy" Brecker, individually. Mr. Brecker is the Managing Member of Coastal Palms and holds a sixty percent (60%) equity interest in the entity. He exercises day-to-day operational control over Coastal Palms and its affiliated entities and is personally liable for certain obligations arising from his individual tortious conduct, as alleged in the Complaint.

3. Suncoast Room Management Inc. ("Suncoast"). Suncoast is a Florida corporation that serves as an affiliated management entity controlled by Mr. Brecker. As alleged in the Complaint, Suncoast was utilized as an instrumentality of the revenue-diversion scheme described below.

In addition to the named defendants, the Complaint references certain related entities through which defendants conducted portions of the activities at issue, including Gulf Breeze Hospitality LLC, a Florida limited liability company, and Savannah Lodging Partners LLC, a Georgia limited liability company. The remaining equity holders of Coastal Palms are Theresa Brecker, who holds a fifteen percent (15%) equity interest and is the spouse of Randall Brecker, and Nolan Prescott, who holds a twenty-five percent (25%) equity interest as a passive investor.

C. Defense Counsel for Defendants

Coastal Palms is represented by the law firm of Whitfield, Barrow & Crane LLP, a Florida-based litigation firm of approximately 200 attorneys, headquartered at 1221 Brickell Avenue, Suite 3000, Miami, Florida 33131. The lead counsel for Coastal Palms is Nathan Whitfield III, Senior Partner. At the time of this letter, Verimark understands that Whitfield, Barrow & Crane LLP also represents Mr. Brecker and Suncoast in this matter, although we have not received formal confirmation of that representation for all defendants.

D. Nature of Claims

The Complaint asserts ten (10) counts against the defendants, as follows:

Count I — Breach of Contract (Royalties). Coastal Palms breached its obligations under Section 4.1 of the Franchise License Agreements by systematically underreporting Gross Room Revenue ("GRR") and thereby underpaying the five percent (5%) royalty fee calculated on GRR.

Count II — Breach of Contract (Marketing Fund Contributions). Coastal Palms breached its obligations under Section 4.2 of the Franchise License Agreements by underpaying the two and one-half percent (2.5%) marketing fund contribution calculated on GRR, as a direct consequence of the same underreporting described in Count I.

Count III — Breach of Contract (Technology Fees). Coastal Palms breached its obligations under Section 4.3 of the Franchise License Agreements by failing to pay the technology fee of $12.50 per room per month for rooms that were not included in GRR reporting, resulting in a shortfall in technology fee payments.

Count IV — Breach of Implied Covenant of Good Faith and Fair Dealing. Coastal Palms' deliberate and systematic underreporting of GRR, and its concealment of the diversion scheme, violated the implied covenant of good faith and fair dealing inherent in each Franchise License Agreement.

Count V — Fraudulent Concealment. Defendants knowingly and intentionally concealed material information regarding the true amount of GRR generated by the franchised properties, with the intent to deprive Verimark of royalties, marketing contributions, and technology fees lawfully owed under the Franchise License Agreements.

Count VI — Negligent Misrepresentation. In the alternative, defendants negligently provided false and misleading GRR reports to Verimark upon which Verimark justifiably relied to its detriment.

Count VII — Unjust Enrichment (in the alternative). Defendants have been unjustly enriched by retaining monies that, in equity and good conscience, belong to Verimark.

Count VIII — Declaratory Judgment (FLA Termination). Verimark seeks a judicial declaration that Coastal Palms' systematic underreporting of GRR constitutes a material breach incapable of cure under Section 14.2(c) of the Franchise License Agreements, thereby entitling Verimark to terminate the Franchise License Agreements.

Count IX — Accounting. Verimark seeks a full and complete accounting of all revenues generated by the franchised properties during the relevant period.

Count X — Civil Conspiracy. Against Brecker and Suncoast individually and collectively, alleging a conspiracy to defraud Verimark through the coordinated revenue-diversion scheme.

E. Factual Background

The factual basis for the claims alleged in the Complaint is summarized as follows:

Coastal Palms executed twenty-two (22) individual Franchise License Agreements ("FLAs") with Verimark over a twelve-year period, commencing with the first FLA for the Naples, Florida property on June 15, 2007, and concluding with the most recent FLA on September 3, 2019. Each FLA contains a twenty-year initial term, is governed by the laws of the State of Florida, and includes a mandatory venue provision designating Broward County, Florida as the exclusive forum for the resolution of disputes arising thereunder.

Beginning no later than January 2013, and continuing through the present, Coastal Palms, acting through Brecker and Suncoast, engaged in a systematic scheme to underreport GRR to Verimark. The scheme was accomplished principally through the following mechanisms:

(a) Off-Platform Booking Channels. Coastal Palms diverted substantial room revenues through booking channels that were not integrated with Verimark's central reservation system, including an unbranded website operated at the domain gulfcoastrooms.com. Revenues generated through these off-platform channels were not included in GRR reports submitted to Verimark.

(b) Suncoast Management Fee Diversion. Suncoast Room Management Inc. was interposed as a management entity that retained a twelve percent (12%) "management fee" on direct bookings processed outside the Verimark reservation system. Only the net balance, after deduction of the management fee, was forwarded to the property-level limited liability companies. Neither Suncoast's gross collections nor the retained management fee were included in GRR reports to Verimark.

(c) Improper Netting of OTA Revenues. Coastal Palms improperly classified net-rate payments received from online travel agencies ("OTAs") as "commissions receivable," thereby reducing reported GRR by the amount of the OTA commission. This treatment directly violated the gross-revenue definition set forth in Section 4.1 of the FLAs, which requires that GRR be calculated on the full room rate charged to the guest, without deduction for commissions, fees, or other amounts retained by third-party intermediaries.

The scheme was uncovered following a whistleblower complaint submitted on November 8, 2021, by Janet Kerrigan, the former Regional Controller for Coastal Palms, who was terminated by Coastal Palms in October 2021. Verimark promptly retained the firm of Thornbury & Associates CPAs LLP to conduct a pre-litigation compliance audit, with the engagement commencing on November 22, 2021. Thornbury & Associates delivered its preliminary findings on January 18, 2022, which indicated approximately twenty-six percent (26%) underreporting of GRR across the top ten audited properties for the period 2019 through 2021.

On February 4, 2022, Verimark issued a formal Notice of Material Breach to Coastal Palms, demanding cure of the identified breaches within thirty (30) days as required under the FLAs. Coastal Palms' counsel, Whitfield, Barrow & Crane LLP, responded by letter dated February 28, 2022, denying the existence of any breach and refusing to tender any cure. The thirty-day cure period expired on March 6, 2022, without any cure being offered or effectuated. Verimark filed the Complaint on the following day, March 7, 2022.

The systematic underreporting of Gross Room Revenue constitutes a material breach that is incapable of cure under Section 14.2(c) of the Franchise License Agreements.

F. Damages Sought

Verimark's total claimed damages are approximately $150 million, comprising the following categories:

For fiscal year 2021 alone, Coastal Palms reported GRR of $112.4 million across the twenty-two franchised properties, whereas Verimark's forensic analysis estimates that the true GRR for that period was approximately $145.6 million — a shortfall of $33.2 million, representing underreporting of between twenty-two percent (22%) and thirty-one percent (31%) across individual properties and years.

G. Counterclaim. We note for completeness that on April 18, 2022, Coastal Palms filed a Counterclaim against Verimark asserting approximately $12 million in alleged damages for purported brand-standard violations and over-billing by Verimark. Verimark denies these allegations in their entirety and believes the Counterclaim is without merit and constitutes a litigation tactic intended to deflect from Coastal Palms' own breaches. To the extent that Pinnacle Indemnity's coverage obligations under the Policy extend to defense costs arising from the Counterclaim, Verimark reserves all rights to claim such coverage. We will supplement this notice with additional information regarding the Counterclaim as warranted.

IV. Identification of Outside Counsel

Verimark retained Calderwood & Harkness LLP as outside litigation counsel for this matter in March 2022. The engagement letter, dated March 4, 2022, was addressed to Renata Solis-Vega, Senior Vice President and General Counsel of Verimark, and was executed on behalf of the firm by the undersigned. A copy of the engagement letter is enclosed as Enclosure 3.

Calderwood & Harkness LLP is a national litigation and transactional law firm with offices across the United States. The firm's Fort Lauderdale office is located at 110 SE 6th Street, Suite 2800, Fort Lauderdale, Florida 33301.

The engagement team assigned to this matter consists of the following attorneys:

Additional attorneys, paralegals, or support staff may be assigned to the matter as the litigation progresses. Verimark will notify Pinnacle Indemnity of any material changes to the engagement team.

V. Anticipated Litigation Costs and Expenses

Calderwood & Harkness LLP has prepared a preliminary litigation budget for this matter, as set forth in the Matter Budget Memorandum dated March 10, 2022, a copy of which is enclosed as Enclosure 4. The preliminary budget estimate for prosecution of this case through trial is $4.5 million to $7.5 million. This range reflects the complexity of the litigation, the volume of documents and data anticipated to be at issue, the number of properties and years covered by the claims, and the expected vigor of the defense.

The budget encompasses the following categories of anticipated costs and expenses:

• Preparation of all pleadings, including the Complaint, any amended complaints, and responsive pleadings to the anticipated Counterclaim;

• Fact discovery, including written discovery, depositions of fact witnesses, and third-party subpoenas;

• Expert discovery, including the retention, preparation, and deposition of expert witnesses;

• Forensic accounting expert engagement for GRR reconstruction and damages quantification (Verimark anticipates retaining Ridgeline Forensic Advisory LLC for this purpose);

• E-discovery processing, review, and hosting of significant document volumes (Verimark anticipates engaging Nexagen Document Solutions LLC as the e-discovery vendor for this matter);

• Dispositive motion practice, including motions for summary judgment;

• Trial preparation, including witness preparation, exhibit compilation, and trial technology;

• Trial, including all costs associated with the presentation of Verimark's affirmative case and defense against the anticipated Counterclaim;

• Mediation and any court-ordered alternative dispute resolution proceedings; and

• All other costs and expenses reasonably incidental to the foregoing.

We respectfully request that Pinnacle Indemnity acknowledge coverage under the Policy for the foregoing categories of costs and expenses and confirm the process and procedures for submitting interim fee and cost invoices for reimbursement. Verimark anticipates that invoices will be submitted on a monthly or quarterly basis, consistent with the billing cycle of Calderwood & Harkness LLP, and requests guidance from Pinnacle Indemnity as to its preferred invoicing format and submission procedures.

VI. Reservation of Rights

Verimark expressly reserves all rights under Policy No. PLI-VHG-2021-08874, including, but not limited to, the right to seek coverage for:

(a) All fees and costs of outside counsel, including the fees and costs of Calderwood & Harkness LLP and any other counsel retained in connection with this matter;

(b) All fees and costs of expert witnesses, including forensic accountants, damages experts, and any other experts retained in connection with the litigation;

(c) All expenses associated with e-discovery and document management, including the costs of collection, processing, hosting, review, and production of electronically stored information;

(d) All fees and costs associated with mediation, arbitration, or any other form of alternative dispute resolution;

(e) All court reporter fees and deposition costs, including transcript costs, videography fees, and related expenses;

(f) All court filing fees, service of process costs, and related litigation expenses;

(g) Any costs associated with the defense of the Counterclaim filed by Coastal Palms; and

(h) Any and all other litigation-related expenses covered under the Policy.

This notice is provided in accordance with the notice provisions of the Policy and is intended to satisfy all conditions precedent to coverage. Verimark does not, by this notice or by any subsequent communication, waive any right, remedy, or defense available to it under the Policy, at law, or in equity. To the extent that any provision of the Policy requires Verimark to take any additional action as a condition precedent to coverage, Verimark requests that Pinnacle Indemnity identify such provision and the action required so that Verimark may comply in a timely manner.

Verimark further reserves the right to supplement this notice as additional information becomes available, as the litigation progresses, or as circumstances otherwise require.

VII. Request for Acknowledgment and Response

We respectfully request that Pinnacle Indemnity provide the following within thirty (30) days of receipt of this letter:

1. Written acknowledgment of receipt of this notice;

2. Confirmation of the applicable coverage terms under the Policy, including identification of any deductibles, self-insured retentions, sub-limits, aggregate limits, or conditions applicable to franchise-litigation coverage or the categories of costs and expenses described herein;

3. Designation of a claims adjuster or dedicated point of contact within Pinnacle Indemnity for ongoing communications regarding coverage, claims processing, and invoicing related to this matter; and

4. Copies of any coverage opinions, coverage determination letters, or reservation-of-rights letters that Pinnacle Indemnity intends to issue in response to this notice.

We trust that Pinnacle Indemnity will give this matter its prompt and careful attention. Verimark is committed to cooperating fully with Pinnacle Indemnity in connection with the coverage determination process and welcomes the opportunity to discuss any questions or concerns that Pinnacle Indemnity may have regarding the claims, the litigation, or the anticipated costs.

VIII. Contact Information and Directions for Communication

All correspondence, notices, and communications regarding this matter and this coverage claim should be directed to:

Priya Anand, Partner Calderwood & Harkness LLP 110 SE 6th Street, Suite 2800 Fort Lauderdale, Florida 33301 Telephone: (954) 761-8244

Email: panand@calderwoodharkness.com

Please copy the following individuals on all such correspondence:

Renata Solis-Vega Senior Vice President & General Counsel Verimark Hospitality Group Inc. 2400 East Las Olas Boulevard, Suite 3100 Fort Lauderdale, Florida 33301

Email: rsolis-vega@verimarkhotels.com

Martin Holcomb Executive Vice President & Chief Financial Officer Verimark Hospitality Group Inc. 2400 East Las Olas Boulevard, Suite 3100 Fort Lauderdale, Florida 33301

Email: mholcomb@verimarkhotels.com

IX. Closing

Verimark looks forward to Pinnacle Indemnity's prompt acknowledgment of this notice and its cooperation in resolving coverage questions in an efficient and collaborative manner. As noted above, this notice is provided without waiver of any rights, remedies, or defenses available to Verimark under the Policy, at law, or in equity, all of which are expressly reserved.

Should you have any questions regarding this notice or require any additional information, please do not hesitate to contact me directly at the telephone number or email address set forth above.

Thank you for your prompt attention to this matter.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Priya Anand, Partner FL Bar No. 0087451 Telephone: (954) 761-8244

Email: panand@calderwoodharkness.com

Enclosures:

1. Copy of Filed Complaint, Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC, Randall Brecker, and Suncoast Room Management Inc., Case No. 1021-00006 (filed March 7, 2022)

2. Copy of Civil Cover Sheet

3. Copy of Engagement Letter between Calderwood & Harkness LLP and Verimark Hospitality Group Inc. (dated March 4, 2022)

4. Copy of Matter Budget Memorandum (dated March 10, 2022)

cc (via email and U.S. Mail):

Renata Solis-Vega, Senior Vice President & General Counsel, Verimark Hospitality Group Inc. Martin Holcomb, Executive Vice President & Chief Financial Officer, Verimark Hospitality Group Inc. Douglas Carmichael, Partner, Calderwood & Harkness LLP

This letter and the enclosures hereto contain information that is privileged, confidential, and/or subject to the attorney-client privilege and work product doctrine. This communication is intended solely for the use of the individual(s) and entity(ies) named above. If you are not the intended recipient, you are hereby notified that any dissemination, distribution, or copying of this communication is strictly prohibited. If you have received this communication in error, please notify the sender immediately and destroy all copies.

Damages Component	Amount
Cumulative underreported GRR (2013–2021) (forensic estimate)	$197,800,000
Underpaid royalties (5% × $197.8M)	$9,890,000
Underpaid marketing contributions (2.5% × $197.8M)	$4,945,000
Underpaid technology fees (214 unreported rooms × $12.50/room/month × ~47 months avg.)	$1,260,000
Subtotal — Direct Underpayments	$16,095,000
Contractual late-payment interest (1.5%/month, compounded, under FLA § 4.6)	$28,400,000
Liquidated damages (3× trailing-twelve-month corrected royalties per property, 22 properties, under FLA § 15.3)	Up to $105,500,000
Total Estimated Damages	~$150,000,000
Attorney	Role	FL Bar No.	Hourly Rate
Priya Anand	Responsible Partner	0087451	$975/hour
Douglas Carmichael	Billing Partner	0093217	$925/hour
Yuki Nakamura	Lead Associate	0119644	$625/hour
Carlos Espinoza	Working Associate	0128903	$495/hour

CALDERWOOD & HARKNESS LLP Attorneys & Counselors at Law 110 SE 6th Street, Suite 2800 Fort Lauderdale, Florida 33301 Telephone: (954) 761-8200 Facsimile: (954) 761-8201 www.calderwoodharkness.com
Priya Anand Partner Direct: (954) 761-8244 panand@calderwoodharkness.com FL Bar No. 0087451
March 14, 2022
VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED AND VIA EMAIL (arthur.baines@pinnacleindemnity.com)
Arthur Baines, Esq. Claims Counsel Pinnacle Indemnity Insurance Co. 300 Pearl Street, Suite 1500 Hartford, Connecticut 06103
Re: Notice of Litigation and Reservation of Rights — Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC, Randall Brecker, and Suncoast Room Management Inc.; Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida; Case No. 1021-00006
Policy No. PLI-VHG-2021-08874
Dear Mr. Baines:
I. Purpose of This Letter
This firm represents Verimark Hospitality Group Inc. ("Verimark" or "VHG"), a Delaware corporation publicly traded on the Nasdaq Stock Market under the ticker symbol VHMK, with its principal executive offices located at 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, Florida 33301. We write to provide formal and timely notice to Pinnacle Indemnity Insurance Co. ("Pinnacle Indemnity") of litigation filed by Verimark, as more fully described below, and to reserve all of Verimark's rights to claim coverage for litigation costs, defense expenses, and all related expenditures arising from or in connection with such litigation under Policy No. PLI-VHG-2021-08874 (the "Policy"), a commercial general liability and franchise-litigation coverage policy issued by Pinnacle Indemnity to Verimark.
This notice is provided in accordance with the notice provisions set forth in the Policy and is intended to satisfy all conditions precedent to coverage thereunder. Nothing contained in this letter, or in any subsequent communication by or on behalf of Verimark, shall be construed as a waiver of any right, remedy, or defense available to Verimark under the Policy, at law, or in equity.
II. Identification of the Insured
The Named Insured under the Policy is Verimark Hospitality Group Inc., a corporation organized and existing under the laws of the State of Delaware. Verimark's shares of common stock are publicly traded on the Nasdaq Stock Market under the ticker symbol VHMK. Verimark's principal business is the ownership, operation, and franchising of branded hotel properties across the southeastern United States. Verimark currently operates and franchises approximately 340 branded hotel properties under the "Verimark Suites," "Verimark Select," and "Verimark Grand" brand flags. For the fiscal year ended December 31, 2021, Verimark reported consolidated revenues of approximately $1.42 billion, of which the franchise segment contributed approximately $218 million.
Verimark's relevant officers for purposes of this matter are:
• Renata Solis-Vega, Senior Vice President and General Counsel; and
• Martin Holcomb, Executive Vice President and Chief Financial Officer.
Both individuals are authorized to communicate with Pinnacle Indemnity regarding coverage matters arising under the Policy, and each should be copied on all correspondence related to this claim, at the address set forth in Section IX below.
III. Description of the Litigation
A. Case Identification
On March 7, 2022, Verimark filed a ten-count Complaint in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida. The case has been assigned the following identifying information:
Caption: Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC, Randall Brecker, and Suncoast Room Management Inc.
Court: Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida
Case No.: 1021-00006
Assigned Judge: The Honorable Richard M. Calloway, Circuit Judge
Date Filed: March 7, 2022
A true and correct copy of the filed Complaint, together with the Civil Cover Sheet, is enclosed with this letter as Enclosures 1 and 2, respectively.
B. Identity of Defendants
The Complaint names three defendants:
1. Coastal Palms Franchise Holdings LLC ("Coastal Palms"). Coastal Palms is a Florida limited liability company with its principal office located at 9500 Gulf Shore Drive, Suite 450, Naples, Florida 34108. Coastal Palms is Verimark's single largest franchise operator, holding twenty-two (22) individual Franchise License Agreements covering branded hotel properties across the states of Florida and Georgia. These twenty-two franchised properties comprise eighteen (18) Verimark Suites locations and four (4) Verimark Select locations, totaling approximately 3,740 guest rooms. The franchise relationship between Verimark and Coastal Palms dates back to June 2007 and represents one of Verimark's most significant franchisee relationships.
2. Randall "Randy" Brecker, individually. Mr. Brecker is the Managing Member of Coastal Palms and holds a sixty percent (60%) equity interest in the entity. He exercises day-to-day operational control over Coastal Palms and its affiliated entities and is personally liable for certain obligations arising from his individual tortious conduct, as alleged in the Complaint.
3. Suncoast Room Management Inc. ("Suncoast"). Suncoast is a Florida corporation that serves as an affiliated management entity controlled by Mr. Brecker. As alleged in the Complaint, Suncoast was utilized as an instrumentality of the revenue-diversion scheme described below.
In addition to the named defendants, the Complaint references certain related entities through which defendants conducted portions of the activities at issue, including Gulf Breeze Hospitality LLC, a Florida limited liability company, and Savannah Lodging Partners LLC, a Georgia limited liability company. The remaining equity holders of Coastal Palms are Theresa Brecker, who holds a fifteen percent (15%) equity interest and is the spouse of Randall Brecker, and Nolan Prescott, who holds a twenty-five percent (25%) equity interest as a passive investor.
C. Defense Counsel for Defendants
Coastal Palms is represented by the law firm of Whitfield, Barrow & Crane LLP, a Florida-based litigation firm of approximately 200 attorneys, headquartered at 1221 Brickell Avenue, Suite 3000, Miami, Florida 33131. The lead counsel for Coastal Palms is Nathan Whitfield III, Senior Partner. At the time of this letter, Verimark understands that Whitfield, Barrow & Crane LLP also represents Mr. Brecker and Suncoast in this matter, although we have not received formal confirmation of that representation for all defendants.
D. Nature of Claims
The Complaint asserts ten (10) counts against the defendants, as follows:
Count I — Breach of Contract (Royalties). Coastal Palms breached its obligations under Section 4.1 of the Franchise License Agreements by systematically underreporting Gross Room Revenue ("GRR") and thereby underpaying the five percent (5%) royalty fee calculated on GRR.
Count II — Breach of Contract (Marketing Fund Contributions). Coastal Palms breached its obligations under Section 4.2 of the Franchise License Agreements by underpaying the two and one-half percent (2.5%) marketing fund contribution calculated on GRR, as a direct consequence of the same underreporting described in Count I.
Count III — Breach of Contract (Technology Fees). Coastal Palms breached its obligations under Section 4.3 of the Franchise License Agreements by failing to pay the technology fee of $12.50 per room per month for rooms that were not included in GRR reporting, resulting in a shortfall in technology fee payments.
Count IV — Breach of Implied Covenant of Good Faith and Fair Dealing. Coastal Palms' deliberate and systematic underreporting of GRR, and its concealment of the diversion scheme, violated the implied covenant of good faith and fair dealing inherent in each Franchise License Agreement.
Count V — Fraudulent Concealment. Defendants knowingly and intentionally concealed material information regarding the true amount of GRR generated by the franchised properties, with the intent to deprive Verimark of royalties, marketing contributions, and technology fees lawfully owed under the Franchise License Agreements.
Count VI — Negligent Misrepresentation. In the alternative, defendants negligently provided false and misleading GRR reports to Verimark upon which Verimark justifiably relied to its detriment.
Count VII — Unjust Enrichment (in the alternative). Defendants have been unjustly enriched by retaining monies that, in equity and good conscience, belong to Verimark.
Count VIII — Declaratory Judgment (FLA Termination). Verimark seeks a judicial declaration that Coastal Palms' systematic underreporting of GRR constitutes a material breach incapable of cure under Section 14.2(c) of the Franchise License Agreements, thereby entitling Verimark to terminate the Franchise License Agreements.
Count IX — Accounting. Verimark seeks a full and complete accounting of all revenues generated by the franchised properties during the relevant period.
Count X — Civil Conspiracy. Against Brecker and Suncoast individually and collectively, alleging a conspiracy to defraud Verimark through the coordinated revenue-diversion scheme.
E. Factual Background
The factual basis for the claims alleged in the Complaint is summarized as follows:
Coastal Palms executed twenty-two (22) individual Franchise License Agreements ("FLAs") with Verimark over a twelve-year period, commencing with the first FLA for the Naples, Florida property on June 15, 2007, and concluding with the most recent FLA on September 3, 2019. Each FLA contains a twenty-year initial term, is governed by the laws of the State of Florida, and includes a mandatory venue provision designating Broward County, Florida as the exclusive forum for the resolution of disputes arising thereunder.
Beginning no later than January 2013, and continuing through the present, Coastal Palms, acting through Brecker and Suncoast, engaged in a systematic scheme to underreport GRR to Verimark. The scheme was accomplished principally through the following mechanisms:
(a) Off-Platform Booking Channels. Coastal Palms diverted substantial room revenues through booking channels that were not integrated with Verimark's central reservation system, including an unbranded website operated at the domain gulfcoastrooms.com. Revenues generated through these off-platform channels were not included in GRR reports submitted to Verimark.
(b) Suncoast Management Fee Diversion. Suncoast Room Management Inc. was interposed as a management entity that retained a twelve percent (12%) "management fee" on direct bookings processed outside the Verimark reservation system. Only the net balance, after deduction of the management fee, was forwarded to the property-level limited liability companies. Neither Suncoast's gross collections nor the retained management fee were included in GRR reports to Verimark.
(c) Improper Netting of OTA Revenues. Coastal Palms improperly classified net-rate payments received from online travel agencies ("OTAs") as "commissions receivable," thereby reducing reported GRR by the amount of the OTA commission. This treatment directly violated the gross-revenue definition set forth in Section 4.1 of the FLAs, which requires that GRR be calculated on the full room rate charged to the guest, without deduction for commissions, fees, or other amounts retained by third-party intermediaries.
The scheme was uncovered following a whistleblower complaint submitted on November 8, 2021, by Janet Kerrigan, the former Regional Controller for Coastal Palms, who was terminated by Coastal Palms in October 2021. Verimark promptly retained the firm of Thornbury & Associates CPAs LLP to conduct a pre-litigation compliance audit, with the engagement commencing on November 22, 2021. Thornbury & Associates delivered its preliminary findings on January 18, 2022, which indicated approximately twenty-six percent (26%) underreporting of GRR across the top ten audited properties for the period 2019 through 2021.
On February 4, 2022, Verimark issued a formal Notice of Material Breach to Coastal Palms, demanding cure of the identified breaches within thirty (30) days as required under the FLAs. Coastal Palms' counsel, Whitfield, Barrow & Crane LLP, responded by letter dated February 28, 2022, denying the existence of any breach and refusing to tender any cure. The thirty-day cure period expired on March 6, 2022, without any cure being offered or effectuated. Verimark filed the Complaint on the following day, March 7, 2022.
The systematic underreporting of Gross Room Revenue constitutes a material breach that is incapable of cure under Section 14.2(c) of the Franchise License Agreements.
F. Damages Sought
Verimark's total claimed damages are approximately $150 million, comprising the following categories:
For fiscal year 2021 alone, Coastal Palms reported GRR of $112.4 million across the twenty-two franchised properties, whereas Verimark's forensic analysis estimates that the true GRR for that period was approximately $145.6 million — a shortfall of $33.2 million, representing underreporting of between twenty-two percent (22%) and thirty-one percent (31%) across individual properties and years.
G. Counterclaim. We note for completeness that on April 18, 2022, Coastal Palms filed a Counterclaim against Verimark asserting approximately $12 million in alleged damages for purported brand-standard violations and over-billing by Verimark. Verimark denies these allegations in their entirety and believes the Counterclaim is without merit and constitutes a litigation tactic intended to deflect from Coastal Palms' own breaches. To the extent that Pinnacle Indemnity's coverage obligations under the Policy extend to defense costs arising from the Counterclaim, Verimark reserves all rights to claim such coverage. We will supplement this notice with additional information regarding the Counterclaim as warranted.
IV. Identification of Outside Counsel
Verimark retained Calderwood & Harkness LLP as outside litigation counsel for this matter in March 2022. The engagement letter, dated March 4, 2022, was addressed to Renata Solis-Vega, Senior Vice President and General Counsel of Verimark, and was executed on behalf of the firm by the undersigned. A copy of the engagement letter is enclosed as Enclosure 3.
Calderwood & Harkness LLP is a national litigation and transactional law firm with offices across the United States. The firm's Fort Lauderdale office is located at 110 SE 6th Street, Suite 2800, Fort Lauderdale, Florida 33301.
The engagement team assigned to this matter consists of the following attorneys:
Additional attorneys, paralegals, or support staff may be assigned to the matter as the litigation progresses. Verimark will notify Pinnacle Indemnity of any material changes to the engagement team.
V. Anticipated Litigation Costs and Expenses
Calderwood & Harkness LLP has prepared a preliminary litigation budget for this matter, as set forth in the Matter Budget Memorandum dated March 10, 2022, a copy of which is enclosed as Enclosure 4. The preliminary budget estimate for prosecution of this case through trial is $4.5 million to $7.5 million. This range reflects the complexity of the litigation, the volume of documents and data anticipated to be at issue, the number of properties and years covered by the claims, and the expected vigor of the defense.
The budget encompasses the following categories of anticipated costs and expenses:
• Preparation of all pleadings, including the Complaint, any amended complaints, and responsive pleadings to the anticipated Counterclaim;
• Fact discovery, including written discovery, depositions of fact witnesses, and third-party subpoenas;
• Expert discovery, including the retention, preparation, and deposition of expert witnesses;
• Forensic accounting expert engagement for GRR reconstruction and damages quantification (Verimark anticipates retaining Ridgeline Forensic Advisory LLC for this purpose);
• E-discovery processing, review, and hosting of significant document volumes (Verimark anticipates engaging Nexagen Document Solutions LLC as the e-discovery vendor for this matter);
• Dispositive motion practice, including motions for summary judgment;
• Trial preparation, including witness preparation, exhibit compilation, and trial technology;
• Trial, including all costs associated with the presentation of Verimark's affirmative case and defense against the anticipated Counterclaim;
• Mediation and any court-ordered alternative dispute resolution proceedings; and
• All other costs and expenses reasonably incidental to the foregoing.
We respectfully request that Pinnacle Indemnity acknowledge coverage under the Policy for the foregoing categories of costs and expenses and confirm the process and procedures for submitting interim fee and cost invoices for reimbursement. Verimark anticipates that invoices will be submitted on a monthly or quarterly basis, consistent with the billing cycle of Calderwood & Harkness LLP, and requests guidance from Pinnacle Indemnity as to its preferred invoicing format and submission procedures.
VI. Reservation of Rights
Verimark expressly reserves all rights under Policy No. PLI-VHG-2021-08874, including, but not limited to, the right to seek coverage for:
(a) All fees and costs of outside counsel, including the fees and costs of Calderwood & Harkness LLP and any other counsel retained in connection with this matter;
(b) All fees and costs of expert witnesses, including forensic accountants, damages experts, and any other experts retained in connection with the litigation;
(c) All expenses associated with e-discovery and document management, including the costs of collection, processing, hosting, review, and production of electronically stored information;
(d) All fees and costs associated with mediation, arbitration, or any other form of alternative dispute resolution;
(e) All court reporter fees and deposition costs, including transcript costs, videography fees, and related expenses;
(f) All court filing fees, service of process costs, and related litigation expenses;
(g) Any costs associated with the defense of the Counterclaim filed by Coastal Palms; and
(h) Any and all other litigation-related expenses covered under the Policy.
This notice is provided in accordance with the notice provisions of the Policy and is intended to satisfy all conditions precedent to coverage. Verimark does not, by this notice or by any subsequent communication, waive any right, remedy, or defense available to it under the Policy, at law, or in equity. To the extent that any provision of the Policy requires Verimark to take any additional action as a condition precedent to coverage, Verimark requests that Pinnacle Indemnity identify such provision and the action required so that Verimark may comply in a timely manner.
Verimark further reserves the right to supplement this notice as additional information becomes available, as the litigation progresses, or as circumstances otherwise require.
VII. Request for Acknowledgment and Response
We respectfully request that Pinnacle Indemnity provide the following within thirty (30) days of receipt of this letter:
1. Written acknowledgment of receipt of this notice;
2. Confirmation of the applicable coverage terms under the Policy, including identification of any deductibles, self-insured retentions, sub-limits, aggregate limits, or conditions applicable to franchise-litigation coverage or the categories of costs and expenses described herein;
3. Designation of a claims adjuster or dedicated point of contact within Pinnacle Indemnity for ongoing communications regarding coverage, claims processing, and invoicing related to this matter; and
4. Copies of any coverage opinions, coverage determination letters, or reservation-of-rights letters that Pinnacle Indemnity intends to issue in response to this notice.
We trust that Pinnacle Indemnity will give this matter its prompt and careful attention. Verimark is committed to cooperating fully with Pinnacle Indemnity in connection with the coverage determination process and welcomes the opportunity to discuss any questions or concerns that Pinnacle Indemnity may have regarding the claims, the litigation, or the anticipated costs.
VIII. Contact Information and Directions for Communication
All correspondence, notices, and communications regarding this matter and this coverage claim should be directed to:
Priya Anand, Partner Calderwood & Harkness LLP 110 SE 6th Street, Suite 2800 Fort Lauderdale, Florida 33301 Telephone: (954) 761-8244
Email: panand@calderwoodharkness.com
Please copy the following individuals on all such correspondence:
Renata Solis-Vega Senior Vice President & General Counsel Verimark Hospitality Group Inc. 2400 East Las Olas Boulevard, Suite 3100 Fort Lauderdale, Florida 33301
Email: rsolis-vega@verimarkhotels.com
Martin Holcomb Executive Vice President & Chief Financial Officer Verimark Hospitality Group Inc. 2400 East Las Olas Boulevard, Suite 3100 Fort Lauderdale, Florida 33301
Email: mholcomb@verimarkhotels.com
IX. Closing
Verimark looks forward to Pinnacle Indemnity's prompt acknowledgment of this notice and its cooperation in resolving coverage questions in an efficient and collaborative manner. As noted above, this notice is provided without waiver of any rights, remedies, or defenses available to Verimark under the Policy, at law, or in equity, all of which are expressly reserved.
Should you have any questions regarding this notice or require any additional information, please do not hesitate to contact me directly at the telephone number or email address set forth above.
Thank you for your prompt attention to this matter.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Priya Anand, Partner FL Bar No. 0087451 Telephone: (954) 761-8244
Email: panand@calderwoodharkness.com
Enclosures:
1. Copy of Filed Complaint, Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC, Randall Brecker, and Suncoast Room Management Inc., Case No. 1021-00006 (filed March 7, 2022)
2. Copy of Civil Cover Sheet
3. Copy of Engagement Letter between Calderwood & Harkness LLP and Verimark Hospitality Group Inc. (dated March 4, 2022)
4. Copy of Matter Budget Memorandum (dated March 10, 2022)
cc (via email and U.S. Mail):
Renata Solis-Vega, Senior Vice President & General Counsel, Verimark Hospitality Group Inc. Martin Holcomb, Executive Vice President & Chief Financial Officer, Verimark Hospitality Group Inc. Douglas Carmichael, Partner, Calderwood & Harkness LLP
This letter and the enclosures hereto contain information that is privileged, confidential, and/or subject to the attorney-client privilege and work product doctrine. This communication is intended solely for the use of the individual(s) and entity(ies) named above. If you are not the intended recipient, you are hereby notified that any dissemination, distribution, or copying of this communication is strictly prohibited. If you have received this communication in error, please notify the sender immediately and destroy all copies.
Damages Component | Amount
Cumulative underreported GRR (2013–2021) (forensic estimate) | $197,800,000
Underpaid royalties (5% × $197.8M) | $9,890,000
Underpaid marketing contributions (2.5% × $197.8M) | $4,945,000
Underpaid technology fees (214 unreported rooms × $12.50/room/month × ~47 months avg.) | $1,260,000
Subtotal — Direct Underpayments | $16,095,000
Contractual late-payment interest (1.5%/month, compounded, under FLA § 4.6) | $28,400,000
Liquidated damages (3× trailing-twelve-month corrected royalties per property, 22 properties, under FLA § 15.3) | Up to $105,500,000
Total Estimated Damages | ~$150,000,000
Attorney | Role | FL Bar No. | Hourly Rate
Priya Anand | Responsible Partner | 0087451 | $975/hour
Douglas Carmichael | Billing Partner | 0093217 | $925/hour
Yuki Nakamura | Lead Associate | 0119644 | $625/hour
Carlos Espinoza | Working Associate | 0128903 | $495/hour

CALDERWOOD & HARKNESS LLP

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