PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
FROM: Yuki Nakamura, Lead Associate, Litigation (General) Calderwood & Harkness LLP FL Bar No. 0119644
TO: Priya Anand, Responsible Partner, Litigation (General) Calderwood & Harkness LLP FL Bar No. 0087451
CC: Douglas Carmichael, Billing Partner (FL Bar No. 0093217) Carlos Espinoza, Working Associate (FL Bar No. 0128903)
DATE: March 28, 2023
RE: Expert discovery Strategy — 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
MATTER NO.: 1021-00006
PRIVILEGE LEGEND: This memorandum is protected by the attorney-client privilege and the work-product doctrine. It was prepared in anticipation of litigation and reflects the mental impressions, conclusions, opinions, and legal theories of counsel. Do not disclose, copy, or distribute this memorandum or any portion thereof without the express prior authorization of Calderwood & Harkness LLP.
I. PURPOSE AND EXECUTIVE SUMMARY
The purpose of this memorandum is to recommend the scope, methodology, and data requirements for the expert report to be prepared by Dr. Sharon Kettlewell of Ridgeline Forensic Advisory LLC, in advance of the April 14, 2023 deadline for service of plaintiff Verimark Hospitality Group Inc.'s ("Verimark") expert disclosures under the Court's October 3, 2022 Case Management and Scheduling Order. This memorandum synthesizes the work performed to date by the Calderwood & Harkness litigation team, the preliminary audit findings of Thornbury & Associates CPAs LLP, and the preliminary analytical work already underway at Ridgeline, in order to provide a unified strategic framework for the expert report and to identify the issues most likely to be contested by the defense.
Dr. Kettlewell was retained by Verimark on December 12, 2022, pursuant to an engagement letter executed on that date. The engagement letter establishes her billing rate at $475 per hour for principal-level work and $325 per hour for staff-level analytical support. The total engagement fee budget — inclusive of the opening expert report, any rebuttal report, deposition preparation, and trial testimony — has been estimated at $1.85 million. To date, approximately $620,000 has been incurred through preliminary analysis, data processing, and initial report drafting activities conducted by Ridgeline between December 2022 and the present.
Fact discovery in this matter has now effectively closed. The final fact deposition was completed on approximately March 17, 2023, concluding a period during which the parties took a total of fourteen fact depositions between January 9 and March 17, 2023. The record developed during fact discovery is substantial. On the Verimark side alone, Nexagen Document Solutions LLC has processed and hosted approximately 2.3 million documents comprising approximately 1.1 terabytes of data. This volume includes, critically, the supplemental document production of 312,000 additional documents received from Coastal Palms Franchise Holdings LLC ("Coastal Palms") on November 18, 2022, following the Court's October 28, 2022 order granting Verimark's Motion to Compel. That supplemental production included the financial records of Suncoast Room Management Inc. ("Suncoast"), the related management entity at the center of the underreporting scheme alleged in this case.
Based on the Calderwood & Harkness team's review of the factual record, the Thornbury preliminary audit findings, and Dr. Kettlewell's preliminary analytical work, I recommend that Dr. Kettlewell's expert report address the following four principal categories of damages:
(a) Reconstruction of True Gross Room Revenue ("GRR"): Dr. Kettlewell should reconstruct the true GRR for each of the twenty-two (22) Coastal Palms franchised hotel properties across the full 2013–2021 underreporting period, using a property-by-property, year-by-year methodology grounded in the complete documentary record now available.
(b) Quantification of Direct Underpayments: Based on the reconstructed GRR, the report should calculate the precise amount of underpaid royalties (at 5% of underreported GRR), underpaid marketing-fund contributions (at 2.5% of underreported GRR), and underpaid technology fees (for unreported rooms added without notice to Verimark).
(c) Calculation of Contractual Late-Payment Interest: The report should apply the late-payment interest provision set forth in Section 4.6 of the Franchise License Agreements ("FLAs") — 1.5% per month, compounded monthly — to each underpayment from the date it was due through a projected judgment date.
(d) Computation of Liquidated Damages Under FLA § 15.3: The report should calculate the liquidated damages to which Verimark is entitled upon termination for cause, equal to three times trailing-twelve-month royalties for each terminated property, using corrected (true) GRR figures.
The recommended total damages presentation across all four categories is approximately $150 million, which is consistent with the demand set forth in the Complaint. This figure is composed of approximately $16.095 million in direct underpayments, $28.4 million in late-payment interest, and $105.5 million in liquidated damages.
The sections that follow address the coordination of Dr. Kettlewell's work with the Thornbury preliminary audit findings, the recommended scope and methodology for each component of the expert report, the key data sets that Dr. Kettlewell should rely upon, the defense expert challenges we anticipate, the proposed structure and timeline for the report, coordination with other ongoing litigation activities, and budget considerations.
II. COORDINATION WITH THORNBURY & ASSOCIATES' PRELIMINARY AUDIT FINDINGS
A. Background on the Thornbury Engagement
Before this litigation was commenced, Verimark engaged Thornbury & Associates CPAs LLP ("Thornbury") to perform a franchise-compliance audit of Coastal Palms' reporting obligations under the FLAs. Thornbury was engaged on November 22, 2021, following Verimark's receipt of a tip from a former Coastal Palms regional controller, Janet Kerrigan, who contacted Verimark's compliance hotline on November 8, 2021 and reported irregularities in the GRR reports being submitted by Coastal Palms. The lead audit partner on the Thornbury engagement is Malcolm Thornbury, CPA, whose principal office is located at 1551 N. Flagler Drive, Suite 800, West Palm Beach, Florida 33401.
Thornbury's audit scope was necessarily limited by the data available to it at the time. Thornbury audited the top ten (10) Coastal Palms properties by reported GRR for the three-year period from 2019 through 2021. This sample was selected because those ten properties accounted for approximately 68% of total reported GRR across the twenty-two-property portfolio. Thornbury's access to underlying financial records was limited to the materials that Verimark had in its own possession at the time — principally, the monthly GRR reports filed by Coastal Palms under the FLAs, together with publicly available data such as STR (Penmark Enterprises) reports for the relevant competitive sets, county tourist development tax filings, and limited bank records obtained informally through Verimark's existing banking relationships.
Thornbury delivered its preliminary findings to Verimark and to Calderwood & Harkness on January 18, 2022. Those findings were significant and formed the factual predicate for the filing of this action on March 4, 2022. Specifically, Thornbury concluded that the ten audited properties had underreported GRR by approximately 26% for the 2019–2021 period. This underreporting was attributable primarily to two mechanisms: (i) the systematic exclusion from GRR reports of revenues collected by Suncoast through the gulfcoastrooms.com website, walk-in bookings, and corporate-direct contracts; and (ii) the improper netting of OTA (online travel agency) commissions against GRR, which had the effect of reducing reported GRR by the amount of commissions paid to OTA platforms.
Based on its audit of the ten-property sample, Thornbury extrapolated its findings across all twenty-two Coastal Palms properties and across the full 2013–2021 period, estimating total underreported GRR of approximately $197.8 million. This extrapolation necessarily involved assumptions about the consistency of underreporting practices across properties and years for which Thornbury had not conducted a detailed audit.
B. Relationship Between Thornbury Findings and the Kettlewell Report
The Thornbury preliminary audit was an essential step in building this case and remains a valuable corroborative data point. However, it was conducted under significant constraints that no longer apply. With the completion of fact discovery, Dr. Kettlewell now has access to a far more complete documentary record than was available to Thornbury, including the following:
• The complete financial records of Suncoast Room Management Inc. for all twenty-two properties and all relevant years, obtained in the November 18, 2022 supplemental production;
• Property Management System ("PMS") data from all twenty-two hotel properties, providing room-night-level transactional detail;
• OTA contracts, booking-channel statements, and commission reconciliation reports for all properties and years;
• Financial statements submitted by Coastal Palms to Ironclad National Bank in connection with mortgage loan covenants;
• Entity-level and property-level tax returns (federal and state) for the full 2013–2021 period; and
• Fourteen fact depositions providing sworn testimony from key Coastal Palms personnel, including the two-day deposition of Randall Brecker, the president of Suncoast who directed the underreporting scheme.
Given this expanded data access, I recommend that Dr. Kettlewell use the Thornbury preliminary audit as a starting point and foundation but that she independently verify and expand upon those findings using the full documentary record now available. The Thornbury audit audited only ten of twenty-two properties and covered only three of the nine relevant years. Dr. Kettlewell's analysis should encompass all twenty-two properties and the full nine-year period, using primary source data rather than extrapolation wherever possible.
In terms of the report's presentation, I recommend that Dr. Kettlewell reference the Thornbury audit as corroborative of her own independent conclusions but that she base her opinions on her own independent analysis of the full data set. This approach serves dual purposes. First, it provides a stronger foundation for the damages opinions by demonstrating that they rest on a comprehensive, property-by-property analysis rather than on an extrapolation from a limited sample. Second, it preempts the defense challenge that we expect from Whitfield, Barrow & Crane LLP — namely, that the Thornbury extrapolation from ten properties to twenty-two, and from three years to nine, was speculative and unreliable. If Dr. Kettlewell has independently analyzed all twenty-two properties across all nine years, the extrapolation critique becomes moot.
We should be mindful that defense counsel Nathan Whitfield III and Gabriela Montes of Whitfield, Barrow & Crane will almost certainly seize upon any perceived over-reliance on the Thornbury extrapolation as a basis for a Daubert challenge. The Thornbury audit, while professionally conducted, was designed as a preliminary compliance audit — not as a litigation-grade forensic analysis. By treating Thornbury as corroborative rather than foundational, we insulate Dr. Kettlewell's opinions from this line of attack.
C. Data Handoff
The Thornbury work papers should be provided to Dr. Kettlewell so that she may review the audit methodology and findings and incorporate them as appropriate into her own analysis. However, this data transfer must be handled with care to preserve applicable privilege protections. The Thornbury engagement was initiated before litigation, but at a time when litigation was reasonably anticipated (the compliance hotline report from Ms. Kerrigan was received on November 8, 2021, and counsel was engaged shortly thereafter). Thus, while the Thornbury work papers may be subject to work-product protection, that protection must be actively maintained.
I recommend that we establish a formal data-transfer protocol between Thornbury and Ridgeline, conducted under Calderwood & Harkness's supervision and documented by an appropriate transmittal letter referencing the privilege protections applicable to the materials. Carlos Espinoza and I will coordinate the logistics of this transfer. All Thornbury work papers provided to Ridgeline should be Bates-stamped and logged as privileged materials in our privilege log, and Ridgeline should be instructed not to disclose the Thornbury materials to any third party without our prior authorization.
III. RECOMMENDED SCOPE OF EXPERT REPORT
A. GRR Reconstruction Methodology
The cornerstone of Dr. Kettlewell's expert report must be the reconstruction of the true Gross Room Revenue for each of the twenty-two Coastal Palms franchised hotel properties — consisting of eighteen Verimark Suites-branded properties and four Verimark Select-branded properties — for each calendar year from 2013 through 2021.
The primary objective of this reconstruction is to determine, with as much precision as the available data permits, the total GRR that should have been reported by Coastal Palms to Verimark under the FLAs, and to quantify the delta between that true GRR and the GRR that was actually reported. This delta — the underreported GRR — is the basis upon which all direct underpayment calculations flow.
Analytical Approach. I recommend that Dr. Kettlewell employ a property-by-property, year-by-year reconstruction methodology using multiple independent data sources, rather than relying solely on extrapolation from a sample of properties or years. This granular approach is made possible by the comprehensive documentary record now available post-discovery. Where primary source data is available for a given property and year (as it is for most of the portfolio and most of the relevant period), Dr. Kettlewell should rely on that primary data. Where gaps exist — as they may for the 2013–2015 period for certain properties due to PMS system migrations — she should use alternative data sources (such as bank records, tax returns, and STR data) to fill those gaps and should document her methodology transparently for each such instance.
Contractual Definition of GRR. The GRR reconstruction must be grounded in the definition of GRR set forth in Section 4.1 of the FLAs. That section defines GRR as follows:
"[A]ll revenues derived from or attributable to the rental of guest rooms at the Hotel, including revenues from any booking channel, direct or indirect, and regardless of the entity collecting such revenue."
This definition is deliberately broad. It encompasses revenues from all booking channels (OTA, brand.com, property direct, walk-in, corporate-direct, and group), it is not limited to revenues collected by the franchisee entity itself (extending to revenues collected by any entity, such as Suncoast), and it operates on a gross-revenue basis (before any deductions for commissions, management fees, or other costs).
Revenue Categories to Capture. Dr. Kettlewell's GRR reconstruction should capture three principal categories of revenue that were excluded from or underreported in Coastal Palms' monthly GRR reports:
(1) Revenues Reported to Verimark. The monthly GRR reports filed by Coastal Palms under FLA § 4.1 establish the baseline of reported GRR. These reports cover the period from 2007 through 2021 and are maintained by Verimark's franchise operations department under the supervision of Deidre Langston, SVP, Franchise Operations. The reported GRR figures are not themselves in dispute; rather, they represent the floor from which the underreporting delta is measured.
(2) Revenues Collected by Suncoast Room Management Inc. This is the largest category of unreported revenue. Suncoast collected revenues through three principal channels: (a) the gulfcoastrooms.com website, which served as an alternative direct-booking platform outside the Verimark brand reservation system; (b) walk-in bookings processed by front-desk staff at the direction of property-level managers acting on instructions from Coastal Palms' corporate office; and (c) corporate-direct contracts negotiated by Suncoast with corporate clients for discounted room blocks, bypassing the Verimark brand sales organization. Suncoast retained a 12% management fee on all revenues it collected before remitting the net balance to the property-level operating entities (Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and others). Under FLA § 4.1, both the 12% management fee and the remitted balance constitute GRR, because both amounts are "derived from or attributable to the rental of guest rooms" and the definition applies "regardless of the entity collecting such revenue." Dr. Kettlewell's reconstruction must capture the full gross amount collected by Suncoast — including the management fee — and add it to the baseline reported GRR.
(3) Gross OTA Revenues. Coastal Palms improperly netted OTA commissions against GRR in its monthly reports to Verimark. That is, when a guest booked a room through an OTA platform (such as Aldermere Technologies, Bramwell Holdings, or similar) and the OTA remitted the net amount (room rate minus commission) to the property, Coastal Palms reported only the net amount as GRR, classifying the commission portion as "commissions receivable" and netting it against the revenue line. This practice is inconsistent with the plain language of FLA § 4.1, which defines GRR as "all revenues derived from or attributable to the rental of guest rooms" — a gross-revenue definition that does not permit deductions for distribution costs. Dr. Kettlewell should reverse the netting entries to reconstruct the gross OTA revenue for each property and year, and include the full gross amount in her GRR reconstruction.
Expected Findings. Based on the preliminary review conducted by Dr. Kettlewell's team at Ridgeline since her retention in December 2022, the following high-level findings are expected:
• For fiscal year 2021 alone, Coastal Palms reported GRR of $112.4 million across the twenty-two-property portfolio. Estimated true GRR for the same period is $145.6 million, reflecting underreporting of $33.2 million — an underreporting rate of approximately 29.5%.
• Cumulative underreported GRR for the full 2013–2021 period is estimated at approximately $197.8 million.
• The underreporting percentage varies by property and year, ranging from approximately 22% to 31%, with the higher percentages concentrated in properties with greater Suncoast penetration (particularly the four Fort Lauderdale-area Verimark Select properties and the six Verimark Suites properties in the Tampa–Sarasota corridor).
These preliminary figures are consistent with Thornbury's extrapolated estimate and will be refined as Dr. Kettlewell completes her independent property-by-property analysis.
B. Direct Underpayment Quantification
Based on the reconstructed underreported GRR of approximately $197.8 million, Dr. Kettlewell should calculate the following direct underpayments:
Underpaid Royalties. Under FLA § 4.2, Coastal Palms owes Verimark a continuing royalty fee equal to 5% of GRR, payable monthly. The underpaid royalty amount is calculated as 5% of the underreported GRR:
5% × $197.8 million = $9.89 million
Underpaid Marketing-Fund Contributions. Under FLA § 4.2(b), Coastal Palms is required to contribute 2.5% of GRR to the Verimark System Marketing Fund. The underpaid marketing-fund contribution is calculated as 2.5% of the underreported GRR:
2.5% × $197.8 million = $4.945 million
Underpaid Technology Fees. Under FLA § 4.3, Coastal Palms owes Verimark a monthly technology fee of $12.50 per available room for the Verimark property management, reservation, and revenue management systems. During the relevant period, Coastal Palms added a total of 214 rooms across four properties (through renovations, additions, and reclassifications of previously non-revenue spaces) without providing notice to Verimark or reporting the additional rooms for purposes of the technology fee calculation. The underpaid technology fee is calculated as follows:
214 rooms × $12.50 per available room per month × approximately 47 months (average period of non-reporting) = approximately $1.26 million
It should be noted that FLA § 4.3 provides for annual CPI adjustment of the technology fee, capped at 3% per year. Dr. Kettlewell should apply the actual CPI-adjusted rate for each year rather than using the base $12.50 rate for the entire period. This adjustment is expected to increase the technology-fee underpayment figure modestly, but the impact will depend on the specific years in which each property's unreported rooms were added.
Subtotal of Direct Underpayments:
C. Late-Payment Interest Calculation
FLA § 4.6 provides for late-payment interest on any amounts not paid when due at a rate of 1.5% per month, compounded monthly. This provision applies to all underpayments of royalties, marketing-fund contributions, and technology fees.
Dr. Kettlewell should build a month-by-month compounding model that calculates the accrued interest on each monthly underpayment from the date it was due (the 15th of the month following the month in which the GRR was earned, per FLA § 4.5) through a projected judgment date. For purposes of the initial report, I recommend using September 30, 2023 as the projected judgment date, which may be adjusted in a supplemental disclosure as the trial date becomes more certain.
The compounding model should reflect the actual monthly underpayment amounts (i.e., property-by-property, month-by-month) rather than applying the interest rate to a lump-sum underpayment figure. This level of granularity is important both for accuracy and for defensibility at deposition and trial.
Based on preliminary modeling, the estimated contractual late-payment interest through a projected judgment date of September 30, 2023 is approximately $28.4 million. This figure reflects the compounding effect of the 1.5% monthly rate over a period that, for the earliest underpayments (dating to January 2013), spans more than ten years.
We should anticipate that the defense will challenge the compounding methodology. The 1.5% monthly rate, when compounded, produces an effective annual interest rate of approximately 19.56%, which is significantly above prevailing market rates and which, over a multi-year period, generates substantial interest amounts. Whitfield, Barrow & Crane may argue that the compounding provision is unenforceable as a penalty, or they may argue that the statutory prejudgment interest rate should apply in lieu of the contractual rate.
To address this anticipated challenge, I recommend that Dr. Kettlewell prepare a simple-interest alternative calculation as a sensitivity analysis. Under the simple-interest methodology (1.5% per month, non-compounded), the estimated interest would be lower — likely in the range of $18–20 million. However, Dr. Kettlewell should lead with the contractual compound-interest figure, as it reflects the bargained-for terms of the FLAs. The simple-interest alternative should be presented as a secondary calculation, clearly labeled as a sensitivity analysis, so that the Court and jury have both figures available in the event that the enforceability of the compounding provision is contested.
D. Liquidated Damages Under FLA § 15.3
FLA § 15.3 provides for liquidated damages upon termination of the franchise for cause. Specifically, the provision states that upon termination for a material breach, the franchisee shall pay the franchisor liquidated damages in an amount equal to three times (3×) the trailing-twelve-month royalties for the terminated property. This provision is intended to compensate the franchisor for the lost future value of the franchise relationship, including the loss of future royalty streams, the impairment to brand value, and the administrative costs of transitioning the property out of the system.
For purposes of Dr. Kettlewell's calculation, trailing-twelve-month royalties must be computed using the corrected (true) GRR — not the underreported figures. This is because the liquidated-damages formula is designed to approximate the true economic value of the franchise relationship, which can only be measured by reference to actual revenues. Using the underreported GRR figures would allow Coastal Palms to benefit from its own breach by reducing its liquidated-damages exposure through the very underreporting that constitutes the breach.
The calculation is applied on a property-by-property basis, reflecting the varying revenue levels across the twenty-two-property portfolio. The aggregate calculation is as follows:
• Corrected annual royalties across all 22 properties (at 5% of corrected GRR): approximately $7.28 million.
• Liquidated damages per property: 3 × trailing-twelve-month corrected royalties for that property.
• Aggregate liquidated damages across all 22 properties: approximately $105.5 million.
The aggregate figure of $105.5 million is higher than the simple product of $7.28 million × 3 ($21.84 million) because the liquidated-damages formula is applied to each property individually, and the trailing-twelve-month period for each property may reflect peak-period revenues. The property-level detail underlying this calculation will be set forth in the exhibits to Dr. Kettlewell's report.
Note on Enforceability. The enforceability of the FLA § 15.3 liquidated-damages provision is a legal question that Carlos Espinoza is separately researching in a memorandum to be circulated to the team. The enforceability analysis turns on whether the liquidated-damages amount bears a reasonable relationship to the anticipated harm at the time of contracting, applying the standard set forth in Lefemine v. Baron, 573 So. 2d 326 (Fla. 1991), and its progeny. Dr. Kettlewell should present the calculation in her report without opining on the legal question of enforceability, but she should be prepared to testify — if asked at deposition or trial — that the 3× trailing-twelve-month royalty formula is consistent with industry practice in the hotel franchising sector and that, as a matter of forensic accounting analysis, the formula produces a result that is within the range of reasonable estimates of the franchisor's actual lost value upon termination.
E. Grand Total Damages Presentation
The grand total of recommended damages across all four categories is as follows:
This figure is consistent with the demand set forth in the Complaint and with the preliminary estimates that have been discussed with the client.
I recommend presenting the damages in a layered format in the expert report, with clear visual separation between the three components: (1) base underpayments, (2) interest, and (3) liquidated damages. This layered presentation serves several purposes. It allows the Court and jury to assess each component independently, understanding that the base underpayments are the least contested category, that the interest figure depends on the enforceability of the compound-interest provision, and that the liquidated-damages figure depends on the enforceability of the FLA § 15.3 provision. It also allows the trier of fact to award damages at any of the three layers without having to accept or reject the entire damages case as a package.
Dr. Kettlewell should prepare summary damages tables and, ideally, demonstrative exhibits (charts, graphs, property-level heat maps) that visually communicate the magnitude and pattern of underreporting across properties and years. These demonstratives will be useful not only in the expert report itself but also in any motion for partial summary judgment and at trial.
IV. KEY DATA SETS FOR DR. KETTLEWELL'S ANALYSIS
Dr. Kettlewell's GRR reconstruction and damages analysis will draw upon multiple independent data sources. The convergence of multiple data sources pointing to the same conclusion — that Coastal Palms systematically underreported GRR — will significantly strengthen the credibility and defensibility of her opinions. This section identifies the key data sets, their provenance, and their relevance to the analysis.
A. Suncoast Room Management Inc. Financial Records
The Suncoast financial records are the single most important data set for purposes of the GRR reconstruction. These records were not available to Thornbury at the time of the preliminary audit and were obtained only after hard-fought discovery, culminating in the Court's October 28, 2022 order granting Verimark's Motion to Compel. The supplemental production containing the Suncoast records was received on November 18, 2022 and comprised approximately 312,000 documents.
The Suncoast production includes the following categories of records:
• General Ledgers: Suncoast's general ledger accounts for fiscal years 2013–2021, recording all revenue, expense, and intercompany transactions.
• Bank Statements: Monthly bank statements for Suncoast's operating accounts at Ironclad National Bank and Westvale Trust Bank (now Crestline Trust Bank), reflecting deposits of room revenue and disbursements to property-level entities.
• Revenue Journals: Detailed revenue journals recording individual booking transactions by property, date, booking channel, room rate, and guest name.
• Management-Fee Invoices: Monthly invoices from Suncoast to the property-level LLCs (Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and others) reflecting the 12% management fee retained by Suncoast on direct-booking revenues.
• Booking Logs from gulfcoastrooms.com: Electronic booking records from the gulfcoastrooms.com website, including booking date, arrival date, departure date, room type, rate, and payment method.
• Corporate-Direct Contract Files: Executed contracts between Suncoast and corporate clients (including negotiated room rates, minimum night guarantees, and payment terms) for corporate-direct bookings that bypassed the Verimark brand reservation system.
These records are critical for reconstructing the direct-booking revenues that were diverted from GRR reports. The reconstruction methodology is straightforward: for each property and each month, Dr. Kettlewell will aggregate the Suncoast-collected revenues (from booking logs, revenue journals, and bank statements) and add them to the reported GRR baseline. The management-fee invoices provide a cross-check, as the 12% fee is a known percentage of total Suncoast-collected revenue.
As noted above, Suncoast retained a 12% management fee on direct-booking revenues before remitting the net balance to the property-level entities. Under FLA § 4.1, both the fee and the remitted amounts constitute GRR, because both are "derived from or attributable to the rental of guest rooms" and the definition applies "regardless of the entity collecting such revenue." Dr. Kettlewell should capture the full gross amount collected by Suncoast — not merely the net amount remitted to the property entities — in her GRR reconstruction.
Randall Brecker, who serves as President of Suncoast, was deposed over two days on January 9–10, 2023. During his testimony, Mr. Brecker made several significant admissions that bear directly on the GRR reconstruction. Most importantly, he testified that he personally directed controllers at the property level to exclude Suncoast-collected revenues from the monthly GRR reports submitted to Verimark. He further testified that the gulfcoastrooms.com website was specifically designed to capture bookings outside the Verimark brand reservation system, and that he was aware that the FLAs defined GRR broadly to include revenues from all booking channels. These admissions not only support the factual predicate for Dr. Kettlewell's reconstruction but also establish the intentional nature of the underreporting — a factor relevant to the enforceability of the liquidated-damages provision and to any punitive-damages claim that may be pursued.
B. OTA Net-Rate Reconciliation Data
The second principal category of unreported revenue involves the improper netting of OTA commissions against GRR. Coastal Palms classified net-rate OTA payments as "commissions receivable" on its internal books and reduced reported GRR by the amount of OTA commissions. This practice is inconsistent with FLA § 4.1's gross-revenue definition, which does not permit deductions for commissions, distribution costs, or other expenses.
To reconstruct gross OTA revenue for each property and year, Dr. Kettlewell will need the following data:
• OTA contracts (both master agreements and property-level rate agreements) with platforms including Hollowell Industries (including Drayton Software), Ridgeway & Co. (including Bramwell Holdings and Drayton Corporation), and other OTA partners;
• Booking-channel statements reflecting the gross booking value, commission rate, and net payment for each OTA reservation;
• Commission reconciliation reports prepared by Coastal Palms' accounting staff, which document the netting methodology employed; and
• Property-level accounting entries (journal entries and general ledger accounts) reflecting the classification of OTA commissions as "commissions receivable" and the netting of those commissions against reported GRR.
These documents were produced in two tranches: the initial production of approximately 84,000 documents on August 22, 2022, and the supplemental production of approximately 312,000 documents on November 18, 2022. The OTA-related documents are distributed across both productions. Nexagen has applied issue-coding to these documents, and the relevant subset has been identified for Dr. Kettlewell's review.
Dr. Kettlewell should reverse the netting entries to reconstruct gross OTA revenue for each property and year. The methodology is conceptually simple — for each property-month, she will identify the net OTA revenue reported in the GRR report, add back the OTA commissions that were netted out, and arrive at the gross OTA revenue that should have been reported. The OTA contracts and commission reconciliation reports will provide the commission rates needed to perform this add-back calculation.
C. Property Management System (PMS) Data
PMS data from all twenty-two hotel properties contains room-night-level transactional records and represents the most granular data set available for the GRR reconstruction. Each PMS record includes, at a minimum, the following fields: check-in date, check-out date, room number, room type, room rate, booking-channel source code (e.g., Verimark brand.com, OTA, Suncoast/gulfcoastrooms.com, walk-in, corporate-direct, group), payment method, and payment amount.
This granularity makes the PMS data the backbone of Dr. Kettlewell's property-by-property reconstruction. By aggregating PMS-level room revenue by property, month, and booking channel, she can independently calculate total GRR for each property-month and compare that figure to the reported GRR. The booking-channel source codes are particularly valuable, as they allow Dr. Kettlewell to isolate Suncoast-channel bookings and OTA bookings and to verify that these revenue streams were indeed excluded from or underreported in the GRR reports.
PMS data was produced in native format as part of the November 18, 2022 supplemental production. Nexagen Document Solutions LLC has processed and hosted this data in a structured database format suitable for analytical review. Dr. Kettlewell's team at Ridgeline has been working with the processed PMS data since her retention in December 2022.
Important caveat regarding data completeness: PMS data for the 2013–2015 period may be incomplete for some properties due to system migrations that occurred during that period. Specifically, several Coastal Palms properties transitioned from an older PMS platform (RoomMaster) to a newer platform (Thackeray Solutions by Ridgeline Industries) between 2014 and 2016, and historical data from the RoomMaster system was not fully migrated to the Ridgeline Industries platform at all properties. Dr. Kettlewell should identify any gaps in PMS data coverage and use alternative data sources — including bank records, tax returns, STR data, and county tourist development tax filings — to fill those gaps. Each such instance should be documented transparently in the report, with a clear explanation of the alternative data source used and the methodology employed to estimate the missing PMS data.
D. Monthly GRR Reports Filed with Verimark
These are Coastal Palms' own monthly revenue reports submitted to Verimark under FLA § 4.1 for each of the twenty-two properties, covering the period from 2007 through 2021. As noted above, these reports establish the baseline of reported GRR against which the underreporting delta is measured. The monthly GRR reports are not themselves contested; rather, Verimark's claim is that these reports systematically understated true GRR by excluding Suncoast-collected revenues and netting OTA commissions.
The monthly GRR reports are maintained by Verimark's franchise operations department under the supervision of Deidre Langston, SVP, Franchise Operations. These records were collected as part of Verimark's own document preservation and have already been provided to Ridgeline as part of the initial data delivery in December 2022.
E. Financial Statements Submitted to Ironclad National Bank
A particularly compelling data source — and a key impeachment point for trial — consists of the financial statements submitted by Coastal Palms to Ironclad National Bank in connection with Coastal Palms' commercial real estate mortgage loans. Ironclad holds first-lien mortgage loans on eighteen of the twenty-two Coastal Palms properties, with an aggregate outstanding balance of approximately $94 million.
These financial statements were obtained via a Subpoena Duces Tecum served on Ironclad National Bank on August 8, 2022, directed to Devon Schultz, SVP, Commercial Real Estate Lending. The subpoena was not contested by either Ironclad or Coastal Palms, and the responsive documents were produced on September 19, 2022.
The significance of the Ironclad financial statements lies in the likelihood that they reflect higher revenue figures than those reported to Verimark. When seeking or maintaining commercial mortgage financing, borrowers have an incentive to present the strongest possible revenue figures to their lenders, as loan-to-value ratios and debt-service coverage ratios are directly affected by reported revenues. Conversely, when reporting GRR to a franchisor for purposes of calculating royalties and fees, franchisees have an incentive to understate revenues to minimize fee obligations. If the financial statements submitted to Ironclad show higher revenues than the GRR reports submitted to Verimark for the same properties and periods, this discrepancy powerfully corroborates the underreporting theory and impeaches any defense claim that Coastal Palms' GRR reporting was conducted in good faith.
Dr. Kettlewell should systematically compare the Ironclad-submitted financial statements to the Verimark GRR reports for each property and year where both data sets are available, and should identify and quantify any discrepancies. This comparison should be presented as a separate section or exhibit in her report, as it provides an independent cross-check on the GRR reconstruction and a vivid illustration of Coastal Palms' dual-track reporting.
F. Tax Returns and Internal Financial Statements
Coastal Palms' entity-level and property-level tax returns (both federal and Florida state) for the 2013–2021 period provide another independent data source for cross-checking the GRR reconstruction. Like the Ironclad financial statements, tax returns may show higher gross revenues than the GRR reports submitted to Verimark, because taxpayers generally have an incentive to accurately report revenues on tax returns (failure to report income constituting a separate legal violation) even if they underreport revenues to franchisors for fee-calculation purposes.
In addition to tax returns, Dr. Kettlewell should review the internal financial statements, profit-and-loss statements, and balance sheets for the following entities:
• Coastal Palms Franchise Holdings LLC
• Gulf Breeze Hospitality LLC
• Savannah Lodging Partners LLC
• Suncoast Room Management Inc.
These internal financial statements, produced in discovery, may contain revenue line items that differ from the GRR reports and that are consistent with the higher (true) GRR figures reconstructed by Dr. Kettlewell.
G. Deposition Testimony
While Dr. Kettlewell's analysis will be grounded primarily in documentary and financial data, the deposition testimony taken during fact discovery provides essential context for understanding the underreporting scheme and for interpreting the financial data. I recommend that Dr. Kettlewell review the following key deposition transcripts:
Randall Brecker (Days 1 & 2, January 9–10, 2023). As noted above, Mr. Brecker is the President of Suncoast and the individual who directed the underreporting scheme. His deposition testimony includes admissions regarding the formation and purpose of Suncoast, his direction to property-level controllers to exclude Suncoast-collected revenues from monthly GRR reports, and his knowledge of the GRR definition in the FLAs. His testimony establishes the intentional and systematic nature of the underreporting.
Janet Kerrigan (deposed approximately January 2023). Ms. Kerrigan is a former Coastal Palms regional controller who served as the initial whistleblower. Her testimony describes the instructions she received from Mr. Brecker to exclude direct-booking revenues from GRR reports, her growing discomfort with those instructions, her understanding that the practice violated the FLAs, and her November 8, 2021 call to Verimark's compliance hotline that triggered the Thornbury audit and ultimately this litigation.
Property-Level Managers and Accountants (10 depositions, January–March 2023). A series of ten depositions of property-level general managers, front-office managers, and accountants were taken across the portfolio. A consistent theme emerges from these depositions: direction from "corporate" (i.e., Mr. Brecker and the Coastal Palms central office) to use the Suncoast channel for walk-in and corporate-direct bookings, with the understood purpose of diverting those revenues away from Verimark's GRR reporting framework. These depositions corroborate the systematic, portfolio-wide nature of the underreporting practice.
Nolan Prescott (deposed approximately February 2023). Mr. Prescott holds a 25% equity interest in Coastal Palms Franchise Holdings LLC. During his deposition, he claimed lack of knowledge of the underreporting scheme. However, this testimony is undermined by the documentary record showing that Mr. Prescott received quarterly financial summaries from Coastal Palms' CFO that included separate line items for Suncoast revenue. Dr. Kettlewell should be aware of this discrepancy, as the defense may attempt to use Mr. Prescott's testimony to argue that the underreporting was limited in scope or unauthorized.
Dr. Kettlewell should review these transcripts not for the purpose of forming legal conclusions but to ensure that her reconstruction methodology is consistent with the factual narrative established by the testimony and that she is prepared to address at her own deposition any questions about how the deposition testimony informed her analysis.
V. ANTICIPATED DEFENSE EXPERT CHALLENGES
A. Expected Defense Position
Coastal Palms has retained Hargrove Economic Consulting Inc., led by Professor Grant Hargrove, PhD, CPA, as its damages expert. Prof. Hargrove's report is due on May 15, 2023, approximately one month after the service of Dr. Kettlewell's report. While we do not yet have the benefit of reviewing Hargrove's report, the defense's litigation posture to date provides a reasonable basis for anticipating the arguments he is likely to advance.
Coastal Palms, through its counsel at Whitfield, Barrow & Crane LLP (Nathan Whitfield III and Gabriela Montes), has maintained a consistent defense position since its February 28, 2022 Answer and Affirmative Defenses. That filing denied any breach of the FLAs and asserted that Coastal Palms' GRR reporting reflected a "reasonable interpretation" of FLA § 4.1's definition of GRR — specifically, the position that revenues collected by Suncoast (a separate legal entity from the franchisee) were not "derived from" the hotel and that OTA commissions could properly be netted against GRR as a cost of revenue generation.
Based on this litigation posture, the deposition testimony of Coastal Palms' witnesses, and our assessment of the defense strategy, we anticipate that Hargrove's report will advance the following positions:
(1) GRR Definition Ambiguity. Hargrove will likely argue that FLA § 4.1's GRR definition is ambiguous as applied to revenues collected by a separate management entity (Suncoast). He may opine that a "reasonable" interpretation of the GRR definition would exclude revenues collected by entities other than the franchisee itself, and that Coastal Palms' reporting methodology was consistent with at least one reasonable reading of the contract.
(2) Narrower GRR Definition. Adopting this narrower interpretation, Hargrove will likely exclude Suncoast-collected revenues (or a substantial portion thereof) from his GRR calculation. He may also exclude walk-in cash payments that were processed through the Suncoast system, arguing that these payments were not properly documented and cannot be reliably quantified. Additionally, he is likely to adopt the net OTA revenue figure (after commission netting) rather than the gross figure, consistent with the defense's position that OTA commissions are a cost of revenue generation.
(3) Reduced Underpayment Estimate. Based on his narrower GRR definition, Hargrove may opine that the maximum underpayment is in the range of $5–8 million — a fraction of our $16.095 million direct underpayment figure. This reduced figure would flow through to lower interest and liquidated-damages calculations as well.
(4) Extrapolation Methodology Attack. If Dr. Kettlewell's report relies to any degree on extrapolation from audited properties to non-audited properties, or from audited years to non-audited years, Hargrove will challenge the extrapolation methodology. He may argue that underreporting rates varied significantly across properties and years, that the audited sample is not representative, and that any extrapolation produces unreliable results. This is the Thornbury critique that we discussed in Section II.B above.
(5) Interest Compounding Challenge. Hargrove will likely present an alternative interest calculation using simple interest rather than compound interest, or using a lower rate (such as the Florida statutory prejudgment interest rate), and will argue that the contractual compound-interest provision is an unenforceable penalty.
B. Recommended Preemptive Measures in the Kettlewell Report
Dr. Kettlewell's report should be drafted to preemptively address each of these anticipated challenges, closing off the defense's strongest arguments before they are made. Specifically:
(1) On the GRR Definition. Dr. Kettlewell should analyze the plain language of FLA § 4.1 and demonstrate that the definition's inclusion of revenues "from any booking channel, direct or indirect, and regardless of the entity collecting such revenue" unambiguously encompasses revenues collected by Suncoast. While the ultimate interpretation of the contract is a legal question for the Court, Dr. Kettlewell can — and should — apply the contractual definition as written and explain why her application is consistent with the text of the provision. She should also note that the definition is consistent with the AHLEI (American Hotel & Lodging Educational Institute) standard definition of gross room revenue used in the hotel franchising industry, which similarly captures revenues from all sources without regard to the collecting entity.
(2) On Extrapolation. By performing a property-by-property, year-by-year analysis for all twenty-two properties across the full 2013–2021 period, Dr. Kettlewell renders the extrapolation critique entirely moot. This is perhaps the most significant advantage of the comprehensive analytical approach recommended in this memorandum. Hargrove's extrapolation attack will have no target if Dr. Kettlewell's opinions are based on direct analysis of each property and year rather than on extrapolation from a sample.
(3) On OTA Netting. Dr. Kettlewell should present the FLA § 4.1 definition and demonstrate that it is a gross-revenue definition that does not permit netting of distribution costs, commissions, or other expenses. She should present both gross and net OTA revenue figures for each property and year, so that the delta is transparent and the Court can assess the impact of the netting issue independently. She should also identify industry standards and practices that support the gross-revenue treatment, if such standards exist.
(4) On Interest Compounding. As discussed in Section III.C above, Dr. Kettlewell should present the contractual compound-interest calculation (1.5% per month, compounded monthly, per FLA § 4.6) as her primary interest figure, and should prepare a simple-interest alternative calculation as a sensitivity analysis. This dual presentation demonstrates transparency and ensures that the Court has the information needed to award interest under either methodology.
In addition to these specific preemptive measures, Dr. Kettlewell's report should be drafted with a careful eye toward admissibility. Every opinion should be tied to a clearly articulated methodology, grounded in reliable data, and consistent with accepted principles of forensic accounting. The report should identify all data sources relied upon, describe the analytical steps taken, and explain the basis for each conclusion. This rigor is essential both for surviving a Daubert challenge and for credibility at trial.
VI. REPORT STRUCTURE AND TIMELINE
A. Recommended Report Structure
I recommend that Dr. Kettlewell's expert report be organized as follows:
1. Qualifications and Engagement Background. Dr. Kettlewell's curriculum vitae, professional qualifications, prior expert testimony experience, and a description of her engagement in this matter (including the scope of her retention, the materials provided to her, and her billing rate).
2. Summary of Opinions and Conclusions. A concise summary of each of Dr. Kettlewell's principal opinions, including the grand total damages figure and the component figures for direct underpayments, late-payment interest, and liquidated damages. This section should be drafted to serve as a standalone summary that can be understood without reference to the remainder of the report.
3. Factual Background and Data Sources Relied Upon. A description of the factual background of the dispute, the FLA provisions relevant to the damages analysis, and a comprehensive list of all data sources, documents, and other materials reviewed by Dr. Kettlewell in forming her opinions.
4. GRR Reconstruction Methodology. A detailed description of the property-by-property, year-by-year GRR reconstruction methodology, including the three revenue categories captured (reported GRR baseline, Suncoast-collected revenues, and gross OTA revenues), the analytical steps performed, and the results for each property and year.
5. Underpaid Royalties Calculation. Calculation of underpaid royalties at 5% of underreported GRR, presented on a property-by-property and year-by-year basis.
6. Underpaid Marketing-Fund Contributions Calculation. Calculation of underpaid marketing-fund contributions at 2.5% of underreported GRR, presented on a property-by-property and year-by-year basis.
7. Underpaid Technology Fees Calculation. Calculation of underpaid technology fees for the 214 unreported rooms across four properties, applying the CPI-adjusted rates for each relevant year.
8. Late-Payment Interest Model. Description and results of the month-by-month compounding interest model (1.5% per month compounded, per FLA § 4.6), together with the simple-interest alternative calculation presented as a sensitivity analysis.
9. Liquidated Damages Computation Under FLA § 15.3. Calculation of liquidated damages upon termination for cause, equal to 3× trailing-twelve-month corrected royalties for each of the twenty-two properties.
10. Summary Damages Tables. Consolidated tables presenting the grand total damages and each component, in the layered format recommended in Section III.E above.
11. Exhibits and Appendices. Property-level detail tables for each of the twenty-two properties; data-source index with Bates ranges and production dates; sensitivity analyses (including simple-interest alternative and alternative GRR scenarios); methodology documentation for data gaps (2013–2015 PMS data); and supporting schedules.
B. Timeline. The current date is March 28, 2023. The expert report service deadline is April 14, 2023, giving us seventeen calendar days to finalize and serve the report. This is an aggressive timeline, but it is achievable given the substantial preliminary work already completed by Dr. Kettlewell and the Ridgeline team since the December 12, 2022 retention.
The key milestones for the remaining period are as follows:
Subsequent deadlines in the expert discovery schedule are as follows:
• Defendant's expert report (Hargrove Economic Consulting): May 15, 2023
• Plaintiff's rebuttal expert report (Dr. Kettlewell): June 9, 2023
• Expert depositions (both Dr. Kettlewell and Prof. Hargrove): June 26–27, 2023
I will continue to monitor compliance with these deadlines and will circulate a revised timeline if any adjustments become necessary.
VII. COORDINATION WITH ONGOING LITIGATION ACTIVITIES
A. Rebuttal Report Planning
Upon receipt of Prof. Hargrove's expert report on or about May 15, 2023, we will conduct an immediate and thorough review of his opinions, methodology, and data sources. Carlos Espinoza will prepare a detailed memorandum analyzing Hargrove's report and identifying the points on which rebuttal is warranted. That memorandum will be circulated to the full team (Priya Anand, Douglas Carmichael, and me) and will serve as the basis for a working session with Dr. Kettlewell to discuss rebuttal topics.
The rebuttal report deadline of June 9, 2023 provides approximately twenty-five days after receipt of Hargrove's report. While this is a compressed timeline, the preliminary rebuttal framework that we will develop in advance (based on the anticipated defense positions discussed in Section V above) should allow us to move quickly once we see the actual report. Dr. Kettlewell's familiarity with the data and her completed analysis will similarly facilitate a rapid rebuttal.
B. Expert Deposition Preparation
Expert depositions are currently scheduled for June 26–27, 2023. Both Dr. Kettlewell and Prof. Hargrove are expected to be deposed during this two-day window. Priya Anand will lead the deposition preparation for Dr. Kettlewell, and I will assist. A comprehensive deposition preparation memorandum will be circulated to the team approximately one week before the deposition (i.e., by approximately June 19, 2023).
The preparation session with Dr. Kettlewell should focus on the following areas: (i) the methodology underlying each component of her damages analysis, with particular attention to the GRR reconstruction approach and the interest compounding model; (ii) her treatment of data gaps for the 2013–2015 period; (iii) anticipated defense challenges to the GRR definition and the liquidated-damages calculation; (iv) the relationship between her analysis and the Thornbury preliminary audit; and (v) her qualifications and prior testimony experience. We should also prepare Dr. Kettlewell for potential questions about her communications with counsel, including any direction provided by Calderwood & Harkness regarding the scope or presentation of her opinions.
With respect to the Hargrove deposition, I recommend that Priya Anand take the lead, focusing on the weaknesses in Hargrove's narrower GRR definition, the analytical gaps in any alternative damages calculation he presents, and his failure to account for the Suncoast revenue stream and the OTA netting issue.
C. Summary Judgment Considerations
A favorable and well-supported expert report significantly strengthens the foundation for a motion for partial summary judgment on liability. We are considering filing such a motion after the close of all discovery (August 4, 2023) on Counts I (breach of the FLAs — underreporting of GRR) and Count II (breach of the FLAs — failure to pay royalties, marketing-fund contributions, and technology fees). The motion would argue that the undisputed material facts — including Randall Brecker's deposition admissions, the documentary evidence of the Suncoast diversion scheme, and the expert testimony establishing the magnitude of the underpayments — establish liability as a matter of law, leaving only the precise amount of damages for trial.
With this potential motion in mind, Dr. Kettlewell's report should be drafted to meet the admissibility standards applicable in Florida courts. Florida adopted the Daubert standard for expert testimony effective July 1, 2019, replacing the former Frye standard. Under Section 90.702, Florida Statutes, and the Daubert framework as interpreted by Florida courts (including the Florida Supreme Court's 2023 decision reaffirming the applicability of Daubert in In re Amendments to Florida Evidence Code), expert testimony must be based on sufficient facts or data, be the product of reliable principles and methods, and reflect a reliable application of those principles and methods to the facts of the case. The Marsh v. Valyou, 977 So. 2d 543 (Fla. 2007), line of cases further requires that the expert's methodology be clearly articulated and that all opinions be tied to reliable data and accepted principles within the expert's field.
Dr. Kettlewell's report should accordingly include clear articulations of her methodology, explicit identification of the data relied upon, and transparent documentation of any assumptions or limitations. The property-by-property, year-by-year approach — rather than reliance on extrapolation — is itself a methodological choice that enhances admissibility, as it reduces the degree of inference required and ties each opinion to specific, verifiable data points.
VIII. BUDGET AND FEE CONSIDERATIONS
Ridgeline Forensic Advisory LLC's total engagement budget for this matter is $1.85 million, encompassing the preparation of the opening expert report, any rebuttal report, deposition preparation and testimony, and trial preparation and testimony. This budget was established in the December 12, 2022 engagement letter and was approved by the client after consultation with Douglas Carmichael, the billing partner on this matter.
Through March 2023, Ridgeline has incurred fees of approximately $620,000. This spend covers the following work streams: preliminary analysis and data intake (approximately $185,000), data processing and database construction (approximately $210,000), initial GRR reconstruction analysis for the ten properties audited by Thornbu