CONFIDENTIAL — FOR MEDIATOR'S EYES ONLY Protected under Fla. Stat. § 44.405
CONFIDENTIAL MEDIATION STATEMENT OF PLAINTIFF VERIMARK HOSPITALITY GROUP INC.
Verimark Hospitality Group Inc. v. Coastal Palms Franchise Holdings LLC, et al. Case No. 1021-00006 Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida
Submitted to: Hon. Patricia Everwood (Ret.), Mediator Everwood Dispute Resolution PLLC 396 Alhambra Circle, Suite 800 Coral Gables, FL 33134
Mediation Scheduled for March 14–15, 2024
Submitted by: Priya Anand, Esq. FL Bar No. 0087451 Calderwood & Harkness LLP 110 SE 6th Street, Suite 2800 Fort Lauderdale, FL 33301 Tel: (954) 555-7800
Fax: (954) 555-7801
panand@calderwoodharkness.com
Counsel for Plaintiff Verimark Hospitality Group Inc.
March 8, 2024
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I. INTRODUCTION AND EXECUTIVE SUMMARY
Verimark Hospitality Group Inc. ("Verimark" or "VHG") respectfully submits this Confidential Mediation Statement to the Honorable Patricia Everwood (Ret.) in advance of the mediation sessions scheduled for March 14–15, 2024 at the offices of Everwood Dispute Resolution PLLC in Coral Gables, Florida. This statement is submitted for the Mediator's eyes only, pursuant to Florida Statute § 44.405 and the parties' mediation agreement, and is not being served on opposing counsel or any other party.
Verimark is a publicly traded hospitality and real estate company listed on the Nasdaq exchange under the ticker symbol VHMK. Incorporated in Delaware and headquartered at 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, Florida 33301, Verimark operates and franchises approximately 340 branded hotels across the southeastern United States under its three principal brand flags: "Verimark Suites," "Verimark Select," and "Verimark Grand." For fiscal year 2021, Verimark reported consolidated revenue of approximately $1.42 billion, of which $218 million was attributable to the franchise segment. The franchise model is a cornerstone of Verimark's business strategy, and the integrity of franchise-fee reporting is essential to the company's financial performance, brand equity, and obligations to its shareholders and the investing public.
This action concerns a breach-of-contract claim against Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "CPFH"), a Florida limited liability company that has served as Verimark's largest single franchise operator, operating 22 hotel properties (approximately 3,740 rooms) across Florida and Georgia under the Verimark Suites and Verimark Select brand flags. Through its managing member, Randall "Randy" Brecker, and an affiliated entity, Suncoast Room Management Inc., Coastal Palms engaged in a systematic and deliberate scheme to underreport Gross Room Revenue ("GRR") over a nine-year period spanning 2013 through 2021. The scheme involved diverting revenue through off-platform booking channels — including an unbranded website, gulfcoastrooms.com — and excluding those revenues from the GRR reports submitted to Verimark, thereby understating GRR by an estimated 22% to 31% across its portfolio. The result was a sustained and material underpayment of royalties, marketing-fund contributions, and technology fees owed to Verimark under 22 individual Franchise License Agreements ("FLAs").
The forensic evidence, developed through a comprehensive audit by Thornbury & Associates CPAs LLP and a detailed expert analysis by Dr. Sharon Kettlewell, CPA/CFF, CFE, of Ridgeline Forensic Advisory LLC, establishes that Coastal Palms underreported approximately $197.8 million in GRR over the nine-year period. Verimark's total claimed damages are approximately $150 million, comprising $16.095 million in direct underpayments of royalties, marketing-fund contributions, and technology fees; $28.4 million in contractual late-payment interest computed under FLA § 4.6 at 1.5% per month, compounded monthly; and $105.5 million in liquidated damages under FLA § 15.3, which provides for damages of three times trailing-twelve-month royalties per property upon termination for cause.
Critically, the Court has already resolved the central liability question in Verimark's favor. On February 9, 2024, the Honorable Richard M. Calloway, Circuit Judge, entered an Order granting Verimark's Motion for Partial Summary Judgment on Count I (Breach of Contract — Royalties) and Count II (Breach of Contract — Marketing Fund). The Court found, as a matter of law, that the FLA's definition of GRR is unambiguous, that it encompasses all revenues derived from the rental of guest rooms "regardless of the entity collecting such revenue," and that Coastal Palms' exclusion of Suncoast-collected revenues from its GRR reports constituted a material breach of FLA §§ 4.1 and 4.2. The Court simultaneously denied Coastal Palms' Cross-Motion for Summary Judgment on all counts and its counterclaim, and deferred the damages determination to trial. This ruling eliminates Coastal Palms' central defense — the claimed ambiguity in the GRR definition — and establishes that Verimark will recover on its core claims. Only the quantum of damages and certain ancillary issues remain to be adjudicated.
In light of this posture, Verimark enters mediation seeking a comprehensive resolution in the range of $80 million to $110 million, inclusive of cash payments, structured payments with adequate security, franchise-surrender provisions, and enhanced compliance components. This range reflects a probability-weighted analysis of Verimark's damages claim, adjusted for collectibility considerations and the litigation costs that would be incurred if the case proceeds to trial in May 2024. Verimark is prepared to negotiate in good faith and is committed to working with Mediator Everwood to achieve a fair, enforceable, and comprehensive resolution of this dispute.
II. PARTIES
A. Plaintiff: Verimark Hospitality Group Inc.
Verimark Hospitality Group Inc. is a Delaware corporation that is publicly traded on the Nasdaq exchange under the ticker symbol VHMK. Verimark's principal offices are located at 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, Florida 33301. Verimark is engaged in the hospitality and real estate industry, operating and franchising approximately 340 branded hotel properties across the southeastern United States under three brand flags: Verimark Suites (an extended-stay, select-service brand), Verimark Select (a focused-service brand), and Verimark Grand (a full-service, upscale brand).
For fiscal year 2021, Verimark reported consolidated revenue of approximately $1.42 billion. The franchise segment, which encompasses royalty fees, marketing-fund contributions, technology fees, and other franchise-related revenue streams, generated approximately $218 million in revenue for fiscal year 2021. The franchise model is central to Verimark's growth strategy, and the company maintains rigorous contractual and operational standards to protect the integrity of its brands, the consistency of the guest experience, and the financial reporting upon which franchise fees are calculated.
The key personnel involved in this matter on behalf of Verimark include:
• Renata Solis-Vega, Senior Vice President and General Counsel, who oversees all legal matters and has supervisory authority over the company's franchise-compliance and enforcement functions.
• Martin Holcomb, Executive Vice President and Chief Financial Officer, who oversees all financial reporting and has been involved in evaluating the financial impact of Coastal Palms' underreporting on Verimark's consolidated financial statements.
• Deidre Langston, Senior Vice President, Franchise Operations, who manages the day-to-day franchise-operations function, including compliance monitoring, audit oversight, and franchisee-relationship management.
Under the standard form Franchise License Agreements executed with its franchisees, Verimark requires each franchisee to report Gross Room Revenue on a monthly basis and to pay the following fees:
(i) A royalty fee of 5% of GRR (FLA § 4.1);
(ii) A marketing-fund contribution of 2.5% of GRR (FLA § 4.2); and
(iii) A technology fee of $12.50 per available room per month (FLA § 4.3), subject to annual CPI adjustment, capped at 3% per year.
These fees are the lifeblood of the franchise model and represent the consideration franchisees pay in exchange for the right to operate under Verimark's brand flags and to access Verimark's reservation systems, marketing platforms, technology infrastructure, and brand-standard support. The accurate and complete reporting of GRR is, accordingly, a fundamental obligation of every Verimark franchisee.
Verimark is represented in this matter by Calderwood & Harkness LLP, a nationally recognized litigation firm with offices in Fort Lauderdale, Miami, and Washington, D.C. The engagement team consists of:
• Priya Anand, Partner (Responsible Partner), FL Bar No. 0087451
• Douglas Carmichael, Partner (Billing Partner), FL Bar No. 0072918
• Yuki Nakamura, Senior Associate (Lead Associate), FL Bar No. 0109832
• Carlos Espinoza, Associate (Working Associate), FL Bar No. 0118447
B. Defendant: Coastal Palms Franchise Holdings LLC and Related Entities
Coastal Palms Franchise Holdings LLC is a Florida limited liability company with its principal office at 9500 Gulf Shore Drive, Suite 450, Naples, Florida 34108. The registered agent for Coastal Palms is Garrison Registered Agents LLC, located at 100 S. Ashley Drive, Suite 600, Tampa, Florida 33602.
The principals and members of Coastal Palms are:
• Randall "Randy" Brecker, Managing Member, holding a 60% equity interest. Mr. Brecker, age 58, is the operational leader of the Coastal Palms enterprise and, as the record demonstrates, was personally responsible for directing and perpetuating the revenue-diversion scheme at the heart of this case.
• Theresa Brecker, Member, holding a 15% equity interest. Ms. Brecker is the spouse of Randall Brecker and serves in a limited operational capacity.
• Nolan Prescott, Member, holding a 25% equity interest. Mr. Prescott, age 67, is described as a passive investor; however, discovery has established that he received quarterly financial summaries that included line items for Suncoast Room Management revenue, undermining his claim of ignorance regarding the revenue-diversion scheme.
Coastal Palms has been Verimark's largest single franchise operator, operating a portfolio of 22 franchised hotel properties — 18 under the Verimark Suites flag and 4 under the Verimark Select flag — across Florida and Georgia. The portfolio encompasses approximately 3,740 total guest rooms.
The property-level entities through which Coastal Palms holds and operates its hotel properties include, among others:
• Gulf Breeze Hospitality LLC, which holds 6 Verimark Suites properties in southwest Florida.
• Savannah Lodging Partners LLC, which holds 4 Verimark Suites properties in coastal Georgia.
• Additional property-level LLCs hold the remaining 12 properties.
Central to the scheme at issue in this case is Suncoast Room Management Inc., a Florida corporation of which Randall Brecker is the president and sole director. Suncoast was established to collect revenues from direct bookings — including walk-in guests, corporate-direct contract bookings, and bookings made through the unbranded website gulfcoastrooms.com — across the Coastal Palms portfolio. Suncoast retained a 12% "management fee" on all direct-booking revenues it collected before remitting the balance to the respective property-level LLCs. Neither Suncoast's gross collections nor its retained management fees were included in the GRR reports submitted to Verimark, resulting in a systematic and material understatement of the franchise fees owed.
For fiscal year 2021, Coastal Palms reported GRR of $112.4 million across its 22-property portfolio. Verimark's forensic analysis, conducted by Dr. Sharon Kettlewell of Ridgeline Forensic Advisory LLC and supported by the preliminary audit of Thornbury & Associates CPAs LLP, estimates that the true GRR for fiscal year 2021 was approximately $145.6 million — meaning that Coastal Palms underreported by approximately $33.2 million in that year alone. This pattern of underreporting extended back to at least January 2013 and persisted through the end of 2021.
A significant collectibility consideration is the lending relationship between Coastal Palms and its primary lender, Ironclad National Bank. Ironclad holds first-lien mortgage loans on 18 of Coastal Palms' 22 hotel properties, with an aggregate outstanding loan balance of approximately $94 million. The relationship manager at Ironclad is Devon Schultz, Senior Vice President. The senior lien position of Ironclad is a material consideration in evaluating the collectibility of any judgment or settlement, as discussed in greater detail in Section VIII below.
Coastal Palms and the other defendants are represented by Whitfield, Barrow & Crane LLP, headquartered at 1221 Brickell Avenue, Suite 3000, Miami, Florida 33131. The defense team consists of:
• Nathan Whitfield III, Senior Partner
• Gabriela Montes, Partner
• Ethan Doyle, Associate
C. Additional Defendants Named in Complaint
In addition to Coastal Palms Franchise Holdings LLC, Verimark has named the following additional defendants in its Complaint:
• Randall Brecker (individually), named in Count X (Civil Conspiracy), based on his personal direction and orchestration of the revenue-diversion scheme.
• Suncoast Room Management Inc., named in Count VII (Unjust Enrichment) and Count X (Civil Conspiracy), based on its role as the instrumentality through which revenues were diverted and the 12% management fee was retained.
The joinder of Mr. Brecker individually and Suncoast as defendants is significant for both liability and collectibility purposes. As discussed below, the forensic record demonstrates that Mr. Brecker personally directed property-level controllers and managers to route walk-in and corporate-direct bookings through Suncoast and to exclude those revenues from monthly GRR reports. His personal liability exposure provides additional settlement leverage and additional sources of recovery.
III. FACTUAL BACKGROUND
A. The Franchise Relationship
The franchise relationship between Verimark and Coastal Palms began on June 15, 2007, when the parties executed their first Franchise License Agreement for a single Verimark Suites property located in Naples, Florida. At that time, Coastal Palms was a relatively small operation, and the initial FLA reflected the standard form agreement that Verimark offers to all of its franchisees, with limited negotiated modifications.
Over the course of the following decade, the relationship expanded significantly. Coastal Palms executed 22 individual Franchise License Agreements with Verimark, covering properties across Florida and Georgia. The most recent FLA was executed on September 3, 2019. Each FLA carries a 20-year initial term, is governed by Florida law, and contains a mandatory venue provision designating Broward County, Florida as the exclusive venue for any litigation arising under the agreement. The FLAs are substantively uniform in their material terms, particularly with respect to revenue reporting, fee calculation, and enforcement provisions.
The contractual provisions at the core of this dispute are as follows:
Gross Room Revenue Definition (FLA § 4.1). The FLA defines Gross Room Revenue as "all revenues derived from or attributable to the rental of guest rooms at the Hotel, including revenues from any booking channel, direct or indirect, and regardless of the entity collecting such revenue." This definition is deliberately expansive. It was drafted to capture every dollar of room-rental revenue generated at a franchised property, regardless of whether that revenue was booked through Verimark's central reservation system, a third-party online travel agency, a direct booking by the property, or any other channel. The phrase "regardless of the entity collecting such revenue" is of particular relevance to this case, as it forecloses any argument that revenues collected by Suncoast Room Management Inc. — rather than by the property-level LLC that is the named franchisee — fall outside the GRR definition.
Royalty Fee (FLA § 4.1). Each franchisee is required to pay Verimark a royalty fee equal to 5% of monthly GRR. This royalty is the core franchise fee and represents the principal consideration for the right to operate under a Verimark brand flag and to access Verimark's reservation systems, brand-marketing platforms, and operational support.
Marketing-Fund Contribution (FLA § 4.2). Each franchisee is required to contribute 2.5% of monthly GRR to the Verimark system-wide marketing fund, which finances national advertising campaigns, digital marketing, loyalty programs, and other brand-promotion initiatives.
Technology Fee (FLA § 4.3). Each franchisee pays a technology fee of $12.50 per available room per month, which funds the provision of Verimark's property-management system, revenue-management tools, and central-reservation-system access. This fee is subject to annual adjustment based on the Consumer Price Index, with an annual cap of 3%.
Late-Payment Interest (FLA § 4.6). The FLA provides that any amounts not paid when due shall bear interest at the rate of 1.5% per month, compounded monthly. This provision was included to incentivize timely payment and to compensate Verimark for the time value of money lost when franchise fees are not remitted on schedule.
Liquidated Damages (FLA § 15.3). Upon termination of a FLA for cause, the franchisee is obligated to pay Verimark liquidated damages equal to three times the trailing-twelve-month royalty fees for the affected property. This provision reflects the parties' agreement, negotiated at arm's length and at the time of contracting, as to a reasonable estimate of the damages Verimark would suffer upon the premature termination of a franchise relationship due to the franchisee's material breach.
Audit Rights (FLA § 8.2). Verimark is entitled to audit a franchisee's financial records upon 10 business days' written notice. If an audit reveals that the franchisee has underpaid by more than 2% of reported GRR, the franchisee bears all costs of the audit. This provision incentivizes accurate reporting and provides Verimark with the contractual tools to verify compliance.
Material Breach and Cure (FLA §§ 14.1 and 14.2(c)). Under § 14.1, Verimark must provide written notice of a material breach and afford the franchisee a 30-day cure period. However, § 14.2(c) expressly provides that "systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure." This provision recognizes that systematic revenue underreporting strikes at the very foundation of the franchise relationship and cannot be remedied by a belated payment of the shortfall.
These contractual provisions, taken together, form a comprehensive framework for revenue reporting, fee calculation, and enforcement. As the Court's February 9, 2024 summary judgment ruling confirms, the obligations imposed by these provisions are clear and unambiguous, and Coastal Palms' failure to comply with them is beyond genuine dispute.
B. The Revenue Diversion Scheme
Beginning no later than January 2013, Coastal Palms — acting through its managing member, Randall Brecker — established and implemented a systematic scheme to divert revenue away from the GRR reporting framework required by the FLAs. The central instrumentality of this scheme was Suncoast Room Management Inc., a Florida corporation formed and controlled by Mr. Brecker, which served as the collection entity for revenue streams that were deliberately excluded from GRR reports to Verimark.
The scheme operated as follows. Suncoast was designated as the entity responsible for collecting revenues from three categories of bookings across the Coastal Palms portfolio:
(1) Walk-in bookings. Guests who arrived at a Coastal Palms property without a reservation and booked a room directly at the front desk were frequently processed through Suncoast's payment-processing infrastructure rather than through the Verimark property-management system. The revenues from these bookings were recorded on Suncoast's books and excluded from the property-level GRR reports submitted to Verimark.
(2) Corporate-direct contract bookings. Coastal Palms maintained direct contractual relationships with corporate clients, government agencies, and group-booking intermediaries. Revenue from these bookings was collected by Suncoast and similarly excluded from GRR reports.
(3) Online bookings through gulfcoastrooms.com. Suncoast operated an unbranded website, gulfcoastrooms.com, which listed room availability and rates for Coastal Palms' properties without identifying them as Verimark-branded hotels. Revenue from bookings made through this website was collected by Suncoast and excluded from GRR reports. The existence of this website was never disclosed to Verimark.
Upon collecting revenues from these channels, Suncoast retained a 12% "management fee" before forwarding the balance to the respective property-level LLCs (including Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and the other property-level entities). Neither the gross amount collected by Suncoast nor the retained management fee was included in the GRR reports submitted to Verimark. The practical effect was that a substantial portion of each property's room-rental revenue was diverted away from the franchise-fee base, resulting in a systematic underpayment of royalties, marketing-fund contributions, and technology fees.
In addition to the Suncoast-channeled revenue diversion, Coastal Palms further understated GRR by improperly treating third-party online travel agency ("OTA") revenues. Specifically, Coastal Palms classified net-rate OTA payments as "commissions receivable" and netted the OTA commission amounts against GRR, reporting only the net revenue rather than the gross amount. This netting violated FLA § 4.1's unambiguous requirement that GRR include all revenue derived from room rentals on a gross basis, without deduction for commissions or other costs.
The scheme was directed and orchestrated by Randall Brecker personally. This has been established through multiple sources of evidence:
• Mr. Brecker's own deposition testimony (taken over two days in February 2023), in which he admitted personally directing property-level controllers and managers to route walk-in and corporate-direct bookings through Suncoast and to exclude those revenues from the monthly GRR reports submitted to Verimark.
• The corroborating testimony of Janet Kerrigan, former Coastal Palms regional controller, who described receiving explicit instructions from Mr. Brecker to ensure that direct-booking revenues were processed through Suncoast and kept off the GRR reports.
• The depositions of 10 property-level managers and accountants, who consistently described a recurring pattern of direction from Mr. Brecker to route walk-in and corporate-direct bookings through Suncoast's payment infrastructure rather than the Verimark property-management system.
• Documentary evidence, including internal emails, memoranda, and financial summaries, produced during discovery (including the supplemental production of Suncoast records compelled by the Court's October 28, 2022 Order).
The scheme was deliberately concealed from Verimark. At no point during the nine-year period did Coastal Palms disclose to Verimark the existence of the gulfcoastrooms.com website, the revenue-collection activities of Suncoast, the 12% management fee retained by Suncoast, or the exclusion of direct-booking revenues from GRR reports. To the contrary, Coastal Palms submitted monthly GRR reports that, on their face, purported to reflect the full measure of room-rental revenue generated at each property.
C. Whistleblower Disclosure
The revenue-diversion scheme came to light through a whistleblower disclosure. On November 8, 2021, Janet Kerrigan, the former regional controller for Coastal Palms, contacted Verimark's compliance hotline and reported the systematic revenue-diversion scheme. Ms. Kerrigan had been terminated from her position at Coastal Palms in October 2021 under circumstances that she has described as retaliatory.
In her initial disclosure and in subsequent interviews with Verimark's in-house legal and compliance team, Ms. Kerrigan provided detailed information about the mechanics of the scheme, including the role of Suncoast Room Management Inc. as the collection entity for diverted revenues, the operation of the gulfcoastrooms.com website, the 12% management fee retained by Suncoast, and Mr. Brecker's personal involvement in directing property-level personnel to exclude direct-booking revenues from GRR reports. Ms. Kerrigan provided documents in her possession that corroborated her account, including internal financial summaries and email correspondence.
Ms. Kerrigan's disclosure triggered an immediate investigation by Verimark's in-house legal team, which in turn led to the retention of outside auditors and the commencement of a formal franchise-compliance audit.
D. Pre-Litigation Investigation
Following Ms. Kerrigan's whistleblower disclosure, Verimark retained Thornbury & Associates CPAs LLP to conduct a franchise-compliance audit of Coastal Palms' operations. Thornbury & Associates, led by Malcolm Thornbury, CPA, is a certified public accounting firm located at 1551 N. Flagler Drive, Suite 800, West Palm Beach, Florida 33401, with extensive experience in hospitality-industry auditing and franchise-compliance matters. The engagement commenced on November 22, 2021.
Thornbury's audit initially focused on Coastal Palms' top 10 properties by reported GRR, representing the largest revenue-generating hotels in the portfolio. The audit team obtained and analyzed available financial records, including property-management-system data, bank statements, tax returns, and OTA settlement reports, for fiscal years 2019 through 2021.
On January 18, 2022, Thornbury delivered its preliminary findings to Verimark's legal team. The results were striking: the 10 audited properties had underreported GRR by approximately 26% for the three-year period 2019–2021. When these findings were extrapolated across all 22 Coastal Palms properties and across the full nine-year period from 2013 through 2021, the estimated total underreported GRR was approximately $197.8 million. These preliminary findings were subsequently confirmed and refined by Dr. Sharon Kettlewell's forensic analysis, as described in Section V below.
E. Breach Notice and Failure to Cure
Armed with the Thornbury preliminary audit findings, Verimark issued a formal Notice of Material Breach to Coastal Palms on February 4, 2022. The Notice, addressed to Coastal Palms Franchise Holdings LLC at its principal office in Naples, Florida, and copied to Randall Brecker individually, described the revenue-diversion scheme in detail, cited the specific FLA provisions that had been breached (§§ 4.1, 4.2, 4.3, and related provisions), and demanded that Coastal Palms cure the breaches within 30 days in accordance with FLA § 14.1. The Notice also expressly reserved all of Verimark's rights and remedies under the FLAs, including the right to terminate the franchise relationships and to seek liquidated damages under § 15.3.
On February 28, 2022, Coastal Palms' counsel, Nathan Whitfield III of Whitfield, Barrow & Crane LLP, responded to the Notice of Material Breach. The response denied that any material breach had occurred and asserted that Suncoast's revenues were properly excluded from GRR under what counsel characterized as a "reasonable interpretation" of the FLA. Specifically, Coastal Palms contended that because Suncoast — rather than the franchisee entity itself — collected the revenues in question, those revenues did not fall within the GRR definition in § 4.1. The response offered no cure and tendered no payment.
The 30-day cure period expired on March 6, 2022. No cure was tendered, and no payment was made. The failure to cure triggered Verimark's right to terminate the FLAs for cause and to seek all available remedies, including liquidated damages.
IV. PROCEDURAL HISTORY
A. Complaint and Initial Pleadings
On March 7, 2022 — the day after the expiration of the cure period — Verimark filed its Complaint in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida, initiating this action under Case No. 1021-00006. The case was assigned to the Honorable Richard M. Calloway, Circuit Judge.
The Complaint asserts ten counts against the defendants:
Count I: Breach of Contract — Royalties (against Coastal Palms)
Count II: Breach of Contract — Marketing Fund (against Coastal Palms)
Count III: Breach of Contract — Technology Fees (against Coastal Palms)
Count IV: Breach of Implied Covenant of Good Faith and Fair Dealing (against Coastal Palms)
Count V: Fraudulent Concealment (against Coastal Palms and Brecker)
Count VI: Negligent Misrepresentation (against Coastal Palms and Brecker)
Count VII: Unjust Enrichment (against Suncoast Room Management Inc., pleaded in the alternative)
Count VIII: Declaratory Judgment — FLA Termination (against Coastal Palms)
Count IX: Accounting (against Coastal Palms, Suncoast, and Brecker)
Count X: Civil Conspiracy (against Brecker individually and Suncoast Room Management Inc.)
The Complaint seeks total damages of approximately $150 million, inclusive of direct underpayments, contractual late-payment interest, and liquidated damages, as well as declaratory relief, accounting, and such other relief as the Court deems just and proper.
On April 18, 2022, Coastal Palms filed its Answer, Affirmative Defenses, and Counterclaim. The Answer denied the material allegations of the Complaint and asserted various affirmative defenses, including the claimed ambiguity of the GRR definition, waiver, estoppel, statute of limitations, and failure to mitigate damages. The Counterclaim sought $12 million in damages based on alleged brand-standard violations by Verimark, including claims of deferred maintenance at the corporate level and inadequate reservation-system uptime that purportedly harmed Coastal Palms' revenue-generating capacity. Verimark filed its Answer to the Counterclaim on May 2, 2022, denying the material allegations and asserting its own affirmative defenses.
A Case Management Conference was held before Judge Calloway on June 14, 2022, at which the Court set the initial trial date for February 2024. The Court also entered a Case Management Order establishing deadlines for discovery, expert disclosure, and dispositive motions.
B. Discovery Phase
Discovery in this case was extensive and, at times, contentious — particularly with respect to Coastal Palms' resistance to producing the financial records of Suncoast Room Management Inc.
On July 11, 2022, Verimark served its First Set of Interrogatories (25 interrogatories) and First Request for Production of Documents (147 requests for production) on Coastal Palms. The discovery requests were broadly targeted at obtaining all financial records, booking data, payment-processing records, bank statements, tax returns, internal communications, and management reports relating to the Coastal Palms portfolio and, critically, to Suncoast Room Management Inc. and the gulfcoastrooms.com website.
Coastal Palms' initial document production, delivered on August 22, 2022, consisted of approximately 84,000 documents. While the production included certain property-level financial records and FLA-related correspondence, it was deficient in 23 categories of requested documents. Most notably, the production was entirely lacking in Suncoast Room Management financial records — the very records most critical to quantifying the revenue diversion at the heart of this case. Coastal Palms took the position that Suncoast was a separate legal entity not subject to the discovery obligations of Coastal Palms, notwithstanding the fact that Suncoast shared common ownership and management with Coastal Palms and was the instrumentality through which the alleged scheme was effected.
On September 15, 2022, Verimark filed a Motion to Compel Production of Suncoast Records, supported by a detailed declaration of Yuki Nakamura, Lead Associate, identifying the deficiencies in the production, the relevance of the Suncoast records, and the basis for compelling production under the applicable rules. The motion was briefed and argued before Judge Calloway, who entered an Order on October 28, 2022 granting the Motion to Compel and ordering Coastal Palms to produce all responsive Suncoast records within 21 days.
On November 18, 2022, Coastal Palms delivered a supplemental production consisting of approximately 312,000 additional documents, including Suncoast's financial records, bank statements, payment-processing data, and internal communications. This supplemental production proved to be extraordinarily important to Verimark's case, as it provided the transactional-level data needed to reconstruct the revenues collected by Suncoast and to quantify the GRR underreporting with precision.
The parties' e-discovery was managed by Nexagen Document Solutions LLC, located at 400 Northpark Town Center, Suite 500, Atlanta, Georgia 30328. Over the course of the discovery phase, Nexagen processed approximately 2.3 million documents totaling approximately 1.1 terabytes of data on behalf of Verimark. The parties entered into a joint E-discovery Protocol Stipulation, which was filed with the Court on June 20, 2022, establishing agreed-upon procedures for search-term negotiation, document-review protocols, privilege logging, and production formatting.
C. Fact Depositions
Verimark took 14 fact depositions during the period of January 9 through March 17, 2023. These depositions provided critical testimony corroborating the documentary evidence and establishing the personal involvement of Randall Brecker in the revenue-diversion scheme.
The most significant depositions included:
Randall Brecker (deposed over two days). Mr. Brecker's deposition was the centerpiece of the fact-discovery phase. Under examination, Mr. Brecker admitted that he personally directed property-level controllers and managers to route walk-in and corporate-direct bookings through Suncoast Room Management Inc. and to exclude those revenues from the monthly GRR reports submitted to Verimark. While Mr. Brecker attempted to characterize these instructions as based on a good-faith interpretation of the FLA, his admissions effectively eliminated any genuine dispute about the mechanics and intentionality of the scheme.
Theresa Brecker. Ms. Brecker's testimony was limited in scope, consistent with her relatively passive role in the Coastal Palms enterprise. She acknowledged awareness of Suncoast's existence but claimed limited knowledge of its specific revenue-collection activities.
Nolan Prescott. Mr. Prescott, the 25% equity holder in Coastal Palms, claimed a lack of knowledge regarding the revenue-diversion scheme. However, this claim was directly contradicted by documents produced in discovery — specifically, quarterly financial summaries that Mr. Prescott received from Coastal Palms' management, which included line items for Suncoast Room Management revenue. These documents demonstrate that Mr. Prescott was, at a minimum, aware that Suncoast was generating revenue from the Coastal Palms properties and that this revenue was being tracked separately from the GRR reported to Verimark.
Janet Kerrigan. Ms. Kerrigan, the whistleblower, provided detailed testimony that corroborated her initial disclosure to Verimark's compliance hotline. She described the mechanics of the revenue-diversion scheme, the operation of the gulfcoastrooms.com website, the 12% management fee retained by Suncoast, and Mr. Brecker's explicit instructions to exclude direct-booking revenues from GRR reports. Her testimony was specific, consistent, and supported by contemporaneous documents.
Property-Level Managers and Accountants (10 depositions). Verimark deposed 10 property-level general managers and accounting personnel from across the Coastal Palms portfolio. A consistent theme emerged from these depositions: each witness described receiving direction from Randall Brecker — in some cases directly and in other cases through intermediaries — to route walk-in and corporate-direct bookings through Suncoast's payment-processing infrastructure and to ensure that these revenues were not included in the monthly GRR reports submitted to Verimark. Several witnesses expressed discomfort with these instructions but stated that they complied based on Mr. Brecker's authority as the managing member.
D. Expert Phase
Following the close of fact discovery, the case proceeded to the expert phase.
Verimark's Forensic Expert: Dr. Sharon Kettlewell. Verimark retained Dr. Sharon Kettlewell, CPA/CFF, CFE, of Ridgeline Forensic Advisory LLC, located at 200 S. Biscayne Boulevard, Suite 1400, Miami, Florida 33131. Dr. Kettlewell is a forensic accountant with 28 years of experience in forensic accounting, fraud examination, and damages quantification, with particular expertise in the hospitality industry. Her expert report was served on April 14, 2023. Her rebuttal report, addressing the opinions of Coastal Palms' expert, was served on June 9, 2023. Dr. Kettlewell was deposed on June 26, 2023. Her methodology and findings are described in detail in Section V below.
Coastal Palms' Damages Expert: Prof. Grant Hargrove. Coastal Palms retained Prof. Grant Hargrove, PhD, CPA, of Hargrove Economic Consulting Inc. Prof. Hargrove's expert report was served on May 15, 2023. His opinions are discussed and rebutted in Section V below. Prof. Hargrove was deposed on June 27, 2023.
Discovery closed on August 4, 2023.
E. Dispositive Motions and the Court's Summary Judgment Ruling
On September 29, 2023, Verimark filed its Motion for Partial Summary Judgment on Counts I and II, seeking a determination of liability as a matter of law on the breach-of-contract claims relating to royalties and marketing-fund contributions. The motion was supported by a 42-page memorandum of law and a Statement of 127 Undisputed Material Facts, each supported by citations to the extensive record of deposition testimony, documentary evidence, and expert analysis developed during discovery.
On October 13, 2023, Coastal Palms filed its Cross-Motion for Summary Judgment on all counts of the Complaint and on its own Counterclaim, arguing that the GRR definition was ambiguous, that Coastal Palms' interpretation was reasonable, and that triable issues of fact precluded summary judgment on any of Verimark's claims.
The parties exchanged response briefs on November 17, 2023, and reply briefs on December 8, 2023. Oral argument was held before Judge Calloway on January 19, 2024.
On February 9, 2024, Judge Calloway entered his Order on the cross-motions for summary judgment. The Court's ruling is discussed in detail in Section VI below, but in summary:
• The Court granted Verimark's Motion for Partial Summary Judgment on Count I (Breach of Contract — Royalties) and Count II (Breach of Contract — Marketing Fund), finding liability as a matter of law.
• The Court denied Coastal Palms' Cross-Motion for Summary Judgment on all counts and on the Counterclaim.
• The Court deferred the determination of damages to trial.
• The trial was continued from its original February 2024 date to May 2024.
The Court's ruling is a watershed moment in this litigation. By granting partial summary judgment on liability for Counts I and II, the Court has determined that Verimark will recover on its core breach-of-contract claims. The only remaining questions for trial are the quantum of damages on Counts I and II, the merits of the remaining counts (including the liquidated-damages claim under Count VIII/§ 15.3), and Coastal Palms' counterclaim. The Court's rejection of the GRR-ambiguity defense — which was the centerpiece of Coastal Palms' litigation strategy — leaves the defense with limited options at trial.
V. DAMAGES ANALYSIS
A. Overview of Verimark's Damages Claim ($150 Million)
Verimark's total damages claim is approximately $150 million, comprising three distinct categories: (1) direct underpayments of royalties, marketing-fund contributions, and technology fees totaling $16.095 million; (2) contractual late-payment interest of $28.4 million, calculated under FLA § 4.6 at the contractual rate of 1.5% per month, compounded monthly; and (3) liquidated damages of $105.5 million, calculated under FLA § 15.3 at three times the trailing-twelve-month royalties per property across all 22 properties.
Each component is discussed in detail below, with reference to the supporting forensic analysis of Dr. Sharon Kettlewell and the relevant FLA provisions.
B. Underreported Gross Room Revenue (2013–2021)
The foundation of Verimark's damages claim is the forensic determination that Coastal Palms systematically underreported Gross Room Revenue over the nine-year period from 2013 through 2021. The cumulative underreported GRR across all 22 properties during this period is estimated at $197.8 million, based on the forensic analysis conducted by Thornbury & Associates CPAs LLP (preliminary audit) and Dr. Sharon Kettlewell of Ridgeline Forensic Advisory LLC (comprehensive expert analysis).
For fiscal year 2021 alone, Coastal Palms reported GRR of $112.4 million across its 22-property portfolio. Dr. Kettlewell's forensic reconstruction of the true GRR for that year, based on Suncoast bank records, OTA reconciliation data, property-management-system records, and tax returns, determined that the true GRR was approximately $145.6 million — an underreporting of $33.2 million, or approximately 29.5%, for fiscal year 2021.
Across the full nine-year period and all 22 properties, the underreporting percentage ranged from 22% to 31%, varying by property and by year. Properties with higher walk-in traffic and corporate-direct business tended to have higher underreporting percentages, as a greater proportion of their revenues was channeled through Suncoast.
The diverted revenue fell into three categories:
(1) Direct bookings processed through Suncoast. This was the largest category of diverted revenue and included walk-in bookings, corporate-direct contract bookings, and bookings made through the unbranded gulfcoastrooms.com website. Revenue from these bookings was collected by Suncoast and excluded entirely from GRR reports.
(2) Suncoast's 12% management fee. Even with respect to the portion of direct-booking revenues that Suncoast remitted to the property-level LLCs, the 12% management fee retained by Suncoast represented revenue derived from room rentals that was never included in GRR. This management fee alone represented a significant revenue stream that was diverted from the franchise-fee base.
(3) Net-rate OTA revenue improperly netted against GRR. Coastal Palms treated OTA commissions as deductions from GRR, reporting only the net revenue received after deduction of OTA fees. Under § 4.1's unambiguous gross-revenue definition, the full amount charged to the guest — not the net amount received by the hotel after OTA commissions — constitutes GRR.
C. Direct Underpayments ($16.095 Million)
Applying the contractual fee rates to the $197.8 million in underreported GRR yields the following direct underpayment calculations:
Underpaid royalties: 5% × $197.8 million = $9.89 million
Underpaid marketing-fund contributions: 2.5% × $197.8 million = $4.945 million
Underpaid technology fees: Coastal Palms added 214 guest rooms across 4 properties without providing notice to Verimark, thereby avoiding technology-fee obligations on those rooms. At the contractual rate of $12.50 per room per month (subject to CPI adjustment) over an average of 47 months of underreporting, the underpaid technology fees total approximately $1.26 million.
Subtotal — Direct Underpayments: $9.89M + $4.945M + $1.26M = $16.095 million
These direct underpayments represent the minimum quantum of Verimark's damages. They are arithmetically derived from the forensic determination of underreported GRR and the contractual fee rates specified in the FLAs. Given the Court's summary judgment ruling establishing liability on Counts I and II, recovery of these underpayments is virtually certain at trial.
D. Contractual Late-Payment Interest ($28.4 Million)
FLA § 4.6 provides that any franchise-fee amounts not paid when due shall bear interest at the rate of 1.5% per month, compounded monthly. This late-payment interest provision was a negotiated term of the FLAs, agreed to by Coastal Palms at the time each FLA was executed, and serves as liquidated compensation for the time value of money lost by Verimark when franchise fees are not timely remitted.
Dr. Kettlewell's damages model calculated the compounded interest on each monthly underpayment from the date that payment should have been made (i.e., the date each monthly GRR report and accompanying fee payment was due under the FLA) through the projected judgment date. Because the underpayments span a nine-year period (2013–2021), and because interest compounds monthly at the contractual rate, the aggregate late-payment interest is substantial.
Dr. Kettlewell's calculation yielded total contractual late-payment interest of $28.4 million. This figure reflects the compounding effect of the 1.5% monthly rate over the extended period during which the underpayments accrued. It should be noted that the interest continues to accrue; the $28.4 million figure is based on a projected judgment date and will increase with each passing month that the underpayments remain outstanding.
E. Liquidated Damages ($105.5 Million)
FLA § 15.3 provides that, upon termination of a Franchise License Agreement for cause, the franchisee is obligated to pay Verimark liquidated damages equal to three times the trailing-twelve-month royalty fees for the affected property. This provision reflects the parties' ex ante estimate of the damages Verimark would suffer upon the premature termination of a franchise relationship due to the franchisee's material breach, including the loss of future royalty streams, the cost of de-identification of the property, the impact on brand reputation and guest loyalty, and the administrative costs of refranchising or repositioning the property.
Dr. Kettlewell computed the liquidated damages on a property-by-property basis, using the corrected (forensically reconstructed) GRR for each property's trailing twelve months. The aggregate trailing-twelve-month royalties across all 22 properties, calculated on corrected GRR, total approximately $7.28 million per year. Applying the 3× multiplier on a per-property basis yields aggregate liquidated damages of $105.5 million.
Verimark's position is that the liquidated-damages provision of § 15.3 is enforceable under Florida law. Florida courts consistently enforce liquidated-damages provisions where the amount represents a reasonable estimate of anticipated damages at the time of contracting and where actual damages would be difficult to calculate with precision. See, e.g., Lefemine v. Baron, 573 So. 2d 326 (Fla. 1991); M & R Inv. Co. v. Hacker, 511 So. 2d 1099 (Fla. 3d DCA 1987). The liquidated-damages provision in the Verimark FLAs satisfies both prongs of this test: (1) at the time of contracting, the parties had no way to predict with certainty the actual damages that would result from a franchise termination for cause, given the multitude of variables involved (remaining term, property performance, refranchising costs, brand impact, etc.); and (2) the 3× trailing-twelve-month royalty formula provides a reasonable approximation of the franchisor's losses, particularly in light of the 20-year FLA terms and the substantial investment Verimark makes in each franchise relationship.
Coastal Palms is expected to argue at trial that the $105.5 million liquidated-damages amount is an unenforceable penalty, particularly when aggregated across all 22 properties. Verimark anticipates and is prepared to rebut this argument with expert testimony and case-law support. Nevertheless, the enforceability of the liquidated-damages provision represents the most significant area of trial risk in this case, as discussed in Section XI below.
F. Reconciliation
The total claimed damages of approximately $150 million represent Verimark's full contractual entitlement under the FLAs. As discussed in Section XI, Verimark's settlement range of $80–$110 million reflects appropriate discounting for litigation risk, collectibility constraints, and the time and expense of further proceedings.
G. Dr. Sharon Kettlewell's Forensic Analysis
Verimark's forensic damages case is supported by the expert analysis of Dr. Sharon Kettlewell, CPA/CFF, CFE, a principal at Ridgeline Forensic Advisory LLC, located at 200 S. Biscayne Boulevard, Suite 1400, Miami, Florida 33131. Dr. Kettlewell brings 28 years of forensic accounting experience to this engagement, with particular expertise in franchise-fee disputes, hospitality-industry financial analysis, and fraud examination. She holds certifications as a Certified Public Accountant, Certified in Financial Forensics (CFF), and Certified Fraud Examiner (CFE).
Dr. Kettlewell's methodology involved a comprehensive reconstruction of the true GRR for each of the 22 Coastal Palms properties for each year of the 2013–2021 period. Her analysis drew upon multiple independent data sources:
• Suncoast bank records, including deposit records, payment-processing statements, and bank statements, which documented the revenues collected by Suncoast from direct bookings, gulfcoastrooms.com, and corporate-direct contracts.
• OTA reconciliation data, which allowed Dr. Kettlewell to determine the gross revenue from OTA bookings (before deduction of OTA commissions) and to compare this to the amounts reported by Coastal Palms in its GRR reports.
• Property-management-system ("PMS") data, which recorded room-night transactions at each property, including walk-in bookings that were subsequently routed through Suncoast's payment-processing infrastructure.
• Tax returns, including federal and state income-tax returns filed by Coastal Palms, Suncoast, and the property-level LLCs, which provided independent corroboration of the revenues generated by each entity.
Dr. Kettlewell cross-referenced these data sources with the preliminary audit findings of Thornbury & Associates CPAs LLP to confirm the consistency and reliability of her estimates. Her analysis yielded the following key findings:
(1) Coastal Palms systematically excluded Suncoast-collected revenues from the GRR reports submitted to Verimark for each of the 22 properties during the 2013–2021 period.
(2) Coastal Palms improperly netted OTA commissions against GRR, reporting net rather than gross OTA revenue.
(3) The estimated total underreported GRR for the nine-year period was $197.8 million.
(4) The resulting underpayments of royalties, marketing-fund contributions, and technology fees totaled $16.095 million.
(5) Contractual late-payment interest on the underpayments, calculated at 1.5% per month compounded monthly, totaled $28.4 million.
Dr. Kettlewell's expert report was served on April 14, 2023. Her rebuttal report, responding to the opinions of Coastal Palms' expert, Prof. Grant Hargrove, was served on June 9, 2023. Dr. Kettlewell was deposed on June 26, 2023. Her testimony was clear, detailed, and well-supported by the underlying data. The total engagement fee for Ridgeline Forensic Advisory LLC, inclusive of testimony preparation, is $1.85 million.
H. Rebuttal of Defendant's Expert (Prof. Grant Hargrove)
Coastal Palms' damages expert, Prof. Grant Hargrove, PhD, CPA, of Hargrove Economic Consulting Inc., opined that the maximum underpayment was only $6.2 million. Prof. Hargrove reached this dramatically lower figure by adopting a narrower definition of GRR that excluded walk-in cash payments and attributed only net OTA revenue (after deduction of OTA commissions) to the franchise-fee base. In essence, Prof. Hargrove's damages opinion was built upon the same GRR-ambiguity defense that Coastal Palms advanced on summary judgment — the very defense that the Court squarely rejected in its February 9, 2024 Order.
The Court's summary judgment ruling fatally undermines the foundation of Prof. Hargrove's opinion. By holding that FLA § 4.1's GRR definition is unambiguous and that it encompasses all revenues from room rentals "regardless of the entity collecting such revenue," the Court has determined as a matter of law that the narrowed GRR definition upon which Prof. Hargrove relied is incorrect. Prof. Hargrove's damages calculation is therefore based on an erroneous legal premise and is entitled to little, if any, weight at trial.
Beyond the legal deficiency, Dr. Kettlewell's rebuttal report identified additional methodological errors in Prof. Hargrove's analysis:
(1) Failure to account for Suncoast's management fee. Prof. Hargrove excluded the 12% management fee retained by Suncoast from his GRR calculation, treating it as a legitimate management expense rather than as a component of room-rental revenue. Under § 4.1, however, GRR includes all revenue "derived from or attributable to the rental of guest rooms," which plainly encompasses the full amount collected from the guest — not the amount remaining after deduction of a management fee imposed by a franchisor-affiliated entity.
(2) Improper exclusion of cash walk-in payments. Prof. Hargrove excluded cash payments from walk-in guests from his GRR calculation, on the theory that these payments could not be reliably traced to specific room-rental transactions. Dr. Kettlewell demonstrated that PMS records documented these transactions with sufficient specificity to support their inclusion in GRR, and that the FLA's GRR definition makes no distinction between cash and non-cash payments.
(3) Inconsistency with unambiguous contractual language. Prof. Hargrove's analysis systematically adopted interpretations of the GRR definition that favored Coastal Palms, rather than applying the plain and unambiguous language of § 4.1 as written. The Court's summary judgment ruling confirms that § 4.1's language is clear and that Coastal Palms' interpretive arguments are without merit.
Dr. Kettlewell's rebuttal report addressed each of these errors in detail and confirmed the $197.8 million underreported-GRR figure. In light of the Court's ruling, Verimark is confident that Dr. Kettlewell's analysis, rather than Prof. Hargrove's, will be credited by the trier of fact at trial.
VI. THE COURT'S SUMMARY JUDGMENT RULING
On February 9, 2024, the Honorable Richard M. Calloway, Circuit Judge, entered an Order on the parties' cross-motions for summary judgment. A copy of the Order is appended as Exhibit 1 to this Mediation Statement. The Court's ruling represents the most significant development in this litigation to date and fundamentally alters the landscape in which the parties approach mediation.