PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
March 11, 2024
MEMORANDUM
FROM: Priya Anand, Partner (FL Bar No. 0087451) Douglas Carmichael, Partner (FL Bar No. 0093217) Calderwood & Harkness LLP 110 SE 6th Street, Suite 2800 Fort Lauderdale, FL 33301
TO: Renata Solis-Vega, Senior Vice President & General Counsel Martin Holcomb, Executive Vice President & Chief Financial Officer Verimark Hospitality Group Inc. 2400 East Las Olas Boulevard, Suite 3100 Fort Lauderdale, FL 33301
RE: Settlement Authority Recommendation — 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
PRIVILEGE NOTICE: This memorandum is protected by attorney-client privilege and the attorney work product doctrine. It contains confidential legal analysis, strategic assessments, and settlement recommendations prepared by Calderwood & Harkness LLP for Verimark Hospitality Group Inc. in connection with pending litigation. This memorandum is intended solely for the named recipients and authorized members of Verimark's Board of Directors. Do not distribute, copy, or disclose this memorandum or its contents to any person without prior written approval of counsel at Calderwood & Harkness LLP.
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I. EXECUTIVE SUMMARY
The purpose of this memorandum is to recommend that the Board of Directors of Verimark Hospitality Group Inc. ("Verimark" or the "Company") authorize the undersigned counsel to negotiate and accept a settlement of the above-captioned litigation in the range of $75 million to $95 million in monetary consideration, together with substantial non-monetary relief, at the mediation session scheduled for March 14–15, 2024. This recommendation is based on a thorough assessment of the litigation posture, probability-weighted damages analysis, collectibility constraints, litigation-cost exposure, and the strategic value of the non-monetary components of the proposed settlement.
The litigation arises from a systematic, years-long scheme by Coastal Palms Franchise Holdings LLC ("Coastal Palms") and its affiliates to underreport Gross Room Revenue ("GRR") across 22 franchised hotel properties operating under the Verimark Suites and Verimark Select brands. The underreporting was accomplished primarily through the use of a related entity, Suncoast Room Management Inc. ("Suncoast"), to collect and divert revenues from direct bookings — including walk-in guests, corporate-direct contracts, and bookings made through the gulfcoastrooms.com website — outside of the GRR calculation reported to Verimark. This scheme resulted in an estimated $197.8 million in underreported GRR over the 2013–2021 period, and corresponding underpayments of royalties, marketing-fund contributions, and technology fees totaling approximately $16.1 million in direct underpayments, with additional claims for contractual late-payment interest and liquidated damages bringing Verimark's total claimed damages to approximately $150 million.
Verimark's litigation position was substantially strengthened by the Court's February 9, 2024 Order granting Verimark's Motion for Partial Summary Judgment on Counts I and II. The Court found that Coastal Palms' systematic exclusion of Suncoast-collected revenues from GRR constituted a material breach of Sections 4.1 and 4.2 of the Franchise License Agreements ("FLAs") as a matter of law. This ruling establishes liability on the two principal breach-of-contract counts, leaving only the damages determination for trial. The Court also denied Coastal Palms' Cross-Motion for Summary Judgment in its entirety, including on its $12 million counterclaim.
Mediation is scheduled for March 14–15, 2024, before the Honorable Patricia Everwood (Ret.) at Everwood Dispute Resolution PLLC in Coral Gables, Florida. The parties agreed to mediate on February 23, 2024, following the summary judgment ruling. This represents a meaningful opportunity to resolve this matter on favorable terms before incurring the substantial additional costs of a May 2024 trial.
Our recommended settlement package includes the following key components:
• Monetary Consideration: $75 million to $95 million, with a target settlement at or near $87.5 million (the midpoint of the authority range);
• Cash Payment at Closing: $25 million funded via wire transfer from an Ironclad National Bank escrow account;
• Structured Payments: Balance of $62.5 million (at the $87.5 million target) paid in eight semi-annual installments of $7.8125 million each, with 6.5% per annum simple interest on the outstanding balance;
• Franchise Surrender: Coastal Palms to surrender franchise rights to 14 of 22 properties, with a 120-day de-identification period;
• Enhanced Audit Protocols: Quarterly audits, real-time POS integration, and cost-shifting to Coastal Palms for a five-year period at the 8 retained properties;
• Personal Guaranties: From Randall Brecker and Nolan Prescott for the full structured-payment amount;
• First-Priority Security Interest: On 8 unencumbered hotel properties with an aggregate appraised value of $71.2 million;
• Mutual Release: Broad mutual release of all claims through the effective date, with dismissal of Coastal Palms' counterclaim with prejudice; and
• Confidentiality and Non-Disparagement: Subject to Verimark's SEC disclosure obligations.
The recommended settlement range of $75 million to $95 million reflects a carefully calibrated assessment that accounts for: (i) the probability-weighted damages analysis yielding a range of approximately $70 million to $105 million, with a midpoint of approximately $85 million; (ii) the significant litigation risks that remain with respect to damages quantification, particularly the enforceability of the FLA's liquidated-damages provision under Florida's penalty doctrine; (iii) the projected additional litigation costs of $1.0 million to $2.2 million through trial, and $500,000 to $1.0 million for appellate proceedings; (iv) the collectibility constraints imposed by Ironclad National Bank's approximately $94 million in first-lien mortgage loans on 18 of the 22 properties; (v) the risk that aggressive post-judgment enforcement could trigger a Coastal Palms bankruptcy filing, which would substantially impair Verimark's recovery; and (vi) the significant non-monetary value — estimated at $15 million to $25 million in net present value over a 10-year horizon — of the franchise-surrender and re-franchising opportunity.
In our judgment, a settlement within the recommended range, coupled with the non-monetary relief described herein, delivers a total value to Verimark that compares favorably to the expected value of proceeding through trial, while providing the certainty of recovery that a litigated outcome cannot guarantee. We respectfully request that the Board approve the recommended settlement authority in advance of the March 14–15 mediation, and that it authorize Priya Anand to accept any settlement within the $75 million to $95 million range at mediation without the need to recess for further Board approval, in order to maintain negotiating momentum and credibility with the mediator and opposing counsel.
II. PROCEDURAL POSTURE AND LITIGATION HISTORY
A. Pre-Litigation Investigation
The investigation that ultimately gave rise to this litigation was triggered by a whistleblower report submitted to Verimark's compliance hotline on November 8, 2021. The report was made by Janet Kerrigan, a former regional controller for Coastal Palms who had been terminated by Coastal Palms in October 2021. Ms. Kerrigan reported that Coastal Palms had been systematically diverting revenues through Suncoast Room Management Inc. and excluding those revenues from the GRR calculations reported to Verimark. Her report included specific allegations regarding the use of the gulfcoastrooms.com direct-booking website, corporate-direct contracts managed through Suncoast, and walk-in cash payments that were processed outside of the Verimark-integrated property management system.
Upon receipt of the Kerrigan report, Verimark's compliance team conducted an initial internal review and promptly escalated the matter to the General Counsel's office. On November 22, 2021, Verimark retained Thornbury & Associates CPAs LLP ("Thornbury"), led by audit partner Malcolm Thornbury, CPA, to conduct a comprehensive franchise-compliance audit of the top 10 Coastal Palms properties ranked by reported GRR. This engagement was structured to examine the 2019–2021 reporting period across those 10 properties and to determine whether the allegations in the Kerrigan report could be corroborated through financial records.
On January 18, 2022, Thornbury delivered its preliminary findings. The results were striking. Across the 10 audited properties, Thornbury determined that GRR had been underreported by approximately 26% for the 2019–2021 period. The principal mechanism for this underreporting was confirmed to be the Suncoast revenue-collection arrangement described in the Kerrigan report, supplemented by improper netting of online travel agency ("OTA") payments against GRR.
Thornbury extrapolated its findings across all 22 Coastal Palms properties and across the full contractual period from 2013 through 2021, estimating total underreported GRR of approximately $197.8 million. While the extrapolation necessarily involved assumptions regarding properties and time periods not directly audited, the methodology was conservative and was subsequently validated by the more comprehensive forensic analysis conducted by Dr. Sharon Kettlewell of Ridgeline Forensic Advisory LLC during the litigation.
On February 4, 2022, armed with the Thornbury preliminary findings, Verimark issued a formal Notice of Material Breach to Coastal Palms pursuant to Section 14.1 of the FLAs. The Notice demanded that Coastal Palms cure the identified breaches within 30 days by, among other things, providing a full accounting of all Suncoast-collected revenues, paying all underpaid royalties and marketing-fund contributions together with accrued interest, and implementing immediate corrective measures to ensure accurate GRR reporting going forward.
On February 28, 2022, the law firm of Whitfield, Barrow & Crane LLP, acting through Nathan Whitfield III, Senior Partner, responded on behalf of Coastal Palms. The response denied any material breach, asserting that Suncoast's revenues were not properly included in the FLA definition of GRR and that Coastal Palms' reporting practices were consistent with industry custom and the parties' course of dealing over the nine-year franchise relationship. The response made no offer to cure and provided no accounting of Suncoast revenues.
The 30-day cure period expired on March 6, 2022, with no cure having been tendered by Coastal Palms.
B. Litigation Timeline Highlights
On March 7, 2022, the day after expiration of the cure period, Verimark filed its Complaint in the Circuit Court of the 17th Judicial Circuit, Broward County, Florida. The Complaint asserted ten counts against Coastal Palms Franchise Holdings LLC and its affiliated entities, including breach of contract (royalties), breach of contract (marketing-fund contributions), breach of contract (technology fees), fraudulent concealment, civil conspiracy, aiding and abetting breach of fiduciary duty, unjust enrichment, declaratory judgment, accounting, and tortious interference with contractual relations. Calderwood & Harkness LLP was retained as litigation counsel simultaneously with the filing.
On April 18, 2022, Coastal Palms, through Whitfield, Barrow & Crane LLP, filed its Answer and Affirmative Defenses, denying the material allegations of the Complaint and raising fifteen affirmative defenses including waiver, estoppel, laches, unclean hands, failure to mitigate, and contractual ambiguity regarding the GRR definition. Coastal Palms simultaneously filed a $12 million Counterclaim against Verimark alleging brand-standard violations at certain Verimark Suites and Verimark Select properties, claiming that Verimark had failed to maintain brand quality and had over-billed Coastal Palms for technology-system upgrades and property-improvement plan requirements.
The Case Management Conference was held on June 14, 2022, before the Honorable Judge Calloway. The Court set an aggressive schedule for discovery and trial preparation, with trial originally set for February 2024. The Court entered a Confidentiality and Protective Order governing the production of proprietary financial information by both parties and non-party Suncoast Room Management Inc.
Discovery in this case was extensive and hard-fought. Verimark propounded comprehensive document requests targeting Coastal Palms' financial records, Suncoast's banking and operational records, and communications between Coastal Palms' principals and its property-management and accounting personnel. Coastal Palms' initial document production of approximately 84,000 documents was served on August 22, 2022. However, that production was woefully incomplete, omitting virtually all records relating to Suncoast's operations and revenues.
Verimark was compelled to file a Motion to Compel on September 16, 2022, seeking production of all Suncoast financial records, including bank statements, merchant processing records, OTA settlement statements, and the gulfcoastrooms.com booking data. The Court granted the Motion to Compel on October 28, 2022, ordering production within 21 days and rejecting Coastal Palms' arguments that Suncoast was a non-party entity outside its control. The Court specifically found that Coastal Palms exercised sufficient control over Suncoast — whose sole officer, Randall Brecker, was also the 60% equity holder and managing member of Coastal Palms — to warrant a finding that Suncoast's records were within Coastal Palms' possession, custody, or control.
Following the Court's order, an additional 312,000 documents were produced, including Suncoast bank records, OTA reconciliation reports, and property-management system ("PMS") data. In total, Nexagen Document Solutions LLC processed approximately 2.3 million documents comprising approximately 1.1 terabytes of data, utilizing predictive coding and technology-assisted review to identify and prioritize the most relevant materials. The total document production across all parties ultimately comprised approximately 396,000 documents.
Fact depositions were conducted between January 9 and March 17, 2023. Fourteen witnesses were deposed, including Randall Brecker (two days), Nolan Prescott, Theresa Brecker, Janet Kerrigan, six property-level general managers, two Coastal Palms accounting personnel, and two Verimark franchise-operations executives. Expert depositions were taken on June 26–27, 2023, covering Dr. Sharon Kettlewell (Verimark's damages expert) and Professor Grant Hargrove (Coastal Palms' damages expert).
Discovery closed on August 4, 2023, following the completion of the expert phase and resolution of several remaining discovery disputes through a telephonic conference with Judge Calloway's chambers.
C. Summary Judgment Rulings
On September 29, 2023, Verimark filed its Motion for Partial Summary Judgment on Counts I and II of the Complaint — the breach-of-contract claims relating to underpaid royalties and marketing-fund contributions, respectively. The motion argued that the undisputed material facts established that Coastal Palms systematically excluded Suncoast-collected revenues from its GRR calculations in violation of the plain language of FLA Sections 4.1 and 4.2. Verimark's motion was supported by extensive record evidence, including the Suncoast bank records produced pursuant to the Court's October 28, 2022 order, Randall Brecker's deposition testimony acknowledging the Suncoast revenue-collection arrangement, and Dr. Kettlewell's forensic analysis demonstrating the magnitude of the underreporting.
On October 13, 2023, Coastal Palms filed its Cross-Motion for Summary Judgment on all counts of Verimark's Complaint and on its own Counterclaim. Coastal Palms argued that the FLA's definition of GRR was ambiguous as to whether revenues collected by an affiliated management company (as opposed to the franchisee itself) were properly included, and that Verimark's course-of-dealing over nine years of franchise operations — during which Verimark allegedly knew or should have known about Suncoast's role — constituted waiver or estoppel.
Response briefs were filed on November 17, 2023, and reply briefs on December 8, 2023. Oral argument was held before Judge Calloway on January 19, 2024. Both Priya Anand and Nathan Whitfield III argued the motions. The argument lasted approximately three hours, with the Court asking pointed questions of both sides regarding the FLA's GRR definition, the relevance of Suncoast's corporate structure, and the applicability of the waiver and estoppel defenses.
On February 9, 2024, the Court issued its Order on the cross-motions. The ruling was strongly favorable to Verimark:
• The Court granted Verimark's Motion for Partial Summary Judgment on Counts I and II, finding as a matter of law that Coastal Palms' exclusion of Suncoast-collected revenues from GRR constituted a material breach of Sections 4.1 and 4.2 of each FLA. The Court held that the FLA's definition of "Gross Room Revenue" — encompassing "all revenue derived from or in connection with the rental of guest rooms at the Hotel, regardless of the method of payment, source of booking, or identity of the collecting entity" — was unambiguous and clearly encompassed revenues collected by Suncoast on behalf of the franchised properties.
• The Court denied Coastal Palms' Cross-Motion for Summary Judgment in its entirety. The Court rejected the ambiguity defense, the waiver defense (finding that Verimark's failure discover the scheme earlier did not constitute knowing acquiescence), and the estoppel defense (finding insufficient evidence of any affirmative representation by Verimark that Suncoast revenues need not be reported).
• The Court deferred the determination of damages on Counts I and II to trial, noting that genuine issues of material fact remained regarding the precise calculation of underreported GRR and the applicability of the FLA's late-payment interest and liquidated-damages provisions.
• The Court continued the trial from February 2024 to May 2024 to allow the parties adequate time to prepare for the damages trial and to explore settlement.
On February 23, 2024, following the summary judgment ruling, the parties agreed to participate in mediation before the Honorable Patricia Everwood (Ret.).
D. Significance of Summary Judgment Ruling for Settlement
The Court's February 9, 2024 Order fundamentally altered the litigation landscape and provides Verimark with substantial leverage entering mediation. Several aspects of the ruling are particularly significant:
First, liability has been established as a matter of law on the two principal counts. Coastal Palms can no longer contest that it breached the FLAs by excluding Suncoast revenues from GRR. The only remaining issue on Counts I and II is the amount of damages — a question that, while contested, is bounded by quantifiable financial data.
Second, the Court explicitly rejected Coastal Palms' "ambiguity" defense regarding the GRR definition. This was Coastal Palms' primary defense theory throughout the litigation, and its elimination removes the single most significant obstacle to Verimark's recovery. It also substantially undermines the foundation of Professor Hargrove's expert opinion, which was predicated on a narrower interpretation of GRR that the Court has now rejected.
Third, the denial of Coastal Palms' cross-motion, including on its counterclaim, signals that the Court views Coastal Palms' positions skeptically. While the counterclaim remains pending, Coastal Palms failed to obtain summary judgment even on its own affirmative claims, suggesting the counterclaim faces significant headwinds at trial.
The remaining issues for trial include: (i) the precise quantification of damages on Counts I and II; (ii) liability and damages on Counts III through X, which present additional complexity and some litigation risk; and (iii) Coastal Palms' counterclaim. However, the core liability finding on the two principal counts means that Coastal Palms now faces a near-certain adverse monetary judgment, with the question being only how large that judgment will be. This dynamic should create meaningful pressure on Coastal Palms to settle on terms favorable to Verimark.
III. DAMAGES ANALYSIS
A. Verimark's Claimed Damages — Full Model
Verimark's total claimed damages in this action amount to approximately $150 million. This figure is composed of the following elements, each of which is supported by the forensic analysis of Dr. Sharon Kettlewell and the franchise-compliance audit of Thornbury & Associates CPAs LLP:
1. Underreported Gross Room Revenue (2013–2021): The Thornbury/Kettlewell forensic estimate, based on analysis of Suncoast bank records, OTA reconciliations, PMS data, and property-level financial records across all 22 Coastal Palms properties, determined that total underreported GRR for the 2013–2021 period was approximately $197.8 million. This figure represents the difference between the GRR that Coastal Palms reported to Verimark and the actual GRR that should have been reported under the FLA definitions.
2. Underpaid Royalties (5% of $197.8 million): Under Section 4.1 of each FLA, Coastal Palms was required to pay Verimark a continuing royalty equal to 5% of monthly GRR. Applied to the underreported GRR of $197.8 million, the resulting underpayment of royalties totals $9.89 million.
3. Underpaid Marketing-Fund Contributions (2.5% of $197.8 million): Under Section 4.2 of each FLA, Coastal Palms was required to contribute 2.5% of monthly GRR to Verimark's national marketing fund. Applied to the underreported GRR, the underpayment of marketing-fund contributions totals $4.945 million.
4. Underpaid Technology Fees: Separate from the GRR-based fees, Section 4.3 of each FLA requires the franchisee to pay a per-room technology fee of $12.50 per room per month to support Verimark's central reservation system, property-management system integration, and guest-loyalty platform. The Thornbury audit identified that Coastal Palms added a total of 214 rooms across 4 properties without providing the required written notice to Verimark, and without paying the corresponding technology fees. Based on 214 rooms at $12.50 per room per month for an average of 47 months of non-payment per room, the underpaid technology fees total $1.26 million.
5. Subtotal of Direct Underpayments: $9.89 million + $4.945 million + $1.26 million = $16.095 million.
6. Contractual Late-Payment Interest (FLA Section 4.6): Each FLA provides that any amounts not paid when due shall bear interest at a rate of 1.5% per month, compounded monthly. Dr. Kettlewell's model calculates interest on each monthly underpayment from the date due through a projected judgment date of June 30, 2024. The resulting late-payment interest totals approximately $28.4 million. This figure reflects the compounding effect over an extended period — some underpayments date back to 2013, representing over 10 years of accrued interest.
7. Liquidated Damages (FLA Section 15.3): Upon termination of an FLA for material breach, Section 15.3 provides for liquidated damages equal to three times the trailing-twelve-month royalties for the affected property. Applied across all 22 properties using corrected (actual) GRR figures for the most recent trailing twelve months, the liquidated-damages claim totals approximately $105.5 million. This figure varies by property based on each property's actual revenue level.
8. Grand Total — Claimed Damages: Approximately $150 million ($16.095 million in direct underpayments + $28.4 million in contractual interest + $105.5 million in liquidated damages).
It is important to note that the $150 million figure represents the maximum amount Verimark could potentially recover under its contract claims. The actual recovery is subject to significant uncertainties, as discussed in Section III.D below.
B. Dr. Sharon Kettlewell's Expert Report (Ridgeline Forensic Advisory LLC)
Dr. Sharon Kettlewell, a forensic accounting expert and managing director of Ridgeline Forensic Advisory LLC, was retained to quantify the damages resulting from Coastal Palms' underreporting scheme. Dr. Kettlewell served her initial expert report on April 14, 2023, and her rebuttal report on June 9, 2023. She was deposed on June 26, 2023. Dr. Kettlewell's opinions are well-supported, methodologically sound, and have been effectively validated by the Court's summary judgment ruling.
Dr. Kettlewell's analysis identified and documented the specific revenue-diversion scheme employed by Coastal Palms. The scheme operated as follows: Suncoast Room Management Inc., a Florida corporation whose president is Randall Brecker (who simultaneously serves as 60% equity holder and managing member of Coastal Palms), collected revenues from three categories of bookings that were diverted outside of the Verimark-integrated reporting system:
• Walk-in guests: Cash and credit-card payments from guests who arrived at the properties without advance reservations were processed through Suncoast's merchant accounts rather than through the Verimark-integrated PMS;
• Corporate-direct contracts: Coastal Palms maintained corporate rate agreements with approximately 47 regional businesses through Suncoast, with payments flowing directly to Suncoast's accounts; and
• gulfcoastrooms.com website bookings: Suncoast operated a direct-booking website, gulfcoastrooms.com, which marketed and accepted reservations for Coastal Palms properties outside of Verimark's central reservation system.
Under this arrangement, Suncoast collected the revenues from these sources, retained a 12% "management fee," and remitted the remaining balance to property-level limited liability companies — specifically Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC — rather than reporting any of these amounts through the Verimark franchise reporting system. Neither Suncoast's collections nor the 12% management fee were reported as GRR to Verimark.
In addition to the Suncoast diversion scheme, Dr. Kettlewell identified a second category of underreporting involving OTA channels. Coastal Palms classified net-rate OTA payments (from platforms such as Aldermere Technologies, Bramwell Holdings, and Drayton Software) as "commissions receivable" and netted the OTA commissions against GRR, reporting only the net amount to Verimark. This practice violated Section 4.1's definition of GRR, which requires reporting on a gross basis — that is, the total amount paid by the guest, not the net amount received after commission deductions.
Dr. Kettlewell's quantification of underreported GRR was based on a comprehensive reconstruction methodology that drew upon the following data sources, which were obtained through the litigation discovery process:
• Suncoast bank statements (all accounts, 2013–2021), produced pursuant to the Court's October 28, 2022 order;
• OTA settlement and reconciliation statements from Hollowell Industries, Ridgeway & Co., and other OTA platforms;
• PMS data exports from the Opera and Choice Advantage systems used at various Coastal Palms properties;
• Property-level general ledger and financial statement data from the Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC entities; and
• Tax returns, bank deposit records, and merchant-processing statements.
The key findings of Dr. Kettlewell's analysis include:
• FY 2021 reported GRR: $112.4 million across 22 properties;
• FY 2021 estimated true GRR: $145.6 million;
• FY 2021 underreported GRR: $33.2 million (approximately 29.5% of reported GRR);
• Underreporting percentage range: 22% to 31%, varying by property and year, with the highest underreporting rates at the Fort Myers and Savannah properties where corporate-direct contracts and gulfcoastrooms.com bookings were most prevalent;
• Cumulative underreported GRR (2013–2021): $197.8 million.
Dr. Kettlewell's engagement fee for this matter, inclusive of report preparation, deposition, and trial testimony preparation, totals $1.85 million. This cost reflects the extraordinary complexity of the forensic reconstruction required and the volume of financial data analyzed.
C. Defense Expert Position (Professor Grant Hargrove, Hargrove Economic Consulting Inc.)
Professor Grant Hargrove of Hargrove Economic Consulting Inc. served his expert report on behalf of Coastal Palms on May 15, 2023. Professor Hargrove is a tenured professor of economics at a regional university and has testified as a damages expert in commercial disputes, though his prior experience has been predominantly in antitrust and securities matters rather than franchise disputes.
Professor Hargrove opined that the maximum underpayment by Coastal Palms was $6.2 million — a figure dramatically lower than Dr. Kettlewell's calculations. The $6.2 million figure was based on a significantly narrower definition of GRR that excluded walk-in cash payments entirely (on the theory that these were "transient ancillary receipts" not contemplated by the FLA definition) and attributed only net OTA revenue (after commission deductions) to GRR. Professor Hargrove further applied a shorter look-back period, limiting his analysis to 2017–2021 based on an argument that the four-year statute of limitations for breach of contract applied to each individual monthly underpayment.
Our associate, Carlos Espinoza, prepared a detailed critique of the Hargrove report in a memorandum dated May 22, 2023. The critique identified the following principal deficiencies:
• Improperly narrow GRR definition: Hargrove's exclusion of walk-in cash payments and OTA gross revenue is inconsistent with the plain language of FLA Section 4.1, which defines GRR as "all revenue derived from or in connection with the rental of guest rooms at the Hotel, regardless of the method of payment, source of booking, or identity of the collecting entity." The phrase "regardless of the method of payment" directly encompasses cash walk-in payments, and the phrase "regardless of ... identity of the collecting entity" encompasses Suncoast-collected revenues.
• Failure to account for Suncoast collections: Hargrove's report essentially adopted Coastal Palms' litigation position that Suncoast revenues are outside the scope of GRR — a position that the Court has now rejected on summary judgment.
• Improper statute-of-limitations limitation: The FLAs contain an express ten-year look-back provision for audit and adjustment purposes under Section 4.8, and the continuing-breach doctrine applies to the ongoing obligation to accurately report and pay on GRR each month.
The Court's February 9, 2024 summary judgment ruling effectively undercuts the foundational premise of the Hargrove report. By holding that Coastal Palms' exclusion of Suncoast-collected revenues from GRR constituted a breach of the FLAs as a matter of law, the Court has rejected the very interpretation of GRR upon which Hargrove's $6.2 million figure was calculated. While Professor Hargrove may attempt to recalculate damages at trial under the Court's GRR definition, his credibility is significantly compromised, and any revised figure would be expected to be substantially higher than his original opinion.
D. Realistic Damages Assessment — Probability-Weighted Model
While Verimark's total claimed damages are approximately $150 million, a realistic assessment of probable recovery must account for the litigation risks associated with each damages component. We have conducted a probability-weighted analysis that assigns estimated probabilities of recovery to each component and calculates weighted-value ranges. This analysis informs our settlement recommendation.
Count I — Breach of Contract (Royalties): Liability Established.
Underpaid royalties of $9.89 million represent a straightforward mathematical computation once the GRR figures are determined. With liability established on summary judgment and the GRR definition resolved in Verimark's favor, the principal remaining risk is the possibility that the jury or court may accept somewhat different GRR figures than Dr. Kettlewell's estimates for particular properties or periods. We assess the probability of full or near-full recovery of this amount at 90% or higher. The probability-weighted value is approximately $8.9 million.
Count II — Breach of Contract (Marketing Fund): Liability Established.
The analysis for the marketing-fund underpayment of $4.945 million is identical to that for royalties — the same GRR figures drive both calculations. Probability of full or near-full recovery: 90% or higher. The probability-weighted value is approximately $4.45 million.
Count III — Breach of Contract (Technology Fees):
The technology-fee underpayment of $1.26 million requires proof that 214 rooms were added across 4 properties without the required notice and fee payments. While Verimark has strong documentary evidence supporting this claim — including building permits, occupancy records, and property-tax assessments showing room counts in excess of what was reported — the factual proof is somewhat more contested than the GRR issue. We assess the probability of recovery at 75%. The probability-weighted value is approximately $0.95 million.
Late-Payment Interest (FLA Section 4.6):
The claimed late-payment interest of $28.4 million is one of the more significant risk areas. While the FLA expressly provides for interest at 1.5% per month, compounded, on amounts not paid when due, there are several risks:
• The court may exercise its equitable discretion to limit the compounding period, particularly for underpayments dating back to 2013;
• Coastal Palms will argue that the interest provision is unconscionable as applied, particularly where the effective annual rate (19.56%, compounded) produces an interest figure that exceeds the principal underpayment by nearly two to one;
• The court may limit the interest run to a shorter look-back period if it accepts any portion of Coastal Palms' statute-of-limitations arguments, even for the interest calculation.
We assess the probability of a full award at 55–65%. The probability-weighted value ranges from approximately $15.6 million to $18.5 million.
Liquidated Damages (FLA Section 15.3):
The liquidated-damages claim of $105.5 million represents the single largest component of Verimark's damages and also the area of greatest litigation risk. Under Florida law, liquidated-damages provisions are enforceable only if: (i) the damages contemplated were not readily ascertainable at the time of contracting; and (ii) the amount stipulated bears a reasonable relationship to the anticipated or actual harm. See Hyman v. Cohen, 73 So. 2d 393 (Fla. 1954); Lefemine v. Baron, 573 So. 2d 326 (Fla. 1991).
Carlos Espinoza's August 25, 2023 research memorandum analyzed the enforceability of Section 15.3 under Florida's penalty doctrine. His assessment, with which we concur, is as follows:
• The 3× trailing-twelve-month royalties formula applied across all 22 properties produces a figure ($105.5 million) that is approximately 6.6 times the direct underpayment amount ($16.095 million). Florida courts have sustained liquidated-damages provisions at multiples of 2× to 3× actual damages, but provisions producing multiples of 5× or greater face increasing judicial skepticism.
• The argument that damages were not readily ascertainable at the time of contracting has some force, given that the GRR figures were within Coastal Palms' exclusive knowledge. However, the fact that Verimark was able to calculate actual damages through the forensic audit process may undercut this element.
• The application of the formula on a per-property basis, as opposed to an aggregate basis, may help or hurt enforceability depending on how the court views the relationship between the formula amount and actual harm at each individual property.
• There is a meaningful risk that the court will find the provision to be an unenforceable penalty, at least as applied to the full 22-property portfolio. However, there is also a reasonable probability that the court will enforce the provision as to some subset of properties or will apply a modified formula.
We assess the probabilities as follows:
• Probability of full enforcement at $105.5 million: 30–40%;
• Probability of partial enforcement (reduced formula or fewer properties), yielding $40–$60 million: 50–60%;
• Probability of complete non-enforcement: 10–20%.
The probability-weighted value at the midpoint is approximately $42 million to $53 million.
Remaining Tort Counts (Counts IV–VI, X):
Counts IV (Fraudulent Concealment), V (Civil Conspiracy), VI (Aiding and Abetting Breach of Fiduciary Duty), and X (Tortious Interference with Contractual Relations) face significant hurdles under Florida's economic-loss rule, which generally bars tort recovery for purely economic losses arising from a contractual relationship. See Indemnity Ins. Co. of N. Am. v. American Aviation, Inc., 891 So. 2d 532 (Fla. 2004). While there are exceptions — particularly where the tort involves conduct that is independent of the contract — the incremental monetary value of these counts beyond the contract damages is limited. We do not expect a substantial punitive-damages award absent proof of an independent tort.
The probability-weighted incremental value of these tort counts is estimated at $2 million to $5 million, primarily reflecting the possibility of a modest punitive-damages award on the fraudulent concealment count if the court finds the economic-loss rule inapplicable.
Count VII — Unjust Enrichment:
Count VII is pled in the alternative and would be subsumed if the contract claims succeed, as is expected. Its value exists solely as a backstop in the event that any FLA is found to be unenforceable. For settlement-valuation purposes, we assign no independent value to this count.
Counts VIII (Declaratory Judgment) and IX (Accounting):
These are equitable claims that do not carry independent monetary value. Their value is captured in the settlement through the franchise-surrender and enhanced-audit-protocol terms.
Coastal Palms' Counterclaim ($12 million):
Coastal Palms' counterclaim alleging brand-standard violations and over-billing has a weak factual basis. The Court denied Coastal Palms' motion for summary judgment on this claim, but it remains pending. The documentary evidence supporting the counterclaim is thin — Coastal Palms has identified only four alleged instances of delayed brand-standard maintenance by Verimark, and the "over-billing" allegations relate to technology-system upgrades that were expressly authorized by the FLAs. We assess the risk of any adverse judgment on the counterclaim at 10–15%. The potential exposure, if an adverse judgment were entered, would be approximately $1.2 million to $1.8 million as an offset against Verimark's recovery.
E. Probability-Weighted Damages Summary Table
The following table summarizes the probability-weighted damages analysis. A more detailed version is included in Appendix A.
Summary:
• Low end of probability-weighted range: approximately $70 million (rounded);
• Midpoint: approximately $85 million;
• High end of probability-weighted range: approximately $105 million (accounting for upside on interest and liquidated damages beyond midpoint estimates).
These figures represent the expected value of Verimark's claims after probability weighting, not the full $150 million claim. The recommended settlement range of $75 million to $95 million is anchored within this probability-weighted range and reflects additional adjustments for collectibility risk and the time value of a certain, near-term recovery versus the uncertain, delayed recovery that a trial and appeals process would entail.
IV. LITIGATION-COST EXPOSURE THROUGH TRIAL
A. Costs Incurred to Date (Through February 2024)
Verimark has incurred substantial litigation costs in prosecuting this case through the summary judgment phase. As of the end of February 2024, the total costs incurred are approximately $8.7 million, broken down as follows:
The Calderwood & Harkness fees of approximately $6.0 million represent roughly 88% of the total projected fee budget of $6.82 million established at the outset of the engagement. The remaining fee budget accommodates the mediation preparation and trial preparation phases. Dr. Kettlewell's engagement is substantially complete, with only trial testimony preparation and testimony itself remaining. The e-discovery costs at Nexagen Document Solutions are substantially complete, with only trial exhibit preparation remaining.
B. Estimated Additional Costs Through Trial (May 2024)
If the case is not resolved at mediation and proceeds to trial in May 2024, the following additional costs are anticipated:
The range in Calderwood & Harkness fees reflects the uncertainty regarding the length and complexity of trial. If trial proceeds on all remaining issues — damages on Counts I and II, liability and damages on Counts III through X, and Coastal Palms' counterclaim — we would expect trial to last 10–15 business days, with corresponding preparation costs at the higher end of the range. If the parties are able to narrow the trial issues through stipulations or additional pre-trial rulings, the lower end of the range may be achievable.
Total projected costs through verdict: $9.0 million to $10.5 million. This projection is consistent with the budget update provided by Douglas Carmichael to Martin Holcomb on January 8, 2024, which estimated total litigation costs through trial in the range of $9.2 million to $10.8 million.
C. Post-Trial Costs if Appeal
In the event of a verdict, both sides are likely to appeal. Verimark would appeal any unfavorable ruling on the liquidated-damages or interest provisions; Coastal Palms would appeal the summary judgment ruling on liability and the damages award. The estimated cost of appellate proceedings, including briefing, oral argument, and potential petition for rehearing or discretionary review, is $500,000 to $1.0 million in additional legal fees.
The time to final resolution through the appellate process is estimated at 18–24 months beyond the trial date. During this period, post-judgment interest would accrue on any judgment in Verimark's favor at the statutory rate, which could provide additional recovery. However, the delay in obtaining a final, enforceable judgment creates meaningful risks: Coastal Palms' financial condition could deteriorate during the appellate period, and the possibility of a bankruptcy filing increases with the passage of time and the overhang of a large outstanding judgment.
D. Cost-Benefit Analysis
The incremental cost of trying the case versus settling at the March mediation is approximately $1.0 million to $2.2 million in additional fees and costs, plus $500,000 to $1.0 million if an appeal follows.
If a settlement at $87.5 million is achievable at mediation, Verimark would net approximately $77.9 million to $78.5 million in monetary recovery after deducting total litigation costs of approximately $9.0 million to $9.6 million (including mediation costs already committed). This figure does not include the $15 million to $25 million in non-monetary value from the franchise-surrender and re-franchising opportunity.
By contrast, if the case proceeds to trial, the probability-weighted net recovery after all costs (including trial and potential appeal) ranges from approximately $60 million to $95 million, with substantial variance. The wide range reflects the binary nature of the key trial risks — particularly the liquidated-damages enforceability question, which could swing the outcome by $40 million or more.
Settlement provides certainty of a favorable recovery at a level that compares favorably to the midpoint of the probability-weighted range. It eliminates the binary risk of adverse rulings on liquidated damages and interest, avoids 12–36 months of additional delay, and converts an uncertain future judgment into a structured payment obligation secured by real property and personal guaranties.
V. COLLECTIBILITY ANALYSIS
A. Ironclad National Bank Senior Lien Position
A critical factor in evaluating any settlement or judgment in this case is the senior secured position of Ironclad National Bank ("Ironclad"). Ironclad, headquartered at 225 Peachtree Street NE, Suite 2600, Atlanta, Georgia 30303 (commercial real estate lending contact: Devon Schultz, Senior Vice President), holds first-lien mortgage loans on 18 of the 22 Coastal Palms hotel properties. The aggregate outstanding balance on these loans is approximately $94 million.
Ironclad's senior lien position has profound implications for Verimark's collectibility analysis. In any foreclosure or liquidation scenario involving the encumbered properties, Ironclad would be entitled to be paid in full before any proceeds would be available to satisfy Verimark's judgment. Any judgment lien that Verimark obtains and records against these 18 properties would be junior to Ironclad's existing first-priority mortgages. Given that the loan-to-value ratios on many of these properties are relatively high — particularly in the current interest rate environment — there may be little or no equity available to satisfy a junior lien holder after Ironclad's secured claim is satisfied.
This reality means that Verimark cannot realistically look to the 18 encumbered properties as a meaningful source of recovery on a judgment. The collectibility analysis must focus on: (i) unencumbered property value; (ii) cash flow from ongoing operations; (iii) personal assets of the principals; and (iv) the risk that aggressive enforcement efforts could trigger adverse consequences, including bankruptcy.
B. Coastal Palms' Financial Capacity
Coastal Palms operates a 22-property hotel portfolio comprising approximately 3,740 total rooms, operating under the Verimark Suites (18 properties) and Verimark Select (4 properties) brand standards. As reported by Coastal Palms (though as we now know, materially understated), the aggregate GRR for fiscal year 2021 was $112.4 million. Dr. Kettlewell's analysis estimates the actual GRR for the same period at approximately $145.6 million.
As noted above, 18 of the 22 properties are encumbered by Ironclad National Bank first-lien mortgages. However, the settlement discussions have revealed that 8 properties are currently unencumbered by Ironclad or any other senior mortgage lien. This is a more favorable situation than originally assessed at the outset of litigation, when only 4 properties appeared to be unencumbered. It appears that Ironclad loans on 4 additional properties were paid down or retired during the course of the litigation, possibly in connection with Coastal Palms' broader debt restructuring or property refinancing efforts. The 8 unencumbered properties have an aggregate appraised value of approximately $71.2 million, based on recent appraisals obtained in connection with pre-mediation discussions.
The two principals of Coastal Palms with meaningful personal assets are:
• Randall Brecker (60% equity holder, age 58), who serves as managing member and also as president of Suncoast Room Management Inc. Brecker is the operational leader of the Coastal Palms enterprise and is believed to have substantial personal assets, including residential real property, investment accounts, and interests in other business ventures. However, the precise extent of his personal assets has not been fully determined through discovery, as the litigation has focused on the corporate entities.
• Nolan Prescott (25% equity holder, age 67), a retired commercial real estate developer who is an investor in the Coastal Palms portfolio but is not involved in day-to-day operations. Prescott is believed to have significant personal wealth from his prior real estate career, but again, the precise extent has not been quantified.
• Theresa Brecker (15% equity holder), who manages payroll and human resources functions for the Coastal Palms properties. Limited independent assets are anticipated, and we do not recommend seeking a personal guaranty from Ms. Brecker.
Cash flow from Coastal Palms' ongoing hotel operations may support structured payments, but this cash flow is subject to economic and operational risk. The hospitality industry experienced significant disruption during the COVID-19 pandemic, and while recovery has been strong in the Florida and Georgia markets where Coastal Palms operates, future economic conditions are inherently uncertain. A structured-payment arrangement, while necessary to achieve a settlement figure within our recommended range, introduces the risk of non-payment during the installment period.
C. Collection Risk Assessment
Based on the foregoing analysis, we assess the collection risk as follows:
A judgment of $150 million — or even the probability-weighted midpoint of $85 million — is likely uncollectible in full through post-judgment enforcement without Coastal Palms' cooperation. The obstacles include:
• Ironclad's $94 million senior position on 18 properties, which effectively shields those assets from execution by a junior judgment creditor;
• The limited unencumbered property value of $71.2 million across 8 properties, which, while significant, may not be fully realizable through forced sale (foreclosure sales typically yield 60–80% of appraised value);
• The personal assets of Brecker and Prescott, which are uncertain in scope and would require extensive post-judgment discovery (asset depositions, subpoenas to financial institutions, etc.) and potentially multi-jurisdictional enforcement proceedings to reach;
• The risk that aggressive enforcement could trigger a Coastal Palms bankruptcy filing, which would subordinate Verimark's unsecured judgment claim to Ironclad's $94 million secured claim and to the administrative expenses of the bankruptcy estate.
Realistically, we estimate the collectible amount (present value) on a judgment in the probability-weighted range at approximately $80 million to $100 million, assuming full cooperation from Coastal Palms and no bankruptcy filing. This figure reflects the fact that even a $70 million judgment could potentially be fully collected from the unencumbered properties and personal assets, while a $105 million judgment would likely require significant cooperation and structured payment.
A negotiated settlement with structured payments, a first-priority security interest on the 8 unencumbered properties, and personal guaranties from Brecker and Prescott provides superior collection certainty versus post-judgment enforcement. The security interest converts Verimark from an unsecured judgment creditor to a secured creditor with priority over subsequent liens, and the personal guaranties provide recourse to the principals' personal assets in the event of default — without the need for expensive and time-consuming post-judgment discovery and enforcement proceedings.
D. Bankruptcy Risk
The possibility that Coastal Palms could file for Chapter 11 bankruptcy protection is a material risk that the Board should carefully consider. A bankruptcy filing could be triggered by the entry of a large judgment that Coastal Palms is unable to pay, or as a strategic maneuver to delay enforcement while Coastal Palms seeks to reorganize.
In a Chapter 11 scenario, Verimark's position would be significantly impaired:
• Ironclad National Bank's approximately $94 million in secured claims would consume most of the enterprise value of the encumbered properties;
• Verimark's judgment would be treated as an unsecured claim, subject to the distributions available to unsecured creditors under a plan of reorganization — which in asset-heavy, debt-heavy hospitality Chapter 11 cases are typically modest;
• The automatic stay would halt all collection efforts, and the bankruptcy process could take 12–24 months or longer;
• Administrative expenses (debtor's counsel, financial advisors, committee counsel) would be paid ahead of unsecured creditors, further reducing available distributions.
We estimate that in a bankruptcy scenario, Verimark's recovery on any judgment above Ironclad's secured claim would be approximately 20 to 35 cents on the dollar. On a $100 million claim, this translates to gross recovery of $20 million to $35 million, or net recovery of approximately $10 million to $25 million after litigation and bankruptcy-participation costs.
A negotiated settlement with an agreed security interest on the unencumbered properties and personal guaranties from the principals substantially mitigates this risk. If the settlement agreement includes a properly perfected first-priority lien on the 8 unencumbered properties (aggregate appraised value: $71.2 million), Verimark would be a secured creditor entitled to priority payment from those assets even in a bankruptcy scenario — a dramatically superior position to that of an unsecured judgment creditor.
VI. FRANCHISE-SURRENDER VALUE ANALYSIS
A. Strategic Value of Franchise Surrender
A critical non-monetary component of our recommended settlement is the requirement that Coastal Palms surrender its franchise rights to 14 of its 22 properties. This franchise-surrender provision serves both defensive and offensive strategic purposes for Verimark: it removes a non-compliant and untrustworthy franchisee from a significant portion of the Verimark brand portfolio, and it creates the opportunity for Verimark to re-franchise those locations to new, compliant operators or to convert them to company-managed properties.
The 14 properties to be surrendered would be located in the following markets:
• Sarasota, Florida: 3 properties
• Fort Myers, Florida: 4 properties
• Jacksonville, Florida: 2 properties
• Savannah, Georgia: 3 properties
• Brunswick, Georgia: 2 properties
These locations were selected for surrender based on several factors: they represent the properties with the highest rates of GRR underreporting (the Fort Myers and Savannah properties in particular), the weakest historical guest-satisfaction scores in the Verimark system, and the greatest logistical distance from Coastal Palms' operational center of gravity in the Naples/Marco Island/Tampa corridor. From Coastal Palms' perspective, these are the properties that its principals are most likely to agree to surrender, as they are peripheral to the core of its business.
The de-identification period for the surrendered properties would be 120 days from execution of the settlement agreement. During this period, Coastal Palms would be required to complete the following: