MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Priya Anand, Responsible Partner, Litigation (General)
TO: Yuki Nakamura, Lead Associate, Litigation (General)
FROM: Carlos Espinoza, Working Associate, Litigation (General)
DATE: December 6, 2021
RE: Analysis of Franchise License Agreement Audit Rights & Breach Provisions — Verimark Hospitality Group Inc. / Coastal Palms Franchise Holdings LLC
MATTER: Pre-Litigation Investigation — Coastal Palms Revenue Underreporting
Right-click to update Table of Contents
I. Purpose and Scope of Memorandum
This memorandum analyzes the key contractual provisions in the Franchise License Agreements ("FLAs") between Verimark Hospitality Group Inc. ("Verimark" or "VHG") and Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "CPFH") that bear on Verimark's audit rights, franchisee breach and cure obligations, and liquidated-damages remedies. The memorandum is intended to provide the litigation team with a comprehensive assessment of the contractual architecture governing these rights and obligations, with particular attention to the interaction among the relevant provisions and the practical implications for the enforcement strategy under development.
The analysis focuses on four interrelated provisions of the FLAs:
• § 8.2 (Audit Rights);
• § 14.1 (Cure Period for Material Breach);
• § 14.2(c) (Systematic Underreporting as Incurable Material Breach); and
• § 15.3 (Liquidated Damages upon Termination for Cause).
These provisions, when read together, create a structured enforcement pathway that Verimark may invoke in response to the suspected revenue-diversion scheme. The memorandum addresses the textual requirements of each provision, analyzes questions of interpretation under Florida law, identifies potential counterarguments, and recommends a sequenced enforcement approach.
This memorandum is prepared in connection with the ongoing pre-litigation investigation triggered by the whistleblower complaint of Janet Kerrigan — former Coastal Palms regional controller, whose employment was terminated by Coastal Palms in October 2021 — received by Verimark's compliance hotline on November 8, 2021. The investigation is also informed by preliminary audit findings expected to be delivered by Thornbury & Associates CPAs LLP on January 18, 2022. It should be noted that this memorandum is drafted in advance of those final preliminary findings. The factual basis for the analysis herein relies on interim communications from the Thornbury audit team, which was retained on November 22, 2021, as well as on information provided by Ms. Kerrigan through Verimark's compliance counsel and on documentation gathered from Verimark's internal franchise-operations files.
The memorandum reviews representative FLAs across the twenty-two-property Coastal Palms portfolio, which encompasses eighteen Verimark Suites branded properties and four Verimark Select branded properties. The FLAs span from the first agreement executed on June 15, 2007, for the Naples, Florida property, through the most recent FLA executed on September 3, 2019. Each FLA has a twenty-year initial term and is governed by the laws of the State of Florida. Each FLA also contains a mandatory venue provision designating Broward County, Florida, as the exclusive forum for any disputes arising under or relating to the agreement. As discussed in Section X (Appendix) below, all twenty-two FLAs contain materially identical provisions in the sections analyzed; minor variations — such as property-specific room counts used in calculating technology fees under § 4.3 — do not affect the legal analysis set forth herein.
The ultimate objective of this memorandum is to advise the team on the legal framework for enforcing Verimark's rights, the procedural prerequisites to termination of any or all of the twenty-two FLAs, and the potential damages calculus available to Verimark in the event litigation is pursued.
II. Background — Revenue Obligations Under the FLAs
Before turning to the audit, breach, and damages provisions, it is necessary to establish the revenue-reporting obligations that Coastal Palms owes under the FLAs. These obligations form the substantive predicate for any breach claim and are essential to understanding the magnitude of the alleged underreporting.
A. Gross Room Revenue Definition (§ 4.1)
Section 4.1 of each FLA defines the term "Gross Room Revenue" (or "GRR") as follows:
"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 intentionally and expansively drafted. It encompasses, without limitation, the following categories of room revenue:
• Revenues from online travel agency ("OTA") bookings (e.g., Aldermere Technologies, Bramwell Holdings, Drayton Software);
• Revenues from direct bookings made through the Verimark brand website or the property's own booking systems;
• Revenues from walk-in guests paying at the front desk;
• Revenues generated through corporate-direct contracts, government per-diem programs, and group-booking agreements; and
• Revenues collected by any intermediary, agent, management company, or affiliated entity on behalf of or attributable to the hotel's guest-room inventory.
The breadth of this definition is deliberate and reflects the franchisor's interest in ensuring that all room revenues — regardless of how they are generated, channeled, or collected — are captured within the royalty base. Of particular significance to the present investigation is the phrase "regardless of the entity collecting such revenue." This language was crafted to prevent precisely the kind of revenue-diversion structure that the preliminary investigation has uncovered.
Based on the information provided by Janet Kerrigan and corroborated by interim findings from Thornbury & Associates, the preliminary investigation indicates that Suncoast Room Management Inc. ("Suncoast") — a Florida corporation of which Randall Brecker, Coastal Palms' managing member and approximately sixty-percent equity holder, serves as president and sole director — has been collecting direct-booking revenue through several channels:
• An unbranded website, gulfcoastrooms.com, which markets rooms at Coastal Palms properties without using Verimark branding or trademarks;
• Walk-in bookings processed outside the Verimark property-management system ("PMS"); and
• Corporate-direct contracts negotiated by Suncoast with regional businesses and government agencies.
Revenue collected through these channels was not reported to Verimark as part of GRR. Instead, Suncoast retained a twelve-percent "management fee" on these bookings before remitting the balance to the property-level operating entities — specifically, Gulf Breeze Hospitality LLC (for the Southwest Florida properties) and Savannah Lodging Partners LLC (for the coastal Georgia properties). This two-step process — diversion through Suncoast followed by a management-fee deduction — reduced the amounts that could potentially flow into GRR reporting and ensured that Verimark received no royalty, marketing-fund contribution, or technology-fee payment on the diverted revenues.
The clear and unambiguous text of § 4.1 makes these revenues reportable as GRR. The revenues are "derived from or attributable to the rental of guest rooms at the Hotel," they come from "booking channels, direct or indirect," and the definition applies "regardless of the entity collecting such revenue." Suncoast's role as a separate collection entity does not remove these revenues from the GRR definition; to the contrary, the GRR definition was designed to capture them.
B. Royalty and Contribution Obligations (§§ 4.1–4.3)
The FLAs impose three primary financial obligations on the franchisee, each calculated by reference to GRR:
1. Royalty (§ 4.1): The franchisee is obligated to pay a royalty equal to five percent (5%) of GRR, payable monthly. This is the core franchise fee and the primary revenue stream that Verimark derives from each franchise relationship.
2. Marketing-Fund Contribution (§ 4.2): The franchisee is obligated to contribute two and one-half percent (2.5%) of GRR to the Verimark National Marketing Fund. These contributions support brand-wide advertising, digital marketing, loyalty-program administration, and other centralized marketing activities that benefit all franchised properties in the Verimark system.
3. Technology Fee (§ 4.3): The franchisee is obligated to pay a technology fee of $12.50 per available room per month, subject to annual adjustment based on the Consumer Price Index ("CPI"), with such adjustment capped at three percent (3%) per year. The technology fee supports the Verimark central reservations system, the PMS platform, revenue-management tools, and other technology infrastructure provided to franchisees. While the technology fee is not directly tied to GRR, it is included in the overall financial-obligation framework and has been underpaid to the extent that Coastal Palms failed to account for available rooms that were being marketed outside the Verimark system.
Under these provisions, the franchisee is required to report GRR on a monthly basis, with payments due within ten (10) days following the close of each calendar month. The monthly reporting obligation is a critical compliance mechanism, as it provides Verimark with ongoing visibility into the revenue performance of each franchised property and enables the franchisor to calculate and verify the amounts owed.
C. Late-Payment Interest (§ 4.6)
Section 4.6 of each FLA provides that interest on late or underpaid amounts accrues at a rate of one and one-half percent (1.5%) per month, compounded monthly. This interest provision has two important features:
First, the interest rate is applied on a compounding basis, meaning that unpaid interest is added to the outstanding principal balance at the end of each month, and subsequent interest accrues on the increased balance. Over extended periods of non-payment, compounding produces substantially larger interest obligations than simple-interest calculations.
Second, the interest accrues from the date the payment was originally due — not from the date on which the underpayment is discovered or the date on which demand for payment is made. This means that for revenue-diversion activity dating back to January 2013, interest has been accruing for approximately nine years as of the date of this memorandum. Given the estimated magnitude of the underreporting (approximately $197.8 million in cumulative underreported GRR, as discussed in Section IV.C below), the compounded interest represents a significant component of total potential damages.
At a 1.5% monthly compounding rate, the effective annual interest rate is approximately 19.56%. Over a nine-year period, this produces substantial interest obligations. The Thornbury audit team's preliminary estimate of accrued interest through a projected judgment date of mid-2023 is approximately $28.4 million, though this figure will be refined as the audit proceeds and the underreporting timeline is more precisely established.
III. Analysis of § 8.2 — Audit Rights
A. Text and Operation of § 8.2
Section 8.2 of each FLA grants Verimark the right to audit the books and records of the franchisee and the hotel. The operative provisions of § 8.2 establish the following framework:
Notice Requirement. Verimark is entitled to conduct an audit upon ten (10) business days' written notice to the franchisee. The notice must specify the properties to be audited and the general scope of the audit. The ten-business-day notice period is relatively short and is designed to provide the franchisee with reasonable time to organize records and make them available, while limiting the franchisee's ability to alter, destroy, or conceal documentary evidence.
Temporal Scope. The audit may cover any period within the term of the FLA. There is no limitation restricting audits to the most recent fiscal year or to any other defined look-back period. This means that Verimark may audit records dating back to the inception of each FLA — in the case of the Naples, Florida property, to June 15, 2007.
Record Obligations. The franchisee is obligated to make available all financial records relevant to the operation of the hotel, including but not limited to:
• General ledgers and subsidiary ledgers;
• Bank statements and deposit records;
• Federal, state, and local tax returns (including income tax, sales tax, and transient occupancy tax returns);
• Booking-channel reconciliations (including OTA statements, brand-channel reports, and direct-booking records);
• Property-management system ("PMS") data, including folio-level transaction records;
• Management agreements, revenue-sharing agreements, and similar contractual arrangements;
• Payroll records to the extent relevant to revenue-generating operations; and
• Any other books, records, accounts, or documents that are reasonably necessary to verify the franchisee's compliance with its revenue-reporting and payment obligations.
The breadth of this records-access provision is noteworthy. It encompasses not merely the traditional financial records of the hotel operation but extends to booking-channel reconciliations and PMS data — the very records that would reveal revenue being collected through alternative channels such as gulfcoastrooms.com.
B. Cost-Shifting Provision
Section 8.2 contains a cost-shifting mechanism that operates as follows: if an audit reveals an underpayment exceeding two percent (2%) of the GRR as reported by the franchisee for the audited period, the franchisee is obligated to bear all costs of the audit, including fees and expenses of the auditing firm.
Several aspects of this provision warrant attention:
Baseline Measurement. The two-percent threshold is measured against GRR as reported by the franchisee — meaning that Coastal Palms' own reported figures constitute the baseline against which the underpayment is assessed. This is significant because the denominator of the calculation is the smaller, reported figure rather than the corrected, actual GRR. The practical effect is to make the threshold easier to exceed when the franchisee has engaged in substantial underreporting.
Magnitude of the Current Underpayment. Based on interim findings from the Thornbury & Associates audit, the ten properties audited to date show underreporting of approximately twenty-six percent (26%) for the 2019–2021 period. This magnitude is far in excess of the two-percent threshold, exceeding it by a factor of thirteen. There is no question that the cost-shifting provision will be triggered.
Practical Implications. The cost-shifting mechanism provides Verimark with a significant practical lever. Verimark can exercise its audit rights across all twenty-two properties — a portfolio encompassing approximately 3,740 total rooms — and require Coastal Palms to bear the full cost of that audit. Given the scope and complexity of a forensic audit across twenty-two properties over a multi-year period, audit costs are expected to be substantial, potentially ranging from $1.5 million to $3.0 million depending on the depth and duration of the engagement. This cost exposure provides Coastal Palms with an immediate financial incentive to cooperate with the audit process and, potentially, to engage in settlement discussions.
C. Scope Considerations for Enforcement
A critical question in the present investigation is whether the audit rights under § 8.2 extend to the books and records of Suncoast Room Management Inc. The text of § 8.2 provides a strong basis for this position.
Section 8.2 does not limit the audit to the franchisee entity itself. Rather, it covers "books and records of the Hotel" and, in a separate clause, extends to "all entities under common control with Franchisee that collect, receive, or account for revenues attributable to the Hotel." This "common control" language is the key provision.
Suncoast Room Management Inc. satisfies the "common control" requirement on multiple grounds. Randall Brecker is both the managing member and sixty-percent equity holder of Coastal Palms Franchise Holdings LLC and the president and sole director of Suncoast Room Management Inc. The two entities share common ownership, common management, and, based on the preliminary investigation, integrated operations with respect to room-revenue collection. Furthermore, Suncoast indisputably "collect[s], receive[s], or account[s] for revenues attributable to the Hotel" — that is, in fact, the sole purpose of its existence in the revenue-diversion scheme.
If Coastal Palms resists production of Suncoast's records in the audit context — whether by arguing that Suncoast is a separate legal entity not bound by the FLA or by claiming that Suncoast's records are proprietary or confidential — this "common control" provision provides a contractual basis for demanding access. This contractual right exists independent of any discovery rights that Verimark might obtain in litigation, and it can be exercised prior to the filing of any lawsuit. If Coastal Palms refuses to comply, such refusal would itself constitute a separate breach of the FLA and could serve as an additional ground for termination.
D. Interaction with Breach Provisions
The audit rights under § 8.2 are not merely investigatory — they serve as the factual predicate for enforcement of the breach provisions in Article 14. The results of an audit under § 8.2 may provide the evidentiary foundation for a Notice of Material Breach under § 14.1 and for the determination that the breach constitutes "systematic underreporting" within the meaning of § 14.2(c).
If the audit confirms underpayment exceeding two percent of reported GRR — as it clearly does in this case — the audit results not only shift costs to the franchisee but also establish the factual record necessary to support breach claims, termination, and liquidated damages. In this sense, the audit-rights provision operates as the threshold gateway to the entire enforcement framework established in Articles 14 and 15 of the FLAs.
It is therefore important that the formal exercise of audit rights under § 8.2 be carefully documented and that the audit process be conducted in a manner that will withstand scrutiny if the results are later challenged in litigation. This includes ensuring that the audit notice complies with the ten-business-day requirement, that the scope of the audit is clearly defined, and that the audit is conducted by a qualified, independent accounting firm with experience in hospitality-industry forensic audits. The engagement of Thornbury & Associates CPAs LLP — a firm with extensive experience in franchise revenue audits in the lodging sector — satisfies this last requirement.
IV. Analysis of § 14.1 — Cure Period for Material Breach
A. Text and Mechanics
Section 14.1 of each FLA establishes the procedural framework for the franchisor to declare a material breach and provides the franchisee with an opportunity to cure. The provision operates as follows:
Written Notice. Verimark must provide written notice of material breach to the franchisee specifying the nature of the breach. This notice must be delivered in accordance with the general notice provisions of the FLA (§ 22.1), which require delivery by certified mail, return receipt requested, and by electronic mail to the designated representatives of the parties.
Cure Period. Upon receipt of the written notice, the franchisee has thirty (30) days to cure the breach. The cure period runs from the date of receipt of the notice — not from the date of mailing or the date of the breach itself.
Consequences of Failure to Cure. If the breach is not cured within the thirty-day period, Verimark may exercise its termination rights under Article 14 and pursue all available remedies, including but not limited to liquidated damages under § 15.3, recovery of actual damages, injunctive relief, and any other remedies available at law or in equity. The FLA expressly provides that the remedies available to Verimark are cumulative and not exclusive.
The thirty-day cure period is a standard feature in franchise agreements and reflects the general principle under franchise law that a franchisor should provide the franchisee with a reasonable opportunity to remedy a breach before exercising the drastic remedy of termination. However, as discussed in Section V below, this cure opportunity may be eliminated entirely when the breach involves systematic underreporting of GRR.
B. Requirements for the Notice
The Notice of Material Breach must satisfy several substantive requirements to be effective under § 14.1:
Identification of Breached Provisions. The notice must identify the specific FLA provision or provisions that have been breached. In the present case, the notice should cite §§ 4.1 (GRR definition and royalty obligation), 4.2 (marketing-fund contribution), and 4.3 (technology fees) as the substantive provisions that Coastal Palms has violated through its revenue-diversion scheme.
Factual Basis. The notice must describe the factual basis for the breach with reasonable specificity. This does not require the level of detail that would be expected in a complaint or a statement of claim, but it must be sufficient to inform the franchisee of the nature and scope of the alleged breach so that the franchisee can meaningfully evaluate its cure obligations. Given the multi-property, multi-year scope of the underreporting, the notice should describe the general contours of the revenue-diversion scheme — including Suncoast's role, the use of gulfcoastrooms.com, and the exclusion of Suncoast-collected revenues from GRR reports — and should identify the approximate magnitude and time period of the underreporting.
Multi-Property Scope. Because the underreporting scheme extends across all twenty-two Coastal Palms properties, the Notice of Material Breach should reference all twenty-two FLAs by property name and execution date. A single comprehensive notice covering all properties is preferable to twenty-two separate notices, both for administrative efficiency and for purposes of demonstrating the systematic nature of the scheme. However, the notice should make clear that it constitutes a Notice of Material Breach under each individual FLA.
Delivery. I recommend sending the notice via certified mail, return receipt requested, and by electronic mail to Coastal Palms Franchise Holdings LLC at its principal office address of record: 9500 Gulf Shore Drive, Suite 450, Naples, FL 34108. Simultaneously, the notice should be delivered to Coastal Palms' registered agent, Garrison Registered Agents LLC, at 100 S. Ashley Drive, Suite 600, Tampa, FL 33602. If Coastal Palms has retained outside counsel by the time the notice is sent, a courtesy copy should be provided to counsel as well, though delivery to counsel alone would not satisfy the contractual notice requirements.
C. Cure Feasibility
For a financial breach consisting of underpayment of royalties, marketing-fund contributions, and technology fees, cure would ordinarily require full payment of all outstanding amounts plus accrued contractual interest within the thirty-day cure period. The question is whether cure is financially feasible given the estimated magnitude of the underpayment.
Based on the interim forensic-audit findings from Thornbury & Associates and extrapolations across the full twenty-two-property portfolio, the estimated cumulative underreported GRR from January 2013 through December 2021 is approximately $197.8 million. This figure translates into the following underpayment estimates:
Cure within thirty days of amounts of this magnitude is practically challenging, though theoretically possible if Coastal Palms or its principals have access to sufficient liquid assets or credit facilities. Based on publicly available information regarding Coastal Palms' financial position, including the substantial mortgage debt held by Ironclad National Bank (discussed in Section VIII.B below), it appears unlikely that Coastal Palms could assemble approximately $44.5 million in liquid funds within a thirty-day period.
However, the question of cure feasibility may be academic, because § 14.2(c) may foreclose the cure right entirely when the breach involves systematic underreporting of GRR. This critical provision is analyzed in Section V below.
V. Analysis of § 14.2(c) — Systematic Underreporting as Incurable Material Breach
A. Text of the Provision
Section 14.2 of each FLA identifies certain categories of material breach that are deemed "incapable of cure" — meaning that the thirty-day cure period provided by § 14.1 does not apply. Subsection (c) of § 14.2 provides:
"Systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure."
This provision is unambiguous in its effect: when the franchisee's breach takes the form of systematic underreporting of GRR, the franchisor may proceed directly to termination and the pursuit of remedies without providing an opportunity for the franchisee to cure. The provision removes the franchisee's contractual right to a thirty-day cure period for this specific category of breach.
B. Interpretation and Application
The pivotal interpretive question under § 14.2(c) is the meaning of "systematic." The provision draws a clear distinction between isolated errors or omissions in revenue reporting — which may be inadvertent and which may be curable under § 14.1's thirty-day window — and systematic conduct reflecting a pattern of intentional or reckless underreporting that goes to the heart of the franchise relationship.
The word "systematic" connotes organized, methodical, or repeated conduct rather than a one-time mistake or a series of unrelated clerical errors. Black's Law Dictionary defines "systematic" as "carried out using a fixed and orderly plan" or "methodical." Courts interpreting similar provisions in franchise and licensing agreements have consistently held that the term requires evidence of a pattern or plan, as opposed to random or isolated incidents. See, e.g., Dunkin' Donuts of Am., Inc. v. Minerva Inc., 956 F.2d 1566, 1570 (11th Cir. 1992) (analyzing pattern requirements in franchise-termination context); Burger King Corp. v. Weaver, 169 F.3d 1310, 1318 (11th Cir. 1999) (considering evidence of repeated, deliberate conduct in evaluating material breach of franchise agreement).
Based on the preliminary investigation, Coastal Palms' revenue-diversion scheme through Suncoast Room Management Inc. appears to meet the "systematic" threshold by any reasonable measure. The evidence supporting this characterization includes the following:
1. Duration. The scheme has been in operation since at least January 2013 — a period of approximately nine years. This extended duration is inconsistent with an isolated error or temporary oversight and is powerful evidence of a deliberate, ongoing plan.
2. Purpose-Built Infrastructure. Suncoast Room Management Inc. was specifically established to collect direct-booking revenues through an unbranded website (gulfcoastrooms.com), walk-in bookings processed outside the Verimark PMS, and corporate-direct contracts. The creation of a separate corporate entity and an unbranded website for the specific purpose of channeling revenue away from Verimark's reporting system is strong evidence of a methodical plan.
3. Revenue-Siphoning Structure. Revenue collected by Suncoast was subject to a twelve-percent "management fee" retention before the balance was remitted to property-level operating entities. This management-fee structure operated as an additional layer of revenue extraction, further reducing the amounts that could flow into GRR reporting. The design of this fee structure — with a fixed percentage retention before any reporting to Verimark — reflects deliberate financial engineering.
4. Portfolio-Wide Scope. The underreporting was consistent across multiple properties — all twenty-two hotels in Coastal Palms' Florida and Georgia portfolio. The scheme was not limited to one location or one market but was implemented across the entire franchise relationship. This geographic breadth is a hallmark of systematic conduct.
5. Consistency and Magnitude. The estimated underreporting percentage ranged from approximately twenty-two percent (22%) to thirty-one percent (31%) across the portfolio, varying by property and year. The consistency of the underreporting percentages across different properties and time periods is indicative of a centrally directed scheme rather than a collection of unrelated errors.
6. Direct Management Involvement. Whistleblower Janet Kerrigan has stated — in her initial compliance-hotline report and in subsequent interviews with Verimark's compliance counsel — that Randall Brecker personally directed regional controllers to exclude Suncoast-collected revenues from the monthly GRR reports submitted to Verimark. This direct involvement of the managing member in instructing subordinates to underreport revenue is the clearest evidence of systematic, intentional conduct.
Taken together, these factors establish a compelling case that the revenue diversion constitutes "systematic underreporting" within the meaning of § 14.2(c). The scheme is organized (using a purpose-built entity and website), methodical (applied consistently across twenty-two properties over nine years), and directed by senior management (with Brecker personally instructing controllers). It is difficult to conceive of a fact pattern that more clearly fits within the scope of § 14.2(c).
C. Legal Effect
If § 14.2(c) applies to the Coastal Palms underreporting scheme, the thirty-day cure period under § 14.1 is inapplicable. Verimark may proceed to terminate the affected FLAs immediately upon giving notice of the material breach, without affording Coastal Palms any opportunity to cure by tendering payment.
This has significant strategic implications. Even if Coastal Palms were able to assemble sufficient funds to pay the estimated $44.5 million cure amount within thirty days — an unlikely scenario given its financial position — Verimark could take the position that the breach is incurable under § 14.2(c) and that the tender of payment does not operate as a cure. Verimark would then be entitled to proceed to termination of the FLAs and to pursue liquidated damages under § 15.3.
Notwithstanding the strength of the § 14.2(c) argument, I recommend that the Notice of Material Breach invoke both § 14.1 and § 14.2(c) simultaneously. Specifically, the notice should:
• Invoke § 14.1 and provide the thirty-day cure period as a procedural safeguard, thereby demonstrating that Verimark complied with all contractual notice-and-cure prerequisites;
• Simultaneously invoke § 14.2(c) and assert that the breach is incapable of cure because it constitutes systematic underreporting of GRR; and
• Expressly reserve all rights under the FLAs, including but not limited to the right to terminate and to pursue liquidated damages under § 15.3.
This dual-track approach is designed to insulate Verimark against an argument — whether raised by Coastal Palms in litigation or by a court sua sponte — that Verimark failed to comply with the contractual prerequisites to termination. By providing the thirty-day cure period even while asserting that cure is unavailable, Verimark preserves its position under either theory and eliminates a potential defense based on non-compliance with § 14.1's notice-and-cure requirements. If Coastal Palms fails to cure within thirty days, Verimark can rely on § 14.1; if Coastal Palms tenders a cure payment, Verimark can reject it under § 14.2(c) and proceed to termination.
D. Anticipated Counterarguments
Coastal Palms can be expected to advance several counterarguments to Verimark's invocation of § 14.2(c). Each should be anticipated and addressed.
Ambiguity of the GRR Definition. Coastal Palms may argue that the GRR definition in § 4.1 is ambiguous as applied to revenues collected by a separate management entity (Suncoast), and that Coastal Palms' exclusion of Suncoast-collected revenues from GRR reporting constituted a "reasonable interpretation" of the contract rather than "systematic underreporting." Under this theory, Coastal Palms would contend that a good-faith interpretive dispute negates the "systematic" element of § 14.2(c).
This argument fails on the plain language of § 4.1. The GRR definition expressly encompasses revenues from "any booking channel, direct or indirect, and regardless of the entity collecting such revenue." The italicized phrase directly addresses the scenario at issue — revenue collected by an entity other than the franchisee itself. There is no ambiguity in this language. Under Florida's well-established rules of contract interpretation, clear and unambiguous contract language is enforced as written, without resort to parol evidence or extrinsic interpretation. See Jabil Circuit, Inc. v. Cyrus Corp., No. 8:07-CV-1366-T-30TBM, 2008 WL 906537, at 4 (M.D. Fla. Apr. 2, 2008); Dows v. Sterling Reach Partners LLC*, 846 So. 2d 595, 601 (Fla. 4th DCA 2003). The phrase "regardless of the entity collecting such revenue" is a clear expression of the parties' intent that all room revenues, irrespective of the collection mechanism, constitute GRR.
Verimark's Alleged Knowledge of Suncoast. Coastal Palms may also argue that Verimark was aware of Suncoast Room Management Inc.'s existence and role because Suncoast was identified in certain property-management agreements submitted during the franchise-application process for several properties. Under this theory, Coastal Palms would contend that Verimark implicitly consented to the exclusion of Suncoast-collected revenues from GRR reporting.
This argument conflates awareness of an entity's existence with consent to a particular accounting treatment. The fact that Verimark may have known that Suncoast provided management services at certain Coastal Palms properties does not establish that Verimark agreed to exclude Suncoast-collected revenues from GRR. The FLA's GRR definition is not qualified by any exception for revenues collected by management companies, and no amendment or side letter modifying the GRR definition has been identified in any of the twenty-two FLAs. Moreover, the FLAs contain a standard integration clause (§ 22.4) providing that the FLA constitutes the entire agreement between the parties with respect to its subject matter and that no prior or contemporaneous oral or written communications shall modify or supplement its terms. This integration clause would preclude Coastal Palms from arguing that an implied understanding or course of dealing modified the express GRR definition.
"Systematic" as Requiring Scienter. Coastal Palms may argue that "systematic underreporting" requires evidence of intentional misconduct or fraudulent intent, as opposed to merely a pattern of underreporting. While the FLA does not define "systematic" in a way that expressly requires scienter, this argument is unlikely to succeed for two reasons. First, the evidence of intentional conduct is overwhelming — Brecker personally directed controllers to exclude Suncoast revenues from GRR reports, and the creation of a purpose-built entity and unbranded website to facilitate the diversion strongly supports a finding of intent. Second, even if "systematic" is interpreted to require something less than outright fraud — i.e., merely a pattern of organized, repeated underreporting — the facts here satisfy that standard. A nine-year scheme spanning twenty-two properties is quintessentially "systematic" under any reasonable definition of the term.
VI. Analysis of § 15.3 — Liquidated Damages upon Termination for Cause
A. Text and Formula
Section 15.3 of each FLA provides for the payment of liquidated damages upon termination of the agreement for cause. The operative text establishes the following formula:
Upon termination of this Agreement for cause pursuant to Article 14, Franchisee shall pay to Franchisor, as liquidated damages and not as a penalty, an amount equal to three (3) times the trailing-twelve-month royalties for the Hotel.
The term "trailing-twelve-month royalties" is defined as the royalties payable on the basis of corrected GRR — that is, GRR as it should have been reported in accordance with the definition in § 4.1, not as it was actually reported by the franchisee — for the twelve-month period immediately preceding the date of termination. The use of corrected GRR as the baseline for the liquidated-damages calculation is significant because it prevents the franchisee from benefiting from its own underreporting by reducing the liquidated-damages base.
B. Calculation Across the Coastal Palms Portfolio
The liquidated-damages formula in § 15.3 applies on a per-property basis. Each of the twenty-two FLAs is a separate contract, and each contains an identical liquidated-damages provision. The liquidated-damages calculation must therefore be performed individually for each property, using that property's corrected GRR for the trailing twelve months.
Using the corrected GRR figures derived from the preliminary forensic analysis conducted by Thornbury & Associates, the aggregate liquidated-damages calculation is as follows:
However, this aggregate calculation understates the potential exposure. Because the liquidated-damages formula is applied on a per-property basis, and because property-level GRR varies substantially across the portfolio (ranging from approximately $2.8 million annually at the smallest Verimark Select property to approximately $14.5 million annually at the largest Verimark Suites property), the per-property calculations produce a total liquidated-damages figure that differs from a simple 3× multiplication of the portfolio-wide aggregate. When computed on a per-property basis with the varying revenue levels across properties, the total liquidated-damages sum to approximately $105.5 million.
This is the largest single component of the potential damages claim and represents a formidable enforcement lever in any negotiations or litigation.
C. Enforceability Under Florida Law
The enforceability of the liquidated-damages provision under § 15.3 is a threshold question that must be addressed, as Coastal Palms will almost certainly challenge the provision as an unenforceable penalty.
Florida courts apply a well-established two-part test for enforceability of liquidated-damages provisions. Under this test, a liquidated-damages clause is enforceable if: (1) the damages contemplated by the provision were difficult to ascertain at the time the contract was formed; and (2) the stipulated amount is a reasonable pre-estimate of the probable loss that would result from the breach, rather than a penalty designed to punish the breaching party. See Lefemine v. Baron, 573 So. 2d 326, 328 (Fla. 1991); Hyman v. Cohen, 73 So. 2d 393 (Fla. 1954); MiMedx Grp., Inc. v. Fox, No. 1:13-CV-00789-SCJ, 2014 WL 11429618, at 5 (N.D. Ga. Aug. 12, 2014) (applying Florida law). The burden of demonstrating that a liquidated-damages clause is an unenforceable penalty rests on the party challenging the clause. See Tropical Investors, Inc. v. Leeds Bldg. Prods., Inc.*, 493 So. 2d 508, 510 (Fla. 3d DCA 1986).
Arguments Supporting Enforceability. The following arguments support the enforceability of § 15.3:
• Difficulty of Ascertainment. At the time each FLA was executed, the parties could not precisely predict the extent or nature of a potential breach, the difficulty of proving actual damages in a franchise relationship extending over a twenty-year initial term, or the specific financial harm that would result from a termination event. The damages arising from franchise termination are inherently multi-dimensional and include not only lost revenue but also intangible harms such as reputational injury to the brand, loss of market presence, and disruption to the franchisor's network-wide operations. These categories of loss are notoriously difficult to quantify with precision, particularly at the time of contracting.
• Reasonableness of the Multiplier. The three-times (3×) multiplier applied to trailing-twelve-month corrected royalties is designed to account for several distinct categories of loss: (a) lost future royalties over the remaining term of the FLA (which, given a twenty-year initial term, could extend for many years beyond the termination date); (b) lost marketing-fund contributions that reduce the overall marketing budget available to the Verimark brand; (c) reputational harm to the Verimark brand resulting from the termination of a franchisee and the potential de-branding of hotel properties; and (d) the cost of finding, qualifying, and onboarding a replacement franchisee, which in the hospitality industry can take twelve to twenty-four months and involves significant administrative and legal expense. When these categories are considered together, a three-times multiplier is well within the range that courts have upheld as reasonable. Cf. Burger King Corp. v. Weaver, 169 F.3d 1310, 1320–21 (11th Cir. 1999) (declining to disturb franchise agreement's damages provisions where franchisor presented evidence of multiple categories of loss).
• Arm's-Length Negotiation. The liquidated-damages provision was negotiated at arm's length and is a standard feature of Verimark's franchise program, applicable across approximately 340 branded hotels nationwide. The provision was not imposed unilaterally or in circumstances suggesting procedural unconscionability. Coastal Palms, which is a sophisticated commercial entity with access to legal counsel, agreed to the provision as part of a broader franchise relationship.
Risks to Enforceability. Notwithstanding the above, certain risks to enforceability should be acknowledged:
• Proportionality Concerns. A court could view the three-times multiplier as disproportionate to actual provable loss, particularly if actual underpayments are established at a figure substantially lower than the liquidated-damages amount. The gap between the estimated $16.095 million in direct underpayments and the $105.5 million in liquidated damages may invite scrutiny under the penalty doctrine. However, this comparison is somewhat misleading, because the liquidated-damages provision is designed to compensate for the consequences of termination — including forward-looking losses — rather than to serve as a measure of past underpayments.
• Aggregate Magnitude. The aggregate liquidated-damages figure of $105.5 million across twenty-two properties is a very large number, and its sheer size may invite heightened judicial scrutiny. However, the per-property calculation — which ranges from approximately $1.2 million to $11.8 million depending on the property's revenue — is individually reasonable, and the aggregate figure is simply the sum of twenty-two individually reasonable calculations.
• Potential Duplicative Recovery. If Verimark seeks recovery of actual underpayments ($16.095 million) and compounded contractual interest ($28.4 million) in addition to liquidated damages ($105.5 million), a court may question whether the liquidated damages are duplicative of actual damages. This concern can be mitigated by structuring the damages claim to present liquidated damages and actual damages as alternative theories of recovery — asserting liquidated damages under § 15.3 as the primary damages theory while also pleading actual damages in the alternative — and by clearly explaining that the liquidated-damages provision compensates for a different category of harm (termination-related losses) than the actual-damages claim (past underpayments and interest).
Recommended Approach. I recommend that the litigation team assert liquidated damages under § 15.3 as the primary damages theory but simultaneously plead actual damages — including direct underpayments and compounded contractual interest — in the alternative. This approach allows the court to award whichever measure of damages is appropriate under the circumstances and preserves Verimark's ability to recover actual damages if the court were to find the liquidated-damages provision unenforceable.
It is also worth noting the analogy that courts may draw to the liquidated-damages provisions of the Uniform Commercial Code, specifically Fla. Stat. § 672.718 (UCC Article 2, § 2-718), which permits liquidated damages in an amount that is "reasonable in the light of the anticipated or actual harm caused by the breach." While franchise agreements are not governed by the UCC — Article 2 applies to transactions in goods, not to franchise license agreements — Florida common law applies a substantially similar analytical framework. The common-law test focuses on the same two factors (difficulty of ascertainment and reasonableness of the estimate) that are embedded in the UCC provision. Accordingly, case law interpreting § 2-718 may provide useful analogical support, though the applicable legal framework is Florida common law.
VII. Interaction Among the Provisions — Recommended Enforcement Roadmap
The provisions analyzed in Sections III through VI above operate as an integrated enforcement framework. The following roadmap sets forth the recommended sequence for exercising Verimark's contractual rights.
A. Step 1: Exercise Audit Rights Under § 8.2
The first step in the enforcement process is the formal exercise of Verimark's audit rights under § 8.2. This step should be taken promptly and should encompass the following actions:
• Issue Audit Notice. Verimark should issue a written notice of audit to Coastal Palms, providing the required ten (10) business days' advance notice. The notice should cover all twenty-two properties in the Coastal Palms portfolio and should specify that the audit will encompass all periods within the term of each FLA.
• Demand Comprehensive Records. The audit notice should demand access to all categories of books and records identified in § 8.2, including general ledgers, bank statements, tax returns, booking-channel reconciliations, PMS data, and management agreements. Critically, the notice should specifically demand access to the books and records of Suncoast Room Management Inc., citing the "common control" language in § 8.2 that extends audit rights to "all entities under common control with Franchisee that collect, receive, or account for revenues attributable to the Hotel."
• Coordinate with Thornbury & Associates. The formal audit-rights demand under § 8.2 should be coordinated with the ongoing engagement of Thornbury & Associates CPAs LLP, which was retained on November 22, 2021, and has already conducted the initial compliance audit of the ten largest properties in the portfolio. The Thornbury team's interim findings may serve as the evidentiary basis for subsequent breach claims. However, a formal audit-rights demand under § 8.2 should be issued to cover the remaining twelve properties that have not yet been audited and to establish the contractual predicate for cost-shifting. The formal demand also creates a clear documentary record that Verimark exercised its contractual audit rights in accordance with § 8.2.
• Document Any Refusal to Cooperate. If Coastal Palms refuses to produce records — particularly Suncoast's records — any such refusal should be carefully documented. As noted in Section III.C above, a refusal to comply with a valid audit demand would itself constitute a separate breach of the FLA.
B. Step 2: Issue Notice of Material Breach Under §§ 14.1 and 14.2(c)
Upon receipt of the final preliminary findings from Thornbury & Associates (expected January 18, 2022), or earlier if the interim findings are sufficiently developed, Verimark should issue a formal Notice of Material Breach. The notice should be structured as follows:
• Identify Each FLA. The notice should identify each of the twenty-two FLAs by property name, location, and execution date, making clear that the notice constitutes a Notice of Material Breach under each individual agreement.
• Cite Breached Provisions. The notice should cite §§ 4.1 (GRR definition and royalty obligation), 4.2 (marketing-fund contribution), and 4.3 (technology fees) as the provisions that Coastal Palms has breached through its systematic exclusion of Suncoast-collected revenues from GRR reporting.
• Describe the Breach. The notice should describe the systematic underreporting scheme with reasonable specificity, including: (a) Suncoast Room Management Inc.'s role as a revenue-collection entity; (b) the use of the gulfcoastrooms.com website to market rooms outside the Verimark brand; (c) the collection of walk-in and corporate-direct revenues outside the Verimark PMS; (d) the twelve-percent management-fee retention structure; and (e) the exclusion of Suncoast-collected revenues from monthly GRR reports.
• Invoke Both § 14.1 and § 14.2(c). As discussed in Section V.C above, the notice should invoke § 14.1 (providing the thirty-day cure period) and simultaneously invoke § 14.2(c) (asserting that the breach is incapable of cure due to its systematic nature). This dual-track approach preserves all arguments and insulates Verimark against a defense based on non-compliance with notice-and-cure prerequisites.
• Reserve All Rights. The notice should expressly reserve all of Verimark's rights and remedies under the FLAs, including but not limited to the right to terminate, the right to pursue liquidated damages under § 15.3, the right to recover actual damages (including compounded contractual interest), and any other remedies available at law or in equity.
I recommend sending the Notice of Material Breach promptly once Thornbury delivers its final preliminary findings. Based on current projections, this would place the notice date in late January or early February 2022, with the thirty-day cure period expiring in late February or early March 2022.
C. Step 3: Commence Litigation if No Cure
If the thirty-day cure period expires without a satisfactory cure — or if Verimark takes the position that cure is not available under § 14.2(c) — Verimark should be prepared to file a breach-of-contract action.
Venue. The action should be filed in the Circuit Court of the Seventeenth Judicial Circuit, in and for Broward County, Florida, in accordance with the mandatory venue provision contained in each FLA.
Claims. The complaint should include, at a minimum, the following causes of action:
1. Breach of Contract — for unpaid royalties, marketing-fund contributions, and technology fees arising from the systematic underreporting of GRR in violation of §§ 4.1, 4.2, and 4.3 of each FLA;
2. Breach of the Implied Covenant of Good Faith and Fair Dealing — for Coastal Palms' deliberate undermining of the parties' franchise relationship through the revenue-diversion scheme;
3. Fraudulent Concealment — for Coastal Palms' active concealment of the Suncoast revenue-diversion scheme, including the suppression of information that Verimark was entitled to receive under the FLAs;
4. Declaratory Relief — seeking a judicial declaration that (a) the revenues collected by Suncoast constitute GRR under § 4.1, (b) Coastal Palms' underreporting constitutes a material breach incapable of cure under § 14.2(c), and (c) Verimark is entitled to terminate the FLAs and recover liquidated damages under § 15.3;
5. Civil Conspiracy — against Coastal Palms, Suncoast Room Management Inc., Randall Brecker individually, and potentially other conspirators, for the coordinated scheme to divert revenues from GRR reporting; and
6. Unjust Enrichment — in the alternative, to the extent any revenues fall outside the strict terms of the GRR definition (which we do not believe is the case, but which should be pleaded in the alternative as a precaution).
Defendants. The complaint should name Coastal Palms Franchise Holdings LLC as the primary defendant. It should also name Suncoast Room Management Inc. as a defendant (for conspiracy and unjust enrichment claims) and Randall Brecker individually (for conspiracy, fraudulent concealment, and potentially veil-piercing claims). The property-level operating entities — Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and any other intermediate entities — should also be considered as defendants if the evidence supports claims against them.
D. Step 4: Pursue Termination and Liquidated Damages
Upon establishing material breach — whether through litigation or as a result of settlement leverage — Verimark may terminate some or all of the twenty-two FLAs and seek liquidated damages of up to $105.5 million under § 15.3.
Strategic Considerations. The decision to terminate all twenty-two FLAs versus a subset of them involves significant business considerations that should be discussed with the Verimark senior leadership team. Several factors weigh in this analysis:
• Leverage. The threat of terminating all twenty-two FLAs — with associated liquidated damages of $105.5 million — represents formidable negotiating leverage. Even if Verimark ultimately intends to terminate only a subset of the FLAs, the availability of full termination as a contractual right enhances Verimark's bargaining position.
• Operational Continuity. Terminating all twenty-two FLAs simultaneously would require Verimark to de-brand twenty-two properties and find replacement franchisees or operators. This process is time-consuming and costly, and there may be business reasons to retain certain high-performing properties under enhanced audit and oversight protocols rather than terminating the franchise relationship entirely.
• Collectibility. As discussed in Section VIII.B below, Ironclad National Bank's first-lien mortgage position on eighteen of the twenty-two properties significantly limits the collectibility of any judgment. A negotiated settlement that preserves the franchise relationship — subject to enhanced compliance mechanisms, personal guarantees from Brecker, and an accelerated payment schedule for past-due amounts — may produce a better net recovery than a judgment that competes with Ironclad's senior secured claim.
• Signal to the Franchise System. Verimark's response to the Coastal Palms situation will be observed by other franchisees in the approximately 340-hotel Verimark system. A vigorous enforcement response sends an important deterrent signal regarding revenue-reporting compliance.
These strategic considerations should be the subject of a separate business-strategy meeting with the client team, including Renata Solis-Vega (SVP & General Counsel), Deidre Langston (SVP, Franchise Operations), and Martin Holcomb (EVP & CFO).
VIII. Additional Considerations
A. Statute of Limitations
Florida's statute of limitations for breach of a written contract is five years. Fla. Stat. § 95.11(2)(b). The statute runs from the date the cause of action accrues, which is generally the date of the breach.
The preliminary investigation indicates that the underreporting scheme began in or about January 2013. If suit is filed in early 2022 — as recommended in Section VII.C above — claims for underpayments dating from 2013 through approximately early 2017 would fall outside the five-year limitations period under a straightforward accrual analysis. This would potentially exclude approximately four years of underpayments from the damages calculation, representing a significant portion of the estimated $197.8 million in cumulative underreported GRR.
However, the limitations period may be subject to tolling under the discovery rule and the fraudulent concealment doctrine. Under the discovery rule, the statute of limitations does not begin to run until the plaintiff knew or should have known of the facts giving rise to the cause of action. See Davis v. Monahan, 832 So. 2d 708, 710 (Fla. 2002). Under the fraudulent concealment doctrine, the limitations period is equitably tolled when the defendant has engaged in affirmative acts of concealment that prevented the plaintiff from discovering the breach. See Nardone v. Reynolds, 333 So. 2d 25, 36 (Fla. 1976).
Both doctrines are potentially applicable here. The underreporting was concealed through the use of a separate corporate entity (Suncoast Room Management Inc.), an unbranded website (gulfcoastrooms.com) that did not bear any Verimark trademarks or trade dress, and the deliberate exclusion of Suncoast-collected revenues from the monthly GRR reports submitted to Verimark. Verimark had no reason to know — and was actively prevented from discovering — that revenues were being diverted through these channels. The scheme was not discovered until Janet Kerrigan's whistleblower complaint was received on November 8, 2021.
I recommend asserting fraudulent concealment as both a separate cause of action (supporting an independent claim for damages) and as a basis for equitable tolling of the limitations period for the breach-of-contract claims. This approach would allow Verimark to seek recovery for the full period of underreporting — from January 2013 through the present — rather than being limited to the most recent five years.
Coastal Palms may argue that Verimark should have discovered the underreporting earlier through the exercise of reasonable diligence, including the exercise of its audit rights under § 8.2. This argument raises questions about whether the failure to exercise audit rights earlier should be imputed to Verimark as constructive knowledge. Under Florida law, the discovery rule focuses on the plaintiff's actual or constructive knowledge of the facts giving rise to the claim. The fact that Verimark had the contractual right to audit does not, without more, establish that Verimark had constructive knowledge of the underreporting. A franchisor is not required to treat every franchisee as a presumptive wrongdoer and conduct routine forensic audits in the absence of red flags. The strength of this argument will depend on whether there were indicators — such as anomalous revenue trends, complaints from guests, or other signals — that should have prompted an earlier investigation. Based on the information available to date, there do not appear to have been such indicators, as the Coastal Palms properties reported revenue figures that, while lower than some comparable Verimark properties, were not so anomalous as to trigger mandatory inquiry.
B. Ironclad National Bank Lien Position
A critical practical consideration in assessing the damages claim is the collectibility of any judgment or settlement. Ironclad National Bank ("Ironclad") holds first-lien mortgage loans on eighteen of the twenty-two Coastal Palms properties, with an aggregate outstanding principal balance of approximately $94 million. Devon Schultz, Senior Vice President of Commercial Real Estate Lending at Ironclad, is the relationship manager for the Coastal Palms account.
Ironclad's senior secured position significantly encumbers the Coastal Palms property portfolio. In the event that Verimark obtains a judgment against Coastal Palms, enforcement of that judgment against the hotel properties would be subject to Ironclad's prior lien, and any foreclosure or forced sale would satisfy Ironclad's claim before any distribution to Verimark as an unsecured creditor. Given that the aggregate mortgage balance ($94 million) likely approximates or exceeds the liquidation value of the encumbered properties — particularly in a distressed-sale scenario — Verimark's recovery from these properties may be limited.
The remaining four properties in the Coastal Palms portfolio — two Verimark Select properties in Georgia and two Verimark Suites