CALDERWOOD & HARKNESS LLP Attorneys at Law 110 SE 6th Street, Suite 2800 Fort Lauderdale, Florida 33301 Telephone: (954) 555-7200 Facsimile: (954) 555-7201 www.calderwoodharkness.com
Priya Anand Partner Direct Dial: (954) 555-7218
Email: panand@calderwoodharkness.com
FL Bar No. 0087451
February 4, 2022
VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED AND ELECTRONIC MAIL (nwhitfield@wbclaw.com)
Nathan Whitfield III, Esq. Senior Partner Whitfield, Barrow & Crane LLP 1221 Brickell Avenue, Suite 3000 Miami, Florida 33131
Re: Verimark Hospitality Group Inc. — Demand for Cure of Material Breach by Coastal Palms Franchise Holdings LLC, Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and Suncoast Room Management Inc.
Dear Mr. Whitfield:
This firm represents Verimark Hospitality Group Inc. ("Verimark" or "VHG"), a Delaware corporation whose common stock is publicly traded on the Nasdaq Stock Market under the ticker symbol VHMK, with its principal offices located at 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, Florida 33301. We understand that your firm serves as counsel to Coastal Palms Franchise Holdings LLC and its affiliated entities. This letter is addressed to you in that capacity.
We write in connection with the systematic underreporting of Gross Room Revenue ("GRR") by Coastal Palms Franchise Holdings LLC ("Coastal Palms"), a Florida limited liability company with its principal office at 9500 Gulf Shore Drive, Suite 450, Naples, Florida 34108, and its affiliated entities, including Gulf Breeze Hospitality LLC ("Gulf Breeze"), Savannah Lodging Partners LLC ("Savannah Lodging"), and Suncoast Room Management Inc. ("Suncoast"). As set forth in detail below, Verimark's investigation has uncovered a long-running revenue diversion scheme spanning nearly a decade, resulting in the underpayment of tens of millions of dollars in franchise fees owed to Verimark under the parties' Franchise License Agreements.
This letter accompanies the formal Notice of Material Breach issued this same date, February 4, 2022, pursuant to Section 14.1 of the applicable Franchise License Agreements (collectively, the "FLAs"). This letter constitutes a demand for cure of all identified breaches and serves as a reservation of all rights and remedies available to Verimark under the FLAs, at law, and in equity. Nothing stated herein should be construed as a waiver or limitation of any of Verimark's rights, claims, or remedies, all of which are expressly reserved.
I. BACKGROUND — THE FRANCHISE RELATIONSHIP
Coastal Palms entered into its first Franchise License Agreement with Verimark on June 15, 2007, for the operation of a single Verimark Suites branded hotel property located in Naples, Florida. That initial agreement marked the beginning of what would become one of the largest multi-unit franchise relationships in Verimark's system.
Over the ensuing twelve years, Coastal Palms and its affiliated entities executed a total of twenty-two (22) individual Franchise License Agreements with Verimark, the most recent of which is dated September 3, 2019. Today, the Coastal Palms portfolio comprises twenty-two (22) franchised hotel properties — eighteen (18) branded as "Verimark Suites" and four (4) branded as "Verimark Select" — located across the states of Florida and Georgia. The portfolio encompasses approximately 3,740 guest rooms in the aggregate.
Each FLA carries a twenty (20)-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 the resolution of any disputes arising under or related to the agreement.
Verimark is aware that the key principals of Coastal Palms are as follows: Randall "Randy" Brecker, who serves as Managing Member and holds approximately sixty percent (60%) of the equity in Coastal Palms; Theresa Brecker, who is a Member holding approximately fifteen percent (15%) of the equity; and Nolan Prescott, who is a Member holding approximately twenty-five percent (25%) of the equity and is understood to be a passive investor. Mr. Brecker has at all relevant times served as the primary decision-maker and operational controller of Coastal Palms and its affiliated entities, including Suncoast Room Management Inc.
II. CONTRACTUAL OBLIGATIONS — REVENUE REPORTING AND PAYMENT
Under each of the twenty-two FLAs, Coastal Palms is required to report Gross Room Revenue on a monthly basis and to remit the following payments to Verimark:
(a) Royalty Fee. Pursuant to FLA Section 4.1, Coastal Palms is obligated to pay Verimark a continuing royalty of five percent (5%) of Gross Room Revenue. Section 4.1 defines "Gross Room Revenue" or "GRR" as "all revenues derived from or attributable to the rental of guest rooms at the Hotel, including revenues from any booking channel, direct or indirect, and regardless of the entity collecting such revenue." This definition is deliberately and expansively drafted to encompass all room-rental revenue, irrespective of the mechanism by which the booking is generated or the entity through which payment is processed.
(b) Marketing-Fund Contribution. Pursuant to FLA Section 4.2, Coastal Palms is obligated to contribute two and one-half percent (2.5%) of Gross Room Revenue to the Verimark System Marketing Fund, which supports brand-wide advertising, digital marketing, and loyalty-program operations for the benefit of all Verimark-branded properties.
(c) Technology Fee. Pursuant to FLA Section 4.3, Coastal Palms is obligated to pay a technology fee of Twelve Dollars and Fifty Cents ($12.50) per available room per month, which covers the cost of Verimark's centralized reservation system, property-management system integration, and related technology infrastructure. This fee is adjusted annually by the Consumer Price Index, subject to a cap of three percent (3%) per year.
All of the foregoing fees are due and payable by the fifteenth (15th) day of each calendar month for the immediately preceding month's GRR, as reported in the monthly revenue statement required under FLA Section 4.5.
FLA Section 4.6 provides that late-payment interest accrues at a rate of one and one-half percent (1.5%) per month, compounded monthly, on any amounts that remain unpaid beyond the applicable due date. This provision applies to all underpayments, whether discovered at the time the payment was due or at a later date through audit or other investigation.
In addition, FLA Section 8.2 grants Verimark the right to audit the franchisee's books, records, and financial documents upon ten (10) business days' written notice. Critically, Section 8.2 further provides that if such an audit reveals that the franchisee has underpaid amounts owed to Verimark by more than two percent (2%) of reported Gross Room Revenue for any audited period, the franchisee shall bear all costs of the audit, including reasonable fees and expenses of auditors and consultants retained by Verimark. As detailed below, the underpayment revealed by Verimark's audit far exceeds this two percent threshold.
III. DISCOVERY OF THE REVENUE DIVERSION SCHEME
On November 8, 2021, a former Coastal Palms regional controller, Janet Kerrigan, contacted Verimark's compliance hotline and reported that Coastal Palms had been systematically diverting revenue through off-platform booking channels and affiliated management entities, thereby materially understating GRR in its monthly reports to Verimark. Ms. Kerrigan served as a regional controller for Coastal Palms from approximately March 2015 through October 2021 and had direct knowledge of the accounting practices and revenue-reporting methodologies employed across the Coastal Palms portfolio.
Specifically, the information received from Ms. Kerrigan, corroborated by documentary evidence she provided and by Verimark's subsequent independent investigation, indicates the following:
(a) Diversion Through Suncoast Room Management Inc. Beginning no later than January 2013, Coastal Palms established and utilized Suncoast Room Management Inc. — a Florida corporation wholly controlled by Randall Brecker — to collect revenues from direct bookings at the franchised properties. These direct bookings included walk-in guests, corporate-direct rate contracts negotiated outside of Verimark's reservation system, and bookings made through an unbranded website operating under the domain name "gulfcoastrooms.com." Suncoast retained a twelve percent (12%) "management fee" on all such bookings before forwarding the balance of the revenue to the property-level limited liability companies, including Gulf Breeze Hospitality LLC and Savannah Lodging Partners LLC. Neither the revenues initially collected by Suncoast nor the "management fees" retained by Suncoast were included in the GRR reports submitted to Verimark. The effect of this arrangement was to systematically siphon room-rental revenue away from Verimark's fee base while simultaneously enriching Mr. Brecker through the management fees retained by his controlled entity.
(b) Improper Netting of OTA Revenue. In addition to the Suncoast diversion scheme, Coastal Palms appears to have underreported revenue from third-party online travel agency ("OTA") channels — including Aldermere Technologies, Bramwell Holdings, and Drayton Software — by classifying net-rate OTA payments as "commissions receivable" and netting them against GRR. Under this methodology, if an OTA collected $100 in room revenue from a guest and remitted $85 to the property after retaining a $15 commission, Coastal Palms reported only $85 as GRR rather than the full $100 gross amount. This practice directly violates Section 4.1's definition of GRR, which expressly encompasses "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." The GRR definition makes no allowance for netting of commissions, fees, or any other deductions.
The combined effect of these two revenue diversion mechanisms has been to substantially and systematically understate the GRR reported by Coastal Palms to Verimark over a period of approximately nine years, resulting in the underpayment of millions of dollars in royalties, marketing-fund contributions, and technology fees.
IV. AUDIT FINDINGS
Following receipt of the whistleblower report, Verimark retained Thornbury & Associates CPAs LLP ("Thornbury"), a regional accounting firm based in West Palm Beach, Florida, to conduct a comprehensive franchise-compliance audit of Coastal Palms' operations. Thornbury was engaged on November 22, 2021, under the direction of lead audit partner Malcolm Thornbury, CPA. The initial phase of the audit focused on the top ten (10) Coastal Palms properties by reported GRR for the 2019–2021 fiscal years.
Thornbury delivered its preliminary audit findings to Verimark on January 18, 2022. Those findings confirmed the substance of the whistleblower's report and revealed the following:
1.  The ten (10) audited properties had underreported Gross Room Revenue by approximately twenty-six percent (26%) for the period spanning fiscal years 2019 through 2021.
2.  The underreporting was attributable to both the Suncoast revenue diversion scheme and the improper netting of OTA revenues, consistent with the mechanisms described by Ms. Kerrigan.
3.  Extrapolating the audit findings across all twenty-two (22) properties and across the full period during which the revenue diversion scheme appears to have been in operation — January 2013 through December 2021 — the estimated total underreported GRR is approximately One Hundred Ninety-Seven Million Eight Hundred Thousand Dollars ($197,800,000.00).
4.  For fiscal year 2021 alone, Coastal Palms reported GRR of One Hundred Twelve Million Four Hundred Thousand Dollars ($112,400,000.00). Based on Verimark's forensic analysis, the estimated true GRR for fiscal year 2021 is approximately One Hundred Forty-Five Million Six Hundred Thousand Dollars ($145,600,000.00), indicating underreporting of approximately Thirty-Three Million Two Hundred Thousand Dollars ($33,200,000.00) in that single year.
5.  The underreporting percentage varies by individual property and year, ranging from approximately twenty-two percent (22%) to thirty-one percent (31%) across the portfolio.
These figures are preliminary and are based on the information currently available to Verimark and its auditors. As the investigation continues and as Verimark obtains access to additional records — including, critically, the complete financial records of Suncoast Room Management Inc. and the booking data from gulfcoastrooms.com — Verimark expects that the total amount of underreported GRR may increase.
V. QUANTIFICATION OF UNDERPAYMENTS AND DAMAGES
Based on the preliminary audit findings of Thornbury & Associates and Verimark's internal financial analysis, the cumulative underpayments resulting from the revenue diversion scheme, together with contractually available damages, are quantified as follows:
A. Direct Underpayments
The technology fee underpayment arises from the fact that Coastal Palms added a total of approximately 214 guest rooms across four (4) properties during the relevant period without providing proper notice to Verimark or making the corresponding technology fee payments, as required under FLA Section 4.3. The estimated average period of underpayment for these rooms is approximately forty-seven (47) months.
B. Contractual Late-Payment Interest
Under FLA Section 4.6, late-payment interest accrues at a rate of one and one-half percent (1.5%) per month, compounded monthly, on all unpaid amounts from the date each payment was originally due. Applying this contractual interest rate to the foregoing underpayments over the applicable periods and projecting through an estimated judgment date, the total accrued late-payment interest is approximately Twenty-Eight Million Four Hundred Thousand Dollars ($28,400,000.00).
C. Liquidated Damages Upon Termination
Under FLA Section 15.3, upon termination of any FLA for cause, Verimark is entitled to recover liquidated damages equal to three times (3×) the trailing-twelve-month royalty fees for the terminated property, calculated using the corrected (i.e., actual) GRR figures. Across all twenty-two (22) franchised properties, using the corrected GRR figures derived from Verimark's forensic analysis, the aggregate liquidated damages amount to approximately One Hundred Five Million Five Hundred Thousand Dollars ($105,500,000.00).
D. Total Potential Damages
Accordingly, Verimark's total potential damages are approximately One Hundred Fifty Million Dollars ($150,000,000.00).
Verimark expressly reserves the right to refine, supplement, and increase these damage calculations as further investigation, audit work, and discovery proceed. The foregoing figures are based on preliminary findings and do not include all categories of damages that Verimark may be entitled to recover, including but not limited to consequential damages, damages for harm to the Verimark brand, and statutory damages or penalties.
VI. MATERIAL BREACH AND DEMAND FOR CURE
The systematic underreporting of Gross Room Revenue, the diversion of room-rental revenues through Suncoast Room Management Inc. and the gulfcoastrooms.com website, the improper netting of OTA revenues, and the resulting failure to pay royalties, marketing-fund contributions, and technology fees owed under the FLAs constitute material breaches of FLA Sections 4.1, 4.2, and 4.3, as well as related provisions governing accurate record-keeping and reporting. These breaches are not isolated or inadvertent; they reflect a deliberate, coordinated, and sustained scheme to deprive Verimark of franchise fees to which it is contractually entitled.
Pursuant to FLA Section 14.1, Verimark has issued a formal Notice of Material Breach, also dated February 4, 2022, demanding that Coastal Palms cure all identified breaches within thirty (30) days — that is, no later than March 6, 2022.
We note that FLA Section 14.2(c) expressly provides that "systematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure." Verimark reserves its position that the breaches identified herein — which involve a deliberate, multi-year scheme to divert and conceal revenue — constitute breaches that are incapable of cure within the meaning of Section 14.2(c), and that Verimark is therefore entitled to terminate the FLAs without affording any cure period.
Notwithstanding Section 14.2(c), and solely in an effort to resolve this matter without resort to litigation, Verimark is affording Coastal Palms the full thirty (30)-day cure period provided under Section 14.1. To effect a valid cure, Coastal Palms must, at a minimum, satisfy each of the following conditions within the cure period:
(a) Full payment to Verimark of all underpaid royalties, marketing-fund contributions, and technology fees, together with all accrued late-payment interest, in an aggregate amount of not less than Forty-Four Million Four Hundred Ninety-Five Thousand Dollars ($44,495,000.00), or such greater amount as may be determined upon completion of the ongoing audit;
(b) Complete and accurate re-submission of GRR reports for the entire period from January 2013 through December 2021, for all twenty-two (22) franchised properties, reflecting the true and correct Gross Room Revenue for each property in each reporting period;
(c) Immediate and permanent cessation of all revenue diversion through Suncoast Room Management Inc., gulfcoastrooms.com, or any other off-platform booking channel, entity, or mechanism not disclosed to and approved by Verimark;
(d) Full and complete cooperation with any further audit, investigation, or examination by Verimark or its designated auditors, consultants, or agents under FLA Section 8.2, including the production of all books, records, financial statements, bank statements, tax returns, and other documents requested by Verimark or its auditors.
Verimark emphasizes that anything less than full and complete compliance with each of the foregoing conditions will not constitute a valid cure. Partial payment, partial disclosure, or partial cooperation will not suffice.
VII. RESERVATION OF RIGHTS — LIQUIDATED DAMAGES AND TERMINATION
Verimark expressly reserves all rights and remedies available to it under the FLAs, at law, and in equity, including but not limited to the following:
(a) Termination of all twenty-two (22) Franchise License Agreements for cause pursuant to FLA Section 14.2(c), based on the systematic underreporting of Gross Room Revenue;
(b) Recovery of liquidated damages under FLA Section 15.3, in the amount of three times (3×) the trailing-twelve-month royalties for each terminated property, totaling approximately One Hundred Five Million Five Hundred Thousand Dollars ($105,500,000.00);
(c) Recovery of all direct underpayments of royalties, marketing-fund contributions, and technology fees, together with all accrued late-payment interest under FLA Section 4.6;
(d) Claims for fraudulent concealment, negligent misrepresentation, unjust enrichment, breach of the implied covenant of good faith and fair dealing, accounting, declaratory judgment, and civil conspiracy, to the extent supported by the facts as they are more fully developed through investigation and discovery;
(e) Recovery of all audit costs, including the fees and expenses of Thornbury & Associates CPAs LLP and any other auditors or consultants retained by Verimark, pursuant to FLA Section 8.2, given that the audit has revealed underpayment far exceeding two percent (2%) of reported Gross Room Revenue;
(f) Recovery of all attorneys' fees, costs, and expenses incurred by Verimark in connection with this matter, to the extent permitted by the FLAs, by the laws of the State of Florida, or by any other applicable authority.
Nothing in this letter, in the accompanying Notice of Material Breach, or in any prior or subsequent communication between the parties or their counsel shall be construed as a waiver, release, limitation, or modification of any of Verimark's rights, claims, or remedies, all of which are expressly and fully reserved. Verimark's decision to afford a cure period under FLA Section 14.1 shall not be deemed a waiver of its rights under FLA Section 14.2(c) or any other provision.
VIII. LITIGATION NOTICE
If Coastal Palms fails to tender full and complete cure of all breaches identified herein within the thirty (30)-day cure period — that is, if cure is not effected by March 6, 2022 — Verimark intends to file suit in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida, consistent with the mandatory venue provision set forth in each of the twenty-two Franchise License Agreements. Verimark will seek damages of approximately One Hundred Fifty Million Dollars ($150,000,000.00), together with all available equitable relief, including but not limited to injunctive relief, an accounting, and a constructive trust over diverted revenues.
Verimark will name as defendants Coastal Palms Franchise Holdings LLC; Randall "Randy" Brecker, individually and in his capacity as Managing Member of Coastal Palms and as the controlling person of Suncoast Room Management Inc.; Suncoast Room Management Inc.; and such other parties and entities as may be warranted by the facts and circumstances as they are further developed. Verimark reserves the right to add additional parties, including but not limited to Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and any other entity that participated in or benefited from the revenue diversion scheme.
IX. PRESERVATION DEMAND
Verimark hereby demands that Coastal Palms Franchise Holdings LLC, its principals (including Randall Brecker, Theresa Brecker, and Nolan Prescott), and all affiliated entities — including, without limitation, Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and Suncoast Room Management Inc. — immediately take all steps necessary to preserve all documents, electronically stored information ("ESI"), and tangible items that are potentially relevant to the matters described in this letter. This preservation obligation extends to all such materials in the possession, custody, or control of any of the foregoing persons or entities, regardless of the format or location of such materials.
Without limiting the generality of the foregoing, the categories of materials that must be preserved include, but are not limited to:
•  All financial records, including general ledgers, subsidiary ledgers, trial balances, journal entries, and financial statements for Coastal Palms, each property-level entity, Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and Suncoast Room Management Inc.;
•  All GRR reports and revenue statements submitted to Verimark for any period;
•  All booking-channel data, including data from Verimark's central reservation system, third-party OTAs, direct booking systems, walk-in records, and the gulfcoastrooms.com website;
•  All OTA contracts, rate agreements, reconciliations, and commission statements;
•  All records, books, and financial documents of Suncoast Room Management Inc., including management fee calculations, invoices, and payment records;
•  All booking logs, website analytics, hosting records, and payment-processing records associated with the domain gulfcoastrooms.com;
•  All bank statements, deposit records, wire transfer confirmations, and canceled checks for all accounts maintained by Coastal Palms, each property-level entity, Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and Suncoast Room Management Inc.;
•  All federal and state tax returns, schedules, and supporting work papers for the foregoing entities for the period from 2007 through the present;
•  All internal and external communications — including emails, text messages, instant messages, voicemails, memoranda, letters, and any other form of correspondence — relating to revenue reporting, GRR calculations, franchise fee payments, Suncoast Room Management, the gulfcoastrooms.com website, or any other matter described in this letter;
•  All property-management agreements, operating agreements, management agreements, and intercompany agreements among any of the foregoing entities;
•  All personnel files, employment records, and separation agreements related to Janet Kerrigan.
This preservation demand requires that all automatic deletion protocols, document-retention schedules, and other routine data-destruction practices be suspended immediately with respect to the categories of materials described above. Coastal Palms and its affiliated entities must take affirmative steps to ensure that no relevant documents or ESI are destroyed, altered, overwritten, deleted, or concealed, whether intentionally or through the ordinary course of business operations.
We advise you and your clients in the strongest possible terms that any destruction, alteration, or concealment of potentially relevant evidence after receipt of this letter may give rise to spoliation sanctions, adverse inference instructions, and other remedies in any subsequent litigation. Florida courts take document-preservation obligations seriously, and Verimark will not hesitate to seek the full range of available sanctions if evidence is not properly preserved.
X. REQUEST FOR RESPONSE
We request that you respond in writing on behalf of Coastal Palms Franchise Holdings LLC and its principals no later than February 18, 2022, indicating (a) whether Coastal Palms acknowledges the breaches identified herein, (b) whether Coastal Palms intends to cure the identified breaches within the thirty (30)-day cure period, and (c) the specific terms and timeline on which Coastal Palms proposes to effect such cure. Failure to respond by the requested date will be understood as an indication that Coastal Palms does not intend to cure the identified breaches, and Verimark will act accordingly.
All correspondence regarding this matter should be directed to the undersigned at the following address:
Priya Anand, Esq. Calderwood & Harkness LLP 110 SE 6th Street, Suite 2800 Fort Lauderdale, Florida 33301 Direct Dial: (954) 555-7218
Email: panand@calderwoodharkness.com
We trust that you will bring this letter and the enclosed Notice of Material Breach to the immediate attention of your clients and advise them of the seriousness of the matters set forth herein. Verimark remains prepared to discuss resolution of this matter in good faith, but only on terms that include full and complete cure of all identified breaches and full compensation for the damages Verimark has sustained.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Priya Anand Partner FL Bar No. 0087451 Direct Dial: (954) 555-7218
Email: panand@calderwoodharkness.com
cc: (via email and first-class mail)
Renata Solis-Vega, SVP & General Counsel, Verimark Hospitality Group Inc., 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, FL 33301
Douglas Carmichael, Partner, Calderwood & Harkness LLP, 110 SE 6th Street, Suite 2800, Fort Lauderdale, FL 33301
Coastal Palms Franchise Holdings LLC (via certified mail, return receipt requested), 9500 Gulf Shore Drive, Suite 450, Naples, FL 34108
Randall "Randy" Brecker (via certified mail, return receipt requested, personal service)
Enclosure: Notice of Material Breach dated February 4, 2022
Category | Calculation | Amount
Underpaid Royalties | 5% × $197,800,000 | $9,890,000.00
Underpaid Marketing-Fund Contributions | 2.5% × $197,800,000 | $4,945,000.00
Underpaid Technology Fees | 214 rooms × $12.50/room/month × ~47 months avg. | $1,260,000.00
Subtotal — Direct Underpayments | $16,095,000.00
Component | Amount
Direct Underpayments | $16,095,000.00
Contractual Late-Payment Interest | $28,400,000.00
Liquidated Damages (upon termination) | $105,500,000.00
Total Potential Damages | $149,995,000.00