PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Priya Anand, Partner, Calderwood & Harkness LLP
FROM: Yuki Nakamura, Associate, Calderwood & Harkness LLP
DATE: November 15, 2021
RE: Preliminary Analysis of Whistleblower Allegations — Verimark Hospitality Group Inc. / Coastal Palms Franchise Holdings LLC
This memorandum is protected by the attorney-client privilege and the work-product doctrine. It is prepared at the direction of counsel in anticipation of litigation and should not be disclosed to any third party without prior authorization from Calderwood & Harkness LLP. This document reflects the mental impressions, conclusions, and legal theories of counsel and is entitled to the heightened protections afforded opinion work product under Hickman v. Taylor, 329 U.S. 495 (1947), and its progeny. Any inadvertent disclosure of this document does not constitute a waiver of any applicable privilege or protection.
I. Executive Summary
On November 8, 2021, Janet Kerrigan, a former regional controller for Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "CPFH"), contacted the compliance hotline maintained by Verimark Hospitality Group Inc. ("Verimark" or "VHG") and reported that Coastal Palms has been systematically underreporting Gross Room Revenue ("GRR") to Verimark over an extended period. Ms. Kerrigan's allegations were received by personnel in Verimark's franchise operations department and promptly escalated to the office of the SVP & General Counsel. The seriousness and specificity of the allegations prompted Verimark's in-house legal team to contact Calderwood & Harkness for advisory guidance.
Ms. Kerrigan alleges that the scheme involves diverting revenue through an affiliated management entity, Suncoast Room Management Inc. ("Suncoast"), and an unbranded website, gulfcoastrooms.com, in order to avoid reporting those revenues as GRR under the applicable Franchise License Agreements ("FLAs"). According to Ms. Kerrigan, this revenue diversion mechanism was established no later than January 2013 and has operated continuously since that date across all 22 of Coastal Palms' franchised properties. She further contends that Randall Brecker, Coastal Palms' Managing Member, personally directed accounting personnel — including Ms. Kerrigan herself — to exclude Suncoast-collected revenues from the monthly GRR reports submitted to Verimark.
If the allegations are substantiated, the revenue diversion could result in significant underpayment of royalties (5% of GRR), marketing-fund contributions (2.5% of GRR), and technology fees ($12.50/room/month), plus substantial contractual late-payment interest (1.5% per month, compounded) and potential liquidated damages (3× trailing-twelve-month royalties per property under FLA § 15.3). The cumulative financial exposure to Coastal Palms, inclusive of all categories of damages, could be very substantial — potentially in excess of $100 million when unpaid royalties, marketing-fund contributions, technology fees, compounded interest, and liquidated damages are aggregated over the full duration of the alleged scheme.
Coastal Palms is Verimark's largest single franchise operator, holding 22 individual FLAs covering approximately 3,740 total rooms across 18 Verimark Suites and 4 Verimark Select branded hotels located in Florida and Georgia. The Coastal Palms portfolio represents a material component of Verimark's franchise segment, which generated $218 million in revenue in FY 2021. Accordingly, the allegations implicate not only significant contractual and financial claims, but also the integrity of Verimark's franchise reporting and compliance infrastructure more broadly.
This memorandum analyzes the substance and credibility of Ms. Kerrigan's allegations, identifies the key contractual provisions implicated, estimates the potential financial exposure on a preliminary basis, and recommends next steps including engagement of an independent forensic auditor and preservation of Ms. Kerrigan as a potential witness. A more detailed analysis of individual claims and litigation strategy will follow in a subsequent memorandum once additional facts have been developed.
II. Background: The Franchise Relationship
A. Parties and Corporate Structure
An understanding of the relevant entities and their interrelationships is essential to analyzing the whistleblower's allegations. The franchise relationship at issue involves a publicly traded franchisor, a multi-property franchisee holding company, various property-level operating entities, and an affiliated management company that is alleged to be at the center of the revenue diversion scheme.
Verimark Hospitality Group Inc. ("Verimark" or "VHG") is a Delaware corporation, publicly traded on the Nasdaq Stock Market under the ticker symbol VHMK. Verimark is headquartered at 2400 East Las Olas Boulevard, Suite 3100, Fort Lauderdale, Florida 33301. Verimark operates and franchises approximately 340 branded hotels across the southeastern United States under three distinct flags: "Verimark Suites," "Verimark Select," and "Verimark Grand." Verimark's FY 2021 consolidated revenue was approximately $1.42 billion, of which the franchise segment contributed approximately $218 million. The franchise segment is a key growth driver for the company and its financial performance is closely tracked by analysts and investors. Verimark maintains a centralized franchise operations department, led by Senior Vice President Deidre Langston, which is responsible for franchisee compliance, brand-standard enforcement, and financial reporting oversight. The office of the SVP & General Counsel, Renata Solis-Vega, oversees all legal matters relating to the franchise program.
Coastal Palms Franchise Holdings LLC ("Coastal Palms" or "CPFH") is a Florida limited liability company with its principal office at 9500 Gulf Shore Drive, Suite 450, Naples, Florida 34108. Coastal Palms serves as the holding company for a portfolio of 22 franchised hotels operating under the Verimark Suites and Verimark Select brands. Its Registered Agent is Garrison Registered Agents LLC, located at 100 S. Ashley Drive, Suite 600, Tampa, Florida 33602. Coastal Palms does not appear to maintain a public-facing corporate website separate from the websites associated with its individual properties and the alleged unbranded booking platform, gulfcoastrooms.com.
The principals of Coastal Palms are as follows:
• Randall "Randy" Brecker — Managing Member and holder of a 60% equity interest in Coastal Palms. Mr. Brecker, age 58, is a former hotel general manager who founded Coastal Palms in 2007 with a single Verimark Suites property in Naples, Florida. Over the following fourteen years, he grew the portfolio to its current 22-property, approximately 3,740-room scale. Mr. Brecker exercises day-to-day management authority over all Coastal Palms properties and, according to Ms. Kerrigan, personally directs the financial reporting practices at issue in this matter. He also serves as President of Suncoast Room Management Inc., the affiliated management entity at the center of the alleged scheme.
• Theresa Brecker — Member holding a 15% equity interest in Coastal Palms. Ms. Brecker is Mr. Brecker's spouse. She is responsible for payroll administration and human resources functions across the Coastal Palms portfolio. Her level of awareness of or involvement in the alleged revenue diversion is not yet known.
• Nolan Prescott — Member holding a 25% equity interest in Coastal Palms. Mr. Prescott, age 67, is a retired commercial real estate developer and a passive investor in Coastal Palms. He does not appear to be involved in day-to-day management of the franchise operations. His level of awareness of the alleged scheme is also unknown at this time.
At the property level, Coastal Palms' hotel portfolio is held through a series of operating entities, including:
• Gulf Breeze Hospitality LLC — a Florida limited liability company that owns and operates six Verimark Suites properties in Southwest Florida. Randall Brecker serves as Managing Member.
• Savannah Lodging Partners LLC — a Georgia limited liability company that owns and operates four Verimark Suites properties in coastal Georgia. Randall Brecker serves as Managing Member.
Additional property-level entities may exist for the remaining twelve properties in the portfolio. The complete organizational structure has not yet been fully mapped, and doing so should be a priority during the investigative phase to ensure that all entities with potential liability or document-retention obligations are identified.
Suncoast Room Management Inc. ("Suncoast") is a Florida corporation. Randall Brecker serves as its President. Suncoast is described by Ms. Kerrigan as the affiliated management company at the center of the revenue diversion scheme. According to Ms. Kerrigan, Suncoast collects revenue from certain booking channels — including walk-in guests, corporate-direct contracts, and bookings made through the unbranded website gulfcoastrooms.com — and retains a 12% "management fee" before forwarding the balance to the property-level LLCs. The revenues collected by Suncoast are allegedly excluded from the monthly GRR reports filed with Verimark. The corporate formation history, capitalization, and complete officer and director roster of Suncoast have not yet been investigated, but Florida Division of Corporations records should be available for review.
B. Franchise License Agreements
The contractual relationship between Verimark and Coastal Palms is governed by 22 individual Franchise License Agreements, each corresponding to a specific hotel property. The first FLA was executed on June 15, 2007, for a single Verimark Suites property in Naples, Florida. Over the following decade and a half, Coastal Palms executed 21 additional FLAs with Verimark as the portfolio expanded, with the most recent FLA dated September 3, 2019, for a Verimark Select property in Jacksonville, Florida. Each FLA has a 20-year initial term from its effective date and is governed by the laws of the State of Florida, with a mandatory venue provision designating Broward County, Florida as the exclusive forum for any disputes arising under or in connection with the agreement.
While there are minor variations among the 22 FLAs reflecting changes to Verimark's standard form over time, the key financial and compliance provisions are substantially consistent across all agreements. The following provisions are of particular relevance to the whistleblower's allegations:
§ 4.1 — Royalty. Each FLA requires the franchisee to pay Verimark a continuing royalty equal to 5% of Gross Room Revenue. Critically, GRR is defined broadly 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 expansive definition appears to have been drafted to capture all room-rental revenue without regard to the booking source or the identity of the collecting party. The breadth of this definition is directly relevant to the analysis of the Suncoast diversion scheme discussed in Section IV below.
§ 4.2 — Marketing-Fund Contribution. Each franchisee is required to contribute 2.5% of GRR to Verimark's brand marketing fund. This contribution is calculated on the same GRR base as the royalty, meaning that any underreporting of GRR would proportionally reduce both the royalty payment and the marketing-fund contribution.
§ 4.3 — Technology Fee. Each franchisee pays a technology fee of $12.50 per available room per month, subject to annual adjustment by the Consumer Price Index, capped at 3% per year. This fee funds the maintenance and enhancement of Verimark's proprietary property-management system, central reservation system, and guest loyalty platform. The fee is calculated based on the number of "available rooms" as defined in each FLA, which corresponds to the total room count for the franchised property. If rooms have been added to a property without updating the FLA room count, as Ms. Kerrigan has suggested may have occurred at certain properties, the technology fees paid would be understated.
§ 4.6 — Late-Payment Interest. All amounts not paid when due accrue interest at the rate of 1.5% per month, compounded monthly, from the date originally due until the date of payment. This compounding interest provision is a standard feature of Verimark's FLAs and, given the nine-year duration of the alleged scheme (2013–2021), could produce interest charges that are very substantial — potentially exceeding the principal underpayments themselves.
Reporting Obligation. Under each FLA, franchisees are required to report GRR to Verimark on a monthly basis, no later than the fifteenth day of the month following the reporting period. These monthly reports serve as the basis for calculating and paying royalties, marketing-fund contributions, and technology fees. The integrity of these reports is foundational to the franchise financial relationship.
§ 8.2 — Audit Rights. Verimark is entitled to audit the franchisee's books and records upon 10 business days' written notice. The audit may cover any period within the preceding 36 months (or longer in the case of fraud or intentional misrepresentation). If the audit reveals an underpayment exceeding 2% of reported GRR for any audited period, the franchisee is required to bear all costs associated with the audit, including the fees and expenses of any accountants or auditors retained by Verimark. This cost-shifting provision is a meaningful enforcement tool, particularly in cases involving significant underreporting.
§ 14.1 — Cure Period. Upon written notice of a breach of any provision of the FLA, the franchisee has 30 days to cure the breach. If the breach is cured within the 30-day period, Verimark may not terminate the FLA on the basis of that breach.
§ 14.2(c) — Incurable Breach. Notwithstanding the general cure provision in § 14.1, the FLA identifies certain breaches that are "incapable of cure" and therefore permit termination without a cure period. Specifically, § 14.2(c) provides that "[s]ystematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure." This provision is directly on point with the whistleblower's allegations and, if the allegations are substantiated, would support termination of any or all 22 FLAs without affording Coastal Palms any opportunity to cure.
§ 15.3 — Liquidated Damages. Upon termination of an FLA for cause, the franchisee is required to pay Verimark liquidated damages equal to 3× the trailing-twelve-month royalties for the terminated property. The parties have agreed that actual damages in the event of early termination would be difficult to calculate with certainty, and that the liquidated-damages amount represents a reasonable estimate of Verimark's actual loss. Across 22 properties, the aggregate liquidated-damages exposure could be very significant.
III. The Whistleblower: Janet Kerrigan
A. Identity and Position
Janet Kerrigan served as Regional Controller for Coastal Palms Franchise Holdings LLC. In that capacity, she oversaw financial reporting and accounting for a cluster of properties within the Coastal Palms portfolio. While the exact number and identity of the properties under her supervision have not yet been confirmed, her title and described responsibilities suggest that she had direct oversight of the monthly GRR reporting process for multiple hotels and would have had regular access to the financial records, accounting systems, and internal communications relevant to the alleged revenue diversion scheme.
Ms. Kerrigan was terminated by Coastal Palms in October 2021. The precise circumstances of her termination are not yet fully known. It is possible that her termination was related to the alleged scheme — for example, she may have raised concerns internally about the reporting practices, leading to retaliatory termination — or her termination may have been unrelated to the allegations. Regardless, the circumstances of her departure may be relevant to both her credibility and her potential motivations for contacting Verimark's compliance hotline, and these circumstances should be explored in detail during a follow-up interview.
On November 8, 2021, Ms. Kerrigan contacted Verimark's compliance hotline. She spoke with personnel in Verimark's franchise operations department, which is led by Senior Vice President Deidre Langston. During the call, which lasted approximately 47 minutes according to hotline records, Ms. Kerrigan provided a detailed account of the alleged revenue diversion scheme. The substance of the call was documented in an internal intake report and was promptly relayed to Renata Solis-Vega, Verimark's SVP & General Counsel. Ms. Solis-Vega recognized the seriousness of the allegations and contacted Calderwood & Harkness for advisory guidance under a separate pre-engagement letter agreement dated March 12, 2020, which authorizes Calderwood & Harkness to provide preliminary legal advice to Verimark on franchise-related disputes.
B. Summary of Ms. Kerrigan's Allegations
Ms. Kerrigan's allegations, as conveyed during her November 8, 2021 hotline call and documented in the internal intake report, are summarized below. These allegations have not yet been independently verified and should be treated as unconfirmed until corroborated through audit findings, documentary evidence, or other witness accounts.
The Suncoast Revenue Diversion Scheme. Ms. Kerrigan alleges that beginning no later than January 2013, Coastal Palms established Suncoast Room Management Inc. as a vehicle to collect revenues from direct bookings — including walk-in guests, corporate-direct contracts, and bookings made through the unbranded website gulfcoastrooms.com — that would not be reported to Verimark as GRR. Under this arrangement, guests who booked through these channels were invoiced by Suncoast rather than by the individual hotel property or its property-level LLC. Suncoast retained a 12% "management fee" on these direct-booking revenues before forwarding the remaining 88% balance to the property-level LLCs (including Gulf Breeze Hospitality LLC, Savannah Lodging Partners LLC, and others). Critically, neither the revenues collected by Suncoast nor the 12% management fee retained by Suncoast were included in the monthly GRR reports submitted to Verimark. The effect of this arrangement, according to Ms. Kerrigan, was to systematically divert a significant portion of each property's guest-room revenue outside the scope of the GRR reporting obligation.
OTA Revenue Netting. Ms. Kerrigan further alleges that Coastal Palms underreported revenue from third-party online travel agency ("OTA") channels by classifying net-rate OTA payments as "commissions receivable" and netting them against GRR, rather than reporting gross OTA revenue as required by the FLA's GRR definition. Under this practice, if a guest booked a room at $200 per night through an OTA that charged a 20% commission, the property would report only $160 (the net amount received from the OTA) rather than $200 (the gross room rate). This netting methodology resulted in a further understatement of GRR beyond the Suncoast diversion.
Brecker's Personal Direction. Ms. Kerrigan states that Randall Brecker personally directed controllers, including herself, to exclude direct-booking revenues collected through Suncoast from the monthly GRR reports filed with Verimark. She described this direction as having been communicated both orally and, on at least some occasions, through internal emails or memoranda. She also stated that Mr. Brecker explicitly characterized the arrangement as a way to reduce franchise costs.
Scope and Duration. Ms. Kerrigan asserts that the underreporting affected all 22 franchised properties in the Coastal Palms portfolio and persisted throughout the period from at least January 2013 through her termination in October 2021 — a span of approximately nine years. She estimates that, at the properties she directly oversaw, revenues were understated by roughly 25% to 30% relative to actual GRR. She acknowledged that her estimate may not be precisely applicable to all 22 properties, as she did not have direct oversight of every location, but she indicated that the same practices were applied portfolio-wide at Mr. Brecker's direction.
C. Preliminary Credibility Assessment
Any assessment of the credibility of Ms. Kerrigan's allegations must account for both the factors that support her reliability as a source and the potential vulnerabilities that Coastal Palms may exploit to challenge her account.
Factors Supporting Credibility. Ms. Kerrigan's position as Regional Controller would have given her direct access to the financial records, GRR reporting processes, and management communications relevant to the alleged scheme. A regional controller in a multi-property franchise operation typically has hands-on responsibility for preparing or reviewing monthly financial statements, revenue reports, and franchise-compliance filings. She would have been in a position to observe the treatment of Suncoast-collected revenue and the OTA netting practices she describes. Her role makes her a credible source for these types of allegations, as she would not need to rely on second-hand information or speculation.
Moreover, Ms. Kerrigan's allegations are notably specific. She identified the entity at the center of the scheme (Suncoast Room Management Inc.), the website used to facilitate unbranded bookings (gulfcoastrooms.com), the mechanism by which revenue was diverted (the 12% management fee), the principal who directed the scheme (Randall Brecker), and the approximate magnitude of the underreporting (25–30% at properties she oversaw). This level of detail is consistent with first-hand knowledge and reduces the likelihood that the allegations are fabricated or based on misunderstanding.
Potential Credibility Issues. Several factors could be raised to challenge Ms. Kerrigan's credibility:
(i) Ms. Kerrigan was recently terminated by Coastal Palms and may have a personal grievance against Randall Brecker or Coastal Palms generally. Her allegations could be motivated, at least in part, by a desire for retaliation or vindication following her departure. The circumstances of her termination should be investigated thoroughly.
(ii) The extent to which Ms. Kerrigan personally participated in or benefitted from the alleged scheme is unknown. If she was directly involved in preparing the GRR reports that excluded Suncoast revenue, she was arguably a participant in the misconduct, which could undermine her credibility as a whistleblower and expose her to potential legal liability. Her motivations for disclosing the scheme now, after years of alleged participation, should be explored.
(iii) We have not yet had the opportunity to interview Ms. Kerrigan in depth or to review any corroborating documents. The allegations as presented through the hotline intake are based solely on her oral statements and have not been tested through document review, cross-referencing with Verimark's internal data, or independent audit.
Assessment. Notwithstanding the caveats identified above, the allegations are sufficiently detailed and specific to warrant further investigation. The specificity of the allegations — naming the entity, the website, the mechanism, and the principal — significantly reduces the risk that this is a fabricated or unfounded complaint. The nature of the alleged scheme is also consistent with patterns observed in other franchise-revenue-diversion cases, which lends additional plausibility to the account. We recommend preserving Ms. Kerrigan as a potential witness. A more detailed interview should be arranged promptly, ideally under the supervision of outside counsel to maintain privilege and to permit a careful assessment of her credibility, motivations, and potential legal exposure.
IV. Analysis of the Alleged Revenue Diversion Scheme
A. The Suncoast Channel
The core of the alleged scheme is the use of Suncoast Room Management Inc. as an intermediary to collect guest-room revenue that is never reported to Verimark as GRR. Under this arrangement, revenues from walk-in guests, corporate-direct contracts, and bookings through the unbranded website gulfcoastrooms.com are invoiced and collected by Suncoast rather than by the property-level LLCs. Suncoast retains a 12% management fee and remits the balance to the property-level entities. Neither the gross revenues collected by Suncoast nor the management fee retained by Suncoast is included in the GRR reported to Verimark. The practical effect is a systematic reduction in the revenue base upon which royalties, marketing-fund contributions, and other franchise fees are calculated.
Under FLA § 4.1, GRR explicitly includes "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 notably broad and appears to have been drafted with precisely this type of diversion in mind. The phrase "regardless of the entity collecting such revenue" is a clear anti-avoidance provision that eliminates the argument that revenues collected by a third-party entity — even an affiliate of the franchisee — are outside the scope of GRR. If Ms. Kerrigan's account is accurate, Suncoast-collected revenue falls squarely within the GRR definition, and the failure to include it in monthly GRR reports constitutes a clear violation of § 4.1.
The 12% management fee retained by Suncoast is also independently problematic. Because the FLA measures royalties and contributions against gross revenue, any deductions, commissions, or fees netted before reporting would constitute underreporting even if the net amount were eventually included in the GRR figures. The GRR definition does not permit the franchisee to deduct management fees, booking commissions, or other intermediary costs before reporting. Accordingly, even if Coastal Palms were to argue that the net amounts forwarded from Suncoast to the property-level LLCs were included in GRR (which Ms. Kerrigan says they were not), the exclusion of the 12% management fee would itself represent underreporting.
The unbranded website gulfcoastrooms.com warrants particular attention. This website appears to be an independent booking channel that competes directly with the Verimark reservation system and with the branded property websites maintained as part of the Verimark franchise program. The operation of an unbranded booking channel raises additional concerns beyond revenue underreporting:
• It may violate brand-standard requirements in the FLAs that restrict franchisees from operating competing booking channels or diverting reservations away from Verimark's proprietary reservation system.
• It may mislead consumers by offering rooms at Verimark-branded properties through a channel that does not identify the properties as part of the Verimark system, potentially undermining brand integrity and consumer trust.
• It provides a mechanism for the franchisee to capture guest data and booking relationships outside of Verimark's centralized guest loyalty program, depriving Verimark of valuable customer information and repeat-booking opportunities.
A review of the gulfcoastrooms.com website — including its content, functionality, booking flow, and the identity of the entity that registers and operates the domain — should be conducted as part of the investigation.
B. OTA Revenue Netting
Ms. Kerrigan's allegation that Coastal Palms classified net-rate OTA payments as "commissions receivable" and netted them against GRR is a separate but related concern that could further amplify the magnitude of the underreporting.
Under § 4.1, GRR 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." This language makes no distinction between revenues received directly from guests and revenues received through OTA intermediaries. The GRR definition is a gross-revenue concept: it measures the total revenue attributable to room rentals, not the net revenue retained by the franchisee after distribution costs.
The practice described by Ms. Kerrigan — treating OTA commissions as offsets to GRR — is inconsistent with the plain language of the FLA and with standard franchise-industry practice. In the hotel franchise industry, it is widely understood and accepted that GRR is reported on a gross basis, with OTA commissions and distribution costs treated as operating expenses below the GRR line rather than as deductions from revenue. This understanding is reflected in the Uniform System of Accounts for the Lodging Industry ("USALI"), which treats room revenue on a gross basis and classifies distribution costs as departmental expenses.
If Coastal Palms has been netting OTA commissions against GRR, the understatement of GRR from this practice alone could be significant, particularly given the increasing share of hotel bookings made through OTA channels over the 2013–2021 period. Industry data suggests that OTA channels accounted for approximately 15% to 25% of total room bookings at comparable select-service and extended-stay properties during this period, and OTA commission rates typically range from 15% to 25% of the room rate. The compounding effect of netting these commissions against GRR across 22 properties over nine years could produce a material aggregate understatement.
C. Unreported Room Additions
During the initial whistleblower call, Ms. Kerrigan mentioned in passing that certain properties in the Coastal Palms portfolio had added rooms — through renovations, conversions of non-room space, or acquisition of adjacent parcels — without notifying Verimark or updating the room count reflected in the applicable FLA. While Ms. Kerrigan did not provide detailed information about this issue, noting that it was tangential to the primary revenue-diversion concern, it nonetheless has financial implications for Verimark.
The technology fee under § 4.3 is calculated at $12.50 per available room per month (as adjusted annually by CPI). If rooms were added to one or more properties without a corresponding update to the FLA room count, the technology fees paid to Verimark would be understated for the affected properties over the applicable time periods. Depending on the number of rooms added and the duration of the underreporting, this shortfall could be meaningful, though it is likely to be relatively modest compared to the royalty and marketing-fund underpayments.
This issue requires further investigation to determine: (i) which properties added rooms; (ii) how many rooms were added; (iii) when the additions occurred; (iv) whether Verimark was notified; and (v) the aggregate technology-fee shortfall. Property tax records, building permits, and Penmark Enterprises ("STR") data may be useful in identifying room-count discrepancies.
V. Preliminary Estimate of Financial Exposure
A. Scope of Potential Underreporting
The following estimates are preliminary and subject to significant uncertainty. They are based on the limited information currently available — principally Ms. Kerrigan's hotline statements and Verimark's internal data on reported GRR — and should not be relied upon for purposes of financial reporting, public disclosure, or litigation demand calculations. Precise quantification will require a comprehensive forensic audit of financial records at both the Coastal Palms property-entity level and Suncoast Room Management Inc.
With that caveat, the available data permits the following preliminary analysis:
Coastal Palms operates 22 franchised properties comprising approximately 3,740 total rooms. FY 2021 reported GRR (as submitted to Verimark in monthly franchise-compliance reports) was $112.4 million across the portfolio. This figure reflects an average revenue per available room ("RevPAR") of approximately $82.35, which appears plausible for select-service and extended-stay hotels in Florida and Georgia but is at the lower end of the range for comparable properties in those markets, potentially consistent with underreporting.
If the underreporting is as extensive as Ms. Kerrigan suggests — she estimates revenues were understated by roughly 25% to 30% at the properties she oversaw — the true GRR for FY 2021 could be substantially higher than reported. Applying a 25% underreporting rate to FY 2021, underreported GRR would exceed $37 million for that year alone, implying a true GRR of approximately $149.9 million. At a 30% underreporting rate, the underreported GRR would approach $48 million, implying a true GRR of approximately $160.6 million.
Over the full 2013–2021 period (nine years), cumulative underreported GRR could be very substantial. Revenue levels during the earlier years (2013–2019) were likely somewhat lower than FY 2021 (which benefited from pent-up demand following the COVID-19 pandemic), while FY 2020 was significantly depressed due to pandemic-related disruptions. Adjusting for these factors and applying a conservatively estimated average underreporting rate of approximately 25%, cumulative underreported GRR over the nine-year period could fall in the range of $150 million to $200 million. These figures are necessarily imprecise and are presented solely to illustrate the potential magnitude of the exposure.
B. Categories of Underpayment
The following categories of financial exposure arise from the alleged underreporting:
Underpaid Royalties. At a 5% royalty rate, the underpaid royalties would equal 5% of cumulative underreported GRR. Using the preliminary estimate of $150 million to $200 million in cumulative underreported GRR, the underpaid royalties would be approximately $7.5 million to $10.0 million.
Underpaid Marketing-Fund Contributions. At a 2.5% contribution rate, the underpaid marketing-fund contributions would equal 2.5% of cumulative underreported GRR, or approximately $3.75 million to $5.0 million.
Underpaid Technology Fees. The technology-fee shortfall depends on the number of unreported rooms and the applicable time periods. This figure cannot be estimated without further investigation but is expected to be a relatively modest increment relative to the royalty and marketing-fund shortfalls.
Subtotal — Direct Underpayments. Combining royalties and marketing-fund contributions alone (7.5% of underreported GRR), the direct underpayment subtotal is approximately $11.25 million to $15.0 million, plus the technology-fee shortfall.
Contractual Late-Payment Interest (§ 4.6). All underpaid amounts accrue interest at 1.5% per month, compounded monthly, from the date originally due. Given the nine-year duration of the alleged scheme, the compounding effect of the interest provision would be very substantial. By way of illustration, a single underpayment of $100,000 from January 2013, compounded at 1.5% per month through November 2021 (106 months), would grow to approximately $486,000 — nearly five times the principal amount. Aggregated across monthly underpayments over the full nine-year period, compounded interest charges could potentially exceed the principal underpayments themselves, potentially adding tens of millions of dollars to the total exposure.
Liquidated Damages (§ 15.3). If Verimark elects to terminate any or all 22 FLAs for cause, the liquidated-damages provision provides for 3× the trailing-twelve-month royalties per terminated property. Based on FY 2021 reported GRR of $112.4 million, reported trailing-twelve-month royalties across all 22 properties would be approximately $5.62 million. The 3× liquidated-damages amount based on reported figures would be approximately $16.86 million. However, if the true GRR is 25–30% higher than reported, the actual trailing-twelve-month royalties would be higher, and the liquidated-damages amount would increase correspondingly — potentially to approximately $22.5 million to $24.1 million across all 22 properties.
Aggregate Potential Exposure. The total potential financial exposure to Coastal Palms — encompassing unpaid royalties, marketing-fund contributions, technology fees, compounded late-payment interest, and liquidated damages — is difficult to estimate precisely without a forensic audit. However, based on the preliminary analysis above, the aggregate exposure could potentially be in the range of $100 million or more. This estimate is necessarily imprecise and is presented for purposes of illustrating the potential order of magnitude of the claims.
C. Verimark's Franchise Segment Context
The financial significance of the alleged underreporting should be understood in the context of Verimark's overall franchise segment. Verimark's franchise segment generated $218 million in revenue in FY 2021. Coastal Palms' reported GRR of $112.4 million represents a significant portion of the franchise portfolio's total GRR base. Actual contributions from Coastal Palms to Verimark — in the form of royalties, marketing-fund contributions, and technology fees — based on reported GRR would be approximately $8.4 million annually (comprising approximately $5.62 million in royalties, $2.81 million in marketing-fund contributions, and an estimated $561,000 in technology fees).
If underreporting is confirmed at the levels Ms. Kerrigan describes, the financial impact to Verimark's franchise revenue stream has been material over the 2013–2021 period. The cumulative underpayment of $11.25 million to $15.0 million in royalties and marketing-fund contributions alone — before interest and liquidated damages — would represent a meaningful shortfall against the franchise segment's reported revenue during those years. This may also have implications for Verimark's historical financial statements and SEC reporting obligations, which should be assessed by Verimark's in-house legal team in consultation with its independent auditors.
VI. Key Contractual Provisions and Litigation Considerations
A. Material Breach Under § 14.2(c)
FLA § 14.2(c) provides that "[s]ystematic underreporting of Gross Room Revenue shall constitute a material breach that is incapable of cure." This provision is directly on point with the whistleblower's allegations and, if the allegations are substantiated, would provide Verimark with the contractual right to terminate any or all 22 FLAs without affording Coastal Palms any opportunity to cure.
If the allegations are substantiated across multiple properties and years, the characterization of the conduct as "systematic" would be strongly supported by the following factors:
• The alleged duration of the scheme (at least January 2013 through October 2021 — approximately nine years);
• The establishment of a separate corporate entity (Suncoast Room Management Inc.) and an unbranded website (gulfcoastrooms.com) to facilitate and perpetuate the revenue diversion;
• The direction from Randall Brecker to controllers to exclude Suncoast-collected revenues from GRR reports, indicating a deliberate and coordinated effort rather than an isolated error or misunderstanding;
• The application of the scheme across all 22 franchised properties in the portfolio, rather than at a single location; and
• The OTA netting practice, which represents a separate and independent methodology for understating GRR.
Taken together, these facts — if proven — would constitute paradigmatic "systematic underreporting" within the meaning of § 14.2(c). The incurable-breach designation would permit Verimark to terminate without first providing a 30-day cure notice under § 14.1, although Verimark may still wish to serve a formal Notice of Material Breach as a matter of good faith and to establish a clear documentary record for litigation purposes. The decision on whether and when to serve such notice should be made in consultation with counsel and should take into account the pre-suit strategy considerations discussed in Section VIII.E below.
B. Audit Rights Under § 8.2
Verimark has the contractual right under § 8.2 to audit Coastal Palms' books and records upon 10 business days' written notice. The scope of the audit extends to all financial records relevant to the calculation of GRR and the determination of amounts owed under the FLA. If the audit reveals an underpayment exceeding 2% of reported GRR for any audited period, the franchisee is required to bear all costs associated with the audit, including the fees and expenses of auditors retained by Verimark.
Given the magnitude of the alleged underreporting (25–30% as estimated by Ms. Kerrigan), the 2% threshold would almost certainly be exceeded at every audited property and for every audited period, shifting the substantial costs of a comprehensive forensic audit to Coastal Palms. The cost-shifting provision thus provides meaningful economic protection for Verimark in pursuing the audit.
However, exercising audit rights under the FLA at this stage raises significant strategic concerns. An FLA audit would require direct engagement with Coastal Palms, including written notice and access to Coastal Palms' premises and records. This would necessarily alert Coastal Palms and its principals to the existence and nature of Verimark's investigation. There is a meaningful risk that, upon learning of the investigation, Coastal Palms or its principals could take steps to destroy or conceal documentary evidence, instruct employees not to cooperate, or otherwise obstruct the investigation. Randall Brecker's apparent willingness to establish a separate entity and unbranded website to facilitate revenue diversion suggests a sophistication and intentionality that may extend to evidence-destruction efforts if the investigation is prematurely disclosed.
As an alternative to the FLA audit process, Verimark could retain an independent forensic accounting firm to conduct a preliminary analysis using sources that do not require Coastal Palms' cooperation, including: (i) Verimark's own reservation-system data, which would reflect bookings made through Verimark's proprietary channels; (ii) OTA channel data obtainable directly from Verimark's OTA partners; (iii) STR (Penmark Enterprises) data, which provides independent estimates of hotel revenue and occupancy; (iv) local property tax records, which may reflect assessed values and revenue estimates that can be compared to reported GRR; and (v) any publicly available financial information for Coastal Palms or its affiliated entities. This approach would allow Verimark to develop a preliminary assessment of whether the allegations are supported by independent data before initiating a formal FLA audit that would alert Coastal Palms to the investigation.
C. Venue and Governing Law
Each FLA is governed by the laws of the State of Florida and contains a mandatory venue provision designating Broward County, Florida as the exclusive forum for any disputes arising under or in connection with the agreement. This venue designation is favorable for Verimark for several reasons: Verimark's corporate headquarters is located in Broward County; Calderwood & Harkness's Fort Lauderdale office at 110 SE 6th Street, Suite 2800, Fort Lauderdale, Florida 33301 is conveniently located within the Broward County judicial district; and Florida courts generally enforce franchise-agreement venue provisions as bargained-for contractual terms.
The applicability of Florida law to all 22 FLAs — including the four properties located in Georgia — simplifies the legal analysis and eliminates the need to account for variations in state law across jurisdictions. Florida law is generally favorable to franchisors in disputes involving revenue underreporting and franchise termination. Florida courts have consistently enforced liquidated-damages provisions in franchise agreements where the stipulated amount bears a reasonable relationship to the anticipated loss, and Florida's prejudgment-interest statute (Fla. Stat. § 55.03) may provide an additional basis for interest recovery beyond the contractual rate.
D. Potential Claims
Based on our preliminary analysis, Verimark may have viable claims against Coastal Palms, its principals, and affiliated entities under the following theories:
1. Breach of Contract — Claims for underpayment of 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. This is the primary claim and is supported by the plain language of the FLA's GRR definition.
2. Breach of the Implied Covenant of Good Faith and Fair Dealing — Under Florida law, every contract includes an implied covenant of good faith and fair dealing. The establishment of Suncoast as a vehicle to divert revenue away from the GRR reporting obligation, if proven, would constitute a paradigmatic violation of this covenant, as it would reflect an intentional effort to deprive Verimark of the benefit of its bargain under the FLAs.
3. Fraudulent Concealment — Coastal Palms' alleged concealment of the Suncoast arrangement and the true amount of GRR from Verimark may support a claim for fraudulent concealment under Florida law. The elements of this claim — a duty to disclose, suppression of a material fact, intent to deceive, and resulting damage — appear to be present based on the whistleblower's allegations.
4. Negligent Misrepresentation — The submission of monthly GRR reports that materially understated actual revenue may support a claim for negligent misrepresentation, to the extent that Coastal Palms owed a duty of care in the preparation and submission of those reports.
5. Unjust Enrichment — As an alternative theory, Verimark may assert that Coastal Palms and its principals have been unjustly enriched by retaining revenues that should have been reported as GRR and upon which franchise fees should have been calculated.
6. Declaratory Judgment — Verimark may seek a declaratory judgment confirming its right to terminate some or all of the 22 FLAs for cause based on the systematic underreporting of GRR, pursuant to § 14.2(c).
7. Accounting — Verimark may seek an equitable accounting of all revenues collected by Suncoast, all amounts received through gulfcoastrooms.com, and all GRR from OTA channels that was subject to the netting practice, in order to determine the full extent of the underreporting.
8. Civil Conspiracy — To the extent that Randall Brecker, Suncoast Room Management Inc., and potentially other individuals or entities acted in concert to perpetrate the revenue diversion scheme, Verimark may assert a claim for civil conspiracy. This theory would permit Verimark to pursue personal liability against Brecker individually and to reach assets held by Suncoast that might not otherwise be available to satisfy a judgment against Coastal Palms alone.
Further analysis of the elements, evidentiary requirements, damages theories, and litigation risks associated with each of these potential claims will be provided in a subsequent memorandum once additional facts have been developed through the forensic audit and the Kerrigan interview.
E. Defense Anticipation
While it is premature to develop a comprehensive defense-anticipation analysis, several likely defense theories can be identified based on the current record:
Ambiguity in the GRR Definition. Coastal Palms may argue that the GRR definition in § 4.1 is ambiguous as to revenues collected by a separate management entity. Specifically, Coastal Palms might contend that Suncoast's revenues are not "derived from or attributable to the rental of guest rooms at the Hotel" because Suncoast is a separate corporate entity that provides management services and collects revenue in its own capacity. This argument appears weak in light of § 4.1's explicit "regardless of the entity collecting such revenue" language, which was plainly drafted to capture revenues collected by affiliates and intermediaries. The contra proferentem canon of construction, which resolves ambiguities against the drafter (here, Verimark), might be invoked, but the language is sufficiently clear that the canon should not apply.
Verimark's Alleged Knowledge of Suncoast. Coastal Palms may contend that Verimark was aware of Suncoast's role in managing the properties because Suncoast was identified in certain property-management agreements submitted to Verimark during the franchise-application process. If Verimark received and reviewed documents identifying Suncoast as a management company, Coastal Palms might argue waiver, estoppel, or acquiescence — i.e., that Verimark knew or should have known about the arrangement and failed to object. This defense should be investigated by reviewing Verimark's franchise-application files and any correspondence between Verimark and Coastal Palms regarding Suncoast. Even if Verimark was aware that Suncoast served as a property-management company, awareness of Suncoast's existence is materially different from knowledge or approval of the revenue-diversion arrangement described by Ms. Kerrigan.
Statute of Limitations. Depending on the characterization of the claims, Coastal Palms may assert that some or all of the alleged underpayments from the earlier years of the scheme (2013–2016) are barred by the applicable statute of limitations. Under Florida law, the statute of limitations for breach of written contract is five years (Fla. Stat. § 95.11(2)(b)), and for fraud-based claims is four years from the date of discovery or the date the fraud should have been discovered through reasonable diligence (Fla. Stat. § 95.031(2)(a)). However, the discovery rule and the fraudulent-concealment tolling doctrine may extend the limitations period for claims based on underreporting that was actively concealed from Verimark. This issue will require detailed analysis in the follow-up memorandum.
Liquidated Damages Enforceability. Coastal Palms may challenge the enforceability of the § 15.3 liquidated-damages provision, arguing that the 3× trailing-twelve-month royalties formula constitutes an unenforceable penalty rather than a reasonable estimate of Verimark's actual damages. Under Florida law, a liquidated-damages provision is enforceable if: (i) the damages flowing from the breach were difficult to ascertain at the time of contracting; and (ii) the stipulated amount was a reasonable forecast of compensatory damages. Verimark should be prepared to demonstrate that both elements are satisfied.
These anticipated defenses appear weak on the current record, but they should be carefully considered in evaluating litigation risk and in preparing for eventual engagement with Coastal Palms or its counsel.
VII. Potential Counterparty Considerations
A. Coastal Palms' Financial Position and Collectibility
Any recovery strategy must account for the practical question of collectibility. Coastal Palms' 22 hotel properties represent substantial real estate assets, but they are understood to be subject to significant mortgage debt. Based on publicly available information, including mortgage recordings in the applicable county land records, Ironclad National Bank holds first-lien mortgage loans on a substantial portion of the Coastal Palms portfolio. The aggregate outstanding balance of these mortgage loans is believed to be significant — likely in the range of $180 million to $220 million, based on publicly recorded mortgage amounts and estimated amortization schedules — although the precise current balance has not been confirmed.
The presence of substantial senior-lien mortgage debt is a meaningful consideration for recovery analysis. If Ironclad's first-lien position encumbers the majority of the value of the hotel properties, the equity available to satisfy a judgment in favor of Verimark may be limited. In a foreclosure or forced-sale scenario, Ironclad would be entitled to full satisfaction of its mortgage claims before any distribution to junior creditors or judgment lienholders.
Furthermore, a judgment or threat of termination against Coastal Palms could trigger default provisions in the Ironclad loan agreements, potentially leading to acceleration of the mortgage debt and further complicating the financial picture. This dynamic should be considered in evaluating the relative merits of negotiation versus litigation and in assessing the risk that aggressive enforcement action could push Coastal Palms into bankruptcy, which would further complicate and delay recovery.
The personal assets of Randall Brecker and Nolan Prescott may be relevant to any recovery, depending on the claims asserted and the potential for personal liability. Civil conspiracy and fraudulent concealment claims, if successfully pursued, could result in personal judgments against Brecker and potentially against Prescott (to the extent he was involved in or aware of the scheme). Brecker's personal net worth is unknown but, as a 60% equity holder in a 22-property hotel portfolio and the president of a management company that retained 12% of diverted revenue, he may have accumulated significant personal assets. Prescott's personal assets, as a retired commercial real estate developer with a 25% equity interest in Coastal Palms, may also be meaningful. Asset searches should be considered as part of the pre-suit investigation.
B. Coastal Palms' Counsel
Coastal Palms is believed to be represented in franchise and commercial matters by Whitfield, Barrow & Crane LLP, a 200-lawyer Florida-based litigation firm headquartered at 1221 Brickell Avenue, Suite 3000, Miami, Florida 33131. The firm has a substantial commercial litigation practice and represents a number of hotel ownership and management groups throughout the state. The lead partner for the Coastal Palms relationship is understood to be Nathan Whitfield III, a well-regarded trial attorney with extensive experience in franchise and hospitality disputes. Mr. Whitfield has a reputation for aggressive, thorough advocacy, and we should expect vigorous defense of any claims Verimark may assert. Staffing and case-strategy decisions should account for the caliber of anticipated opposing counsel.
VIII. Recommendations
Based on the analysis set forth above, we recommend the following next steps. These recommendations are prioritized in order of urgency and are designed to advance the investigation while preserving Verimark's litigation options and maintaining the confidentiality of the inquiry.
A. Engagement of Independent Auditor
We recommend that Verimark promptly engage an independent forensic accounting firm to conduct a franchise-compliance audit focused on the Coastal Palms portfolio. The audit should be structured as a preliminary, non-contact investigation — that is, it should rely on data sources that do not require Coastal Palms' cooperation or awareness — in order to corroborate or refute the whistleblower's allegations before Verimark initiates any direct engagement with Coastal Palms under the FLA audit provisions.
We specifically recommend Thornbury & Associates CPAs LLP, a well-established regional accounting firm based at 1551 N. Flagler Drive, Suite 800, West Palm Beach, Florida 33401. The firm's lead audit partner, Malcolm Thornbury, CPA, CFE, has significant experience in franchise-compliance auditing and forensic accounting investigations in the hospitality industry. Mr. Thornbury has served as a testifying expert in several franchise-revenue disputes in Florida courts and is familiar with the analytical methodologies required to reconstruct GRR from third-party data sources.
The initial audit should focus on the ten largest Coastal Palms properties by reported GRR, covering at minimum the 2019–2021 period. This targeted approach will allow Thornbury to efficiently determine whether the whistleblower's allegations are substantiated by independent data before expanding the scope to the full 22-property portfolio and the full 2013–2021 period.
Thornbury's engagement scope should include the following work streams:
(i) GRR Reconstruction. Reconstruct actual GRR from available third-party sources, including: Verimark's own reservation-system data (reflecting bookings made through Verimark's proprietary channels); OTA channel data obtainable from Verimark's OTA partner agreements (e.g., Aldermere Technologies, Bramwell Holdings, Drayton Software); STR (Penmark Enterprises) reports, which provide independent estimates of hotel revenue, occupancy, and average daily rate benchmarked against competitive sets; property tax records from the applicable Florida and Georgia counties, which may reflect assessed values and revenue estimates; and any other publicly available or third-party data sources that can serve as independent benchmarks for actual property-level revenue.
(ii) Comparative Analysis. Compare reconstructed GRR to the GRR reported by Coastal Palms in its monthly franchise-compliance reports for the same periods. Identify any material discrepancies between reconstructed and reported GRR, and characterize the magnitude, pattern, and potential causes of any discrepancies identified.
(iii) Extrapolation and Estimation. If discrepancies are identified at the audited properties, develop a methodology for extrapolating the findings across the full 22-property portfolio and the full 2013–2021 period. Prepare preliminary estimates of aggregate underreported GRR, underpaid royalties, underpaid marketing-fund contributions, underpaid technology fees, and applicable late-payment interest.
The audit engagement should be structured through outside counsel — specifically, the engagement letter should be between Calderwood & Harkness and Thornbury & Associates, with Verimark's consent, to preserve attorney-client privilege and work-product protection over the audit findings and related communications. Thornbury should be instructed that all reports, memoranda, and work papers are prepared at the direction of counsel in anticipation of litigation and should be clearly marked as privileged and confidential.
B. Preservation of Janet Kerrigan as Witness
Ms. Kerrigan is a critical potential witness whose cooperation could be essential to establishing the factual basis for Verimark's claims. We recommend the following steps to preserve her availability and enhance her value as a witness:
(i) Detailed Interview. A detailed in-person interview with Ms. Kerrigan should be conducted at the earliest opportunity, ideally within the next two weeks. The interview should be conducted under the supervision of outside counsel at Calderwood & Harkness's Fort Lauderdale office to maintain privilege and to permit a careful, systematic elicitation of facts. The interview should cover, at minimum: the organizational structure and operations of Suncoast; the mechanics of the revenue diversion, including the 12% management fee; the specific properties affected; the time period over which the scheme operated; the identity of other individuals involved in or aware of the scheme; the circumstances of Ms. Kerrigan's termination; and any documents or communications she may have retained from her employment.
(ii) Document Identification and Preservation. Ms. Kerrigan should be asked to identify and preserve any documents, emails, text messages, or other communications she may have retained from her employment at Coastal Palms that corroborate her allegations. This may include electronic files on personal devices, printed documents, or records stored in personal email or cloud-storage accounts. She should be cautioned not to access, download, or remove any additional documents from Coastal Palms' s