PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP
801 Brickell Avenue, Suite 2800 Miami, Florida 33131
INTERNAL MEMORANDUM
August 2024
TO: Firm File — Matter No. 1027-00003
FROM: Samuel Eklund, Billing Partner Francesca Morano, Responsible Partner
RE: Final Billing Summary and Matter Closing Memorandum — Pellegrino Capital Group LLC / Meridian Shores Hospitality LLC Buyout-Valuation Dispute (JAMS Ref. No. 1440032871)
COPIES: Simone Laroche, Lead Associate (for file) Jeffrey Park, Working Associate (for file)
— PRIVILEGED AND CONFIDENTIAL / ATTORNEY WORK PRODUCT —
This memorandum is prepared in anticipation of litigation and for the purpose of providing legal advice. It is protected by the attorney-client privilege and the work-product doctrine. It is intended solely for internal firm use and for the files of Matter No. 1027-00003. No portion of this memorandum may be disclosed to any person or entity outside Calderwood & Harkness LLP without the prior written authorization of the undersigned.
Right-click to update Table of Contents
I. EXECUTIVE SUMMARY
The purpose of this memorandum is to memorialize the final billing, costs, and outcome for Matter No. 1027-00003, which is now closed, and to serve as the definitive administrative record for firm files. This document provides a comprehensive overview of the engagement, the underlying dispute, the procedural history, the settlement outcome, the complete billing summary (including fees, expert costs, arbitration fees, mediator fees, and insurance recovery), and an assessment of the outcome achieved on behalf of our client. This memorandum should be retained as part of the permanent matter file.
Client. Our client in this matter was Pellegrino Capital Group LLC ("PCG"), a Florida limited liability company and family office headquartered at 1900 Bayshore Boulevard, Suite 1400, Tampa, Florida 33606. The Managing Member of PCG is Dominic R. Pellegrino. The day-to-day client contacts throughout the engagement were Adriana Pellegrino-Voss, Senior Vice President of Investments, and Marcus Thiel, Chief Financial Officer.
Counterparty. The adverse party was Meridian Shores Hospitality LLC ("MSH"), a Delaware limited liability company with its principal office at 220 Royal Palm Way, Suite 300, Palm Beach, Florida 33480. MSH's principals are Nathaniel "Nate" Cordero (Managing Member) and Elena Cordero (Member, holding a 40% ownership interest in MSH). MSH was represented throughout the arbitration and settlement by Hargrove, Dunlap & Castillo LLP, with Victoria Castillo, Partner, as lead counsel and Ryan Matsuda, Senior Associate, serving as working attorney.
Underlying Asset. The dispute centered on the valuation and buyout of MSH's membership interest in a joint venture entity that owns and operates The Palmetto Grand Resort & Spa, a 312-room luxury beachfront hotel located at 650 Mandalay Avenue, Clearwater Beach, Florida 33767. The hotel is operated under a franchise agreement with Aurelian Hotels & Resorts Inc.
Joint Venture Entity. Palmetto Grand Ventures LLC ("PGV") is a Florida limited liability company (Florida Filing No. L17000124583; EIN 82-5063921) formed on June 15, 2017. PGV is owned 65% by PCG and 35% by MSH, with PCG serving as sole Manager under the terms of the Operating Agreement dated June 15, 2017 (the "OA").
Nature of Dispute. The matter arose from a valuation disagreement following PCG's exercise of its contractual call option under Section 12.4 of the OA. PCG tendered a buyout price of $41.3 million based on its retained appraiser's valuation; MSH rejected the tender and demanded $70.0 million, including a bad-faith penalty under OA Section 12.7. The resulting gap of $28.7 million between the parties' positions led to the initiation of JAMS arbitration proceedings.
Outcome. The matter was resolved through a negotiated settlement and redemption of MSH's 35% membership interest in PGV for $52.85 million, paid in a lump sum at closing on June 28, 2024. The JAMS arbitration was dismissed with prejudice on August 9, 2024. The matter is now closed.
Engagement Period. The firm's engagement spanned from March 22, 2023 (the date of the engagement letter) through August 9, 2024 (the date of the formal dismissal of the JAMS arbitration), a period of approximately seventeen (17) months.
Total Fees and Costs. Total defense costs incurred were $1,738,650, of which $625,000 was reimbursed by Atlantic Omnivrel Insurance Company under PCG's managers' liability policy, resulting in net defense costs to PCG of $1,113,650. The total out-of-pocket cost to PCG, inclusive of the $52.85 million redemption price and net defense costs, was $53,963,650.
II. MATTER BACKGROUND AND PROCEDURAL HISTORY
A. Formation of the Joint Venture and Acquisition
Palmetto Grand Ventures LLC ("PGV") was formed as a Florida limited liability company on June 15, 2017, pursuant to the Operating Agreement of Palmetto Grand Ventures LLC, dated as of the same date (the "OA"). Under the OA, PCG holds a 65% membership interest and serves as sole Manager of PGV, with broad authority over the day-to-day management and operations of the joint venture. MSH holds the remaining 35% membership interest as a passive member, subject to certain specified consent rights enumerated in OA Section 7.3, including consent rights over capital events, major capital expenditures in excess of $2.0 million, material modifications to the franchise agreement, and any sale or refinancing of the hotel.
PGV acquired The Palmetto Grand Resort & Spa on August 1, 2017, for a total purchase price of $87.5 million. The acquisition was financed with a $61.25 million senior secured loan from Gulf Atlantic National Bank ("GANB") (Loan No. CRE-2017-06284), representing a loan-to-value ratio of approximately 70%. The loan bears interest at SOFR plus 2.25% (originally LIBOR plus 2.25%, subsequently converted upon the LIBOR transition) and matures on August 1, 2027. The loan is secured by a first-priority mortgage on the hotel property, an assignment of leases and rents, and a pledge of PCG's and MSH's membership interests in PGV.
Total equity contributed at the time of acquisition was approximately $28,557,700, inclusive of approximately $2,307,700 in closing costs. MSH's initial capital contribution was $10.0 million (as agreed and stipulated in OA Section 4.1 as MSH's "Agreed Initial Capital Contribution"). PCG's initial capital contribution was $18,562,500 (representing the balance of the equity requirement and closing costs allocated in accordance with the parties' respective ownership percentages, subject to the agreed treatment of MSH's fixed initial contribution amount).
Between 2017 and 2019, PGV undertook a comprehensive renovation of the hotel, including upgrades to guest rooms, common areas, the spa facility, pool deck, restaurant outlets, and conference facilities. Total renovation capital invested during this period was $24.3 million, funded by additional capital contributions from the members. PCG contributed $15.795 million and MSH contributed $8.505 million toward the renovation, in each case in accordance with the capital call and pro rata contribution provisions of OA Section 4.2. Following the renovation capital contributions, MSH's aggregate capital contributions to PGV totaled $18.505 million.
The hotel has been operated since acquisition under a franchise agreement with Aurelian Hotels & Resorts Inc. ("Aurelian"), dated July 15, 2017, with a twenty-year term expiring July 14, 2037. Under the franchise agreement, PGV pays Aurelian a franchise fee equal to 5% of gross room revenue, plus a 2% contribution to Aurelian's national marketing fund, for a combined franchise cost of 7% of gross room revenue.
The hotel's performance improved significantly following the completion of renovations. For the fiscal year ended December 31, 2022 — the valuation date used by the parties' appraisers — The Palmetto Grand Resort & Spa generated total revenue of approximately $62.8 million, achieved revenue per available room ("RevPAR") of $289, produced net operating income ("NOI") of approximately $18.4 million, and generated hotel-level EBITDA of approximately $19.7 million. These figures reflected strong demand fundamentals in the Clearwater Beach submarket, driven by post-pandemic leisure travel recovery and the hotel's elevated competitive positioning following the renovation program.
B. Call-Option Exercise and Dispute Initiation
Under OA Section 12.4, PCG, as Manager, holds an irrevocable call option to purchase MSH's membership interest in PGV at fair market value, as determined in accordance with the valuation procedures set forth in OA Sections 12.4(a) through 12.4(d). The call option became exercisable on or after the fifth anniversary of the OA's effective date — that is, on or after June 15, 2022.
PCG delivered its formal written notice of exercise of the call option to MSH on January 9, 2023, in accordance with the notice provisions of OA Section 18.1. The notice stated PCG's intention to acquire MSH's 35% membership interest and initiated the valuation procedures under OA Section 12.4.
As required by OA Section 12.4(a), PCG engaged Whitfield Realty Advisors LLC to conduct an independent appraisal of the hotel and PGV's assets. Gerald K. Whitfield, MAI, the principal of Whitfield Realty Advisors, completed the appraisal on February 10, 2023. Mr. Whitfield determined the fair market value of 100% of PGV's assets as of December 31, 2022, to be $118.0 million. Mr. Whitfield's valuation employed both an income capitalization approach (utilizing a 9.5% capitalization rate and a discounted cash flow analysis with a 10.75% discount rate) and a sales comparison approach, with a weighted blending methodology assigning 40% weight to the income approach and 60% weight to the sales comparison approach, reflecting the availability of recent comparable luxury beachfront hotel transactions in the Florida Gulf Coast submarket.
Based on the Whitfield appraisal, PCG calculated the buyout price as follows:
• Gross asset value (100% of PGV): $118,000,000
• Less: Outstanding GANB debt: ($48,600,000)
• Net equity value: $69,400,000
• MSH's 35% share of net equity: $24,290,000
• Plus: MSH's accrued preferred return: $17,010,000
• Total buyout price tendered: $41,300,000
PCG formally tendered the buyout price of $41.3 million to MSH on March 1, 2023, accompanied by a copy of the Whitfield appraisal report, the computation of the buyout price, and a draft assignment of membership interest document. MSH rejected the tender on March 10, 2023.
MSH retained Beacon Valuation Group Inc. to conduct its own independent appraisal. Dr. Priya Ramanathan, CFA, ASA, the principal of Beacon Valuation Group, completed MSH's appraisal on April 14, 2023. Dr. Ramanathan determined the fair market value of 100% of PGV's assets to be $151.5 million — $33.5 million, or approximately 28.4%, above the Whitfield appraisal. Dr. Ramanathan's valuation relied exclusively on the income approach, utilizing a discounted cash flow analysis with an 8.5% discount rate and a 7.75% terminal capitalization rate. Notably, the Beacon appraisal included adjustments for the estimated intangible value of the Aurelian franchise agreement and incorporated $8.2 million in alleged deferred maintenance that MSH contended should be added back to the property's value on the theory that PCG, as Manager, had improperly deferred capital expenditures in order to suppress the hotel's appraised value.
Based on the Beacon appraisal, MSH demanded a total buyout price of $70.0 million. MSH's demand included a bad-faith penalty of $16.975 million under OA Section 12.7, which provides that if the Manager exercises the call option and the Manager's initial appraisal is determined to have been conducted or obtained in bad faith or in a manner calculated to understate fair market value, the Manager shall pay a penalty equal to 25% of the fair market value of the redeemed interest. MSH alleged that PCG had improperly influenced the Whitfield appraisal by providing selective comparable data and by directing the appraiser to apply an unreasonably high capitalization rate.
The divergence between the Whitfield appraisal ($118.0 million) and the Beacon appraisal ($151.5 million) was 28.4%. This divergence exceeded the 10% threshold specified in OA Section 12.4(c), thereby triggering each party's right to appoint a third, neutral appraiser to provide an independent determination of fair market value, with the OA specifying that the neutral appraiser's determination would be binding absent agreement of the parties.
MSH's accrued preferred return of $17.01 million represents the cumulative 8% compounding preferred return on MSH's aggregate capital contributions of $18.505 million, calculated from August 1, 2017 (the date of the initial capital contribution) through December 31, 2022 (the agreed valuation date). This figure was stipulated by the parties during the course of the arbitration and was not in dispute.
C. Engagement of Calderwood & Harkness LLP
PCG retained Calderwood & Harkness LLP on March 22, 2023, following a referral from PCG's longstanding general counsel. A comprehensive conflict check was conducted and cleared on March 21, 2023. The conflict check encompassed MSH, Nathaniel Cordero and Elena Cordero individually, PGV, Hargrove, Dunlap & Castillo LLP, Victoria Castillo, and all other known involved parties and entities. No conflicts were identified.
The engagement letter was executed on March 22, 2023, and established the following engagement team:
• Francesca Morano — Responsible Partner
• Samuel Eklund — Billing Partner
• Simone Laroche — Lead Associate
• Jeffrey Park — Working Associate
All members of the engagement team are based in the firm's Miami and Tampa offices. The engagement letter specified hourly billing at standard rates, with monthly invoicing. A litigation hold notice was issued to PCG on March 23, 2023, directing the preservation of all documents and electronically stored information potentially relevant to the dispute, including but not limited to investment-committee records, internal valuations, correspondence with MSH and the Corderos, hotel financial records, franchise agreement correspondence with Aurelian, and all communications with GANB.
D. Arbitration Proceedings (JAMS Ref. No. 1440032871)
The arbitration proceedings unfolded over the following timeline:
March 20, 2023 — Demand for Arbitration. MSH, through Hargrove, Dunlap & Castillo LLP, filed a Demand for Arbitration with JAMS, invoking the mandatory arbitration clause set forth in OA Section 16.2. The Demand asserted claims for (i) a declaratory determination that the fair market value of PGV's assets is $151.5 million; (ii) an order compelling PCG to consummate the redemption at $70.0 million, inclusive of the bad-faith penalty; and (iii) an award of attorneys' fees and costs.
April 5, 2023 — Response and Counterclaim. Calderwood & Harkness filed PCG's Response and Counterclaim on April 5, 2023, together with a supporting Memorandum in Support. PCG denied MSH's allegations of bad faith, contested the Beacon appraisal methodology and conclusions, and asserted a counterclaim for declaratory relief that the fair market value of PGV's assets is $118.0 million and that the proper buyout price is $41.3 million as tendered.
April 28, 2023 — Appointment of Arbitrator. The Honorable Margaret Liu Chen (Ret.) was appointed as the sole arbitrator for the proceeding. Judge Chen is a retired Florida Circuit Court judge and experienced commercial arbitrator with extensive experience in real estate and partnership disputes.
May 15, 2023 — Preliminary Conference. Arbitrator Chen conducted a preliminary conference with the parties and established a comprehensive case management order, including deadlines for document production, fact depositions, expert depositions, dispositive motions, and the evidentiary hearing. A firm discovery schedule was set with a document production deadline of August 22, 2023, and depositions to be completed by October 31, 2023. Calderwood & Harkness filed its Preliminary Conference Statement on May 12, 2023, in advance of the conference.
June 1, 2023 — Joint Retention of Neutral Appraiser. Pursuant to OA Section 12.4(c), the parties jointly retained Linden Park Advisory LLC to serve as the neutral third appraiser. Thomas Carraway, MAI, FRICS, a nationally recognized hotel valuation expert and principal of Linden Park Advisory, was designated as the neutral appraiser. The Joint Stipulation regarding Neutral Appraiser, filed with JAMS on May 30, 2023, established the scope of engagement, the data exchange protocol, and the timeline for delivery of Mr. Carraway's report.
July 14, 2023 — Preliminary Indication of Value. Linden Park Advisory delivered a preliminary indication of value establishing a range of $130.0 million to $138.0 million for 100% of PGV's assets. This preliminary range was significant because it fell materially closer to PCG's position than to MSH's position, though above the Whitfield appraisal by $12.0 million to $20.0 million. A formal report was never finalized by Linden Park Advisory due to the eventual settlement of the matter.
August 22, 2023 — Document Production Deadline. Both parties completed document production in accordance with the case management order. PCG produced approximately 12,400 documents totaling over 78,000 pages. MSH produced approximately 8,200 documents.
September 18, 2023 — Expert Depositions. The depositions of Gerald K. Whitfield (PCG's appraiser) and Dr. Priya Ramanathan (MSH's appraiser) were conducted on September 18, 2023. Both depositions were taken at JAMS's Jacksonville Resolution Center and lasted approximately one full day each. The depositions focused on the divergent methodological approaches, the selection of capitalization rates and discount rates, the treatment of the franchise agreement value, and the deferred maintenance adjustment.
October 10, 2023 — Fact Depositions. The depositions of Dominic Pellegrino (PCG's Managing Member) and Nathaniel Cordero (MSH's Managing Member) were conducted on October 10, 2023. Calderwood & Harkness conducted the deposition of Mr. Cordero and defended the deposition of Mr. Pellegrino. The depositions addressed the parties' understanding of the call-option provisions, the history of capital expenditure decisions, the relationship between the parties, and the factual basis for MSH's bad-faith allegations.
November 6, 2023 — Motion to Compel. MSH filed a motion to compel production of PCG's internal investment-committee memoranda and related materials. MSH argued that these documents were relevant to the bad-faith claim and that they had not been withheld on the basis of any applicable privilege. Calderwood & Harkness filed an opposition to the motion, asserting that the investment-committee memoranda were protected by the attorney-client privilege and/or the work-product doctrine to the extent they reflected or incorporated legal advice received by PCG in connection with the call-option exercise and the valuation process.
November 30, 2023 — Ruling on Motion to Compel. Arbitrator Chen partially granted MSH's motion to compel, ordering production of investment-committee memoranda that predated the commencement of the dispute and that did not contain or reflect legal advice, while sustaining PCG's privilege claims as to memoranda created after the dispute arose or that were prepared in anticipation of arbitration. Calderwood & Harkness prepared and submitted a supplemental production and a revised privilege log in December 2023, producing an additional 47 documents while maintaining privilege designations on 23 documents.
E. Mediation and Settlement
January 15, 2024 — Agreement to Mediate. Following informal discussions between counsel regarding the possibility of a negotiated resolution, the parties agreed to submit the matter to mediation. Raymond Alcazar of Alcazar Dispute Resolution LLC, located at 333 SE 2nd Avenue, Suite 2100, Miami, Florida 33131, was jointly selected as mediator. Mr. Alcazar is a well-known commercial mediator with extensive experience in real estate valuation and joint venture disputes in South Florida.
February 12, 2024 — First Mediation Session. The first mediation session was conducted on February 12, 2024, at Alcazar Dispute Resolution's offices in Miami. Both parties attended with full authority. Despite a full day of negotiations, the session ended without resolution. However, the session was productive in narrowing the issues and identifying the key economic parameters that would need to be addressed in any settlement.
March 25, 2024 — Second Mediation Session. The second mediation session was held on March 25, 2024. During this session, a framework agreement was reached for the redemption of MSH's 35% interest at a purchase price of $52.85 million. The framework was memorialized in a term sheet signed by the principals of both parties during the mediation. Key terms of the framework included: (i) a lump-sum payment at closing; (ii) MSH's withdrawal of the bad-faith penalty claim; (iii) mutual releases of all claims; and (iv) each party bearing its own fees and costs.
March 27, 2024 — Confirmation of Framework Terms. Calderwood & Harkness transmitted an email to opposing counsel confirming the settlement framework terms reached during the second mediation session.
April 8, 2024 — Term Sheet Executed. A formal term sheet was executed by the parties, confirming the principal business terms of the settlement and establishing a timeline for the negotiation and execution of definitive documentation.
May 20, 2024 — Definitive Agreements Executed. The Definitive Redemption Agreement and the Mutual Release and Settlement Agreement were executed by the parties on May 20, 2024. These documents were extensively negotiated between Calderwood & Harkness and Hargrove, Dunlap & Castillo LLP over a period of approximately six weeks. The Redemption Agreement set forth the mechanics of the closing, including representations and warranties, conditions to closing, the form of assignment of membership interest, and the required lender consents. The Mutual Release and Settlement Agreement provided for broad mutual releases of all claims, known and unknown, arising out of or related to the dispute, the OA, and the joint venture relationship, with customary carve-outs for obligations arising under the settlement documents themselves.
June 28, 2024 — Closing of Redemption. The closing of the redemption took place on June 28, 2024. PCG paid MSH the redemption price of $52,850,000 by wire transfer of immediately available funds. The Assignment of Membership Interest was executed and delivered, and MSH's 35% membership interest in PGV was transferred to PCG. Closing certificates were delivered by both PCG and MSH certifying compliance with the conditions to closing. Gulf Atlantic National Bank delivered its Lender Consent Letter, consenting to the redemption and the related amendments to the PGV operating agreement.
July 15, 2024 — Amended and Restated Operating Agreement. The Amended and Restated Operating Agreement of Palmetto Grand Ventures LLC was executed on July 15, 2024, reflecting PCG's 100% ownership of PGV as the sole member. The amended agreement eliminated the minority consent provisions, the call-option and put-option provisions, and the preferred return provisions that had been applicable to the two-member structure.
August 9, 2024 — Dismissal of Arbitration. A Joint Stipulation of Dismissal with Prejudice was filed with JAMS on August 9, 2024, signed by Francesca Morano of Calderwood & Harkness LLP on behalf of PCG and by Victoria Castillo of Hargrove, Dunlap & Castillo LLP on behalf of MSH. The JAMS arbitration (Ref. No. 1440032871) was formally dismissed with prejudice. This date marks the formal closing of the matter.
III. SETTLEMENT ECONOMICS AND FINANCIAL SUMMARY
A. Negotiated Redemption Price Derivation
The negotiated redemption price of $52.85 million was derived through arm's-length mediation and reflects a compromise between the parties' respective positions, anchored in significant part by the preliminary indication of value provided by Linden Park Advisory LLC, the neutral third appraiser. The derivation of the settlement figure from the neutral appraiser's preliminary range is as follows:
• Linden Park neutral preliminary range: $130.0 million to $138.0 million
• Midpoint of the Linden Park range: ($130.0M + $138.0M) ÷ 2 = $134.0 million
• Less: Outstanding GANB debt: ($48.6 million)
• Net equity at midpoint: $85.4 million
• MSH's 35% share of net equity: $85.4M × 0.35 = $29.89 million
• Plus: MSH's accrued preferred return: $17.01 million
• Subtotal (midpoint basis): $46.9 million
• Negotiated premium over midpoint basis: $52.85M − $46.9M = $5.95 million
• Final negotiated redemption price: $52.85 million
The $5.95 million negotiated premium above the midpoint-basis calculation reflects several factors that informed the settlement negotiations, including: (i) a litigation-risk discount applied to the prospect of an adverse finding on MSH's bad-faith claim, which, while assessed by Calderwood & Harkness as having a low probability of success on the merits, could not be entirely dismissed given the breadth of OA Section 12.7 and the partial production of investment-committee memoranda; (ii) the value to PCG of achieving an accelerated closing and obtaining full control of PGV without the uncertainty and delay of a contested merits hearing; and (iii) the avoidance of further arbitration costs, including the cost of finalizing the Linden Park appraisal report, expert testimony, and a multi-day evidentiary hearing, which were estimated at an additional $350,000 to $500,000 in legal fees and expert costs.
B. Funding of Redemption
The $52.85 million redemption price was funded through the following sources:
• PCG cash from existing liquidity: $22,000,000
• Incremental draw on PGV's revolving credit facility with Gulf Atlantic National Bank: $30,850,000
Following the closing of the redemption, PGV's total outstanding indebtedness to GANB was $79.45 million ($48.6 million under the original term loan plus $30.85 million under the revolving credit facility draw). PCG has indicated its intention to refinance the consolidated debt with GANB or a successor lender in order to achieve a more favorable capital structure and extend maturities beyond the current August 1, 2027, maturity date. Calderwood & Harkness was not engaged to advise on the refinancing, and no additional engagement has been contemplated at this time.
C. Comparison to Initial Positions
A comparison of the settlement outcome to the parties' initial positions demonstrates the following:
The settlement of $52.85 million was reached at a point approximately 40% above PCG's opening position and approximately 24.5% below MSH's demand. This positioning reflects the gravitational pull of the Linden Park neutral preliminary range, which landed significantly closer to PCG's Whitfield appraisal than to MSH's Beacon appraisal.
Critically, the bad-faith penalty claim of $16.975 million asserted by MSH under OA Section 12.7 was entirely withdrawn by MSH as part of the settlement. No bad-faith finding was made by the arbitrator. The withdrawal of this claim represented a significant concession by MSH and eliminated the most substantial downside risk that had been facing PCG.
Under the settlement terms, each party bears its own attorneys' fees and costs. No fee-shifting was agreed to or imposed. This mutual walk-away on fees was consistent with Calderwood & Harkness's recommendation, given that the engagement letter did not include a contingent-fee arrangement and the OA's fee-shifting provision under Section 16.4 required a "prevailing party" determination that would have been uncertain in the context of a negotiated resolution.
IV. BILLING SUMMARY — CALDERWOOD & HARKNESS LLP FEES AND COSTS
A. Legal Fees
Total Calderwood & Harkness LLP professional fees for the engagement, covering all phases from initial case assessment through matter closing, were $1,287,400.
The engagement team comprised the following professionals, all of whom recorded time to Matter No. 1027-00003:
• Francesca Morano, Responsible Partner — overall engagement management, client relationship, strategy, mediation sessions, settlement negotiations, and review of all major work product and filings.
• Samuel Eklund, Billing Partner — billing management, client communications regarding invoicing, engagement economics, and selected substantive review.
• Simone Laroche, Lead Associate — primary drafting responsibility for all arbitration pleadings, motions, discovery, and transactional documents; day-to-day case management; expert coordination; deposition preparation and attendance; valuation analysis work product; and mediation preparation.
• Jeffrey Park, Working Associate — document review and production management; privilege log preparation; legal research; deposition outline drafting; and supporting research and drafting on motions and transactional closing documents.
The fee breakdown by engagement phase is set forth below. The allocations are approximate and reflect the categorization of time entries in the firm's billing system:
Phase 1: Pre-Arbitration / Case Assessment and Initial Strategy. This phase included review and analysis of the OA and its call-option, valuation, and bad-faith penalty provisions; initial case assessment and strategy memorandum; engagement setup and conflict clearance; litigation hold notice; initial client conferences; and preliminary review of the Whitfield and Beacon appraisals. This phase covered the period from engagement (March 22, 2023) through the filing of the Response and Counterclaim (April 5, 2023).
Phase 2: Arbitration — Pleadings, discovery, Depositions, and Motions Practice. This phase encompassed the preparation and filing of the Response and Counterclaim and Memorandum in Support; the Preliminary Conference Statement; attendance at the preliminary conference; preparation and service of document requests and interrogatories; document production management (review and production of approximately 12,400 documents); expert coordination with Whitfield Realty Advisors and Linden Park Advisory; deposition preparation and attendance for the depositions of Whitfield, Ramanathan, Pellegrino, and Cordero; the opposition to MSH's motion to compel; and the preparation of the supplemental production and privilege log. This was the most labor-intensive phase of the engagement.
Phase 3: Valuation Analysis Work Product. This phase included the preparation of the Comparative Appraisal Analysis Memorandum, analyzing the divergent methodologies and conclusions of the Whitfield and Beacon appraisals; the Cap Rate and discount Rate Market Survey, benchmarking the appraisers' selected rates against market data for luxury Gulf Coast hotel transactions; the Bad-Faith Penalty Risk Assessment, evaluating the probability and magnitude of an adverse determination under OA Section 12.7; the Deferred Maintenance Claim Analysis, addressing MSH's assertion that $8.2 million in deferred maintenance should be treated as a value addback; and the Preferred Return Calculation Verification, confirming the accuracy of the stipulated $17.01 million accrued preferred return. These work products informed both the arbitration strategy and the settlement authority analysis.
Phase 4: Mediation and Settlement. This phase covered the preparation of the Mediation Position Statement; the Settlement Authority Memorandum (recommending settlement parameters to PCG); attendance at two mediation sessions; post-mediation settlement negotiations; negotiation and drafting of the term sheet; the Second Mediation Session Summary and Recommendation; and all related client communications and strategy conferences.
Phase 5: Transactional / Closing. This phase encompassed the drafting and negotiation of the Definitive Redemption Agreement, the Mutual Release and Settlement Agreement, the Assignment of Membership Interest, the Amended and Restated Operating Agreement of PGV, the Closing Certificates for both PCG and MSH, and the coordination of the Lender Consent Letter with GANB. This phase also included the preparation and filing of the Joint Stipulation of Dismissal with Prejudice with JAMS, the preparation of the Closing Binder Index and Checklist, and the preparation of this Final Billing Summary and Matter Closing Memorandum.
B. Expert and Appraiser Costs
Total expert and appraiser costs borne by PCG for the engagement were $385,000. This amount includes the following:
• Whitfield Realty Advisors LLC (Gerald K. Whitfield, MAI) — PCG's retained appraiser. Fees covered the preparation of the initial appraisal report (February 10, 2023), supplemental analyses provided in connection with the arbitration, preparation for and attendance at deposition (September 18, 2023), and ongoing consulting engagement throughout the dispute.
• Linden Park Advisory LLC (Thomas Carraway, MAI, FRICS) — neutral third appraiser jointly retained by the parties. Fees reflect PCG's 50% share of the jointly borne costs of the neutral appraisal engagement, including site inspection, data analysis, preliminary indication of value (delivered July 14, 2023), and ongoing availability for arbitration testimony (which was ultimately not required due to settlement).
Beacon Valuation Group Inc. (Dr. Priya Ramanathan, CFA, ASA) served as MSH's retained appraiser; all fees of Beacon Valuation Group were borne exclusively by MSH and are not included in the figures reported herein.
C. Arbitration Fees
PCG's share of JAMS arbitration fees for the proceeding was $47,500. This amount represents PCG's 50% share of the forum fees and arbitrator compensation charged by JAMS for the proceeding before the Honorable Margaret Liu Chen (Ret.), JAMS Ref. No. 1440032871. The JAMS Resolution Center for the proceeding was located at 1 Independent Drive, Suite 1600, Jacksonville, Florida 32202. The arbitration fees covered the filing fee, case management fees, and arbitrator hourly and hearing-day fees through the date of dismissal.
D. Mediator Fees
PCG's share of mediator fees for the two mediation sessions conducted by Raymond Alcazar of Alcazar Dispute Resolution LLC was $18,750. This amount represents PCG's 50% share of the jointly borne mediator compensation for the first mediation session (February 12, 2024) and the second mediation session (March 25, 2024), as well as Mr. Alcazar's pre-mediation review and preparation time.
E. Total Defense Costs
The total defense costs incurred by PCG in connection with Matter No. 1027-00003 are summarized as follows:
All invoices have been transmitted to PCG, and all amounts have been paid in full. No outstanding receivables remain for this matter.
V. INSURANCE COVERAGE AND REIMBURSEMENT
PCG maintained a Managers' Liability / Wrongful Acts insurance policy issued by Atlantic Omnivrel Insurance Company, a Connecticut-domiciled insurer. The relevant policy details are as follows:
• Carrier: Atlantic Omnivrel Insurance Company
• Policy Number: AFML-2022-08745
• Coverage Type: Managers' Liability / Wrongful Acts
• Coverage Limit: $10,000,000 per occurrence / $10,000,000 aggregate
In April 2023, Calderwood & Harkness, on behalf of PCG, tendered MSH's claims to Atlantic Fidelity via a formal tender letter, requesting that the carrier accept the defense of the claims and fund defense costs under the policy. The tender letter identified the specific claims asserted by MSH in the JAMS Demand for Arbitration, including the bad-faith penalty claim under OA Section 12.7, as potentially covered "wrongful acts" within the scope of the managers' liability policy.
Atlantic Fidelity accepted the tender under a reservation of rights. The carrier's reservation of rights letter identified certain coverage defenses and exclusions that the carrier reserved the right to assert, including potential application of the contract-liability exclusion and the intentional-acts exclusion. Notwithstanding the reservation of rights, Atlantic Fidelity agreed to fund defense costs as they were incurred, subject to the policy's terms and conditions and a panel-counsel rate requirement that was accommodated within Calderwood & Harkness's applicable billing rates.
Over the course of the engagement, Atlantic Fidelity reimbursed a total of $625,000 toward PCG's defense costs. This reimbursement was applied against the total defense costs of $1,738,650, resulting in net defense costs to PCG of:
$1,738,650 − $625,000 = $1,113,650 (net cost to PCG after insurance reimbursement)
No additional insurance claims remain pending, and no further reimbursement is anticipated from Atlantic Fidelity in connection with this matter. The carrier was notified of the settlement and dismissal of the arbitration, and no coverage issues have been raised by the carrier with respect to the settlement.
VI. NET FINANCIAL IMPACT TO PCG
The total net financial impact to PCG from the matter, inclusive of the redemption price and all defense costs net of insurance recovery, is summarized in the following table:
Several additional observations are warranted regarding the financial impact and positioning of PCG following the resolution of this matter:
First, as noted in Section III.C above, the settlement terms provide that each party bears its own attorneys' fees and costs. Accordingly, PCG was unable to recover any portion of its defense costs from MSH, and no further recovery is expected.
Second, as a result of the redemption, PCG now holds 100% of the membership interests in PGV and, through PGV, 100% of the economic interest in The Palmetto Grand Resort & Spa. This consolidation of ownership provides PCG with enhanced operational flexibility, including the ability to make capital expenditure decisions, refinance existing indebtedness, renegotiate or extend the Aurelian franchise agreement, and pursue a disposition of the hotel property, in each case without the need to obtain the minority member consent that was required under the original OA.
Third, PGV's post-closing outstanding debt of $79.45 million (comprising the original $48.6 million term loan and the $30.85 million incremental revolving credit facility draw used to partially fund the redemption) represents a materially higher leverage level than the pre-redemption capital structure. PCG has indicated its intention to address this through a comprehensive refinancing with GANB or a successor lender. Calderwood & Harkness has not been engaged to advise on the refinancing.
VII. KEY DELIVERABLES AND WORK PRODUCT INVENTORY
The following is a comprehensive inventory of all major documents, pleadings, memoranda, and work product prepared by Calderwood & Harkness LLP during the engagement on Matter No. 1027-00003. This inventory is organized by category and should be cross-referenced to the Closing Binder Index and Checklist prepared in August 2024.
Pre-Dispute / Administration
1. Engagement Letter — executed March 22, 2023
2. Conflict Check Memorandum — completed March 21, 2023
3. Litigation Hold Notice to PCG — issued March 23, 2023
Case Assessment.
4. Initial Case Assessment Memorandum — April 2023
5. OA Key Provisions Summary Memorandum — April 2023
Arbitration Pleadings and Motions
6. Response and Counterclaim — filed April 5, 2023
7. Memorandum in Support of Response and Counterclaim — filed April 5, 2023
8. Preliminary Conference Statement — filed May 12, 2023
9. Joint Stipulation re: Neutral Appraiser — filed May 30, 2023
10. Opposition to MSH's Motion to Compel — filed November 2023
11. Supplemental Production Log and Privilege Log — December 2023
Discovery.
12. First Set of Document Requests to MSH — served June 2023
13. First Set of Interrogatories to MSH — served June 2023
Deposition Materials.
14. Deposition Outline — Nathaniel Cordero
15. Deposition Outline — Dr. Priya Ramanathan
16. Deposition Preparation Memorandum — Dominic Pellegrino
Valuation Analysis Work Product
17. Comparative Appraisal Analysis Memorandum — August 2023
18. Cap Rate and discount Rate Market Survey — July 2023
19. Bad-Faith Penalty Risk Assessment — September 2023
20. Deferred Maintenance Claim Analysis — October 2023
21. Preferred Return Calculation Verification — June 2023
Mediation and Settlement
22. Settlement Authority Memorandum — January 2024
23. Mediation Position Statement — February 2024
24. Second Mediation Session Summary and Recommendation — March 2024
Transactional / Closing Documents
25. Term Sheet — executed April 8, 2024
26. Definitive Redemption Agreement — executed May 20, 2024
27. Mutual Release and Settlement Agreement — executed May 20, 2024
28. Assignment of Membership Interest — executed and delivered June 28, 2024
29. Amended and Restated Operating Agreement of PGV — executed July 15, 2024
30. Closing Certificate — PCG — delivered June 28, 2024
31. Closing Certificate — MSH — delivered June 28, 2024
32. Lender Consent Letter — Gulf Atlantic National Bank — obtained June 2024
33. Joint Stipulation of Dismissal with Prejudice — filed August 9, 2024
Correspondence.
34. Insurance Tender Letter to Atlantic Omnivrel Insurance Company — April 2023
35. Email to Opposing Counsel (Victoria Castillo) Confirming Settlement Framework Terms — March 27, 2024
36. Email to Adriana Pellegrino-Voss re: Linden Park Preliminary Indication of Value — July 15, 2023
Administrative.
37. Closing Binder Index and Checklist — August 2024
38. Final Billing Summary and Matter Closing Memorandum (this document) — August 2024
All documents listed above are maintained in the firm's document management system under Matter No. 1027-00003 and, where applicable, in the physical closing binder maintained by Simone Laroche.
VIII. OUTCOME ASSESSMENT AND LESSONS LEARNED
A. Outcome Assessment
The resolution of this matter at a redemption price of $52.85 million represents a favorable outcome for PCG when evaluated against the range of potential outcomes and the risk profile of the dispute. The following observations inform this assessment:
Savings Relative to MSH's Demand. The settlement at $52.85 million represents a savings of $17.15 million from MSH's opening demand of $70.0 million, or approximately 24.5% below MSH's initial position. While PCG paid $11.55 million above its own initial offer of $41.3 million, this premium was anticipated once the Linden Park preliminary range indicated that the Whitfield appraisal had likely understated fair market value.
Elimination of Bad-Faith Penalty Risk. The bad-faith penalty claim under OA Section 12.7 was entirely withdrawn by MSH as part of the settlement. No bad-faith finding was made. This was a critical outcome for PCG. Under OA Section 12.7, a bad-faith finding could have resulted in a penalty of up to 25% of the fair market value of the redeemed interest. Based on MSH's asserted valuation, this penalty was claimed at $16.975 million. Even if the neutral appraiser's midpoint valuation had been adopted, a bad-faith penalty could have added approximately $10.5 million to $12.0 million to the redemption price. While Calderwood & Harkness assessed the probability of a bad-faith finding as low, the claim created meaningful settlement leverage for MSH and constituted the most significant downside risk in the arbitration.
Full Ownership Consolidation. PCG obtained 100% ownership of PGV and The Palmetto Grand Resort & Spa without the need for a contested merits decision in the arbitration. This eliminated the risk of an adverse arbitral award and provided certainty of outcome. The consolidation of ownership also provides PCG with significant strategic and operational benefits going forward.