PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 1200 Brickell Avenue, Suite 3400 Miami, Florida 33131 Telephone: (305) 555-7200 Facsimile: (305) 555-7201
INTERNAL MEMORANDUM
March 27, 2024
TO: Dominic R. Pellegrino, Managing Member, Pellegrino Capital Group LLC Adriana Pellegrino-Voss, SVP of Investments, Pellegrino Capital Group LLC
FROM: Francesca Morano, Partner, Calderwood & Harkness LLP Simone Laroche, Associate, Calderwood & Harkness LLP
RE: Summary of Second Mediation Session and Recommendation — Meridian Shores Hospitality LLC v. Pellegrino Capital Group LLC, JAMS Ref. No. 1440032871
Matter No.: 1027-00003
CONFIDENTIALITY NOTICE: This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared in anticipation of and in connection with ongoing litigation. It contains the mental impressions, conclusions, opinions, and legal theories of counsel. This memorandum is intended solely for the use of Pellegrino Capital Group LLC senior management. Do not copy, forward, distribute, or otherwise disclose this memorandum or its contents to any person outside of PCG senior management without the prior written approval of Calderwood & Harkness LLP.
I. EXECUTIVE SUMMARY
On March 25, 2024, Pellegrino Capital Group LLC ("PCG") and Meridian Shores Hospitality LLC ("MSH") participated in a second full-day mediation session in Miami, Florida, facilitated by mediator Raymond Alcazar of Alcazar Dispute Resolution LLC, located at 333 SE 2nd Avenue, Suite 2100, Miami, Florida 33131. The session was convened in connection with the pending arbitration before JAMS, Reference No. 1440032871, involving a dispute over the valuation and redemption of MSH's 35% membership interest in Palmetto Grand Ventures LLC ("PGV"), the joint venture entity that owns and operates the Palmetto Grand Resort & Spa in Clearwater Beach, Florida.
After extensive, arms-length negotiation conducted over the course of approximately ten hours, the parties reached a framework agreement for the redemption of MSH's entire 35% membership interest in PGV at a negotiated redemption price of $52,850,000 (the "Redemption Price"), payable as a lump sum wire transfer at closing. This memorandum summarizes the mediation session in detail, sets forth the framework terms agreed upon by the parties, provides an economic analysis of the settlement, assesses the key negotiation dynamics, and sets forth our recommendation regarding next steps.
The settlement reflects several key concessions and favorable outcomes for PCG:
• Withdrawal of the Bad-Faith Penalty Claim. MSH withdrew its claim for a bad-faith penalty under Section 12.7 of the Operating Agreement, which MSH had valued at $16,975,000 in its original demand. The elimination of this claim removes a significant and unpredictable litigation risk for PCG.
• Mutual Walk-Away on Attorneys' Fees and Costs. The parties agreed that each side will bear its own attorneys' fees and costs incurred in connection with the dispute, the arbitration, and the mediation. This is a favorable outcome given that MSH had asserted a claim for fee-shifting under the Operating Agreement.
• Modest Premium Over Midpoint Analysis. PCG agreed to a Redemption Price representing a $5.95 million premium over the midpoint analysis derived from the Linden Park Advisory LLC neutral appraiser's preliminary indication of value. While this premium is not insignificant in absolute terms, it is modest relative to the $28.7 million gap that separated the parties' original positions and represents a reasonable accommodation of the valuation uncertainty inherent in the Linden Park preliminary range.
• Significant Reduction from MSH's Demand. MSH conceded $17.15 million from its original demand of $70.0 million, while PCG's incremental cost over its original tender was $11.55 million. PCG achieved a result that is approximately 60% closer to its original position than to MSH's demand.
We strongly recommend that PCG authorize the prompt execution of a binding term sheet on the framework terms described herein, targeting execution on or before April 8, 2024, followed by the preparation and negotiation of definitive documentation with a target closing in June 2024. The rationale for this recommendation is set forth in detail below.
By way of context, the first mediation session, held on February 12, 2024, was unsuccessful. At that session, MSH insisted on the bad-faith premium and maintained its full $70.0 million demand, while PCG offered in the range of $45.0–$47.0 million. No meaningful progress was made. The breakthrough at the second session was driven principally by both parties' updated risk assessments in light of the discovery record — particularly the deposition testimony and the partially granted motion to compel — and the Linden Park preliminary valuation range, which effectively narrowed the universe of reasonable outcomes and forced both sides toward the center.
II. BACKGROUND AND PROCEDURAL POSTURE
A. Dispute Overview
The dispute at the center of this matter arises from PCG's exercise of its contractual call option under Section 12.4 of the Amended and Restated Operating Agreement of Palmetto Grand Ventures LLC, dated June 15, 2017 (the "Operating Agreement" or "OA"). PGV is a Delaware limited liability company formed in 2017 as a joint venture between PCG (65% membership interest) and MSH (35% membership interest) for the purpose of acquiring, owning, and operating the Palmetto Grand Resort & Spa, a luxury beachfront hotel and conference facility located at 650 Mandalay Avenue, Clearwater Beach, Florida 33767.
On January 9, 2023, PCG delivered written notice to MSH exercising its call option under OA Section 12.4, thereby electing to purchase MSH's entire 35% membership interest in PGV at Fair Market Value ("FMV") as determined in accordance with the appraisal procedures set forth in the Operating Agreement. Section 12.4 of the OA provides that the call option may be exercised by PCG at any time after the fifth anniversary of the joint venture's formation, subject to compliance with certain notice and procedural requirements. PCG's exercise of the call option was timely and procedurally proper, a point that has not been disputed by MSH.
Pursuant to OA Section 12.4(a), PCG was required to obtain an independent appraisal of the FMV of 100% of the JV assets within 60 days of exercising the call option. PCG retained Whitfield Realty Advisors LLC, led by Gerald K. Whitfield, MAI, a recognized expert in commercial real estate valuation with over 25 years of experience appraising hospitality properties in the southeastern United States. Whitfield completed its appraisal on February 10, 2023, concluding that the FMV of 100% of PGV's assets as of December 31, 2022, was $118.0 million. The Whitfield appraisal employed a blended methodology consisting of the income capitalization approach (weighted 40%, utilizing a direct capitalization rate of 9.5% and a discounted cash flow analysis with a 10.75% discount rate) and the sales comparison approach (weighted 60%), based on comparable luxury resort transactions in the Gulf Coast market.
Based on the Whitfield appraisal, PCG calculated MSH's redemption amount as follows:
• FMV of 100% of JV assets: $118,000,000
• Less outstanding indebtedness to Gulf Atlantic National Bank ("GANB"): ($48,600,000)
• Net equity value: $69,400,000
• MSH's 35% share of net equity: $24,290,000
• Plus MSH's accrued but unpaid preferred return (per OA Section 6.2): $17,010,000
• Total tender amount: $41,300,000
On March 1, 2023, PCG tendered $41,300,000 to MSH in accordance with the Operating Agreement. MSH rejected the tender on March 10, 2023, asserting that the Whitfield appraisal materially understated the FMV of PGV's assets and that PCG had acted in bad faith in the exercise of the call option.
MSH then retained its own appraiser, Beacon Valuation Group Inc., led by Dr. Priya Ramanathan, CFA, ASA, to conduct a competing appraisal. Beacon completed its appraisal on April 14, 2023, concluding that the FMV of 100% of PGV's assets as of December 31, 2022, was $151,500,000. The Beacon appraisal relied exclusively on the income capitalization approach, applying a direct capitalization rate of 7.75% and a discounted cash flow analysis with an 8.5% discount rate. Based on the Beacon appraisal and its claim for a bad-faith penalty, MSH demanded a total redemption payment of $70,000,000, calculated as follows:
• FMV of 100% of JV assets (Beacon): $151,500,000
• Less outstanding GANB debt: ($48,600,000)
• Net equity value: $102,900,000
• MSH's 35% share of net equity: $36,015,000
• Plus accrued preferred return: $17,010,000
• Subtotal: $53,025,000
• Plus bad-faith penalty under OA Section 12.7 (25% of determined FMV of redeemed interest): $16,975,000
• Total demand: $70,000,000 (rounded)
The gap between PCG's tender and MSH's demand was $28,700,000, representing a substantial divergence that made consensual resolution initially difficult to achieve.
On March 20, 2023, MSH filed a Demand for Arbitration with JAMS, asserting claims for breach of contract (failure to tender at FMV), breach of the implied covenant of good faith and fair dealing, and entitlement to the bad-faith penalty under OA Section 12.7. On April 5, 2023, PCG filed its Response and Counterclaim, denying MSH's claims and asserting that PCG exercised the call option in good faith and in compliance with the Operating Agreement, and counterclaiming for specific performance of the redemption at the Whitfield-derived price. On April 28, 2023, the Honorable Margaret Liu Chen (Ret.) was appointed as the arbitrator.
B. Neutral Appraiser and discovery Phase
Under OA Section 12.4(c), when the two appraisals diverge by more than 10%, the parties are required to jointly retain a neutral third-party appraiser to provide an independent valuation. The Whitfield appraisal ($118.0 million) and the Beacon appraisal ($151.5 million) diverged by approximately 28.4%, well in excess of the 10% threshold. Accordingly, after a brief negotiation regarding the selection of the neutral appraiser, the parties jointly retained Linden Park Advisory LLC ("Linden Park"), led by Thomas Carraway, MAI, FRICS, a nationally recognized hospitality real estate appraiser and Fellow of the Royal Institution of Chartered Surveyors. The engagement became effective on June 1, 2023, with Linden Park's scope of work defined by the appraisal procedures set forth in OA Section 12.4(c) and a supplemental engagement letter executed by both parties.
On July 14, 2023, Linden Park delivered a preliminary indication of value, concluding that the FMV of 100% of PGV's assets as of December 31, 2022, fell within a range of $130,000,000 to $138,000,000. Linden Park's preliminary analysis employed a blended methodology incorporating the income capitalization approach (direct capitalization at an 8.75% cap rate and DCF analysis at a 9.75% discount rate), the sales comparison approach, and a limited cost approach. The formal appraisal report was never finalized, as the parties entered mediation before Linden Park completed its final report. Nonetheless, the preliminary indication of value has been the most significant data point informing settlement discussions.
The discovery phase of the arbitration proceeded in parallel with the appraisal process. Key discovery milestones included:
• August 22, 2023: Deadline for completion of document production by both parties.
• September 18, 2023: Expert depositions of Gerald K. Whitfield (Whitfield Realty Advisors) and Dr. Priya Ramanathan (Beacon Valuation Group) were conducted. As discussed in further detail in Section V.B below, both depositions yielded significant testimony bearing on the merits of the dispute.
• October 10, 2023: Party depositions of Dominic R. Pellegrino (PCG Managing Member) and Nathaniel Cordero (MSH Managing Member) were conducted. These depositions addressed, among other things, the circumstances of PCG's exercise of the call option, the selection of appraisers, the parties' communications regarding the operation and management of the Palmetto Grand, and the parties' respective expectations regarding value.
• November 30, 2023: Arbitrator Chen issued an order partially granting MSH's motion to compel production of PCG internal investment-committee memoranda. The order required PCG to produce certain investment-committee materials relating to the decision to exercise the call option and the evaluation of the Palmetto Grand's value, while sustaining PCG's objections to the production of materials relating to PCG's broader portfolio strategy and unrelated investment decisions. The produced materials, as discussed in Section V.B below, did not contain evidence of bad-faith intent.
C. First Mediation Session
On January 15, 2024, the parties agreed to submit the dispute to mediation with Raymond Alcazar of Alcazar Dispute Resolution LLC, a certified Florida Supreme Court mediator with extensive experience in complex commercial real estate and partnership disputes. The first mediation session was held on February 12, 2024, at Alcazar's offices in Miami. The session lasted a full day.
The first session did not result in a resolution. MSH maintained its demand of $70.0 million, insisting on the inclusion of the bad-faith premium under OA Section 12.7 and characterizing PCG's exercise of the call option as an opportunistic attempt to acquire MSH's interest at a below-market price. PCG offered in the range of $45.0 to $47.0 million during the first session, based on the Whitfield appraisal as adjusted modestly upward to account for certain data points in the Linden Park preliminary indication of value, but categorically rejected the bad-faith penalty claim.
At the conclusion of the first session, mediator Alcazar encouraged both sides to reassess their positions in light of the Linden Park preliminary valuation range and the discovery record, and the parties agreed to schedule a second session. The second session was set for March 25, 2024.
III. SECOND MEDIATION SESSION — MARCH 25, 2024
A. Attendees and Logistics
The second mediation session was held on March 25, 2024, at the offices of Alcazar Dispute Resolution LLC, 333 SE 2nd Avenue, Suite 2100, Miami, Florida 33131. The session was mediated by Raymond Alcazar, a certified Florida Supreme Court mediator.
The following individuals attended on behalf of PCG:
• Dominic R. Pellegrino, Managing Member, Pellegrino Capital Group LLC
• Adriana Pellegrino-Voss, SVP of Investments, Pellegrino Capital Group LLC
• Marcus Thiel, Chief Financial Officer, Pellegrino Capital Group LLC
• Francesca Morano, Partner, Calderwood & Harkness LLP
• Simone Laroche, Lead Associate, Calderwood & Harkness LLP
The following individuals attended on behalf of MSH:
• Nathaniel "Nate" Cordero, Managing Member, Meridian Shores Hospitality LLC
• Elena Cordero, Member, Meridian Shores Hospitality LLC
• Victoria Castillo, Partner, Hargrove, Dunlap & Castillo LLP
• Ryan Matsuda, Senior Associate, Hargrove, Dunlap & Castillo LLP
The session convened at approximately 9:00 a.m. Eastern Time and concluded at approximately 7:15 p.m. Eastern Time, spanning approximately ten hours and fifteen minutes of active mediation with intermittent breaks for meals and caucus deliberation.
B. Opening Joint Session
Mediator Alcazar convened a brief joint session at the outset of the day, with all attendees from both sides present in a single conference room. Alcazar recapped the procedural history of the dispute, noting the filing of the JAMS arbitration, the appointment of Arbitrator Chen, the completion of the discovery phase, the Linden Park preliminary indication of value (range of $130.0–$138.0 million), and the parties' respective positions as they stood at the conclusion of the first mediation session on February 12, 2024. Alcazar emphasized the parties' shared interest in achieving an efficient and final resolution of the dispute and noted the significant costs — financial, operational, and relational — of continued litigation.
MSH opened with a presentation by Victoria Castillo of Hargrove, Dunlap & Castillo LLP. Castillo reiterated MSH's position that the Whitfield appraisal at $118.0 million was materially below the true FMV of PGV's assets. Castillo identified three principal areas of disagreement with the Whitfield methodology:
First, Castillo argued that Whitfield's direct capitalization rate of 9.5% was aggressive and unreasonably high for a Gulf Coast luxury resort property of the Palmetto Grand's caliber, contending that comparable market transactions supported a cap rate in the range of 7.75% to 8.75%. She cited several recent transactions involving luxury beachfront hotels in Florida, including sales in the Naples, Sarasota, and Fort Lauderdale markets, that reflected cap rates below 9.0%.
Second, Castillo argued that Whitfield failed to account for the significant below-market value of the Aurelian Hotels & Resorts franchise agreement, which MSH contended provided PGV with a material competitive advantage in terms of branding, reservation systems, loyalty program access, and marketing support, the value of which was not adequately reflected in Whitfield's income projections or sales comparisons.
Third, Castillo contended that Whitfield improperly excluded approximately $8.2 million in deferred-maintenance items that MSH asserted should have been addressed under OA Section 8.3 (Capital Expenditure and Maintenance Obligations). MSH's position was that these deferred items depressed the property's current income and should be added back to the valuation as a reflection of the property's true earning capacity.
PCG responded through Francesca Morano. Morano emphasized the reasonableness of Whitfield's methodology, noting that the blended approach — weighting the income capitalization approach at 40% and the sales comparison approach at 60% — was consistent with accepted appraisal standards for hospitality properties and was, in fact, the more conservative approach relative to Beacon's exclusive reliance on the income approach. Morano defended the 9.5% cap rate as within the range of reasonable market comparables for a property of the Palmetto Grand's age, condition, and submarket, and noted that the 10.75% discount rate was supported by investor survey data from the American Hotel & Lodging Association and the Glenrock Group.
On the question of good faith, Morano stated directly to the MSH team that PCG exercised the call option in full compliance with the Operating Agreement and retained Whitfield through its standard vendor-selection process, without giving Whitfield any instructions, guidance, or target regarding a desired valuation outcome. Morano stated that the discovery record — including Dominic Pellegrino's deposition testimony and the investment-committee materials produced under the November 30, 2023 order — confirmed the absence of any bad-faith intent, and that MSH's claim under OA Section 12.7 lacked evidentiary support.
After approximately 45 minutes of joint session, mediator Alcazar moved the parties to separate caucus rooms to begin private negotiations.
C. Caucus Negotiations — Morning Phase
1. MSH's Revised Opening Position
In the first caucus round, mediator Alcazar reported to the PCG team that MSH had reduced its demand from $70.0 million to $63.0 million. This represented a $7.0 million reduction from MSH's prior position, but MSH maintained the bad-faith penalty claim under OA Section 12.7, albeit at a reduced calculation.
MSH's stated rationale for the reduction, as communicated by Alcazar, was as follows: MSH acknowledged that the Beacon appraisal at $151.5 million represented the upper bound of a reasonable valuation range and that the Linden Park preliminary indication provided a more moderate reference point. However, MSH maintained that even under the Linden Park range, the Beacon appraisal's income approach was methodologically sound, and that a finalized Linden Park report would likely have reflected the impact of the factors identified by Castillo (franchise agreement value, deferred maintenance). MSH characterized the reduction as reflecting a "realistic" application of the bad-faith penalty — something less than the maximum 25% under OA Section 12.7 — rather than a full withdrawal of the claim.
From PCG's perspective, the $63.0 million figure remained significantly above the range that the neutral appraisal data supported. Nonetheless, the $7.0 million reduction from the opening demand was a constructive signal that MSH was prepared to negotiate meaningfully.
2. PCG's Revised Opening Position
In response, PCG offered $48.5 million. This represented a meaningful increase from the $45.0–$47.0 million range that PCG had offered at the first mediation session and approximately $1.6 million above the midpoint-derived figure of $46.9 million (calculated as follows: Linden Park midpoint of $134.0 million, less $48.6 million GANB debt, yielding $85.4 million in JV net equity, multiplied by MSH's 35% interest, plus $17.01 million in accrued preferred return, for a subtotal of $46.9 million, plus a modest premium).
PCG's stated rationale, as communicated by Morano to Alcazar, was as follows: The Linden Park neutral appraiser's preliminary range validated PCG's position that the true FMV of PGV's assets lay well below Beacon's $151.5 million and much closer to the Whitfield appraisal. The $48.5 million offer reflected PCG's goodwill toward resolution, a modest litigation-risk adjustment to account for the inherent uncertainty in any appraisal process, and the practical benefits of a prompt closing. PCG categorically rejected any bad-faith penalty under OA Section 12.7 and communicated through Alcazar that the penalty claim would need to be resolved — by withdrawal or otherwise — as a precondition to any settlement.
3. Further Rounds — Morning
Mediator Alcazar conducted two additional caucus rounds during the morning, shuttling between the parties' separate conference rooms. The parties' respective positions evolved as follows:
• Second round: MSH reduced its demand to $60.0 million; PCG moved to $49.0 million. Gap: $11.0 million.
• Third round (pre-lunch): MSH reduced its demand to $58.5 million; PCG moved to $49.5 million. Gap: $9.0 million.
Over the course of the morning, the gap between the parties narrowed from $14.5 million (at $63.0 million versus $48.5 million) to $9.0 million ($58.5 million versus $49.5 million). While the rate of convergence was encouraging, the remaining $9.0 million gap was substantial and was driven primarily by the continued presence of the bad-faith penalty claim in MSH's demand.
A key discussion point during the PCG caucus was a report by Alcazar that MSH's counsel, Victoria Castillo, had privately acknowledged to the mediator that the bad-faith claim under OA Section 12.7 faced significant evidentiary challenges. In particular, Castillo reportedly recognized the impact of Dominic Pellegrino's deposition testimony on October 10, 2023, in which Pellegrino described PCG's standard vendor-selection process for the retention of Whitfield and testified credibly and unequivocally that PCG did not give Whitfield any instructions regarding a target value or desired outcome. Alcazar indicated that this acknowledgment was significant and that MSH might be willing to reconsider the penalty claim as part of a broader package.
The parties broke for lunch at approximately 12:30 p.m.
D. Caucus Negotiations — Afternoon Phase
1. The Bad-Faith Claim Withdrawal
After lunch, mediation resumed at approximately 1:45 p.m. In the first post-lunch caucus, mediator Alcazar communicated a significant development: MSH was prepared to withdraw the bad-faith penalty claim under OA Section 12.7 entirely, provided that the negotiated redemption price reflected a meaningful premium above a simple midpoint analysis derived from the Linden Park preliminary indication of value.
This was a critical and pivotal concession. The $16,975,000 bad-faith penalty component had been the single largest contested item beyond the base valuation dispute, and its presence in MSH's demand had been the principal obstacle to resolution at both the first mediation session and the morning rounds of the second session. The withdrawal of this claim fundamentally changed the character of the negotiation from a multi-issue dispute involving both valuation and penalty claims to a single-issue negotiation focused exclusively on the appropriate redemption price.
Alcazar elaborated that Nate Cordero had been personally persuaded during the discovery process — particularly by the deposition testimony and the investment-committee materials — that PCG did not possess the subjective intent required to trigger the bad-faith penalty under OA Section 12.7. However, MSH maintained the position that PCG's retention of an appraiser who applied an arguably aggressive capitalization rate of 9.5%, which was at the high end of the reasonable range for a luxury Gulf Coast resort property, warranted a pricing adjustment that went beyond a simple midpoint calculation. In essence, MSH was willing to concede the legal claim for a penalty in exchange for an economic accommodation in the form of a higher base redemption price.
From PCG's perspective, this was a highly favorable development. As we discussed in our September 2023 Bad-Faith Penalty Risk Assessment Memorandum, the bad-faith penalty claim, while facing significant evidentiary obstacles, could not be entirely dismissed as frivolous. OA Section 12.7 provides for a penalty of up to 25% of the determined FMV of the redeemed interest, and the arbitrator's interpretation of the "bad faith" standard — including whether an arguably aggressive but not fraudulent appraisal methodology could constitute bad faith — was uncertain. The voluntary withdrawal of this claim eliminated a meaningful tail risk for PCG and allowed the negotiation to proceed on a more rational and predictable basis.
2. Negotiations Toward the $52–$54 Million Range
With the bad-faith claim removed from the equation, the parties focused their negotiation purely on the proper redemption price, with the central question being the appropriate premium, if any, over the Linden Park midpoint-derived figure of $46.9 million.
In the next round, MSH dropped its demand to $55.0 million. PCG moved its offer to $51.0 million. The gap between the parties had narrowed to $4.0 million, a dramatic improvement from the $28.7 million that had separated the parties at the outset of the dispute.
The key arguments advanced by each side during this phase were as follows:
MSH's principal argument: MSH contended that the Linden Park preliminary indication of value ($130.0–$138.0 million) was just that — a preliminary indication — and had never been finalized into a formal appraisal report. MSH argued that a finalized Linden Park appraisal would likely have come in closer to the top of the range ($138.0 million) or above, given the trends reflected in the DCF analysis component of the preliminary indication and the comparable sales data that had been identified but not yet fully analyzed. MSH further argued that the $8.0 million width of the Linden Park range ($130.0–$138.0 million) itself reflected significant uncertainty, and that the parties should not simply split the range at the midpoint but should instead give greater weight to the upper end, where MSH contended the data pointed. MSH also noted the inherent value of certainty and finality to PCG, arguing that a modestly higher price was justified by the benefits PCG would receive from a clean, prompt, and final resolution.
PCG's principal argument: PCG demonstrated that even at the very top of the Linden Park range ($138.0 million), MSH's 35% equity share plus preferred return would be:
• Gross asset value: $138,000,000
• Less GANB debt: ($48,600,000)
• Net equity: $89,400,000
• MSH's 35% share: $31,290,000
• Plus accrued preferred return: $17,010,000
• Total: $48,300,000
This figure of $48.3 million was still below PCG's current offer of $51.0 million, demonstrating that PCG was already offering a premium above even the most favorable interpretation of the neutral appraisal data for MSH. PCG argued that its willingness to pay above the top-of-range figure reflected the value of settlement and should not be further inflated by speculative arguments about what a finalized Linden Park report might have concluded.
PCG further argued that the total cost of the dispute — including defense costs of approximately $1.7 million already incurred, plus the additional expert and arbitration costs that would be required for a full merits hearing (estimated at $550,000–$800,000) — and the time-value-of-money cost associated with the delayed closing of the redemption, both supported a prompt resolution at a price that included only a modest premium. PCG noted that a merits hearing before Arbitrator Chen was not expected to be scheduled until Q3 or Q4 of 2024, and that a post-hearing award and any potential challenge could extend the matter well into 2025, during which time PGV would continue to bear the operational and governance burdens of the JV structure.
3. Closing the Gap
After several additional rounds of caucus discussion, mediator Alcazar elected to make a formal mediator's proposal in the late afternoon. At approximately 5:30 p.m., Alcazar presented the following proposal to each party separately:
Mediator's Proposal: Redemption Price of $52,850,000
Alcazar communicated the rationale underlying the proposal to each side. As relayed to the PCG team, the proposed figure of $52.85 million was derived from the Linden Park midpoint equity value of $46.9 million, plus a negotiated premium of $5.95 million intended to account for the following factors:
(a) the legitimate uncertainty inherent in the Linden Park preliminary indication of value, which was never finalized and which spanned an $8.0 million range;
(b) the residual litigation risk associated with the bad-faith penalty claim under OA Section 12.7, even though MSH was agreeing to withdraw it — Alcazar noted that MSH's willingness to withdraw the claim had a quantifiable value and should be reflected in the pricing;
(c) the avoided cost of a full arbitration hearing, including additional legal fees, expert costs, JAMS arbitrator fees, and the opportunity cost of senior management time devoted to hearing preparation and testimony; and
(d) the time value and commercial benefit to PCG of an accelerated closing that would provide PCG with 100% ownership and control of PGV significantly sooner than a litigated outcome.
MSH accepted the mediator's proposal after a brief internal caucus of approximately 20 minutes.
PCG's team engaged in a thorough discussion of the proposal during its own caucus. The key considerations were as follows:
• Settlement Authority: The team confirmed that the proposed Redemption Price of $52.85 million fell within the previously authorized settlement range of $48.0–$54.0 million, as set forth in the Settlement Authority Memorandum prepared by Calderwood & Harkness LLP and approved by Dominic Pellegrino in January 2024. The proposed price was $1.15 million below the top of the authorized range.
• Dominic Pellegrino's Assessment: Mr. Pellegrino expressed satisfaction with the outcome, noting that MSH's original demand of $70.0 million had been reduced by $17.15 million and that the bad-faith penalty claim — which he viewed as both legally unfounded and personally offensive — had been eliminated. He noted the commercial importance of obtaining 100% ownership and control of PGV and the Palmetto Grand, which would enable PCG to pursue strategic alternatives without the constraints of JV governance.
• Funding Confirmation: Marcus Thiel confirmed that PCG could fund the $52.85 million redemption through a combination of $22.0 million in existing PCG liquidity (available from PCG's corporate treasury and unencumbered investment accounts) and a $30.85 million incremental draw on PGV's revolving credit facility with Gulf Atlantic National Bank (Loan No. CRE-2017-06284), subject to the lender's consent. This draw would increase PGV's total outstanding debt from $48.6 million to $79.45 million, which Mr. Thiel indicated would be within the facility's available capacity based on his preliminary review. Mr. Thiel noted that the increased debt level would necessitate a prompt refinancing of PGV's total indebtedness post-closing to reduce the interest burden and potentially extend the maturity date.
PCG accepted the mediator's proposal.
At approximately 7:00 p.m., mediator Alcazar confirmed to both parties that the mediator's proposal had been accepted on both sides. The parties' counsel then spent approximately 15 minutes in a brief joint session memorializing the framework terms on a handwritten term sheet, which was initialed by the parties' representatives. The session concluded at approximately 7:15 p.m.
E. Framework Terms Agreed
The following framework terms were agreed upon by the parties at the conclusion of the March 25, 2024 mediation session. These terms are to be reflected in a binding term sheet (target execution: on or before April 8, 2024) and subsequently memorialized in definitive documentation.
Redemption Price: $52,850,000.
Payment: Lump sum wire transfer of immediately available funds at closing.
Closing Timeline: Closing to occur within approximately 90 calendar days of execution of the binding term sheet, subject to execution of definitive agreements, receipt of lender consent from Gulf Atlantic National Bank, and satisfaction of standard closing conditions.
Mutual Release: Full and final mutual release of all claims, counterclaims, causes of action, demands, and liabilities of any kind by and among PCG, MSH, Dominic R. Pellegrino (individually), Nathaniel Cordero (individually), and Elena Cordero (individually) arising out of, relating to, or in any way connected with the Operating Agreement, the call-option exercise, the operation and management of PGV, and the JAMS arbitration (Ref. No. 1440032871).
Bad-Faith Claim: MSH irrevocably withdraws its claim for a bad-faith penalty under OA Section 12.7 as part of the mutual release. The withdrawal is to be reflected in the definitive settlement documentation and the joint stipulation of dismissal.
Attorneys' Fees and Costs: Each party shall bear its own attorneys' fees, expert fees, arbitration fees, mediation fees, and all other costs and expenses incurred in connection with the dispute, the JAMS arbitration, and the mediation. No party shall have any claim against any other party for reimbursement or indemnification of such fees and costs (mutual walk-away).
Dismissal of Arbitration: Upon closing, the parties shall file a Joint Stipulation of Dismissal with Prejudice of JAMS Ref. No. 1440032871, with each party bearing its own costs.
Post-Closing Governance: Following closing, PCG shall execute an Amended and Restated Operating Agreement of PGV reflecting PCG as the sole (100%) member and manager of PGV. MSH shall execute an Assignment of Membership Interest transferring its entire 35% membership interest to PCG.
Confidentiality: The terms of the settlement shall be confidential and shall not be disclosed by either party or their respective affiliates, representatives, or counsel to any third party, except as required by applicable law, regulation, or legal process, or as necessary for tax reporting, financial reporting, audit, and similar purposes. The parties shall agree on mutually acceptable confidentiality provisions in the definitive documentation.
Binding Term Sheet: The parties agreed to execute a binding term sheet reflecting the foregoing framework terms within two weeks of the mediation session, with a target execution date of on or before April 8, 2024. The binding term sheet will be followed by the preparation and negotiation of a definitive Redemption Agreement and ancillary closing documents.
IV. ECONOMIC ANALYSIS OF THE SETTLEMENT
A. Comparison to PCG's Original Offer and MSH's Demand
The following table summarizes the relationship between the settlement price, PCG's original tender, and MSH's original demand:
As the table illustrates, PCG achieved a result that is approximately 60% closer to its original position than to MSH's demand. PCG conceded $11.55 million of the $28.7 million gap, while MSH conceded $17.15 million. This distribution reflects a favorable outcome for PCG, particularly in light of the fact that the Linden Park preliminary indication of value tended to suggest that the Whitfield appraisal was below the likely FMV and that some upward adjustment from PCG's original tender was warranted.
B. Derivation of the Midpoint Analysis and Premium
The following analysis derives the midpoint figure and the negotiated premium:
• Linden Park preliminary range (100% JV assets): $130,000,000 – $138,000,000
• Midpoint of range: ($130,000,000 + $138,000,000) / 2 = $134,000,000
• Less outstanding GANB indebtedness: ($48,600,000)
• JV net equity at midpoint: $85,400,000
• MSH's 35% share of net equity: $85,400,000 × 0.35 = $29,890,000
• Plus MSH's accrued preferred return (stipulated amount): $17,010,000
• Midpoint-derived subtotal: $29,890,000 + $17,010,000 = $46,900,000
• Settlement Redemption Price: $52,850,000
• Negotiated premium over midpoint: $52,850,000 – $46,900,000 = $5,950,000
• Premium as percentage of midpoint subtotal: $5,950,000 / $46,900,000 = approximately 12.7%
The $5.95 million premium over the midpoint-derived figure represents the cost to PCG of achieving a consensual resolution that avoids the risks and costs of a full arbitration hearing. As discussed in Section IV.C below, this premium is more than offset by the economic value of the risks and costs avoided.
C. Comparison to Avoided Costs and Risks
The $5.95 million premium should be evaluated against the following avoided costs and risks:
Avoided Bad-Faith Penalty Exposure. OA Section 12.7 provides for a penalty of up to 25% of the determined FMV of the redeemed interest in cases where the exercising member is found to have acted in bad faith. At the Linden Park midpoint, the maximum potential penalty exposure would have been approximately:
($29,890,000 + $17,010,000) × 25% = $46,900,000 × 25% = approximately $11,725,000
While our September 2023 Bad-Faith Penalty Risk Assessment Memorandum assessed the probability of an adverse finding on the bad-faith claim as relatively low (estimated at 15%–25%, reflecting the evidentiary challenges MSH would face and the credible deposition testimony of Dominic Pellegrino), even at a 15% probability, the expected value of this exposure was approximately $1.76 million. At a 25% probability, the expected value was approximately $2.93 million. The complete elimination of this exposure through MSH's voluntary withdrawal of the claim is a significant benefit of the settlement.
Moreover, the bad-faith penalty exposure carried a binary and potentially catastrophic risk profile: if the arbitrator had found bad faith, the penalty could have been as high as $11.73 million on top of the base redemption price, resulting in a total cost to PCG that would have far exceeded the settlement amount. The elimination of this tail risk is valuable beyond its expected-value calculation.
Avoided Additional Litigation Costs. Had the arbitration proceeded to a full merits hearing before Arbitrator Chen, we estimated the following additional costs:
PCG's total defense costs incurred to date in connection with the dispute, the arbitration, and the mediation are as follows:
Insurance Offset. Atlantic Omnivrel Insurance Company, under Policy No. AFML-2022-08745 ($10,000,000 per occurrence / $10,000,000 aggregate, managers' professional liability), has reimbursed PCG $625,000 toward defense costs to date under a reservation of rights. Atlantic Fidelity's continued willingness to fund defense costs was not assured; the insurer had raised questions regarding the applicability of certain policy exclusions and the reasonableness of ongoing defense expenditures. A settlement that concludes the matter promptly reduces the risk of a coverage dispute with Atlantic Fidelity and preserves the relationship for future claims.
Time Value and Opportunity Cost. A merits hearing before Arbitrator Chen was not expected to be scheduled until Q3 or Q4 of 2024, at the earliest. Post-hearing briefing, deliberation, and issuance of an award could have extended the matter into early 2025. In the event of an unfavorable award, PCG would have had limited options for judicial challenge (JAMS awards are subject to the narrow grounds for vacatur under the Federal Arbitration Act, 9 U.S.C. § 10), but any challenge would have added additional months or years of uncertainty. In the interim, PGV's operations and strategic flexibility would have remained constrained by the JV governance structure and the overhang of the pending dispute.
Conversely, a prompt closing of the redemption allows PCG to immediately assume 100% ownership and control of PGV and the Palmetto Grand, enabling PCG to pursue strategic alternatives — including potential disposition, repositioning, brand conversion, or refinancing — without the need for MSH's consent under the Operating Agreement's governance provisions (including MSH's consent rights on dispositions, capital calls in excess of $2.0 million, and refinancings).
Net Assessment. When the avoided costs and risks are considered in aggregate — the expected value of the bad-faith penalty exposure ($1.76–$2.93 million), the avoided additional litigation costs ($625,000–$925,000), the insurance and time-value considerations, and the strategic benefits of accelerated full ownership — the $5.95 million negotiated premium represents a reasonable and economically justified cost of resolution.
D. Funding Mechanics
The $52,850,000 Redemption Price will be funded through the following sources:
• PCG existing liquidity: $22,000,000, sourced from PCG's corporate treasury and unencumbered investment accounts.
• Incremental draw on PGV revolving credit facility: $30,850,000, drawn on PGV's existing revolving credit facility with Gulf Atlantic National Bank (Loan No. CRE-2017-06284, SOFR + 2.25% per annum, maturing August 1, 2027).
Following the incremental draw, PGV's total outstanding indebtedness to GANB will be:
• Existing outstanding balance: $48,600,000
• Incremental draw: $30,850,000
• Total post-draw outstanding debt: $79,450,000
Marcus Thiel has confirmed the availability of sufficient capacity on the revolving credit facility to accommodate the incremental draw, based on his preliminary review of the facility's terms and covenants. However, the incremental draw will require the prior written consent of GANB, as the interest transfer and the resulting change in PGV's ownership structure may trigger consent requirements under the loan documents. Christine Delacroix, SVP, Commercial Real Estate, at GANB, will need to be contacted promptly by PCG and Calderwood & Harkness to initiate the consent process.
It is PCG's intention to refinance PGV's total indebtedness ($79.45 million) following closing to reduce the interest burden, optimize the capital structure, and potentially extend the maturity beyond the current August 1, 2027 date. The refinancing process can proceed more efficiently and on more favorable terms once PCG has achieved 100% ownership and the dispute overhang has been removed.
V. ASSESSMENT OF KEY NEGOTIATION DYNAMICS
A. Impact of Linden Park Preliminary Indication
The Linden Park preliminary indication of value, delivered on July 14, 2023, was the single most significant factor influencing both parties' willingness to settle. The Linden Park range of $130.0–$138.0 million served as an independent, neutral benchmark that effectively bracketed the negotiation.
For PCG, the Linden Park range validated the concern that the Whitfield appraisal at $118.0 million was below the likely FMV — Linden Park's low end of $130.0 million exceeded the Whitfield figure by $12.0 million, suggesting that the Whitfield cap rate of 9.5% was somewhat aggressive, even if not unreasonable. This reality required PCG to acknowledge that some upward adjustment from its original tender would be necessary to achieve a resolution.
For MSH, however, the Linden Park range was equally impactful in the opposite direction. The Linden Park high end of $138.0 million fell $13.5 million below the Beacon appraisal's $151.5 million conclusion, demonstrating that the Beacon methodology — with its exclusive reliance on the income approach, its below-market 8.5% discount rate, and its inclusion of the full $8.2 million deferred-maintenance adjustment — was materially above the range that the neutral appraiser found supported by the data.
The net effect was to compress the zone of agreement significantly and to force both parties toward the center. The Linden Park range effectively established the reasonable bounds within which the FMV of 100% of PGV's assets could be expected to fall, and the negotiation accordingly focused on where within (or modestly outside) that range the parties would agree.
The fact that the Linden Park report was never finalized introduced an additional element of uncertainty that, paradoxically, may have facilitated settlement. Because neither party could point to a definitive neutral valuation, each side faced the risk that a finalized report could have moved in either direction — toward the bottom of the range (favoring PCG) or the top (favoring MSH). This bilateral uncertainty created an incentive for both parties to resolve the matter on negotiated terms rather than incur the risk and expense of a finalized report and full hearing.
B. Discovery Record and Deposition Testimony
The discovery phase produced several significant evidentiary developments that influenced the parties' settlement calculus.
Dominic Pellegrino's Deposition (October 10, 2023). Mr. Pellegrino's deposition testimony was credible and effective on the critical issue of good faith. He described in detail PCG's standard vendor-selection process for the retention of Whitfield Realty Advisors, including the solicitation of proposals from three qualified appraisal firms, the evaluation of qualifications and fees, and the selection of Whitfield based on industry expertise and availability. Importantly, Mr. Pellegrino testified clearly and without equivocation that PCG did not provide Whitfield with any instructions, guidance, or target regarding a desired valuation outcome, and that PCG did not exert any influence over Whitfield's methodology, assumptions, or conclusions. This testimony directly undermined MSH's bad-faith narrative and was evidently persuasive to the MSH team, as mediator Alcazar reported during the afternoon caucus negotiations.
Dr. Priya Ramanathan's Deposition (September 18, 2023). The deposition of MSH's appraiser revealed several weaknesses in the Beacon Valuation Group methodology that would have been exploitable at a merits hearing. In particular:
• Dr. Ramanathan acknowledged under questioning that Beacon's exclusive reliance on the income capitalization approach, without any weight given to the sales comparison approach, was atypical for hospitality property appraisals in markets with sufficient comparable transaction data. When presented with several comparable luxury resort sales in the Gulf Coast market, Dr. Ramanathan conceded that these transactions were "relevant" but maintained that the income approach was more reliable for a property of the Palmetto Grand's unique characteristics.
• Dr. Ramanathan's use of an 8.5% discount rate was questioned in light of published investor survey data and market comparables suggesting that 9.0% to 10.0% was a more typical range for luxury resort properties in the relevant submarket. Dr. Ramanathan defended the lower rate by reference to the Palmetto Grand's strong historical cash flow and brand affiliation but acknowledged that the selection of the discount rate was "judgment-dependent."
• The $8.2 million deferred-maintenance adjustment included in the Beacon appraisal was challenged on the ground that it was not fully supported by independent engineering reports. Dr. Ramanathan acknowledged relying in part on estimates provided by MSH's property management team rather than independent third-party assessments.
These deposition weaknesses would have been the subject of vigorous cross-examination at a merits hearing and may have led the arbitrator to discount the Beacon appraisal significantly.
Motion to Compel and Produced Materials (November 30, 2023). The partially granted motion to compel resulted in the production of certain PCG investment-committee memoranda relating to the decision to exercise the call option and the evaluation of the Palmetto Grand's value. On review by both parties' counsel, the produced materials did not contain evidence of bad-faith intent. To the contrary, the investment-committee materials reflected a straightforward analysis of the strategic merits of consolidating PCG's ownership of PGV, the market conditions affecting the hospitality sector, and the financial implications of the redemption — all consistent with a good-faith exercise of the contractual call option. This was a significant development that further weakened MSH's Section 12.7 claim and contributed to MSH's willingness to withdraw it.
C. MSH's Motivation to Settle
Several factors motivated MSH to accept a settlement price significantly below its original demand:
Desire for Liquidity. Nate Cordero's desire for a clean and prompt exit from the PGV joint venture became apparent during his October 10, 2023 deposition, in which he acknowledged that his investment objectives had evolved since the formation of the JV in 2017, and through communications relayed by mediator Alcazar. A negotiated settlement with a defined closing timeline provided MSH with certainty of outcome and timing that a continued arbitration could not guarantee.
Recognition of Weakness in Bad-Faith Claim. As discussed above, MSH's internal assessment of the bad-faith penalty claim evolved significantly during the discovery phase. The deposition testimony, the investment-committee materials, and the Linden Park preliminary indication of value collectively undermined the factual basis for the claim. MSH's willingness to withdraw the claim in exchange for a pricing premium reflected a pragmatic recognition that the claim's litigation value was diminishing and that its best use was as a bargaining chip to extract a higher base price.