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FILED: NEW YORK COUNTY CLERK 06/05/2020 01:13 PM INDEX NO. 652343/2018
NYSCEF DOC. NO. 183 RECEIVED NYSCEF: 06/05/2020
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
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CRESCO LABS, NEW YORK, LLC, a New
York limited liability company, and CRESCO Index No.: 652343/2018
LABS LLC, Hon. Andrew Borrok
an Illinois limited liability company,
Mot. Seq. No. 009
Plaintiffs,
AFFIRMATION OF
-against- RACHEL IZOWER-
FADDE IN OPPOSITION
FIORELLO PHARMACEUTICALS, INC., a TO MOTION FOR
New York corporation, LEAVE TO AMEND
Defendants.
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RACHEL IZOWER-FADDE, an attorney admitted to practice law in the State
of New York hereby affirms the following is true under penalties of perjury, as
follows:
1. I am a member of the firm of Izower Feldman LLP, attorneys for
defendant Fiorello Pharmaceuticals, Inc., (“Fiorello”). I submit this affirmation in
opposition to Plaintiffs’ motion for leave to amend the amended complaint pursuant
to CPLR 3025(b) (the “Motion”). I am fully familiar with the matters set forth
herein.
2. The primary purpose of this affirmation is to provide the relevant
procedural background and to attach documents relevant to the Court’s
determination of the Motion.
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THE LOI
3. This action arises from a February 14, 2018 Letter of Intent between
Plaintiffs Cresco Labs, LLC and Cresco Labs NY, LLC (together “Plaintiffs” or
“Cresco”) and Fiorello (the “LOI”). (Exhibit 1, is a true and correct copy of the LOI
at issue in this action with the dollar amounts redacted.) The LOI is dated February
14, 2018 in its first paragraph, in the footnote on each page and in the signature block
on its last page.
4. The “Timing” Provision which includes the 30 business day
exclusivity period is on page 4 of the LOI, it also provides that the parties complete
due diligence and draft and execute definitive agreement(s), “at the earliest possible
date but not later than thirty (30) business days from the date of the execution of the
LOI (unless otherwise extended by the mutual terms of the Parties).” The 30th
business day after February 14, 2018, was March 29, 2018. March 29, 2018 passed
without completion of due diligence, without reaching a definitive agreement and
with a host of open issues remaining.
5. The “Confidentiality” Provision prohibits disclosure or use of
confidential information “which would give it or any competitor or other interested
party an advantage over its counterpart in these discussions” (¶3) and requires that
the “execution of this LOI and the contemplated completion of this transaction” be
kept strictly confidential (¶5).
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DOH COMMUNICATIONS
6. After expiration of the LOI, Fiorello entered into a merger agreement
with GTI on June 29, 2018. (Proposed SAC, ¶54). Fiorello submitted the merger
agreement to the New York State Department of Health (“DOH”) for approval, but
the DOH denied the proposed change in ownership attendant to the merger
agreement. In letters denying the requested change in ownership of Fiorello, the
DOH explained that:
The proposed ownership change would result in GTI a proposed new
investor, owning one hundred percent of Fiorello.
… The Department has reviewed your request and hereby denies the
proposed change in ownership, as it would constitute a direct transfer
of the registration.
In addition, Fiorello has not demonstrated progress towards beginning
operations. …. Please submit an updated timeline demonstrating how
Fiorello will begin operations, to the satisfaction of the Department by
the end of the calendar year.
August 23, 2018, DOH letter to Fiorello.
[T]he registration issued to Fiorello is non-transferrable. The
Department has reviewed your amended request and hereby denies the
proposed change in ownership, as it would still constitute a direct
transfer of the registration. Among other reasons, Fiorello has no
satisfactory tangible operational assets to sell to Green Thumb
Industries (GTI), except its registration, which is prohibited pursuant to
10 NYCRR § 1004.8
September 25, 2018, DOH letter to Fiorello.
7. In August, 2019, the DOH finally approved a merger between Fiorello
and GTI only after they amended the merger agreement and after Fiorello had
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become operational. (Attached together as Exhibit 2 are true and correct copies of
the DOH’s letters of August 23, 2018 and September 25, 2018 addressing their
rejection of the proposed Fiorello/GTI merger and its August 6, 2019 letter
approving the amended merger after Fiorello became operational. The August 2019
letter has been redacted to reflect only the portion related to the merger approval.)
8. The DOH similarly initially rejected Cresco’s proposed acquisition of
Valley Agriceuticals, LLC. On page 2 of an August 6, 2019 letter the DOH sent to
Valley regarding the proposed acquisition by Cresco, the DOH referenced “Valley’s
requested change in ownership which was previously denied on November 14,
2018.” (Exhibit 3 is a true and correct copy of that letter as produced by Cresco in
discovery in this Action.)
9. After the merger, both Susan Yoss and Eric Sirota ceased their roles as
Fiorello’s co-CEOs, both remain on Fiorello’s board of directors, which is an
uncompensated position. (Exhibit 4 is a true and correct copy of the disclosure of
this information provided to Cresco during discovery in this Action.)
PROCEDURAL HISTORY
10. Cresco commenced this action on May 11, 2018 by summons with
notice (NYSCEF 1).
11. Cresco filed its first complaint on June 26, 2018 (NYSCEF 8). That
same day it sought to enjoin Fiorello from entering into or performing an agreement
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with any other party to sell its license, assets, or stock to any other entity. (NYSCEF
16).
12. The Court denied provisional relief, finding no likelihood of success on
the merits. (True and correct copies of the Court’s order and transcript of oral
argument denying Cresco’s request for preliminary injunction are attached together
hereto as Exhibit 5).
13. On August 10, 2018, Defendants moved to dismiss Cresco’s
Complaint. (NYSCEF 38). Cresco requested a lengthy extension of time to respond
to Defendants’ motion to dismiss to allow them to retain new counsel, which they
did. (NYSCEF 55, 56, 59)
14. Finally, on November 20, 2018, Cresco filed an amended complaint
rather than oppose Defendants’ motion to dismiss (NYSCEF 60). The Amended
Complaint, set forth claims for (1) breach of the LOI exclusivity provision; (2)
breach of contract for the sale of Fiorello’s stock; (3) tortious interference with
contract; and (4) unjust enrichment against Yoss and Sirota.
15. On May 24, 2019, the Court dismissed Cresco’s breach of contract
claim for the sale of Fiorello’s stock, limited the tortious interference claim to the
alleged separate breach of the exclusivity provision, and dismissed the claim against
Yoss and Sirota, for unjust enrichment (NYSCEF 119). The Court amended its
Decision and Order on October 15, 2019 to, inter alia, confirm that Yoss and Sirota
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were dismissed from the case (NYSCEF 142). (True and correct copies of the
Court’s May 24, 2019 decision and order and October 15, 2019 amended decision
and order are attached hereto as Exhibits 6 and 7, respectively). Notice of Entry of
the Court’s amended decision and order was filed and served on October 18, 2019
(NYSCEF 143). Cresco did not appeal nor seek reargument.
16. On June 6, 2019, Fiorello filed its answer to the amended complaint and
asserted counterclaims against Cresco (NYSCEF 125). Fiorello’s counterclaims and
affirmative defenses included assertions that Cresco breached the LOI’s
confidentiality provisions and failed to perform its obligations under the LOI.
17. Since June of 2019, after Yoss and Sirota were dismissed from this
Action, the parties have been actively engaged in discovery. Fiorello has produced
approximately 32,000 pages of documents, as well as more than 300 native files (the
number of pages of these documents would depend on formatting and printing).
Fiorello’s production has included phone records, calendars and text messages.
18. In addition to productions by the parties, Fiorello and Cresco, third
parties GTI and Liberty Health Sciences (“Liberty”) have also produced documents.
19. To date, 12 depositions have been taken including of Yoss, Dan Siegel
Fiorello’s third Board member, two of Fiorello preferred shareholders, three GTI
executives and three Cresco executives and their outside transactional counsel.
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THE PROPOSED AMENDMENT
20. Cresco now asks the Court to for leave to again amend its amended
complaint. The proposed SAC attempts to revive its previously dismissed unjust
enrichment claim against Sirota and Yoss. It also drops Cresco’s tortious
interference claim against John Does 1-10, which had survived in its amended
complaint. There is no objection to Cresco withdrawing that claim.
21. The new “factual” allegations included in the proposed amendment fall
into three broad categories: (1) details of communications between Fiorello and third
parties; (2) benefits to Sirota and Yoss from their sale of Fiorello stock or otherwise
related to Fiorello’s merger with GTI; and (3) Cresco’s costs from its purchase of
Valley Agriceuticals, an entity unrelated to either Fiorello or GTI.
22. First, as set forth in the accompanying memorandum of law, none of
these new allegations cure the fundamental problems with Cresco’s unjust
enrichment claim.
23. Second, Cresco has long had the information it relies upon to allege the
“benefits” to Yoss and Sirota as well as its own “costs.” The only reason for its
delay in pleading those allegations is that it has been dilatory.
24. Specifically, Cresco has long known what Sirota and Yoss’s obtained
in exchange for selling their shares to GTI. Cresco received the details of Sirota and
Yoss’s shareholdings in Fiorello, including the amount of common and preferred
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shares of all Fiorello stockholders, in the first quarter of 2018, because that
information was provided as part of the due diligence materials Fiorello shared with
Cresco via a “dropbox” folder. My firm coordinated the collection of the materials
shared through this dropbox folder and reproduced them to Cresco in June 2019.
Cresco also knew the financial terms of the Fiorello/GTI merger by September 9,
2019 when Fiorello’s amended and restated agreement and plan of merger with GTI
was produced to Cresco. Although there were some agreed upon redactions none of
the financial terms of the agreement were redacted, including the per-share
consideration. 1
25. In addition to alleging that Sirota and Yoss received cash and stock in
GTI in exchange for their shares in Fiorello, the proposed SAC includes a number
of other alleged “benefits” to Sirota and Yoss. These allegations are both irrelevant
and inaccurate, 2 but are not central to the underlying issues in the case and so we
have determined not to correct them here.
26. Similarly, Cresco had the terms of its own deal with Valley
1
A fully unredacted copy of Fiorello’s amended and restated merger agreement with GTI was
produced to Cresco on November 11, 2019.
2
For example, Sirota and Yoss did not receive any “consulting fees” from GTI. GTI did
compensate them for the accrual of their past salaries that had been consistently carried on
Fiorello’s books and would have been part of any transaction – including the proposed transaction
with Cresco. Similarly, that a family member was a salaried employee who maintained her
position after the GTI merger agreement has no bearing on the proposed unjust enrichment claim
and Cresco cites no caselaw to suggest itcould have relevance. The allegation regarding this
family member appears to have been included in the proposed SAC simply to cause consternation.
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Agriceuticals, LLC (and therefore its alleged “costs”) at the very latest by the time
the deal was approved by the DOH on August 6, 2019 (See Ex. 3), if not nearly a
year earlier when it executed its merger agreement to acquire the company in
October 2018 (proposed SAC ¶60).
27. Third, the new allegations are materially misleading. While Cresco’s
motion for leave to amend can and should be defeated on the law, some of the new
allegations in the proposed second amended complaint were sufficiently misleading
that they could not be left in the public record without providing some response.
A. Alleged communications between Fiorello and GTI.
28. The proposed SAC contains numerous allegations of contacts between
GTI and Sirota and Yoss during the LOI period. The timing of contacts between the
entities is available from email, phone logs and text messages and is not seriously in
dispute. Nothing in the LOI required that all contact between Fiorello and any third
party cease during the exclusivity period. The LOI does not purport to restrict
contacts initiated by third parties nor impose any duty on Fiorello to report such
contacts to Cresco. Rather, the LOI merely required Fiorello to abstain from
engaging in discussions regarding a possible acquisition of Fiorello by any entity
other than Cresco. (Ex. 1). The discovery confirms that while GTI’s CEO, Ben
Kovler, reached out to Fiorello during the exclusivity period about a possible
transaction with Fiorello, Fiorello was not responsive to GTI’s overtures until after
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the expiration of the LOI.
29. For example, during depositions conducted by Cresco’s counsel, GTI
witnesses expressed frustration that Yoss and Sirota were not responsive to GTI’s
unsolicited attempts to discuss a possible transaction between GTI and Fiorello
during the exclusivity period.
30. An excerpt from the deposition transcript of GTI’s CEO, Ben Kovler,
is illustrative:
Q. Do you see here, fourth text down, 3-22-18, looks like 2:38 p.m., he
says, ‘Hi Ben, we received the LOI, but we are not in a position to
discuss until at least March 30.’ What was your reaction to him sending
you that text message?
A. Frustrated. Unclear what was actually going on.
Q. And why were you frustrated?
A. Well, I sent him an email he didn't respond to. Then he responds
with no response. And then another day goes by, and I said, ‘Should we
expect a response?’ And it looks like five hours go by. This was the
modus operandi with Eric [Sirota] was talking to a wall without actually
getting any answers.
…
I think I spoke to him [Sirota] live, and he was unresponsive or would
answer a different question when asking about this.
Kovler Tr. 71:16-72:6; 74:10-12
31. Anthony Georgiadis, GTI’s CFO, also testified about Sirota and Yoss’s
lack of responsiveness to GTI’s overtures during the exclusivity period.
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Q. What was your reaction when you learned that Eric [Sirota] had
communicated that they received the LOI but are not in position to
discuss it until at least March 30th?
A. He actually responded.
Q. Eric actually responded?
A. Yes.
Q. Can you explain that?
A. I recall Ben was trying to get in touch with Eric and Susan, and they
would not respond…. So my immediate reaction was he actually
responded.
Georgiadis Tr. 125:13-126:1
32. Mr. Georgiadis’s testimony also reflects Sirota’s and Yoss’s hesitance
to jump into detailed negotiations with GTI when they met on April 1, 2018 after
expiration of the LOI’s exclusivity period.
33. For example, Georgiadis testified:
[I]t didn’t feel like even after Ben and Jen flew up there on Easter
Sunday that this was going to result in anything fruitful.
Georgiadis Tr. 140:8-11.
34. Yoss, Fiorello’s independent director, Daniel Siegel, and the manager
of its controlling preferred shareholder, Andrew Stone, all also testified that during
the exclusivity period Fiorello did not discuss any potential acquisition or merger
transaction with any entity other than Cresco.
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35. Yoss testified:
Once we signed the letter of intent, we did not, during the period of the
letter of intent, speak to any other party. …We didn’t discuss another
transaction. Our transaction that we had agreed to was to try to get the
Cresco transaction closed. … we didn’t negotiate. We didn’t discuss
another transaction as an alternative at all. We were focused on the
Cresco deal.
Yoss Tr. 30:13-31:17
36. Siegel testified:
Q. And what was said about exclusivity with Cresco in that discussion?
A. That we wanted to bring this to closure and that we shouldn't be
having any conversation with anyone else. … My understanding was
we weren't to discuss this with other shareholders, family members,
really with anyone else. The only people we were talking to were
Cresco.
…
Q. And when you say, “discuss this,” are you referring to the Cresco
LOI?
A. My understanding was I wasn't supposed to, you know, talk to
anyone else about potential sale of the company. This was all being
done quietly.
Siegel Tr. 86:2-87:3
My understanding was that we were not supposed to negotiate. We
were just in these you know -- you know, basically, I'm blanking on the
word for this, you know, just one-on-one Cresco and Fiorello and no
one else could come into the equation.
Siegel Tr. 88:5-10
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I remember at one point Eric noted he had unsolicited offer that he had
received and we all – Eric, Susan and I agreed to not respond until, you
know, the end of the period, if we hadn’t consummated the agreement
[with Cresco].
Siegel Tr. 126:3-7
Q. Did you have any say in whether Fiorello responded to it [the
unsolicited offer]?
A. there was really nothing to discuss. We were in an exclusive period.
We were law-abiding citizens, so it was just a matter we all knew we
weren’t’ talking to anyone else so… I mean, there was an obvious
decision because you’re in exclusive agreement not to communicate,
not to negotiate with others.”
Siegel Tr. 126:23-127:11
[S]ome approach had come in [during the Cresco exclusivity period]
and we were going to do nothing while we were in the exclusive period
[with Cresco].
Siegel Tr. 129:22-24
37. Stone testified:
A. I asked her [Yoss] under the letter [Cresco LOI], which I had not
seen, is there a way she can negotiate with other companies or would
that be a violation of her arrangement with Cresco…. She said she is
exclusive to Cresco and cannot have engagement with other companies.
Q. And how many times did you have that conversation with her?
A. More than one. I asked her if she can consult with her lawyer and
see if there were ways of having conversations with other investors and
she said, no.
Stone Tr. 57:21-58:10.
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Q. …[D]id you have an understanding as to what Susan Yoss was going
to do about that in light of the exclusivity provision in the letter of intent
with Cresco?
A. Yes…. That she was going to attempt to get the deal done with
Cresco. And if it couldn't be done, then she was pleased to know that
there are other interested parties.
Stone Tr. 62:13-22.
Q. And did you ever have any conversations with Susan Yoss about
whether it would be to Fiorello's advantage if the expiration date came
and went without Fiorello having entered into a definitive agreement
with Cresco?
A. I broached the topic with her…. I said, if the deal passes the
expiration date and we can talk to other potential investors, is that
advantageous? And she said, my lawyers have advised me that's not
something that we will do. We will work on our best effort to close the
deal with Cresco and we'll cross that bridge if and when it comes to the
time.
Stone Tr. 76:19-77:11
38. True and correct excerpts from the depositions of Ben Kovler, Anthony
Georgiadis, Susan Yoss, Daniel Siegel, Andrew Stone, and Charles Bachtell taken
in this Action are attached as Exhibits 8 through 13, respectively.
B. Alleged communications between Fiorello and Liberty.
39. Cresco’s allegations and omissions regarding the communications
between Liberty and Sirota and Yoss are particularly troubling. The Proposed
Amendment precisely excises slivers of communications from their context to create
an entirely misleading impression. While Cresco disingenuously manipulates the
record to create the appearance of negotiations between Fiorello and Liberty during
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the LOI period, Cresco entirely omits the fact that it was actively negotiating its own
possible business combination with Liberty at the same time.
40. Cresco’s CEO, Charles Bachtell, has admitted that Cresco, was
negotiating with Liberty and disclosed confidential information during the
Exclusivity Period. Liberty then made unsolicited offers to Fiorello which Fiorello
never pursued.
41. The Proposed Amendment alleges that on the same day that the LOI
was executed, Fiorello “began discussing the sale of a majority equity stake in
Fiorello with companies other than Cresco.” To support this allegation, Cresco
points to a February 15, 2018 call between Fiorello’s Co-CEO’s and the CEO of
Liberty that took place within hours of Fiorello’s execution of the LOI. (Proposed
SAC ¶28.) What Cresco omits from this timeline is the fact that Liberty’s CEO
initiated contact with Fiorello after over a month of no communication between
Liberty and Fiorello and that between the time that Fiorello executed the LOI and
the time that Liberty reached out to Fiorello, Liberty’s CEO and CFO had a
conference call with Cresco’s CEO, Charles Bachtell.
42. This is the timeline that has been recreated through the documentary
evidence and that is fully supported by the discovery record.
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Feb. 15, 2018 Sirota countersigns the LOI on behalf of Fiorello.
4:00 PM ET Cresco’s CEO Charles Bachtell, CFO Ken Amann and Rene
Gulliver and George Scorsis of Liberty participate in a
conference call. (Exhibit 14 is a true and correct copy of a
calendar invite for the February 15, 2018 conference call among
three Cresco and two Liberty executives regarding “Cresco
Labs Valuation Analysis”). At the time, Cresco and Liberty
were exploring a possible business combination. Ex. 13,
Bachtell Tr. 254:3-7.
Days before the call right after Cresco executed the penultimate
version of the LOI with Fiorello, Bachtell, emailed Liberty to
tell them that “we’ve got a few good updates to share.” (Exhibit
15 is a true and correct copy of an email chain dated between
January 15 and February 13, 2018 among Cresco and Liberty
personnel.)
5:07 PM George Scorsis of Liberty sends an email to Sirota and Yoss
after over a month of no contact; Mr. Scorsis calls Sirota later
that day. (Exhibit 16 is a true and correct copy of an email chain
dated between January 18 and February 15, 2018 between
George Scorsis of Liberty and Sirota. The chain reflects a break
in the emails between January 20, 2018 and February 15, 2018
at 5:07 PM when Mr. Scorsis reinitiates communication asking:
“Do you have a moment to connect?”)
5:11 PM Concerned about the extreme coincidence in the timing between
the execution of the LOI – which was supposed to be
confidential – and the renewed contact from LHS, Sirota and
Yoss respond to Scorsis’s email and to Scorsis’ call later that
day to try to find out what triggered Liberty’s renewed attention
to Fiorello. (Id.)
43. Rather than suggest a breach of the exclusivity provision by Fiorello,
the evidence strongly suggests that it was Cresco’s discussion with Liberty at 4 PM
that lead to Liberty’s renewed interest in Fiorello.
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44. Similarly, the proposed amendment alleges that on March 2, 2018,
Liberty texted Sirota: “[w]e are sending you an unsolicited int hr[sic] next 24 hours.”
And further alleges that on March 3, 2018 Liberty did send a letter of intent to
purchase Fiorello for a higher purchase price and a higher upfront payment than in
the Cresco LOI. (Proposed SAC ¶31). What the proposed amendment omits,
however, is that on March 1, 2018, Cresco sent Liberty a version of its investment
deck (the “2-15-2018 Cresco Deck”), which provided Liberty with the exact amount
of the “upfront capital required to purchase the [New York medical marijuana
license]” and information from which the price (or approximate price) and timing of
the remaining payments under the LOI would be due for the proposed transaction
between Cresco and Fiorello’s shareholders. (Attached together as Exhibit 17 are
true and correct copies of that March 1, 2018 and excerpts from its attachment titled
“2-15-2018 Cresco Deck”; see Page 9 “Growth Objectives,” bullet 5, “Finalize
acquisition of existing license in New York to open cultivation and processing
operations and four dispensary locations (one of only four allowed in Manhattan)”;
page 57 “Investment Details New York”; first two sentences “Cresco Labs has
executed a binding LOI to acquire a hundred percent of a vertically integrated license
in New York, which includes cultivation, processing and up to four dispensary
locations.” “Our partner did not win one of the initial five licenses awarded by New
York state”; the following paragraph provides the amount of the initial capital
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required to “acquire the license” and the following page 58 provides additional
details on “capital expenditures” in the next two years that closely coincide with the
LOI amounts.)
45. Cresco’s CEO admitted at his deposition that the