Preview
FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018
NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022
Exhibit F
Answer To Amended Complaint And Counterclaims,
Dated June 6, 2019
Index No. 652343/2018 Motion Seq. No. 11
FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018
NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
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:
CRESCO LABS, NEW YORK, LLC, a New York Index No. 652343/2018
limited liability company, and CRESCO LABS LLC, an :
Illinois limited liability company,
: Hon. Andrew J. Borrok
Plaintiffs,
:
-against- ANSWER TO AMENDED
: COMPLAINT AND
FIORELLO PHARMACEUTICALS, INC., a New York COUNTERCLAIMS
corporation, ERIC SIROTA, an individual, SUSAN :
YOSS, an individual, and JOHN DOES 1-10,
:
Defendants.
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Defendant FIORELLO PHARMACEUTICALS, INC., (“Fiorello”), by its undersigned
attorneys, Izower Feldman, LLP, as and for its answer to the Amended Complaint of the plaintiffs
Cresco Labs LLC and Cresco Labs, New York, LLC (collectively “Cresco” or “Plaintiffs”), hereby
respond as follows:
1. Deny the allegations set forth in paragraph 1 of the Amended Complaint.
2. Deny the allegations set forth in paragraph 2 of the Amended Complaint except admit that
Fiorello and Cresco executed an Equity Purchase Agreement Letter of Intent on February 14, 2018,
(“LOI”) and respectfully refer the Court to said LOI for a complete statement of its terms.
3. Deny the allegations set forth in paragraph 3 of the Amended Complaint.
4. Deny the allegations set forth in the first paragraph 4 (the Amended Complaint contains 2
paragraphs numbered as “4”) of the Amended Complaint.
4. Deny the allegations set forth in the second paragraph 4 (the Amended Complaint contains
2 paragraphs numbered as “4”) of the Amended Complaint.
5. Deny having knowledge or information sufficient to form a belief as to the truth of the
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allegations set forth in paragraph 5 of the Amended Complaint.
6. Deny having knowledge or information sufficient to form a belief as to the truth of the
allegations set forth in paragraph 6 of the Amended Complaint.
7. Admit the allegations set forth in paragraph 7 of the Amended Complaint and that at the
time of the LOI Fiorello was a pre-operational development-stage business, except to deny the
characterization of Fiorello as a fledgling operation.
8. Deny the allegations set forth in paragraph 8 of the Amended Complaint except admit that
Sirota is a co-CEO of Fiorello.
9. Admit the allegations set forth in paragraph 9 of the Amended Complaint.
10. Deny the allegations in paragraph 10 of the Amended Complaint to the extent that they
relate to Fiorello and deny having knowledge or information sufficient to form a belief as to the
truth of the remaining allegations set forth in paragraph 10 of the Amended Complaint.
11. Admit the allegations set forth in paragraph 11 of the Amended Complaint.
12. Admit the allegations set forth in paragraph 12 of the Amended Complaint.
13. Deny having knowledge or information sufficient to form a belief as to the truth of the
allegations set forth in paragraph 13 of the Amended Complaint.
14. Deny the allegations set forth in paragraph 14 of the Amended Complaint except admit that
Fiorello is a “Registered Organization” licensed by the New York State Department of Health
(“DOH”) and that it only has a presence in the State of New York.
15. Deny the allegations set forth in paragraph 15 of the Amended Complaint.
16. Deny the allegations set forth in paragraph 16 of the Amended Complaint.
17. Deny the allegations set forth in paragraph 17 of the Amended Complaint except admit that
Fiorello and Cresco executed the LOI a copy of which is attached to the Amended Complaint as
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Exhibit 1.
18. Deny the allegations set forth in paragraph 18 of the Amended Complaint and respectfully
refer the Court to the LOI for a complete statement of its terms.
19. Deny the allegations set forth in paragraph 19 of the Amended Complaint and respectfully
refer the Court to the LOI for a complete statement of its terms.
20. Deny the allegations set forth in paragraph 20 of the Amended Complaint and respectfully
refer the Court to the LOI for a complete statement of its terms.
21. Deny the allegations set forth in paragraph 21 of the Amended Complaint and respectfully
refer the Court to the LOI for a complete statement of its terms.
22. Deny the allegations set forth in paragraph 22 of the Amended Complaint and respectfully
refer the Court to the LOI for a complete statement of its terms.
23. Deny the allegations set forth in paragraph 23 of the Amended Complaint and respectfully
refer the Court to the LOI for a complete statement of its terms.
24. Deny the allegations set forth in paragraph 24 of the Amended Complaint and respectfully
refer the Court to the LOI for a complete statement of its terms.
25. Deny the allegations set forth in paragraph 25 of the Amended Complaint.
26. Deny the allegations set forth in paragraph 26 of the Amended Complaint.
27. Deny the allegations set forth in paragraph 27 of the Amended Complaint.
28. Deny the allegations set forth in paragraph 28 of the Amended Complaint.
29. Deny the allegations set forth in paragraph 29 of the Amended Complaint except admit that
the LOI expired on March 29, 2018.
30. Deny the allegations set forth in paragraph 30 of the Amended Complaint except admit that
Fiorello and its Board of Directors were unwilling to extend the LOI but would consider a different
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letter of intent with Cresco and so advised Cresco upon the expiration of the LOI.
31. Deny the allegations set forth in paragraph 31 of the Amended Complaint except admit that
Cresco breached its confidentiality obligations to Fiorello under the LOI.
32. Deny the allegations contained in paragraph 32 of the Amended Complaint except admit
that corporate counsel sent correspondence to Cresco’s counsel and respectfully refer the Court to
such correspondence for a complete statement of its contents.
33. Deny the allegations contained in paragraph 33 of the Amended Complaint except admit
that after the expiration of the LOI Fiorello had communications with other entities who expressed
an interest in a business combination with Fiorello.
34. Deny the allegations set forth in paragraph 34 of the Amended Complaint except admit that
the quoted excerpt is part of the hearing transcript and that Exhibit 2 to the Amended Complaint
contains excerpted portions of the hearing transcript and respectfully refer the Court to the entire
transcript for a complete understanding of what was said and its context.
35. Deny the allegations set forth in paragraph 35 of the Amended Complaint except admit
Cresco and Fiorello had continued negotiations after the expiration of the LOI on a without
prejudice for settlement purposes only basis which included the opportunity for Cresco to submit
its Best and Final bid by June 22, 2018 and respectfully refer the Court to such invitation for a
complete statement of its terms.
36. Deny the allegations in the first sentence of paragraph 36 of the Amended Complaint
except to admit that Fiorello entered into a merger agreement with a third party. Admit the
remaining allegations in paragraph 36 of the Amended Complaint and respectfully refer the court
to the referenced documents for a complete statement of their terms.
37. Deny having knowledge or information sufficient to form a belief as to the truth of the
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allegations set forth in paragraph 37 of the Amended Complaint except admit that Fiorello had
negotiations with entities other than Cresco in May 2018.
38. Deny the allegations set forth in paragraph 38 of the Amended Complaint.
39. Deny the allegations set forth in paragraph 39 of the Amended Complaint.
40. Deny having knowledge or information sufficient to form a belief as to the truth of the
allegations set forth in paragraph 40 of the Amended Complaint.
41. Deny having knowledge or information sufficient to form a belief as to the truth of the
allegations set forth in paragraph 41 of the Amended Complaint.
42. Answering Defendants respond to paragraph 42 of the Amended Complaint by repeating
and realleging each of their answers to each of the allegations there referred to as if fully set forth
hereinbelow.
43. Deny the allegations set forth in paragraph 43 of the Amended Complaint except admit that
Fiorello and Cresco entered into the LOI on February 14, 2018, and respectfully refer the Court to
said LOI for a complete statement of its terms.
44. Deny the allegations set forth in paragraph 44 of the Amended Complaint.
45. Deny the allegations set forth in paragraph 45 of the Amended Complaint.
46. Deny the allegations set forth in paragraph 46 of the Amended Complaint.
47. Deny the allegations set forth in paragraph 47 of the Amended Complaint.
48-57. Plaintiffs’ Second Cause of Action for “breach of contract for the sale of Fiorello’s
Stock” as alleged in paragraphs 48 through 57 of the Amended Complaint has been dismissed and
therefore no response is required as to those allegations.
58. Answering Defendants respond to paragraph 58 of the Amended Complaint by repeating
and realleging each of their answers to each of the allegations there referred to as if fully set forth
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hereinbelow.
59. Deny the allegations set forth in paragraph 59 of the Amended Complaint.
60. The allegations in paragraph 60 of the Amended Complaint are not asserted against Fiorello
and therefore no response is required, however it denies all substantive allegations there asserted
by Plaintiffs.
61. The allegations in paragraph 61 of the Amended Complaint are not asserted against Fiorello
and therefore no response is required, however it denies all substantive allegations there asserted
by Plaintiffs.
62. The allegations in paragraph 62 of the Amended Complaint are not asserted against Fiorello
and therefore no response is required, however it denies all substantive allegations there asserted
by Plaintiffs.
63. The allegations in paragraph 63 of the Amended Complaint are not asserted against Fiorello
and therefore no response is required, however it denies all substantive allegations there asserted
by Plaintiffs.
64. The allegations in paragraph 64 of the Amended Complaint are not asserted against Fiorello
and therefore no response is required, however it denies all substantive allegations there asserted
by Plaintiffs.
65-69. Plaintiffs’ Fourth Cause of Action for Unjust Enrichment against Sirota and Yoss as alleged
in paragraphs 65 through 69 of the Amended Complaint has been dismissed and therefore no
response is required as to those allegations.
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AFFIRMATIVE DEFENSES
FIRST AFFIRMATIVE DEFENSE
65. The Complaint fails to set forth a claim for which relief may be granted.
SECOND AFFIRMATIVE DEFENSE
66. There is no enforceable agreement between Plaintiff and any of the Defendants.
THIRD AFFIRMATIVE DEFENSE
67. Plaintiff has no damages.
FOURTH AFFIRMATIVE DEFENSE
68. Damages, if any, are limited to out of pocket costs incurred prior to the termination of the
LOI.
FIFTH AFFIRMATIVE DEFENSE
69. Plaintiffs failed to perform their obligations under the LOI.
SIXTH AFFIRMATIVE DEFENSE
70. Any damages which Plaintiffs might be awarded, should be set off by amounts for which
Plaintiffs are liable to Defendant, including but not limited to the amount of the good faith payment
which Plaintiffs have forfeited by reason of their failure to perform and numerous breaches of their
obligations under the LOI.
SEVENTH AFFIRMATIVE DEFENSE
71. Plaintiffs are barred from equitable relief by their own unclean hands.
EIGHTH AFFIRMATIVE DEFENSE
72. The transaction contemplated by the LOI could not have been consummated because
certain required approvals could not have been obtained under the terms of the LOI.
NINTH AFFIRMATIVE DEFENSE
73. Plaintiffs’ damages are speculative and therefore not recoverable.
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TENTH AFFIRMATIVE DEFENSE
74. Fiorello’s alleged breach of the exclusivity clause, if any, was not the but for cause of
Plaintiffs’ injury.
COUNTERCLAIMS
75. Defendant Fiorello Pharmaceuticals, Inc. (“Fiorello”) is a New York corporation
with offices in New York, New York. Fiorello has 17 shareholders of its common and preferred
stock. Fiorello’s principal business is its license from the New York Department of Health (the
“DOH”) to cultivate, manufacture, and sell medical marijuana in New York.
76. Defendant Cresco Labs LLC (“Cresco”) is an Illinois corporation that entered into
an LOI with Fiorello, dated February 14, 2018, to acquire 100% of the issued and outstanding
stock of Fiorello from all of its 17 shareholders (the “LOI”).
77. CLNY is a New York corporation wholly owned by Cresco and formed on or about
March 14, 2018, solely for the purpose of acquiring the stock of Fiorello from its 17 shareholders.
78. Cresco and CLNY are subject to the jurisdiction of the courts of New York and
have submitted to jurisdiction herein.
79. Venue is proper in New York, New York.
ALLEGATIONS COMMON TO ALL CLAIMS FOR RELIEF
80. On or about February 14, 2018, Cresco, CLNY, and Fiorello entered into the LOI,
to use their good faith efforts to negotiate definitive agreements by which Cresco directly or
through its wholly owned subsidiary, CLNY, would seek to acquire 100% of the issued and
outstanding stock of Fiorello from its 17 shareholders, subject to the approval and agreement of
all of such shareholders, the members of Cresco, the boards of directors of both Cresco and
Fiorello, and the DOH. The LOI is Exhibit A hereto.
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81. Although the LOI was an unenforceable agreement to agree as to Fiorello because
its object was to acquire all the stock of Fiorello from its shareholders as the ultimate sellers but
none of whom were party to the LOI, Fiorello nevertheless performed its obligations under the
LOI prior to its expiration on March 29, 2018.
82. The LOI is enforceable against Cresco and CLNY as a preliminary agreement.
83. Pursuant to the LOI section on Timing, the LOI expired on the 30th business day
after its execution. Because it was executed on February 14, 2018, the LOI expired in accordance
with its terms on March 29, 2018.
84. By executing the LOI, Cresco and CLNY collectively agreed as “Buyer,” among
other things:
a. to make a Good Faith Payment to Fiorello of $500,000 “upon the execution
and delivery of” the LOI. Ex. A, p. 3, “Good Faith Payment.”
b. to negotiate definitive agreements and ancillary documents in good faith
(Ex. A, p. 1); promptly prepare definitive agreements that include operating agreements,
investment agreements as well as any ancillary agreements (Ex. A, p. 4, “Definitive Agreement”);
to “with reasonable diligence do all such things and provide all such reasonable assurances as may
be required[;] (Ex. A, p. 4, “Further Acts”); and “to use [its] respective best efforts to complete
and execute the Definitive Agreement … at the earliest possible date but no later than (30)
business days from the date of execution of this LOI” – i.e. by March 29, 2018. Ex. A, p. 4,
“Timing.” (the “Good Faith Negotiation” or “Definitive Agreement” obligations)
c. “to provide its due diligence list once this LOI is executed;” and to “provide
whatever relevant materials and documentation Fiorello may reasonably request;” “to complete
[its] due diligence reviews as promptly as practicable (Ex. A, p. 4 “Due Diligence”); and “to use
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[its] respective best efforts to … conclude due diligence … at the earliest possible date but no later
than (30) business days from the date of execution of this LOI” – i.e. by March 29, 2018. Ex. A,
p. 4, “Timing.” (the “Due Diligence” obligations);
d. “to enter into a Management Oversight Agreement” starting “from the date
the LOI is executed” and to provide “funding to Fiorello” during the LOI period – i.e. to provide
bridge financing to Fiorello. Ex. A, p. 3, “Management Oversight Agreement”; and
e. to keep strictly confidential all negotiations and disclosures made pursuant
to the LOI, including specifically not to disclose the “LOI and the contemplated completion of this
transaction” to “customers, suppliers, employees or other persons” and to return or destroy all
copies of any confidential information at the end of the LOI period. Ex. A, p.5, “Confidentiality.”
f. to use their good faith efforts to complete due diligence and negotiate and
draft definitive agreements within the time provided for by the LOI.
85. Cresco and CLNY failed to perform their obligations under the LOI, including by
breaching each of these LOI provisions.
86. Breach of the Good Faith Payment Provision. Cresco/CLNY executed and
delivered The LOI on February 14, 2018. They, however, did not make the required Good Faith
Payment that was due upon execution. Fiorello had to contact Cresco many times regarding its
obligations to make the Good Faith Payment.
87. Rather than making the Good Faith Payment when due, Cresco/CLNY unilaterally
insisted on a new term, not contemplated by the LOI, to provide that the Good Faith Payment be
deposited into an escrow account. They, however, provided neither an escrow agreement – which
was not called for by the LOI – nor an escrow agent.
88. Ultimately Fiorello’s counsel provided an escrow agreement and agreed to act as
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escrow agent. Only then did Cresco/CLNY finally deposit the Good Faith Payment into the escrow
account on March 1, 2018, 15 days after it was due to have been paid. Cresco thereby wasted 1/3
of the available 30 business days to complete and execute a Definitive Agreement.
89. Fiorello incurred additional legal expense in connection with the negotiation and
execution of the escrow agreement not contemplated by the LOI.
90. Pursuant to the LOI section on Timing, it expired on the 30th business day after its
execution. Because it was executed on February 14, 2018, The LOI expired in accordance with
its terms on March 29, 2018. By reason of its delay and failure to make the Good Faith Payment
when due, Cresco/CLNY failed to act in good faith, failed to use their best efforts, and squandered
10 of the available 30 business days to negotiate and execute definitive agreements.
91. Pursuant to the section on Good Faith Payment, it is forfeited by Cresco/CLNY if
(i) Cresco/CLNY did not complete due diligence within 30 calendar days through no failure of
Fiorello to provide requested customary reasonable diligence materials, or (ii) the parties failed to
enter into a Definitive Agreement because of the intentional misconduct or grossly negligent
conduct of Cresco/CLNY.
92. Breach of the Due Diligence Obligations. Pursuant to the section on Due Diligence
in the LOI, Cresco/CLNY was required to provide its due diligence list to Fiorello once the LOI
was executed. Cresco/CLNY were further required by the Timing provision to use their best
efforts to complete due diligence at the earliest possible date but no later than March 29, 2018.
Cresco/CLNY did not do so.
93. Despite repeated requests by Fiorello, Cresco/CLNY failed to make any due
diligence requests to Fiorello until March 1, 2018; squandering 14 days of the 30 calendar day
period in which Cresco/CLNY was to complete its due diligence.
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94. The only due diligence requests made by Cresco/CLNY on March 1 was a generic
legal due diligence list which was incomplete for the proposed transaction and much of which was
not relevant to Fiorello’s operations.
95. Fiorello immediately began responding to Cresco/CLNY’s March 1 diligence
requests by beginning to produce documents on March 1, 2018, and by March 9, 2018 had
populated the diligence secure file with over 500 documents comprising thousands of pages. In
addition, Fiorello went well beyond the initial diligence request by including many business
documents not requested by Cresco/CLNY but which Fiorello believed relevant for diligence
purposes in the ordinary course.
96. To the extent Cresco/CLNY made additional diligence requests they were promptly
and fully responded to within days.
97. Cresco/CLNY rescheduled and delayed a diligence trip to inspect Fiorello’s
locations and when the trip finally occurred the Cresco representatives were distracted and
disinterested.
98. Cresco/CLNY did not complete its due diligence by March 14, 2018 as required,
or even by March 29, 2018, through no fault of Fiorello but only due to Cresco/CLNY’s own
failure to make timely and proper due diligence requests and its failure to timely review the
diligence materials provided by Fiorello.
99. Whenever Cresco/CLNY requested during the term of The LOI that additional
people be given access to the secure diligence file, that access was promptly granted.
100. In April 2018 – long after the time to complete due diligence had expired – Cresco
acknowledged that it had not completed its due diligence and requested that additional Cresco
representatives be given access to the secure diligence file.
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101. Cresco/CLNY forfeited the Good Faith Payment by failing to complete due
diligence within 30 calendar days.
102. Breaches of the Management Oversight Provision and Obligation to Provide
Bridge Financing. Pursuant to the section on Management Oversight Agreement Cresco/CLNY
was obligated to negotiate and enter into a Management Oversight Agreement and in that
connection to provide funding to Fiorello in good faith and “as soon as practicable.”
103. This was a material term of the LOI because Cresco/CLNY knew that funding in
advance of any potential transaction was critical to Fiorello to continue its operational plans to
comply with the requirements of the DOH in connection with its medical marijuana license.
Cresco/CLNY further knew that Fiorello had foregone other funding opportunities in reliance on
Cresco/CLNY performing its obligations under the LOI.
104. Cresco/CLNY also knew that by reason of the exclusivity provision in the LOI’s
Timing section, Fiorello was impeded from arranging other financing during the term of the LOI
as an alternative to the funding commitment by Cresco/CLNY.
105. Despite repeated requests by Fiorello that Cresco/CLNY provide a draft of the
Management Oversight Agreement, negotiate its terms and provide the associated funding to
Fiorello for its operations, Cresco/CLNY refused to have such negotiations and refused to provide
any funding to Fiorello.
106. Definitive Agreement Breaches. Cresco/CLNY undertook to provide draft
agreements that collectively would constitute the Definitive Agreement.
107. Although purchasers in acquisition transactions typically provide draft agreements
promptly after letters of intent are entered into, Cresco/CLNY failed to provide any drafts until
March 1, 2018, squandering 10 of the available 30 business days to negotiate and execute definitive
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agreements, and then only provided a draft agreement that was ill suited to the potential
transaction. In response to Fiorello’s comments, Cresco/CLNY agreed on March 2 to provide a
new draft stock purchase agreement that would better reflect the contemplated stock purchase
transaction.
108. Cresco/CLNY, however, did not provide the new draft stock purchase agreement
until March 8, 2018. By then 15 of the available 30 business days to negotiate and execute
definitive agreements had been squandered by Cresco/CLNY.
109. The new draft also was inadequate for many reasons including but not limited to its
failure to address certain key issues, and its omission of critical collateral agreements that needed
to be reviewed in conjunction with the draft stock purchase agreement. Essential terms and
provisions of the draft stock purchase agreement still remained to be negotiated.
110. Cresco/CLNY did not provide a draft guaranty or note until March 12 and March
15, 2018, respectively. Since the LOI contemplated a pay out over two years with shareholders
having an election to take equity of Cresco instead of cash the draft note and guaranty were critical
transaction agreements that still needed to be negotiated. The drafts that Cresco/CLNY provided
were completely inadequate for the contemplated transaction.
111. By March 15, 2018, when Cresco/CLNY finally provided a draft note,
Cresco/CLNY had squandered 20 of the 30 business days to negotiate and execute definitive
agreements. Moreover that draft was completely unsuitable for the contemplated transaction.
112. By reason of the delay by Cresco/CLNY in preparing and providing draft
documents there remained many outstanding issues and no usable drafts of the necessary
documents to effectuate the transaction contemplated by the LOI when the LOI expired on March
29, 2018.
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113. Breaches of Confidentiality. The LOI included a confidentiality provision that,
among other things, prohibited Cresco/CLNY from disclosing any confidential information of
Fiorello including but not limited to the fact and the terms of The LOI, and any possible
transaction.
114. During the course of negotiations of the LOI Cresco had sought to exclude
“potential financiers” from the confidentiality provision disclosure for the purpose of raising
capital by Cresco in connection with any possible transaction with Fiorello shareholders.
115. Fiorello objected to such a carve out from the confidentiality provisions for
financing by Cresco and refused to agree to same. As a consequence, there is no such carve out in
the LOI and Cresco was precluded from any discussions of the LOI, including its existence, from
potential financing sources.
116. Nevertheless, in breach of the confidentiality provision of the LOI and of their
obligations of good faith, Cresco/CLNY disclosed information to prospective investors as early as
March 2018, but no later than May 2018, of a prospective transaction by which it would acquire
the right to cultivate and sell medical marijuana in New York from which the identity of Fiorello
might be inferred, all in violation of the LOI’s “Confidentiality” provision. Some of those
investors might also be investors in Fiorello or in other companies that owned or had an interest in
owning or investing in the New York medical marijuana market.
117. On April 3, 2018, an article appeared in the publication Cannabis Business
Executive that reflected an interview with Cresco’s CEO, Charlie Bachtell. The article discloses
that Cresco was acquiring a medical marijuana company in New York in the second quarter of
2018 and would be operational in the third quarter and provided sufficient detail so that the likely
identity of Fiorello could be inferred. This was a further breach of the Confidentiality provision
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and of Cresco/CLNY’s obligations of good faith.
118. In April 2018, Cresco’s Chief Operating Officer, David Ellis contacted a major
shareholder of Fiorello and disclosed to him the existence of the LOI, alleged that Fiorello was in
breach of the LOI, sent to him a copy of both the LOI and Cresco’s litigation letter to Fiorello
dated April 14, 2018, and suggested the prospect of litigation would likely interfere with Fiorello’s
relationship with the DOH which would potentially put Fiorello’s medical marijuana license in
jeopardy.
119. Ellis also falsely told the major shareholder that Fiorello was not in compliance
with its obligations to the DOH.
120. Prior to that discussion with Ellis, the shareholder did not know of the specific terms
and conditions of the LOI, had never seen it, and had not authorized Fiorello either to enter into
the LOI, nor to act on behalf of the preferred shareholder in connection with its investment
decisions concerning its stock ownership of Fiorello.
121. The contact by Ellis on behalf of Cresco/CLNY was a further breach of the
confidentiality obligations and obligations of good faith in the LOI. Moreover, the false statement
by Ellis that Fiorello was not in compliance with its obligations to DOH was defamatory.
122. As a consequence of Ellis’s contact with the Fiorello shareholder, the shareholder
became concerned about the investment in Fiorello and felt that he needed to exercise greater
oversight over the operations and strategic decisions being considered and taken by Fiorello’s
board of directors.
123. After the LOI expired but in connection with negotiating a possible extension of
the LOI, Fiorello requested information about unauthorized disclosures of the LOI by
Cresco/CLNY but said requests were refused.
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124. Cresco/CLNY has not returned or destroyed Fiorello’s confidential information.
FIRST CLAIM AGAINST CRESCO AND CLNY
FOR DECLARATORY RELIEF
125. Fiorello repeats and realleges each of the allegations set forth in paragraphs 75
through 124 of the Answer and Counterclaims as if fully set forth hereinbelow.
126. On or about February 14, 2018, Cresco, CLNY, and Fiorello entered into the LOI
as a preliminary agreement.
127. Fiorello performed its obligations under the LOI.
128. The failure of Cresco/CLNY to make prompt due diligence requests and timely to
review the diligence materials they requested caused Cresco/CLNY to fail to complete its due
diligence within 30 days as required by the LOI. By reason of this Cresco/CLNY forfeited the
Good Faith Payment.
129. Moreover, Cresco/CLNY forfeited the Good Faith Payment by reason of their own
intentional misconduct and gross negligence in not completing its due diligence within 30 days or
even before the LOI expired.
130. Cresco/CLNY also forfeited the Good Faith Payment by reason of the intentional
misconduct and gross negligence of Cresco/CLNY, including but not limited to by (i) failing to
make the Good Faith Payment when due on February 14, 2018 and thereby squandering 10 of the
30 business days in which to enter into a “Definitive Agreement”, (ii) failing promptly to provide
usable draft agreements, such as a stock purchase agreement and form of note, thereby squandering
20 of the 30 business days in which to enter into a “Definitive Agreement”, (iii) failing promptly
to address essential issues such as (a) how to effectuate the purchase of Fiorello stock from all of
its 17 shareholders, and (b) to provide the timing and content of Cresco disclosure information in
advance of the shareholder election to take Cresco equity units rather than cash consideration at
ANSWER AND COUNTERCLAIMS - 17 -
FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018
NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022
each installment, the parties to the LOI were unable to enter into a Definitive Agreement as
contemplated by the LOI; (iv) misleading Fiorello as to their financial wherewithal and status of
bus
Preview
FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 Exhibit F Answer To Amended Complaint And Counterclaims, Dated June 6, 2019 Index No. 652343/2018 Motion Seq. No. 11 FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK --------------------------------------------------------------------- X : CRESCO LABS, NEW YORK, LLC, a New York Index No. 652343/2018 limited liability company, and CRESCO LABS LLC, an : Illinois limited liability company, : Hon. Andrew J. Borrok Plaintiffs, : -against- ANSWER TO AMENDED : COMPLAINT AND FIORELLO PHARMACEUTICALS, INC., a New York COUNTERCLAIMS corporation, ERIC SIROTA, an individual, SUSAN : YOSS, an individual, and JOHN DOES 1-10, : Defendants. --------------------------------------------------------------------- X Defendant FIORELLO PHARMACEUTICALS, INC., (“Fiorello”), by its undersigned attorneys, Izower Feldman, LLP, as and for its answer to the Amended Complaint of the plaintiffs Cresco Labs LLC and Cresco Labs, New York, LLC (collectively “Cresco” or “Plaintiffs”), hereby respond as follows: 1. Deny the allegations set forth in paragraph 1 of the Amended Complaint. 2. Deny the allegations set forth in paragraph 2 of the Amended Complaint except admit that Fiorello and Cresco executed an Equity Purchase Agreement Letter of Intent on February 14, 2018, (“LOI”) and respectfully refer the Court to said LOI for a complete statement of its terms. 3. Deny the allegations set forth in paragraph 3 of the Amended Complaint. 4. Deny the allegations set forth in the first paragraph 4 (the Amended Complaint contains 2 paragraphs numbered as “4”) of the Amended Complaint. 4. Deny the allegations set forth in the second paragraph 4 (the Amended Complaint contains 2 paragraphs numbered as “4”) of the Amended Complaint. 5. Deny having knowledge or information sufficient to form a belief as to the truth of the ANSWER AND COUNTERCLAIMS - 1 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 allegations set forth in paragraph 5 of the Amended Complaint. 6. Deny having knowledge or information sufficient to form a belief as to the truth of the allegations set forth in paragraph 6 of the Amended Complaint. 7. Admit the allegations set forth in paragraph 7 of the Amended Complaint and that at the time of the LOI Fiorello was a pre-operational development-stage business, except to deny the characterization of Fiorello as a fledgling operation. 8. Deny the allegations set forth in paragraph 8 of the Amended Complaint except admit that Sirota is a co-CEO of Fiorello. 9. Admit the allegations set forth in paragraph 9 of the Amended Complaint. 10. Deny the allegations in paragraph 10 of the Amended Complaint to the extent that they relate to Fiorello and deny having knowledge or information sufficient to form a belief as to the truth of the remaining allegations set forth in paragraph 10 of the Amended Complaint. 11. Admit the allegations set forth in paragraph 11 of the Amended Complaint. 12. Admit the allegations set forth in paragraph 12 of the Amended Complaint. 13. Deny having knowledge or information sufficient to form a belief as to the truth of the allegations set forth in paragraph 13 of the Amended Complaint. 14. Deny the allegations set forth in paragraph 14 of the Amended Complaint except admit that Fiorello is a “Registered Organization” licensed by the New York State Department of Health (“DOH”) and that it only has a presence in the State of New York. 15. Deny the allegations set forth in paragraph 15 of the Amended Complaint. 16. Deny the allegations set forth in paragraph 16 of the Amended Complaint. 17. Deny the allegations set forth in paragraph 17 of the Amended Complaint except admit that Fiorello and Cresco executed the LOI a copy of which is attached to the Amended Complaint as ANSWER AND COUNTERCLAIMS - 2 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 Exhibit 1. 18. Deny the allegations set forth in paragraph 18 of the Amended Complaint and respectfully refer the Court to the LOI for a complete statement of its terms. 19. Deny the allegations set forth in paragraph 19 of the Amended Complaint and respectfully refer the Court to the LOI for a complete statement of its terms. 20. Deny the allegations set forth in paragraph 20 of the Amended Complaint and respectfully refer the Court to the LOI for a complete statement of its terms. 21. Deny the allegations set forth in paragraph 21 of the Amended Complaint and respectfully refer the Court to the LOI for a complete statement of its terms. 22. Deny the allegations set forth in paragraph 22 of the Amended Complaint and respectfully refer the Court to the LOI for a complete statement of its terms. 23. Deny the allegations set forth in paragraph 23 of the Amended Complaint and respectfully refer the Court to the LOI for a complete statement of its terms. 24. Deny the allegations set forth in paragraph 24 of the Amended Complaint and respectfully refer the Court to the LOI for a complete statement of its terms. 25. Deny the allegations set forth in paragraph 25 of the Amended Complaint. 26. Deny the allegations set forth in paragraph 26 of the Amended Complaint. 27. Deny the allegations set forth in paragraph 27 of the Amended Complaint. 28. Deny the allegations set forth in paragraph 28 of the Amended Complaint. 29. Deny the allegations set forth in paragraph 29 of the Amended Complaint except admit that the LOI expired on March 29, 2018. 30. Deny the allegations set forth in paragraph 30 of the Amended Complaint except admit that Fiorello and its Board of Directors were unwilling to extend the LOI but would consider a different ANSWER AND COUNTERCLAIMS - 3 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 letter of intent with Cresco and so advised Cresco upon the expiration of the LOI. 31. Deny the allegations set forth in paragraph 31 of the Amended Complaint except admit that Cresco breached its confidentiality obligations to Fiorello under the LOI. 32. Deny the allegations contained in paragraph 32 of the Amended Complaint except admit that corporate counsel sent correspondence to Cresco’s counsel and respectfully refer the Court to such correspondence for a complete statement of its contents. 33. Deny the allegations contained in paragraph 33 of the Amended Complaint except admit that after the expiration of the LOI Fiorello had communications with other entities who expressed an interest in a business combination with Fiorello. 34. Deny the allegations set forth in paragraph 34 of the Amended Complaint except admit that the quoted excerpt is part of the hearing transcript and that Exhibit 2 to the Amended Complaint contains excerpted portions of the hearing transcript and respectfully refer the Court to the entire transcript for a complete understanding of what was said and its context. 35. Deny the allegations set forth in paragraph 35 of the Amended Complaint except admit Cresco and Fiorello had continued negotiations after the expiration of the LOI on a without prejudice for settlement purposes only basis which included the opportunity for Cresco to submit its Best and Final bid by June 22, 2018 and respectfully refer the Court to such invitation for a complete statement of its terms. 36. Deny the allegations in the first sentence of paragraph 36 of the Amended Complaint except to admit that Fiorello entered into a merger agreement with a third party. Admit the remaining allegations in paragraph 36 of the Amended Complaint and respectfully refer the court to the referenced documents for a complete statement of their terms. 37. Deny having knowledge or information sufficient to form a belief as to the truth of the ANSWER AND COUNTERCLAIMS - 4 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 allegations set forth in paragraph 37 of the Amended Complaint except admit that Fiorello had negotiations with entities other than Cresco in May 2018. 38. Deny the allegations set forth in paragraph 38 of the Amended Complaint. 39. Deny the allegations set forth in paragraph 39 of the Amended Complaint. 40. Deny having knowledge or information sufficient to form a belief as to the truth of the allegations set forth in paragraph 40 of the Amended Complaint. 41. Deny having knowledge or information sufficient to form a belief as to the truth of the allegations set forth in paragraph 41 of the Amended Complaint. 42. Answering Defendants respond to paragraph 42 of the Amended Complaint by repeating and realleging each of their answers to each of the allegations there referred to as if fully set forth hereinbelow. 43. Deny the allegations set forth in paragraph 43 of the Amended Complaint except admit that Fiorello and Cresco entered into the LOI on February 14, 2018, and respectfully refer the Court to said LOI for a complete statement of its terms. 44. Deny the allegations set forth in paragraph 44 of the Amended Complaint. 45. Deny the allegations set forth in paragraph 45 of the Amended Complaint. 46. Deny the allegations set forth in paragraph 46 of the Amended Complaint. 47. Deny the allegations set forth in paragraph 47 of the Amended Complaint. 48-57. Plaintiffs’ Second Cause of Action for “breach of contract for the sale of Fiorello’s Stock” as alleged in paragraphs 48 through 57 of the Amended Complaint has been dismissed and therefore no response is required as to those allegations. 58. Answering Defendants respond to paragraph 58 of the Amended Complaint by repeating and realleging each of their answers to each of the allegations there referred to as if fully set forth ANSWER AND COUNTERCLAIMS - 5 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 hereinbelow. 59. Deny the allegations set forth in paragraph 59 of the Amended Complaint. 60. The allegations in paragraph 60 of the Amended Complaint are not asserted against Fiorello and therefore no response is required, however it denies all substantive allegations there asserted by Plaintiffs. 61. The allegations in paragraph 61 of the Amended Complaint are not asserted against Fiorello and therefore no response is required, however it denies all substantive allegations there asserted by Plaintiffs. 62. The allegations in paragraph 62 of the Amended Complaint are not asserted against Fiorello and therefore no response is required, however it denies all substantive allegations there asserted by Plaintiffs. 63. The allegations in paragraph 63 of the Amended Complaint are not asserted against Fiorello and therefore no response is required, however it denies all substantive allegations there asserted by Plaintiffs. 64. The allegations in paragraph 64 of the Amended Complaint are not asserted against Fiorello and therefore no response is required, however it denies all substantive allegations there asserted by Plaintiffs. 65-69. Plaintiffs’ Fourth Cause of Action for Unjust Enrichment against Sirota and Yoss as alleged in paragraphs 65 through 69 of the Amended Complaint has been dismissed and therefore no response is required as to those allegations. ANSWER AND COUNTERCLAIMS - 6 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 AFFIRMATIVE DEFENSES FIRST AFFIRMATIVE DEFENSE 65. The Complaint fails to set forth a claim for which relief may be granted. SECOND AFFIRMATIVE DEFENSE 66. There is no enforceable agreement between Plaintiff and any of the Defendants. THIRD AFFIRMATIVE DEFENSE 67. Plaintiff has no damages. FOURTH AFFIRMATIVE DEFENSE 68. Damages, if any, are limited to out of pocket costs incurred prior to the termination of the LOI. FIFTH AFFIRMATIVE DEFENSE 69. Plaintiffs failed to perform their obligations under the LOI. SIXTH AFFIRMATIVE DEFENSE 70. Any damages which Plaintiffs might be awarded, should be set off by amounts for which Plaintiffs are liable to Defendant, including but not limited to the amount of the good faith payment which Plaintiffs have forfeited by reason of their failure to perform and numerous breaches of their obligations under the LOI. SEVENTH AFFIRMATIVE DEFENSE 71. Plaintiffs are barred from equitable relief by their own unclean hands. EIGHTH AFFIRMATIVE DEFENSE 72. The transaction contemplated by the LOI could not have been consummated because certain required approvals could not have been obtained under the terms of the LOI. NINTH AFFIRMATIVE DEFENSE 73. Plaintiffs’ damages are speculative and therefore not recoverable. ANSWER AND COUNTERCLAIMS - 7 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 TENTH AFFIRMATIVE DEFENSE 74. Fiorello’s alleged breach of the exclusivity clause, if any, was not the but for cause of Plaintiffs’ injury. COUNTERCLAIMS 75. Defendant Fiorello Pharmaceuticals, Inc. (“Fiorello”) is a New York corporation with offices in New York, New York. Fiorello has 17 shareholders of its common and preferred stock. Fiorello’s principal business is its license from the New York Department of Health (the “DOH”) to cultivate, manufacture, and sell medical marijuana in New York. 76. Defendant Cresco Labs LLC (“Cresco”) is an Illinois corporation that entered into an LOI with Fiorello, dated February 14, 2018, to acquire 100% of the issued and outstanding stock of Fiorello from all of its 17 shareholders (the “LOI”). 77. CLNY is a New York corporation wholly owned by Cresco and formed on or about March 14, 2018, solely for the purpose of acquiring the stock of Fiorello from its 17 shareholders. 78. Cresco and CLNY are subject to the jurisdiction of the courts of New York and have submitted to jurisdiction herein. 79. Venue is proper in New York, New York. ALLEGATIONS COMMON TO ALL CLAIMS FOR RELIEF 80. On or about February 14, 2018, Cresco, CLNY, and Fiorello entered into the LOI, to use their good faith efforts to negotiate definitive agreements by which Cresco directly or through its wholly owned subsidiary, CLNY, would seek to acquire 100% of the issued and outstanding stock of Fiorello from its 17 shareholders, subject to the approval and agreement of all of such shareholders, the members of Cresco, the boards of directors of both Cresco and Fiorello, and the DOH. The LOI is Exhibit A hereto. ANSWER AND COUNTERCLAIMS - 8 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 81. Although the LOI was an unenforceable agreement to agree as to Fiorello because its object was to acquire all the stock of Fiorello from its shareholders as the ultimate sellers but none of whom were party to the LOI, Fiorello nevertheless performed its obligations under the LOI prior to its expiration on March 29, 2018. 82. The LOI is enforceable against Cresco and CLNY as a preliminary agreement. 83. Pursuant to the LOI section on Timing, the LOI expired on the 30th business day after its execution. Because it was executed on February 14, 2018, the LOI expired in accordance with its terms on March 29, 2018. 84. By executing the LOI, Cresco and CLNY collectively agreed as “Buyer,” among other things: a. to make a Good Faith Payment to Fiorello of $500,000 “upon the execution and delivery of” the LOI. Ex. A, p. 3, “Good Faith Payment.” b. to negotiate definitive agreements and ancillary documents in good faith (Ex. A, p. 1); promptly prepare definitive agreements that include operating agreements, investment agreements as well as any ancillary agreements (Ex. A, p. 4, “Definitive Agreement”); to “with reasonable diligence do all such things and provide all such reasonable assurances as may be required[;] (Ex. A, p. 4, “Further Acts”); and “to use [its] respective best efforts to complete and execute the Definitive Agreement … at the earliest possible date but no later than (30) business days from the date of execution of this LOI” – i.e. by March 29, 2018. Ex. A, p. 4, “Timing.” (the “Good Faith Negotiation” or “Definitive Agreement” obligations) c. “to provide its due diligence list once this LOI is executed;” and to “provide whatever relevant materials and documentation Fiorello may reasonably request;” “to complete [its] due diligence reviews as promptly as practicable (Ex. A, p. 4 “Due Diligence”); and “to use ANSWER AND COUNTERCLAIMS - 9 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 [its] respective best efforts to … conclude due diligence … at the earliest possible date but no later than (30) business days from the date of execution of this LOI” – i.e. by March 29, 2018. Ex. A, p. 4, “Timing.” (the “Due Diligence” obligations); d. “to enter into a Management Oversight Agreement” starting “from the date the LOI is executed” and to provide “funding to Fiorello” during the LOI period – i.e. to provide bridge financing to Fiorello. Ex. A, p. 3, “Management Oversight Agreement”; and e. to keep strictly confidential all negotiations and disclosures made pursuant to the LOI, including specifically not to disclose the “LOI and the contemplated completion of this transaction” to “customers, suppliers, employees or other persons” and to return or destroy all copies of any confidential information at the end of the LOI period. Ex. A, p.5, “Confidentiality.” f. to use their good faith efforts to complete due diligence and negotiate and draft definitive agreements within the time provided for by the LOI. 85. Cresco and CLNY failed to perform their obligations under the LOI, including by breaching each of these LOI provisions. 86. Breach of the Good Faith Payment Provision. Cresco/CLNY executed and delivered The LOI on February 14, 2018. They, however, did not make the required Good Faith Payment that was due upon execution. Fiorello had to contact Cresco many times regarding its obligations to make the Good Faith Payment. 87. Rather than making the Good Faith Payment when due, Cresco/CLNY unilaterally insisted on a new term, not contemplated by the LOI, to provide that the Good Faith Payment be deposited into an escrow account. They, however, provided neither an escrow agreement – which was not called for by the LOI – nor an escrow agent. 88. Ultimately Fiorello’s counsel provided an escrow agreement and agreed to act as ANSWER AND COUNTERCLAIMS - 10 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 escrow agent. Only then did Cresco/CLNY finally deposit the Good Faith Payment into the escrow account on March 1, 2018, 15 days after it was due to have been paid. Cresco thereby wasted 1/3 of the available 30 business days to complete and execute a Definitive Agreement. 89. Fiorello incurred additional legal expense in connection with the negotiation and execution of the escrow agreement not contemplated by the LOI. 90. Pursuant to the LOI section on Timing, it expired on the 30th business day after its execution. Because it was executed on February 14, 2018, The LOI expired in accordance with its terms on March 29, 2018. By reason of its delay and failure to make the Good Faith Payment when due, Cresco/CLNY failed to act in good faith, failed to use their best efforts, and squandered 10 of the available 30 business days to negotiate and execute definitive agreements. 91. Pursuant to the section on Good Faith Payment, it is forfeited by Cresco/CLNY if (i) Cresco/CLNY did not complete due diligence within 30 calendar days through no failure of Fiorello to provide requested customary reasonable diligence materials, or (ii) the parties failed to enter into a Definitive Agreement because of the intentional misconduct or grossly negligent conduct of Cresco/CLNY. 92. Breach of the Due Diligence Obligations. Pursuant to the section on Due Diligence in the LOI, Cresco/CLNY was required to provide its due diligence list to Fiorello once the LOI was executed. Cresco/CLNY were further required by the Timing provision to use their best efforts to complete due diligence at the earliest possible date but no later than March 29, 2018. Cresco/CLNY did not do so. 93. Despite repeated requests by Fiorello, Cresco/CLNY failed to make any due diligence requests to Fiorello until March 1, 2018; squandering 14 days of the 30 calendar day period in which Cresco/CLNY was to complete its due diligence. ANSWER AND COUNTERCLAIMS - 11 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 94. The only due diligence requests made by Cresco/CLNY on March 1 was a generic legal due diligence list which was incomplete for the proposed transaction and much of which was not relevant to Fiorello’s operations. 95. Fiorello immediately began responding to Cresco/CLNY’s March 1 diligence requests by beginning to produce documents on March 1, 2018, and by March 9, 2018 had populated the diligence secure file with over 500 documents comprising thousands of pages. In addition, Fiorello went well beyond the initial diligence request by including many business documents not requested by Cresco/CLNY but which Fiorello believed relevant for diligence purposes in the ordinary course. 96. To the extent Cresco/CLNY made additional diligence requests they were promptly and fully responded to within days. 97. Cresco/CLNY rescheduled and delayed a diligence trip to inspect Fiorello’s locations and when the trip finally occurred the Cresco representatives were distracted and disinterested. 98. Cresco/CLNY did not complete its due diligence by March 14, 2018 as required, or even by March 29, 2018, through no fault of Fiorello but only due to Cresco/CLNY’s own failure to make timely and proper due diligence requests and its failure to timely review the diligence materials provided by Fiorello. 99. Whenever Cresco/CLNY requested during the term of The LOI that additional people be given access to the secure diligence file, that access was promptly granted. 100. In April 2018 – long after the time to complete due diligence had expired – Cresco acknowledged that it had not completed its due diligence and requested that additional Cresco representatives be given access to the secure diligence file. ANSWER AND COUNTERCLAIMS - 12 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 101. Cresco/CLNY forfeited the Good Faith Payment by failing to complete due diligence within 30 calendar days. 102. Breaches of the Management Oversight Provision and Obligation to Provide Bridge Financing. Pursuant to the section on Management Oversight Agreement Cresco/CLNY was obligated to negotiate and enter into a Management Oversight Agreement and in that connection to provide funding to Fiorello in good faith and “as soon as practicable.” 103. This was a material term of the LOI because Cresco/CLNY knew that funding in advance of any potential transaction was critical to Fiorello to continue its operational plans to comply with the requirements of the DOH in connection with its medical marijuana license. Cresco/CLNY further knew that Fiorello had foregone other funding opportunities in reliance on Cresco/CLNY performing its obligations under the LOI. 104. Cresco/CLNY also knew that by reason of the exclusivity provision in the LOI’s Timing section, Fiorello was impeded from arranging other financing during the term of the LOI as an alternative to the funding commitment by Cresco/CLNY. 105. Despite repeated requests by Fiorello that Cresco/CLNY provide a draft of the Management Oversight Agreement, negotiate its terms and provide the associated funding to Fiorello for its operations, Cresco/CLNY refused to have such negotiations and refused to provide any funding to Fiorello. 106. Definitive Agreement Breaches. Cresco/CLNY undertook to provide draft agreements that collectively would constitute the Definitive Agreement. 107. Although purchasers in acquisition transactions typically provide draft agreements promptly after letters of intent are entered into, Cresco/CLNY failed to provide any drafts until March 1, 2018, squandering 10 of the available 30 business days to negotiate and execute definitive ANSWER AND COUNTERCLAIMS - 13 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 agreements, and then only provided a draft agreement that was ill suited to the potential transaction. In response to Fiorello’s comments, Cresco/CLNY agreed on March 2 to provide a new draft stock purchase agreement that would better reflect the contemplated stock purchase transaction. 108. Cresco/CLNY, however, did not provide the new draft stock purchase agreement until March 8, 2018. By then 15 of the available 30 business days to negotiate and execute definitive agreements had been squandered by Cresco/CLNY. 109. The new draft also was inadequate for many reasons including but not limited to its failure to address certain key issues, and its omission of critical collateral agreements that needed to be reviewed in conjunction with the draft stock purchase agreement. Essential terms and provisions of the draft stock purchase agreement still remained to be negotiated. 110. Cresco/CLNY did not provide a draft guaranty or note until March 12 and March 15, 2018, respectively. Since the LOI contemplated a pay out over two years with shareholders having an election to take equity of Cresco instead of cash the draft note and guaranty were critical transaction agreements that still needed to be negotiated. The drafts that Cresco/CLNY provided were completely inadequate for the contemplated transaction. 111. By March 15, 2018, when Cresco/CLNY finally provided a draft note, Cresco/CLNY had squandered 20 of the 30 business days to negotiate and execute definitive agreements. Moreover that draft was completely unsuitable for the contemplated transaction. 112. By reason of the delay by Cresco/CLNY in preparing and providing draft documents there remained many outstanding issues and no usable drafts of the necessary documents to effectuate the transaction contemplated by the LOI when the LOI expired on March 29, 2018. ANSWER AND COUNTERCLAIMS - 14 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 113. Breaches of Confidentiality. The LOI included a confidentiality provision that, among other things, prohibited Cresco/CLNY from disclosing any confidential information of Fiorello including but not limited to the fact and the terms of The LOI, and any possible transaction. 114. During the course of negotiations of the LOI Cresco had sought to exclude “potential financiers” from the confidentiality provision disclosure for the purpose of raising capital by Cresco in connection with any possible transaction with Fiorello shareholders. 115. Fiorello objected to such a carve out from the confidentiality provisions for financing by Cresco and refused to agree to same. As a consequence, there is no such carve out in the LOI and Cresco was precluded from any discussions of the LOI, including its existence, from potential financing sources. 116. Nevertheless, in breach of the confidentiality provision of the LOI and of their obligations of good faith, Cresco/CLNY disclosed information to prospective investors as early as March 2018, but no later than May 2018, of a prospective transaction by which it would acquire the right to cultivate and sell medical marijuana in New York from which the identity of Fiorello might be inferred, all in violation of the LOI’s “Confidentiality” provision. Some of those investors might also be investors in Fiorello or in other companies that owned or had an interest in owning or investing in the New York medical marijuana market. 117. On April 3, 2018, an article appeared in the publication Cannabis Business Executive that reflected an interview with Cresco’s CEO, Charlie Bachtell. The article discloses that Cresco was acquiring a medical marijuana company in New York in the second quarter of 2018 and would be operational in the third quarter and provided sufficient detail so that the likely identity of Fiorello could be inferred. This was a further breach of the Confidentiality provision ANSWER AND COUNTERCLAIMS - 15 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 and of Cresco/CLNY’s obligations of good faith. 118. In April 2018, Cresco’s Chief Operating Officer, David Ellis contacted a major shareholder of Fiorello and disclosed to him the existence of the LOI, alleged that Fiorello was in breach of the LOI, sent to him a copy of both the LOI and Cresco’s litigation letter to Fiorello dated April 14, 2018, and suggested the prospect of litigation would likely interfere with Fiorello’s relationship with the DOH which would potentially put Fiorello’s medical marijuana license in jeopardy. 119. Ellis also falsely told the major shareholder that Fiorello was not in compliance with its obligations to the DOH. 120. Prior to that discussion with Ellis, the shareholder did not know of the specific terms and conditions of the LOI, had never seen it, and had not authorized Fiorello either to enter into the LOI, nor to act on behalf of the preferred shareholder in connection with its investment decisions concerning its stock ownership of Fiorello. 121. The contact by Ellis on behalf of Cresco/CLNY was a further breach of the confidentiality obligations and obligations of good faith in the LOI. Moreover, the false statement by Ellis that Fiorello was not in compliance with its obligations to DOH was defamatory. 122. As a consequence of Ellis’s contact with the Fiorello shareholder, the shareholder became concerned about the investment in Fiorello and felt that he needed to exercise greater oversight over the operations and strategic decisions being considered and taken by Fiorello’s board of directors. 123. After the LOI expired but in connection with negotiating a possible extension of the LOI, Fiorello requested information about unauthorized disclosures of the LOI by Cresco/CLNY but said requests were refused. ANSWER AND COUNTERCLAIMS - 16 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 124. Cresco/CLNY has not returned or destroyed Fiorello’s confidential information. FIRST CLAIM AGAINST CRESCO AND CLNY FOR DECLARATORY RELIEF 125. Fiorello repeats and realleges each of the allegations set forth in paragraphs 75 through 124 of the Answer and Counterclaims as if fully set forth hereinbelow. 126. On or about February 14, 2018, Cresco, CLNY, and Fiorello entered into the LOI as a preliminary agreement. 127. Fiorello performed its obligations under the LOI. 128. The failure of Cresco/CLNY to make prompt due diligence requests and timely to review the diligence materials they requested caused Cresco/CLNY to fail to complete its due diligence within 30 days as required by the LOI. By reason of this Cresco/CLNY forfeited the Good Faith Payment. 129. Moreover, Cresco/CLNY forfeited the Good Faith Payment by reason of their own intentional misconduct and gross negligence in not completing its due diligence within 30 days or even before the LOI expired. 130. Cresco/CLNY also forfeited the Good Faith Payment by reason of the intentional misconduct and gross negligence of Cresco/CLNY, including but not limited to by (i) failing to make the Good Faith Payment when due on February 14, 2018 and thereby squandering 10 of the 30 business days in which to enter into a “Definitive Agreement”, (ii) failing promptly to provide usable draft agreements, such as a stock purchase agreement and form of note, thereby squandering 20 of the 30 business days in which to enter into a “Definitive Agreement”, (iii) failing promptly to address essential issues such as (a) how to effectuate the purchase of Fiorello stock from all of its 17 shareholders, and (b) to provide the timing and content of Cresco disclosure information in advance of the shareholder election to take Cresco equity units rather than cash consideration at ANSWER AND COUNTERCLAIMS - 17 - FILED: NEW YORK COUNTY CLERK 01/06/2022 05:40 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 292 RECEIVED NYSCEF: 01/06/2022 each installment, the parties to the LOI were unable to enter into a Definitive Agreement as contemplated by the LOI; (iv) misleading Fiorello as to their financial wherewithal and status of bus