Preview
FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018
NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022
Exhibit YY5
Motion Sequence 11: Memorandum of Law in Support of Defendant’s
Motion for Summary Judgment or, in the Alternative, to Limit Plaintiff’s Damages
as a Matter of Law
Index No. 652343/2018 Motion Sequence 12
FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018
NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
----------------------------------------------------------X
CRESCO LABS, NEW YORK, LLC, a New
York limited liability company, and CRESCO
Index No.: 652343/2018
LABS LLC, an Illinois limited liability company,
Hon. Andrew Borrok
Plaintiffs,
Mot. Seq. No. 11
-against-
FIORELLO PHARMACEUTICALS, INC., a
New York corporation,
Defendant.
----------------------------------------------------------X
MEMORANDUM OF LAW IN SUPPORT OF DEFENDANT’S MOTION
FOR SUMMARY JUDGMENT OR, IN THE ALTERNATIVE, TO LIMIT
PLAINTIFF’S DAMAGES AS A MATTER OF LAW
IZOWER FELDMAN, LLP
Attorneys for Defendant Fiorello
Pharmaceuticals, Inc.
1325 Franklin Avenue, Suite 255
Garden City, NY 11530
Tel: (646) 688-3232
Fax: (646) 304-7071
On the brief
Ronald D. Lefton
Rachel Izower-Faddé
FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018
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TABLE OF CONTENTS
TABLE OF AUTHORITIES ................................................................................ iii
PRELIMINARY STATEMENT ............................................................................1
STATEMENT OF FACTS ......................................................................................3
I. Fiorello’s Medical Marijuana License. ...........................................................3
II. Cresco And Fiorello Enter Into The LOI. ........................................................4
III. The No-Shop Provision. ...................................................................................6
IV. Cresco Failed To Perform. ...............................................................................6
V. Fiorello Did Not Breach The Exclusivity Clause...........................................10
VI. Fiorello’s Shareholders And The DOH Would Not Have Approved
Any Transaction On The LOI Terms. ...........................................................13
ARGUMENT ..........................................................................................................15
I. Cresco Cannot Recover Because It Breached The LOI. ................................15
II. Fiorello Did Not Breach. ................................................................................16
III. Cresco Cannot Satisfy The Causation Element..............................................18
A. Cresco’s Alleged Damages Are Not Directly Traceable To
The Supposed Breach. .........................................................................18
B. Any Alleged Breach Was Not The “But For” Cause Of
Cresco’s Losses. ..................................................................................21
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IV. New York Law Limits Possible Recovery To Reliance Damages. ...............24
A. Cresco Cannot Recover Benefit-Of-The-Bargain Damages
For A Deal It Never Made...................................................................24
B. Cresco is Not Entitled to Damages That Were Not Within
the Contemplation of the Parties. ........................................................28
CONCLUSION.......................................................................................................32
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TABLE OF AUTHORITIES
Cases
180 Water St. Assoc., L.P. v Lehman Bros. Holdings, Inc.,
7 AD3d 316 [1st Dept 2004] ................................................................................ 24
Anderson v Liberty Lobby, Inc.,
477 US 242 [1986] ............................................................................................... 17
BW Hvac Operations, LLC v Lambro Indus., Inc.,
2014 WL 2728049 [N.Y. Sup Ct, New York County 2014] ............................... 25
Cerberus Capital Management, L.P. v. Snelling & Snelling,
12 Misc. 3d 1187(A) [Sup. Ct. NY Cty 2005] ..................................................... 25
Diesel Props S.r.l. v Greystone Bus. Credit II LLC,
631 F3d 42 [2d Cir 2011] ..................................................................................... 18
Fairbrook Leasing, Inc. v Mesaba Aviation, Inc.,
519 F3d 421 [8th Cir 2008].................................................................................. 25
Ge Oil & Gas, Inc. v Turbine Generation Services, L.L.C.,
2016 WL 865318 [N.Y. Sup Ct, New York County 2016] ................................. 25
Goodstein Const. Corp. v City of New York,
80 NY2d 366 [1992] ............................................................................. 3, 24-29, 31
Granite Partners, L.P. v. Merrill Lynch, Pierce, Fenner & Smith Inc.,
2002 WL 826956 [SDNY May 1, 2002] ............................................................. 22
Hirsch Elec. Co., Inc. v Community Services, Inc.,
145 AD2d 603 [2d Dept 1988] ...................................................................... 19, 21
Imperium Capital, LLC v Krasilovsky (Mercer) Family Ltd. Partnership,
2013 WL 4013491 [N.Y. Sup Ct, New York County 2013] ............................... 25
Kenford Co. v. Erie Cty.,
67 NY2d 257 [1986] ................................................................................ 18, 21, 28
L-7 Designs, Inc. v Old Navy, LLC,
647 F3d 419 [2d Cir 2011] ................................................................................... 25
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Lexington 360 Assoc. v First Union Nat. Bank of N. Carolina,
234 AD2d 187 [1st Dept 1996] ...................................................................... 18, 22
MG W. 100 LLC v St. Michael's Prot. Episcopal Church,
127 AD3d 624 [1st Dept 2015] ............................................................................ 24
MG W. 100 LLC v St. Michael's Prot. Episcopal Church,
43 Misc 3d 1231(A) [Sup Ct 2014] ..................................................................... 29
NBT Bancorp Inc. v Fleet/Norstar Fin. Group Inc.,
87 NY2d 614 (1996) ...................................................................................... 21, 23
People ex rel. Spitzer v Grasso,
50 AD3d 535 [1st Dept 2008] .............................................................................. 17
Pesa v. Yoma Dev. Grp., Inc.,
18 NY3d 527 [2012] ............................................................................................ 22
Raven Capital Mgt. LLC v Georgia Film Fund 72, LLC,
2021 WL 465980 [N.Y. Sup Ct, New York County 2021] ................................. 24
Rose Lee Mfg., Inc. v Chem. Bank,
186 AD2d 548 [2d Dept 1992] ............................................................................ 22
Sands Bros. & Co., Ltd. v Generex Pharm., Inc.,
298 AD2d 307 [1st Dept 2002] ............................................................................ 24
Signature Bank v. Laro Maintenance Corp.,
2011 WL 2669744 [NY Sup. Ct. June 21, 2011]................................................. 17
Teachers Ins. and Annuity Ass’n of Am. v Tribune Co.,
670 F Supp 491 [SDNY 1987]............................................................................. 29
Trademark Research Corp. v Maxwell Online, Inc.,
995 F2d 326 [2d Cir 1993] ................................................................................... 30
Worldwide Services, Ltd. v Bombardier Aerospace Corp.,
2015 WL 5671724 [SDNY Sept. 22, 2015]......................................................... 25
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Regulations
10 NYCRR 1004.8-10............................................................................................... 3
10 NYCRR 1004.10(B)(5) ...................................................................................... 31
Other Authorities
22A N.Y. Jur. 2d Contracts § 418........................................................................... 15
28A N.Y. Prac., Contract Law § 22:6 ..................................................................... 22
1 Farnsworth, Contracts §3.26a .............................................................................. 26
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PRELIMINARY STATEMENT
The sole remaining claim in this action alleges a breach of the exclusivity
provision in the February 14, 2018 letter of intent (“LOI”) between Defendant
Fiorello Pharmaceuticals, Inc. (“Fiorello”), and the proposed “Buyer,” Plaintiffs
Cresco Labs, LLC and Cresco Labs, New York, LLC (together “Cresco”). Fiorello
moves for summary judgment dismissing this action in its entirety or, in the
alternative, determining as a matter of law that the proper measure of damages is
out-of-pocket, reliance damages. 1
This Court has held that the LOI was a “preliminary agreement” to negotiate
a further agreement and that there was no “meeting of the minds” as to that
contemplated further agreement. Nevertheless, Cresco persists in its efforts to hold
Fiorello liable to the same extent as if the Parties actually had reached a final
agreement and that agreement had received the multiple levels of approval required.
Cresco thus improperly pursues its dismissed breach of contract claim under another
name.
1 This motion is supported by the Affidavits of Eric Sirota (“Sirota_Aff.”) and Jonathan Canarick
(“Canarick_Aff.”) and Affirmations of Jerome Levy (“Levy_Aff.”) and Rachel Izower-Fadde
(“RIF_Aff.”). References to exhibits (“Ex.”) A-W are to the RIF_Aff.; Exs. X-JJ to the
Sirota_Aff.; KK-LL to the Canarick_Aff.; and MM-RR to the Levy_Aff.
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The limited 30-business-day exclusivity clause did not preclude Fiorello from
communicating with others. Rather, it prohibited Fiorello only from negotiating a
sale of a majority of its stock or assets with another prospective buyer.
There is no evidence of breach. The record confirms that, although two
companies, Liberty Health Sciences (“Liberty”) and Green Thumb Industries
(“GTI”), approached Fiorello, there were no discussions of any transaction until
April 2018, after the LOI had expired. Whereas Fiorello had discussed a potential
transaction with each of Liberty and GTI prior to the LOI’s effective date, there was
no discussion of deal terms during the exclusivity period. On the contrary, when
Liberty and GTI sent unsolicited proposals during the exclusivity period, Fiorello
responded that it could not engage.
Cresco cannot establish a question of material fact based upon evidence, as
opposed to speculation, argument, and counsel’s own innuendo, that there was a
breach. But even assuming arguendo that a material breach occurred, there is no
causal nexus between any supposed breach and any cognizable injury to Cresco.
Among other things, the New York Department of Health (“DOH”) would not have
approved the agreement contemplated by the LOI. Moreover, Fiorello’s
shareholders would not have approved any agreement based upon the LOI’s terms.
Absent both these approvals, no transaction could proceed. Accordingly, Cresco’s
claim should be dismissed.
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Alternatively, New York law restricts recovery for breach of a preliminary
agreement, such as the LOI, to out-of-pocket reliance damages. The New York Court
of Appeals decision in Goodstein Const. Corp. v City of New York, 80 NY2d 366
[1992], requires dismissal of Cresco’s claims for tens of millions of dollars in
replacement costs and lost profits. Holding otherwise would give Cresco the benefit
of a bargain that was never made and subject Fiorello to unreasonable liability
inconsistent with the LOI– the very result Goodstein prohibits.
STATEMENT OF FACTS
I. FIORELLO’S MEDICAL MARIJUANA LICENSE.
DOH closely regulates the State’s medical marijuana industry, including non-
transferrable industry licenses. DOH must approve any changes in the ownership or
control of a licensee. Licensees must become operational within six months or risk
losing their license. [10 NYCRR 1004.8-10].
After receiving its license in August 2017, Fiorello received DOH approval to
begin operations. Fiorello identified and negotiated leases for manufacturing and
dispensary locations. To proceed, Fiorello needed to raise funding or secure a
partner. [Sirota_Aff. ¶¶6, 10; Exs. C ¶14; D ¶¶11, 13, 16].
Before February 2018, several industry participants approached Fiorello,
including Cresco, Liberty, and GTI. Fiorello rejected an offer from GTI in December
2017. In January 2018, Fiorello and Liberty executed an NDA, exchanged some
3
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documents, and had preliminary discussions. Fiorello also secured a $5 million
financing offer from another entity. [Sirota_Aff. ¶10; Ex. D ¶19].
II. CRESCO AND FIORELLO ENTER INTO THE LOI.
Between December 2017 and February 2018, Cresco and Fiorello exchanged
draft LOIs for a potential stock purchase from Fiorello’s 17 shareholders. [RIF_Aff.
¶¶19-20; Sirota_Aff. ¶¶2, 5, 23; Canarick_Aff. ¶¶3-5; Exs. A; C ¶15; D ¶¶3, 20].
On February 15, 2018, Fiorello executed the LOI, previously executed by Cresco
and effective February 14. Fiorello’s shareholders were not parties to the LOI and
had not authorized or directed the Board to enter into the LOI. [Id.] Fiorello did not
make any representations about whether any of its shareholders, including Sirota and
Yoss, would approve any proposed Definitive Agreement. [Id.] Sirota and Yoss
executed the LOI in their corporate capacities only. They were not bound to approve
any agreement in their capacities as members of Fiorello’s Board or to sell their own
shares to Cresco pursuant to any potential agreement. [Exs. A; D ¶3]. The LOI was
only an agreement to attempt to negotiate an agreement to then present to
shareholders. [Ex. B, 10].
The LOI outlined certain “proposed terms” for a potential transaction whereby
Cresco would buy 100% of Fiorello’s stock from all Fiorello shareholders for $22.5
million in cash or equity, at each shareholder’s option, payable in installments over
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a two-year period, plus up to $10 million if New York State legalized adult
recreational marijuana use, for a total potential value of $32.5 million. [Ex. A, 1-2].
The LOI reflected the Parties’ understanding that they might not reach a
Definitive Agreement (which the LOI defined to include the stock purchase
agreement (“SPA”) and all ancillary agreements) and, even if they did, a deal might
not close. The LOI specifically stated that any transaction was contingent upon
satisfactory completion of due diligence, as well as approvals by:
• the Parties’ boards of directors;
• 100% of Fiorello shareholders;
• Cresco’s members; and
• DOH.
[Ex. A, 3-4.]
The Parties understood that these approvals were not guaranteed and that any
potential Definitive Agreement might not close. The LOI’s text recognized that
contingency. [Exs. A, 1, 4-5; B, 8].
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III. THE NO-SHOP PROVISION.
The “Timing” Section limits the LOI’s term to 30 business days, during which
the Parties were to “complete and execute” the contemplated Definitive Agreement.
The related exclusivity language is:
By executing this LOI, the Parties agree that they will not
discuss or enter into any transaction with any third-party
involving (a) the sale of a majority equity stake in, or all
or substantially all of the assets of, Fiorello or any
subsidiary or parent entities of Fiorello, including without
limitation, any sale or other transfer of the grower and
dispensary license used or owned by Fiorello to any third-
party or (b) the purchase of any equity interest in or assets
of another [NY Licensee] by Buyer.
Id., 4. 2 Neither the no-shop provision nor any other part of the LOI prohibited
Fiorello from discussing a different transaction.
IV. CRESCO FAILED TO PERFORM.
The following timeline identifies Cresco’s repeated breaches and inaction,
which squandered most of the exclusivity period.
February 15
Cresco immediately breached the LOI by, among other things, neither making
the required Good Faith Payment nor providing its due diligence list. [RIF_Aff
¶¶39-40; Sirota_Aff. ¶¶13-14; Exs. A, 3-4; D ¶46; E, ¶16; E(C); H(2) 59:15-24].
2
The no-shop provision was negotiated to delete “exclusive dealings” thereby clarifying that other
communications were permissible [Exs. H(5) 92:16-23].
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Cresco also refused to negotiate a Management Oversight Agreement (“MOA”) or
provide interim funding, even though Cresco knew this was critical to Fiorello.
[RIF_Aff ¶41; Sirota_Aff. ¶¶16-17; Exs. H(1) 98:13-17, 110:25–111:5, 206:22-
207:2; H(2) 30:22-32:16, 39:8-42:12; X]. Contrary to the representations it made in
the LOI, Cresco did not have adequate funding to make “each and all installments”
and still had not raised the funds when the LOI expired. [Exs. A, 4; H(1) 171:13-23,
176:7-177:8, 294:13-300:5; L-M].
March 1
After 1/3 of the exclusivity period had passed, Cresco finally made the Good
Faith Payment (after unilaterally imposing an escrow requirement) and produced a
generic, largely inapplicable due diligence list and (despite having assumed
responsibility for drafting) an incomplete placeholder draft agreement that did not
reflect the LOI. [Sirota_Aff. ¶¶13-15; Exs. A, 3; D ¶¶46, 50; E ¶¶16-20; E(C); I].
In its efforts to attract investors, Cresco issued an investment deck, from
which Fiorello could be identified as the LOI counterparty. [RIF_Aff. ¶¶55-58; Exs.
H(1) 272:6-273:12; N-O]. Cresco’s CEO admitted that the deck breached the LOI
confidentiality provisions. [Id.].
March 2
Cresco withdrew its draft SPA, acknowledging it did not reflect the LOI.
Cresco also told its counsel that several DOH approval requirements “remain
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conditions to close.” [Ex. I]. Cresco did not follow up with respect to those issues
until March 22.
March 8
After 1/2 the LOI term had expired, Cresco forwarded a new draft SPA to
Fiorello, but none of the necessary related documents. [Exs. A, 1-2; E ¶¶17, 20-22].
March 9-12
Cresco sent a draft consulting agreement then withdrew and replaced it. [Ex.
E, ¶17; J].
March 15
A month after the LOI’s execution, Cresco sent a first draft of a promissory
note that was wholly unsuitable for the proposed deal. [Ex. E ¶¶21-22; Ex. K].
Cresco drafted a contribution and exchange agreement, but it did not resolve the
deal’s myriad tax issues. [Id.]
March 22-23
Cresco asked Fiorello to seek DOH guidance on issues central to Cresco’s
willingness and ability to proceed with the contemplated transaction. Fiorello raised
Cresco’s questions with DOH the following day, but, by the end of the LOI’s term,
DOH had not responded. [Sirota_Aff. ¶19; Exs. V, Z].
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March 26
Fiorello provided Cresco with detailed comments on the various drafts and
prepared the required schedules. [Exs. E ¶23; E(D)].
March 29
On the LOI’s expiration date,3 Cresco and Fiorello were far from agreement.
Fiorello confirmed that the LOI had expired. Cresco acknowledged that no
Definitive Agreement had been reached, tax issues remained, and required DOH
input “related to our structure” had not been received. [Exs. E ¶¶24-25; E(F); V
(Cresco’s counsel prepared an “issues memo” on the draft documents); GG
(3/30/2018 Cresco email “Let’s do what we can to get the definitive doc executed
this week – even if we can’t figure out the tax issue because we’re waiting for
feedback from the DOH.”)].
April 1-5
Cresco (a) acknowledged that the Parties still had not agreed on all terms,
noting “open points in the documents,” including the tax structure “gating issue,”
[Exs. E(E); GG at MS_000689-90]; (b) admitted that “both sides ha[d] been diligent
and I know any delays have been related to tricky tax structuring, responses from
3
Cresco now takes the position that the 30-business-days calculates to March 30. It makes no
difference whether exclusivity expired on March 29 or 30; there were no prohibited discussions
with others.
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DOH,…all reasonable issues[;]” and (c) acknowledged Fiorello had put its
“operation on hold pending our closing.” [Exs. D ¶56; GG at MS_000687].
Fiorello’s concerns that Cresco was breaching the confidentiality provisions
were substantiated when it read a trade publication interview of Cresco’s CEO and
received a copy of a Cresco investment deck. [Sirota_Aff. ¶34; Ex. D ¶57]. When
Fiorello demanded that Cresco identify the extent of its confidentiality breaches,
Cresco stonewalled. [Id.].
V. FIORELLO DID NOT BREACH THE EXCLUSIVITY CLAUSE.
Fiorello did not discuss a sale of the Company with any third party during the
30-business-day no-shop period. Fiorello even rejected without discussion three
unsolicited offers and did not discuss any sale during a meet-and-greet with Liberty
officers.
GTI’s Unsolicited Offer
On March 20, 2018, GTI sent Fiorello an unsolicited proposal to purchase
Fiorello for $25 million ($15 million cash/$10 million equity). [Sirota_Aff. ¶26, 30,
Exs. EE-FF]. Fiorello responded on March 22 that it could not discuss any
transaction with GTI until at least March 30. [Id.]. GTI witnesses attested to their
frustration that Fiorello would not engage in discussions at the time. [RIF_Aff. ¶67;
Exs. H(8) 71:16-72:6, 74:10-12; H(9) 125:13-126:1].
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Liberty’s Unsolicited Offers
Pre-LOI, Fiorello and Liberty had engaged in preliminary discussions about
Fiorello’s business. Before speaking with Fiorello, an industry attorney told Liberty
that sales of New York medical marijuana licenses “have been in the $26M range.”
[Ex. U]. On February 15, Liberty CEO George Scorsis called Fiorello to say he and
Liberty CFO Renee Gulliver would be in New York on February 22 and would like
to meet. Suspicious about the timing of Liberty’s call on the heels of executing the
LOI and because Sirota and Yoss had never met Liberty’s principals, and to foster a
good relationship with a major industry player, they agreed to meet. [Sirota_Aff.
¶23].
Fiorello’s suspicions proved well founded. Discovery established that, at that
time, Cresco and Liberty were discussing their own potential merger and Cresco had
included in its valuation a New York license based upon a binding LOI. [RIF_Aff.
¶¶56-63, 70; Exs. Q-R; T].
On February 22, Yoss and Sirota met with Scorsis and Gulliver over coffee.
The meeting lasted less than an hour and the attendees discussed market conditions,
product development, and the Olympics. The attendees did not discuss a sale of
Fiorello’s equity or assets. [Sirota_Aff. ¶24; Exs. H(4) 171:25-174:5; H(5) 155:14-
158:4, 163:17-164:11; H(10) 66:15-20, 66:24-67:25].
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On March 3, 2018, Liberty sent Fiorello an unsolicited offer to purchase
Fiorello for $27.5 million ($22.5 million cash/$5 million equity). [Ex. BB]. Those
financial terms comported with the pre-LOI information Liberty had received from
a third party. [Exs. H(1), 81:21-82:2; U]. Fiorello responded that it could not discuss
Liberty’s proposal “until at least March 30th.” [Sirota_Aff. ¶25; Ex. CC].
On March 16, Liberty sent a nearly identical unsolicited offer. [Sirota_Aff.
¶27; Ex. DD]. Fiorello again responded that it could not discuss any potential
transaction with Liberty “until at least March 30th.” [Sirota_Aff. ¶27; Exs. AA, DD].
There is no evidence of negotiations between Fiorello and any party other than
Cresco during the exclusivity period. [RIF_Aff. ¶¶64-79]. Cresco may nevertheless
rely on testimony by Gulliver to the effect that, at the February 22 meeting, there
would have been discussion about whether Fiorello was free to talk and at what price.
[RIF_Aff. ¶75; Ex. H(11) 61:14-65:21].
Every other meeting participant testified that no such discussion occurred.
[RIF_Aff. ¶78; Exs. H(4) 171:25-174:5; H(5) 155:14-158:4, 163:17-164:11; H(10)
66:24-67:25]. Moreover, Gulliver did not testify that there was any other discussion
of potential terms or of a potential transaction, at that meeting or otherwise.
[RIF_Aff. ¶79; Ex. H(11) 61:14-65:21]. Gulliver later acknowledged that there had
been no negotiations and that the absence of any exchange of documents or email
indicated to him that there had been no material discussions. [RIF_Aff. ¶76; Ex.
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H(11) 139:9-21]. More than three years after the event, he had conflated his recall
of January and April into February. [RIF_Aff. ¶79(c); Ex. H(11) 126:7-13].
VI. FIORELLO’S SHAREHOLDERS AND DOH WOULD NOT HAVE APPROVED
ANY TRANSACTION ON THE LOI TERMS.
On April 5, inconsistent with its slow-walking theory, Cresco estimated that
it needed three additional weeks to complete due diligence, resolve all open issues,
and finalize all necessary documents. [Sirota_Aff. ¶¶32, 36; Exs. E ¶25; E(F)]. If
that schedule had been approved (and Cresco had adhered to it), it would have been
well past the LOI’s April 15 contemplated “Closing” date before anything could be
submitted to shareholders and DOH.
In April 2018, after the LOI had expired, Fiorello began discussions with other
potential purchasers, explored funding options, and continued discussions with
Cresco on a non-exclusive basis. [Sirota_Aff. ¶¶33, 36; Ex. D ¶¶62-69].
Cresco’s stonewalling on its breach of the LOI’s confidentiality provision
concerned Fiorello’s Board about proceeding with Cresco. Moreover, between mid-
April and mid-May, well after the expiration of the LOI, multiple New York
officials’ encouraging statements about adult legalization energized the market for
marijuana licenses. In May 2018, Fiorello’s financial advisor Ackrell Capital issued
a valuation report, which showed that the LOI terms were below market. This
informed how the Board proceeded with Cresco and others. [Sirota_Aff. ¶¶37-43;
Ex. HH].
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Moreover, throughout May and June 2018, Fiorello’s majority preferred
shareholder, which had veto power over any change-of-control transaction,
expressed opposition to any transaction on the LOI’s terms, particularly the below-
market price and lack of adequate security for the LOI’s installment and contingency
payments. [Sirota_Aff. ¶41; Canarick_Aff. ¶¶3, 9-12; Ex. LL].
After a late-June 2018 auction in which Cresco participated, Fiorello and all
its shareholders agreed to merge Fiorello into a GTI subsidiary. In October 2018,
Cresco entered a merger agreement with Valley Agriceuticals, Inc. (“Valley”),
another NY medical marijuana licensee. [Ex. C ¶¶34-36, 40-41].
DOH rejected both transactions, explaining that it would not approve the sale
of a 100% interest in any pre-operational medical marijuana licensee because such
a sale would be a prohibited transfer of the license. DOH also refused to approve
any transaction in which any consideration was contingent upon adult legalization.
[RIF_Aff. ¶94; Sirota_Aff. ¶¶44-47; Levy_Aff. ¶¶5, 7, 9, 11-15; Exs. MM-NN; PP-
QQ]. The potential deal contemplated by the LOI had both these fatal flaws: 1)
Fiorello was not operational and, absent the promised funding from Cresco, had put
its operational development on hold, and 2) the up to $10 million adult legalization
contingency amounted to 31% of total potential consideration. [Ex. A; Sirota_Aff.
¶¶16-18, 44-45; Levy_Aff. ¶15]. DOH would not have approved any Definitive
Agreement based on the LOI.
14
FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018
NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022
In August 2019, DOH approved a merger with GTI, 17 months after the LOI
expired, based on a materially different merger agreement without any adult
legalization contingency and only after Fiorello had become operational and
renewed its license. [Sirota_Aff. ¶¶44-52; Ex. II-JJ].
ARGUMENT
I. CRESCO CANNOT RECOVER BECAUSE IT BREACHED THE LOI.
Cresco falsely accuses Fiorello of “slow-walk[ing] the memorialization of a
final agreement” after allegedly breaching the exclusivity provision. [Ex. C ¶3]. Yet,
Cresco itself did more than slow walk its own LOI obligations; it ignored them.
A plaintiff cannot recover for breach of a contract it did not itself perform.
22A N.Y. Jur. 2d Contracts § 418 (p
Preview
FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 Exhibit YY5 Motion Sequence 11: Memorandum of Law in Support of Defendant’s Motion for Summary Judgment or, in the Alternative, to Limit Plaintiff’s Damages as a Matter of Law Index No. 652343/2018 Motion Sequence 12 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK ----------------------------------------------------------X CRESCO LABS, NEW YORK, LLC, a New York limited liability company, and CRESCO Index No.: 652343/2018 LABS LLC, an Illinois limited liability company, Hon. Andrew Borrok Plaintiffs, Mot. Seq. No. 11 -against- FIORELLO PHARMACEUTICALS, INC., a New York corporation, Defendant. ----------------------------------------------------------X MEMORANDUM OF LAW IN SUPPORT OF DEFENDANT’S MOTION FOR SUMMARY JUDGMENT OR, IN THE ALTERNATIVE, TO LIMIT PLAINTIFF’S DAMAGES AS A MATTER OF LAW IZOWER FELDMAN, LLP Attorneys for Defendant Fiorello Pharmaceuticals, Inc. 1325 Franklin Avenue, Suite 255 Garden City, NY 11530 Tel: (646) 688-3232 Fax: (646) 304-7071 On the brief Ronald D. Lefton Rachel Izower-Faddé FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 TABLE OF CONTENTS TABLE OF AUTHORITIES ................................................................................ iii PRELIMINARY STATEMENT ............................................................................1 STATEMENT OF FACTS ......................................................................................3 I. Fiorello’s Medical Marijuana License. ...........................................................3 II. Cresco And Fiorello Enter Into The LOI. ........................................................4 III. The No-Shop Provision. ...................................................................................6 IV. Cresco Failed To Perform. ...............................................................................6 V. Fiorello Did Not Breach The Exclusivity Clause...........................................10 VI. Fiorello’s Shareholders And The DOH Would Not Have Approved Any Transaction On The LOI Terms. ...........................................................13 ARGUMENT ..........................................................................................................15 I. Cresco Cannot Recover Because It Breached The LOI. ................................15 II. Fiorello Did Not Breach. ................................................................................16 III. Cresco Cannot Satisfy The Causation Element..............................................18 A. Cresco’s Alleged Damages Are Not Directly Traceable To The Supposed Breach. .........................................................................18 B. Any Alleged Breach Was Not The “But For” Cause Of Cresco’s Losses. ..................................................................................21 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 IV. New York Law Limits Possible Recovery To Reliance Damages. ...............24 A. Cresco Cannot Recover Benefit-Of-The-Bargain Damages For A Deal It Never Made...................................................................24 B. Cresco is Not Entitled to Damages That Were Not Within the Contemplation of the Parties. ........................................................28 CONCLUSION.......................................................................................................32 ii FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 TABLE OF AUTHORITIES Cases 180 Water St. Assoc., L.P. v Lehman Bros. Holdings, Inc., 7 AD3d 316 [1st Dept 2004] ................................................................................ 24 Anderson v Liberty Lobby, Inc., 477 US 242 [1986] ............................................................................................... 17 BW Hvac Operations, LLC v Lambro Indus., Inc., 2014 WL 2728049 [N.Y. Sup Ct, New York County 2014] ............................... 25 Cerberus Capital Management, L.P. v. Snelling & Snelling, 12 Misc. 3d 1187(A) [Sup. Ct. NY Cty 2005] ..................................................... 25 Diesel Props S.r.l. v Greystone Bus. Credit II LLC, 631 F3d 42 [2d Cir 2011] ..................................................................................... 18 Fairbrook Leasing, Inc. v Mesaba Aviation, Inc., 519 F3d 421 [8th Cir 2008].................................................................................. 25 Ge Oil & Gas, Inc. v Turbine Generation Services, L.L.C., 2016 WL 865318 [N.Y. Sup Ct, New York County 2016] ................................. 25 Goodstein Const. Corp. v City of New York, 80 NY2d 366 [1992] ............................................................................. 3, 24-29, 31 Granite Partners, L.P. v. Merrill Lynch, Pierce, Fenner & Smith Inc., 2002 WL 826956 [SDNY May 1, 2002] ............................................................. 22 Hirsch Elec. Co., Inc. v Community Services, Inc., 145 AD2d 603 [2d Dept 1988] ...................................................................... 19, 21 Imperium Capital, LLC v Krasilovsky (Mercer) Family Ltd. Partnership, 2013 WL 4013491 [N.Y. Sup Ct, New York County 2013] ............................... 25 Kenford Co. v. Erie Cty., 67 NY2d 257 [1986] ................................................................................ 18, 21, 28 L-7 Designs, Inc. v Old Navy, LLC, 647 F3d 419 [2d Cir 2011] ................................................................................... 25 iii FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 Lexington 360 Assoc. v First Union Nat. Bank of N. Carolina, 234 AD2d 187 [1st Dept 1996] ...................................................................... 18, 22 MG W. 100 LLC v St. Michael's Prot. Episcopal Church, 127 AD3d 624 [1st Dept 2015] ............................................................................ 24 MG W. 100 LLC v St. Michael's Prot. Episcopal Church, 43 Misc 3d 1231(A) [Sup Ct 2014] ..................................................................... 29 NBT Bancorp Inc. v Fleet/Norstar Fin. Group Inc., 87 NY2d 614 (1996) ...................................................................................... 21, 23 People ex rel. Spitzer v Grasso, 50 AD3d 535 [1st Dept 2008] .............................................................................. 17 Pesa v. Yoma Dev. Grp., Inc., 18 NY3d 527 [2012] ............................................................................................ 22 Raven Capital Mgt. LLC v Georgia Film Fund 72, LLC, 2021 WL 465980 [N.Y. Sup Ct, New York County 2021] ................................. 24 Rose Lee Mfg., Inc. v Chem. Bank, 186 AD2d 548 [2d Dept 1992] ............................................................................ 22 Sands Bros. & Co., Ltd. v Generex Pharm., Inc., 298 AD2d 307 [1st Dept 2002] ............................................................................ 24 Signature Bank v. Laro Maintenance Corp., 2011 WL 2669744 [NY Sup. Ct. June 21, 2011]................................................. 17 Teachers Ins. and Annuity Ass’n of Am. v Tribune Co., 670 F Supp 491 [SDNY 1987]............................................................................. 29 Trademark Research Corp. v Maxwell Online, Inc., 995 F2d 326 [2d Cir 1993] ................................................................................... 30 Worldwide Services, Ltd. v Bombardier Aerospace Corp., 2015 WL 5671724 [SDNY Sept. 22, 2015]......................................................... 25 iv FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 Regulations 10 NYCRR 1004.8-10............................................................................................... 3 10 NYCRR 1004.10(B)(5) ...................................................................................... 31 Other Authorities 22A N.Y. Jur. 2d Contracts § 418........................................................................... 15 28A N.Y. Prac., Contract Law § 22:6 ..................................................................... 22 1 Farnsworth, Contracts §3.26a .............................................................................. 26 v FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 PRELIMINARY STATEMENT The sole remaining claim in this action alleges a breach of the exclusivity provision in the February 14, 2018 letter of intent (“LOI”) between Defendant Fiorello Pharmaceuticals, Inc. (“Fiorello”), and the proposed “Buyer,” Plaintiffs Cresco Labs, LLC and Cresco Labs, New York, LLC (together “Cresco”). Fiorello moves for summary judgment dismissing this action in its entirety or, in the alternative, determining as a matter of law that the proper measure of damages is out-of-pocket, reliance damages. 1 This Court has held that the LOI was a “preliminary agreement” to negotiate a further agreement and that there was no “meeting of the minds” as to that contemplated further agreement. Nevertheless, Cresco persists in its efforts to hold Fiorello liable to the same extent as if the Parties actually had reached a final agreement and that agreement had received the multiple levels of approval required. Cresco thus improperly pursues its dismissed breach of contract claim under another name. 1 This motion is supported by the Affidavits of Eric Sirota (“Sirota_Aff.”) and Jonathan Canarick (“Canarick_Aff.”) and Affirmations of Jerome Levy (“Levy_Aff.”) and Rachel Izower-Fadde (“RIF_Aff.”). References to exhibits (“Ex.”) A-W are to the RIF_Aff.; Exs. X-JJ to the Sirota_Aff.; KK-LL to the Canarick_Aff.; and MM-RR to the Levy_Aff. 1 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 The limited 30-business-day exclusivity clause did not preclude Fiorello from communicating with others. Rather, it prohibited Fiorello only from negotiating a sale of a majority of its stock or assets with another prospective buyer. There is no evidence of breach. The record confirms that, although two companies, Liberty Health Sciences (“Liberty”) and Green Thumb Industries (“GTI”), approached Fiorello, there were no discussions of any transaction until April 2018, after the LOI had expired. Whereas Fiorello had discussed a potential transaction with each of Liberty and GTI prior to the LOI’s effective date, there was no discussion of deal terms during the exclusivity period. On the contrary, when Liberty and GTI sent unsolicited proposals during the exclusivity period, Fiorello responded that it could not engage. Cresco cannot establish a question of material fact based upon evidence, as opposed to speculation, argument, and counsel’s own innuendo, that there was a breach. But even assuming arguendo that a material breach occurred, there is no causal nexus between any supposed breach and any cognizable injury to Cresco. Among other things, the New York Department of Health (“DOH”) would not have approved the agreement contemplated by the LOI. Moreover, Fiorello’s shareholders would not have approved any agreement based upon the LOI’s terms. Absent both these approvals, no transaction could proceed. Accordingly, Cresco’s claim should be dismissed. 2 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 Alternatively, New York law restricts recovery for breach of a preliminary agreement, such as the LOI, to out-of-pocket reliance damages. The New York Court of Appeals decision in Goodstein Const. Corp. v City of New York, 80 NY2d 366 [1992], requires dismissal of Cresco’s claims for tens of millions of dollars in replacement costs and lost profits. Holding otherwise would give Cresco the benefit of a bargain that was never made and subject Fiorello to unreasonable liability inconsistent with the LOI– the very result Goodstein prohibits. STATEMENT OF FACTS I. FIORELLO’S MEDICAL MARIJUANA LICENSE. DOH closely regulates the State’s medical marijuana industry, including non- transferrable industry licenses. DOH must approve any changes in the ownership or control of a licensee. Licensees must become operational within six months or risk losing their license. [10 NYCRR 1004.8-10]. After receiving its license in August 2017, Fiorello received DOH approval to begin operations. Fiorello identified and negotiated leases for manufacturing and dispensary locations. To proceed, Fiorello needed to raise funding or secure a partner. [Sirota_Aff. ¶¶6, 10; Exs. C ¶14; D ¶¶11, 13, 16]. Before February 2018, several industry participants approached Fiorello, including Cresco, Liberty, and GTI. Fiorello rejected an offer from GTI in December 2017. In January 2018, Fiorello and Liberty executed an NDA, exchanged some 3 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 documents, and had preliminary discussions. Fiorello also secured a $5 million financing offer from another entity. [Sirota_Aff. ¶10; Ex. D ¶19]. II. CRESCO AND FIORELLO ENTER INTO THE LOI. Between December 2017 and February 2018, Cresco and Fiorello exchanged draft LOIs for a potential stock purchase from Fiorello’s 17 shareholders. [RIF_Aff. ¶¶19-20; Sirota_Aff. ¶¶2, 5, 23; Canarick_Aff. ¶¶3-5; Exs. A; C ¶15; D ¶¶3, 20]. On February 15, 2018, Fiorello executed the LOI, previously executed by Cresco and effective February 14. Fiorello’s shareholders were not parties to the LOI and had not authorized or directed the Board to enter into the LOI. [Id.] Fiorello did not make any representations about whether any of its shareholders, including Sirota and Yoss, would approve any proposed Definitive Agreement. [Id.] Sirota and Yoss executed the LOI in their corporate capacities only. They were not bound to approve any agreement in their capacities as members of Fiorello’s Board or to sell their own shares to Cresco pursuant to any potential agreement. [Exs. A; D ¶3]. The LOI was only an agreement to attempt to negotiate an agreement to then present to shareholders. [Ex. B, 10]. The LOI outlined certain “proposed terms” for a potential transaction whereby Cresco would buy 100% of Fiorello’s stock from all Fiorello shareholders for $22.5 million in cash or equity, at each shareholder’s option, payable in installments over 4 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 a two-year period, plus up to $10 million if New York State legalized adult recreational marijuana use, for a total potential value of $32.5 million. [Ex. A, 1-2]. The LOI reflected the Parties’ understanding that they might not reach a Definitive Agreement (which the LOI defined to include the stock purchase agreement (“SPA”) and all ancillary agreements) and, even if they did, a deal might not close. The LOI specifically stated that any transaction was contingent upon satisfactory completion of due diligence, as well as approvals by: • the Parties’ boards of directors; • 100% of Fiorello shareholders; • Cresco’s members; and • DOH. [Ex. A, 3-4.] The Parties understood that these approvals were not guaranteed and that any potential Definitive Agreement might not close. The LOI’s text recognized that contingency. [Exs. A, 1, 4-5; B, 8]. 5 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 III. THE NO-SHOP PROVISION. The “Timing” Section limits the LOI’s term to 30 business days, during which the Parties were to “complete and execute” the contemplated Definitive Agreement. The related exclusivity language is: By executing this LOI, the Parties agree that they will not discuss or enter into any transaction with any third-party involving (a) the sale of a majority equity stake in, or all or substantially all of the assets of, Fiorello or any subsidiary or parent entities of Fiorello, including without limitation, any sale or other transfer of the grower and dispensary license used or owned by Fiorello to any third- party or (b) the purchase of any equity interest in or assets of another [NY Licensee] by Buyer. Id., 4. 2 Neither the no-shop provision nor any other part of the LOI prohibited Fiorello from discussing a different transaction. IV. CRESCO FAILED TO PERFORM. The following timeline identifies Cresco’s repeated breaches and inaction, which squandered most of the exclusivity period. February 15 Cresco immediately breached the LOI by, among other things, neither making the required Good Faith Payment nor providing its due diligence list. [RIF_Aff ¶¶39-40; Sirota_Aff. ¶¶13-14; Exs. A, 3-4; D ¶46; E, ¶16; E(C); H(2) 59:15-24]. 2 The no-shop provision was negotiated to delete “exclusive dealings” thereby clarifying that other communications were permissible [Exs. H(5) 92:16-23]. 6 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 Cresco also refused to negotiate a Management Oversight Agreement (“MOA”) or provide interim funding, even though Cresco knew this was critical to Fiorello. [RIF_Aff ¶41; Sirota_Aff. ¶¶16-17; Exs. H(1) 98:13-17, 110:25–111:5, 206:22- 207:2; H(2) 30:22-32:16, 39:8-42:12; X]. Contrary to the representations it made in the LOI, Cresco did not have adequate funding to make “each and all installments” and still had not raised the funds when the LOI expired. [Exs. A, 4; H(1) 171:13-23, 176:7-177:8, 294:13-300:5; L-M]. March 1 After 1/3 of the exclusivity period had passed, Cresco finally made the Good Faith Payment (after unilaterally imposing an escrow requirement) and produced a generic, largely inapplicable due diligence list and (despite having assumed responsibility for drafting) an incomplete placeholder draft agreement that did not reflect the LOI. [Sirota_Aff. ¶¶13-15; Exs. A, 3; D ¶¶46, 50; E ¶¶16-20; E(C); I]. In its efforts to attract investors, Cresco issued an investment deck, from which Fiorello could be identified as the LOI counterparty. [RIF_Aff. ¶¶55-58; Exs. H(1) 272:6-273:12; N-O]. Cresco’s CEO admitted that the deck breached the LOI confidentiality provisions. [Id.]. March 2 Cresco withdrew its draft SPA, acknowledging it did not reflect the LOI. Cresco also told its counsel that several DOH approval requirements “remain 7 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 conditions to close.” [Ex. I]. Cresco did not follow up with respect to those issues until March 22. March 8 After 1/2 the LOI term had expired, Cresco forwarded a new draft SPA to Fiorello, but none of the necessary related documents. [Exs. A, 1-2; E ¶¶17, 20-22]. March 9-12 Cresco sent a draft consulting agreement then withdrew and replaced it. [Ex. E, ¶17; J]. March 15 A month after the LOI’s execution, Cresco sent a first draft of a promissory note that was wholly unsuitable for the proposed deal. [Ex. E ¶¶21-22; Ex. K]. Cresco drafted a contribution and exchange agreement, but it did not resolve the deal’s myriad tax issues. [Id.] March 22-23 Cresco asked Fiorello to seek DOH guidance on issues central to Cresco’s willingness and ability to proceed with the contemplated transaction. Fiorello raised Cresco’s questions with DOH the following day, but, by the end of the LOI’s term, DOH had not responded. [Sirota_Aff. ¶19; Exs. V, Z]. 8 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 March 26 Fiorello provided Cresco with detailed comments on the various drafts and prepared the required schedules. [Exs. E ¶23; E(D)]. March 29 On the LOI’s expiration date,3 Cresco and Fiorello were far from agreement. Fiorello confirmed that the LOI had expired. Cresco acknowledged that no Definitive Agreement had been reached, tax issues remained, and required DOH input “related to our structure” had not been received. [Exs. E ¶¶24-25; E(F); V (Cresco’s counsel prepared an “issues memo” on the draft documents); GG (3/30/2018 Cresco email “Let’s do what we can to get the definitive doc executed this week – even if we can’t figure out the tax issue because we’re waiting for feedback from the DOH.”)]. April 1-5 Cresco (a) acknowledged that the Parties still had not agreed on all terms, noting “open points in the documents,” including the tax structure “gating issue,” [Exs. E(E); GG at MS_000689-90]; (b) admitted that “both sides ha[d] been diligent and I know any delays have been related to tricky tax structuring, responses from 3 Cresco now takes the position that the 30-business-days calculates to March 30. It makes no difference whether exclusivity expired on March 29 or 30; there were no prohibited discussions with others. 9 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 DOH,…all reasonable issues[;]” and (c) acknowledged Fiorello had put its “operation on hold pending our closing.” [Exs. D ¶56; GG at MS_000687]. Fiorello’s concerns that Cresco was breaching the confidentiality provisions were substantiated when it read a trade publication interview of Cresco’s CEO and received a copy of a Cresco investment deck. [Sirota_Aff. ¶34; Ex. D ¶57]. When Fiorello demanded that Cresco identify the extent of its confidentiality breaches, Cresco stonewalled. [Id.]. V. FIORELLO DID NOT BREACH THE EXCLUSIVITY CLAUSE. Fiorello did not discuss a sale of the Company with any third party during the 30-business-day no-shop period. Fiorello even rejected without discussion three unsolicited offers and did not discuss any sale during a meet-and-greet with Liberty officers. GTI’s Unsolicited Offer On March 20, 2018, GTI sent Fiorello an unsolicited proposal to purchase Fiorello for $25 million ($15 million cash/$10 million equity). [Sirota_Aff. ¶26, 30, Exs. EE-FF]. Fiorello responded on March 22 that it could not discuss any transaction with GTI until at least March 30. [Id.]. GTI witnesses attested to their frustration that Fiorello would not engage in discussions at the time. [RIF_Aff. ¶67; Exs. H(8) 71:16-72:6, 74:10-12; H(9) 125:13-126:1]. 10 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 Liberty’s Unsolicited Offers Pre-LOI, Fiorello and Liberty had engaged in preliminary discussions about Fiorello’s business. Before speaking with Fiorello, an industry attorney told Liberty that sales of New York medical marijuana licenses “have been in the $26M range.” [Ex. U]. On February 15, Liberty CEO George Scorsis called Fiorello to say he and Liberty CFO Renee Gulliver would be in New York on February 22 and would like to meet. Suspicious about the timing of Liberty’s call on the heels of executing the LOI and because Sirota and Yoss had never met Liberty’s principals, and to foster a good relationship with a major industry player, they agreed to meet. [Sirota_Aff. ¶23]. Fiorello’s suspicions proved well founded. Discovery established that, at that time, Cresco and Liberty were discussing their own potential merger and Cresco had included in its valuation a New York license based upon a binding LOI. [RIF_Aff. ¶¶56-63, 70; Exs. Q-R; T]. On February 22, Yoss and Sirota met with Scorsis and Gulliver over coffee. The meeting lasted less than an hour and the attendees discussed market conditions, product development, and the Olympics. The attendees did not discuss a sale of Fiorello’s equity or assets. [Sirota_Aff. ¶24; Exs. H(4) 171:25-174:5; H(5) 155:14- 158:4, 163:17-164:11; H(10) 66:15-20, 66:24-67:25]. 11 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 On March 3, 2018, Liberty sent Fiorello an unsolicited offer to purchase Fiorello for $27.5 million ($22.5 million cash/$5 million equity). [Ex. BB]. Those financial terms comported with the pre-LOI information Liberty had received from a third party. [Exs. H(1), 81:21-82:2; U]. Fiorello responded that it could not discuss Liberty’s proposal “until at least March 30th.” [Sirota_Aff. ¶25; Ex. CC]. On March 16, Liberty sent a nearly identical unsolicited offer. [Sirota_Aff. ¶27; Ex. DD]. Fiorello again responded that it could not discuss any potential transaction with Liberty “until at least March 30th.” [Sirota_Aff. ¶27; Exs. AA, DD]. There is no evidence of negotiations between Fiorello and any party other than Cresco during the exclusivity period. [RIF_Aff. ¶¶64-79]. Cresco may nevertheless rely on testimony by Gulliver to the effect that, at the February 22 meeting, there would have been discussion about whether Fiorello was free to talk and at what price. [RIF_Aff. ¶75; Ex. H(11) 61:14-65:21]. Every other meeting participant testified that no such discussion occurred. [RIF_Aff. ¶78; Exs. H(4) 171:25-174:5; H(5) 155:14-158:4, 163:17-164:11; H(10) 66:24-67:25]. Moreover, Gulliver did not testify that there was any other discussion of potential terms or of a potential transaction, at that meeting or otherwise. [RIF_Aff. ¶79; Ex. H(11) 61:14-65:21]. Gulliver later acknowledged that there had been no negotiations and that the absence of any exchange of documents or email indicated to him that there had been no material discussions. [RIF_Aff. ¶76; Ex. 12 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 H(11) 139:9-21]. More than three years after the event, he had conflated his recall of January and April into February. [RIF_Aff. ¶79(c); Ex. H(11) 126:7-13]. VI. FIORELLO’S SHAREHOLDERS AND DOH WOULD NOT HAVE APPROVED ANY TRANSACTION ON THE LOI TERMS. On April 5, inconsistent with its slow-walking theory, Cresco estimated that it needed three additional weeks to complete due diligence, resolve all open issues, and finalize all necessary documents. [Sirota_Aff. ¶¶32, 36; Exs. E ¶25; E(F)]. If that schedule had been approved (and Cresco had adhered to it), it would have been well past the LOI’s April 15 contemplated “Closing” date before anything could be submitted to shareholders and DOH. In April 2018, after the LOI had expired, Fiorello began discussions with other potential purchasers, explored funding options, and continued discussions with Cresco on a non-exclusive basis. [Sirota_Aff. ¶¶33, 36; Ex. D ¶¶62-69]. Cresco’s stonewalling on its breach of the LOI’s confidentiality provision concerned Fiorello’s Board about proceeding with Cresco. Moreover, between mid- April and mid-May, well after the expiration of the LOI, multiple New York officials’ encouraging statements about adult legalization energized the market for marijuana licenses. In May 2018, Fiorello’s financial advisor Ackrell Capital issued a valuation report, which showed that the LOI terms were below market. This informed how the Board proceeded with Cresco and others. [Sirota_Aff. ¶¶37-43; Ex. HH]. 13 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 Moreover, throughout May and June 2018, Fiorello’s majority preferred shareholder, which had veto power over any change-of-control transaction, expressed opposition to any transaction on the LOI’s terms, particularly the below- market price and lack of adequate security for the LOI’s installment and contingency payments. [Sirota_Aff. ¶41; Canarick_Aff. ¶¶3, 9-12; Ex. LL]. After a late-June 2018 auction in which Cresco participated, Fiorello and all its shareholders agreed to merge Fiorello into a GTI subsidiary. In October 2018, Cresco entered a merger agreement with Valley Agriceuticals, Inc. (“Valley”), another NY medical marijuana licensee. [Ex. C ¶¶34-36, 40-41]. DOH rejected both transactions, explaining that it would not approve the sale of a 100% interest in any pre-operational medical marijuana licensee because such a sale would be a prohibited transfer of the license. DOH also refused to approve any transaction in which any consideration was contingent upon adult legalization. [RIF_Aff. ¶94; Sirota_Aff. ¶¶44-47; Levy_Aff. ¶¶5, 7, 9, 11-15; Exs. MM-NN; PP- QQ]. The potential deal contemplated by the LOI had both these fatal flaws: 1) Fiorello was not operational and, absent the promised funding from Cresco, had put its operational development on hold, and 2) the up to $10 million adult legalization contingency amounted to 31% of total potential consideration. [Ex. A; Sirota_Aff. ¶¶16-18, 44-45; Levy_Aff. ¶15]. DOH would not have approved any Definitive Agreement based on the LOI. 14 FILED: NEW YORK COUNTY CLERK 01/20/2022 06:26 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 668 RECEIVED NYSCEF: 01/20/2022 In August 2019, DOH approved a merger with GTI, 17 months after the LOI expired, based on a materially different merger agreement without any adult legalization contingency and only after Fiorello had become operational and renewed its license. [Sirota_Aff. ¶¶44-52; Ex. II-JJ]. ARGUMENT I. CRESCO CANNOT RECOVER BECAUSE IT BREACHED THE LOI. Cresco falsely accuses Fiorello of “slow-walk[ing] the memorialization of a final agreement” after allegedly breaching the exclusivity provision. [Ex. C ¶3]. Yet, Cresco itself did more than slow walk its own LOI obligations; it ignored them. A plaintiff cannot recover for breach of a contract it did not itself perform. 22A N.Y. Jur. 2d Contracts § 418 (p