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NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
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CRESCO LABS, NEW YORK, LLC, a New York
limited liability company, and CRESCO LABS LLC, Index No.: 652343/2018
an Illinois limited liability company, Hon. Andrew Borrok
Plaintiffs, Mot. Seq. No.
-against-
FIORELLO PHARMACEUTICALS, INC., a New York
corporation, ERIC SIROTA, an individual, SUSAN
YOSS, an individual, and JOHN DOES 1-10,
Defendants.
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DEFENDANTS’ MOTION FOR A PROTECTIVE ORDER AND
A STAY OF DISCOVERY PURSUANT TO C.P.L.R. §§ 3103 AND 3124(b)
IZOWER FELDMAN, LLP
Attorneys for Defendants Fiorello
Pharmaceuticals, Eric Sirota and
Susan Yoss
85 Broad Street, Floor 18
New York, New York 10004
Tel: (646) 688-3232
Fax: (646) 304-7071
On the brief
Ronald D. Lefton
Stephanie R. Feldman
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TABLE OF CONTENTS
TABLE OF AUTHORITIES ....................................................................................................... ii
PRELIMINARY STATEMENT .................................................................................................. 1
FACTUAL BACKGROUND ...................................................................................................... 3
A. Factual History Underlying the Action..................................................................... 3
B. Procedural History .................................................................................................. 4
LEGAL ARGUMENT ................................................................................................................ 8
POINT I: DEFENDANTS ARE ENTITLED TO A PROTECTIVE ORDER PRECLUDING
PLAINTIFFS FROM OBTAINING DISCOVERY THAT IS IMMATERIAL TO
THEIR CLAIMS, SERVE ONLY AS A “FISHING EXPEDITION” AND
DESIGNED TO HARASS DEFENDANTS ........................................................... 8
A. A Protective Order Striking the Requests Is Necessary To Preclude
Plaintiffs From Obtaining Discovery That The Court Has Already
Ruled Is Irrelevant and Immaterial To Their Claims ............................................... 9
1. Plaintiffs’ Claims In The Amended Complaint Are Substantially
The Same To Those In The Original Complaint Which This Court
Found Insufficient ........................................................................................ 11
B. Plaintiffs’ Discovery Requests Are Demonstrably Overbroad And Serve
Only As A “Fishing Expedition” Designed To Harass Defendants And
Chill Plaintiffs’ Competition In The Market.......................................................... 14
POINT II: A STAY OF DISCOVERY PURSUANT TO CPLR 3214(b)
IS WARRANTED PENDING DISPOSITION OF DEFENDANTS’
MOTION TO DISMISS ...................................................................................... 16
A. Based Upon The Court’s Prior Rulings Of No Likelihood of Success,
The Court Should Impose A Discovery Stay Under CPLR 3214 ........................... 16
B. Service Of Discovery At This Juncture Is Premature Since Issue Has Yet
To Be Joined, Plaintiffs Failed to Properly Join Cresco, And Defendants
Have Yet To Be Served With An Amended Summons .......................................... 18
C. Defendants Will Be Prejudiced Should Discovery Be Allowed To Proceed .......... 20
CONCLUSION ........................................................................................................................ 23
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TABLE OF AUTHORITIES
CASES
Andon ex rel Andon v. 302-304 Mott St. Assoc., 94 N.Y.2d 740 (2000) ..................................... 15
Bandike Associates, Inc. v. B.B.M. Realty Corp., 55 A.D.2d 999 (3d Dep’t 1977) ....................... 8
Barouh Eaton Allen Corp. v. International Business Machines Corp., 76 A.D.2d 873
(2d Dep’t 1980) ............................................................................................................... 8
Bielat v Montrose, 249 A.D.2d 103 (1st Dep’t 1998)................................................................. 21
Capoccia v. Spiro, 88 A.D.2d 1100 (3d Dep’t 1982); app dismd. 57 N.Y.2d 774 (1982) ........... 15
Cascardo v Cascardo, 136 A.D.3d 729 (2d Dep’t 2016) ........................................................... 13
Columbia Gas of New York, Inc. v. New York State Elec. & Gas Corp., 35 A.D.2d 620 (3d Dep’t
1970) ............................................................................................................................... 8
Dubow v. Ames Home Pub. Co., 2 A.D.2d 675 (1st Dep’t 1956) ............................................... 18
Hanover Ins. Co. v Lama, 164 Misc. 2d 843 (App. Term 1995) ............................................ 8, 15
In re Williamson, 261 A.D.2d 147 (1st Dep’t 1999) .................................................................... 8
Jones v. Maples, 257 A.D.2d 53 (1st Dep’t 1999) ................................................................. 8, 13
Lipin v. Bender, 84 N.Y.2d 562 (1994); rearg. den. 84 N.Y.2d 1027 (1995) ............................. 21
Mangialino v. White Haven Memorial Park, 132 A.D.2d 970 (4th Dep't 1987) ........................... 8
Martinez v. Patel, 126 Misc.2d 985 (Sup. Ct., Kings Cty., 1985)............................................... 18
Montalvo v CVS Pharm., Inc., 102 A.D.3d 842 (2d Dep’t 2013) ............................................... 13
Neos v. Neos, 212 A.D.2d 678 (2d Dep’t 1995) ........................................................................... 9
Parimist Funding Corp. v. Rydzinski, 215 A.D.2d 738 (2d Dep’t 1995) .............................. 15, 16
Rappaport v. Blank, 99 Misc.2d 1020 (Sup. Ct., N.Y. Cty.) rev’d on other grounds 72 A.D.2d
717 ................................................................................................................................ 16
Rawlins ex rel. Rawlins v St. Joseph’s Hosp. Health Ctr., 108 A.D.3d 1191 (4th Dep’t 2013) ... 13
Reuters Ltd. v. Dow Jones Telerate, 231 A.D.2d 337 (1st Dep’t 1997) ...................................... 14
Rodolitz v. Beneficial Nat. Life Ins. Co., 41 A.D.2d 707 (1st Dep’t 1973 ..................................... 8
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Stever v. Stever, 10 A.D.3d 358 (2d Dep’t 2004) ....................................................................... 15
Strong v. Brookhaven Memorial Hosp. Medical Center, 240 A.D.2d 726 (2d Dep’t 1997) .......... 8
Wegman v. Wegman, 37 N.Y.2d 940 (1975) .............................................................................. 21
STATUTES AND RULES
22 N.Y.C.R.R. § 202.70 .................................................................................. 2, 16-17, 17 n.1, 20
N.Y. C.P.L.R. § 305 (McKinney 2018) ................................................................................. 2, 18
N.Y. C.P.L.R. § 1003 (McKinney 2018) ................................................................................... 19
N.Y. C.P.L.R. § 3101 (McKinney 2018) ................................................................................... 20
N.Y. C.P.L.R. § 3103 (McKinney 2018) .................................................................... 1, 3, 7-8, 13
N.Y. C.P.L.R. § 3214 (McKinney 2018) ................................................................ 1, 3, 16-17, 20
ADDITIONAL CITATIONS
4 N.Y. Prac., Com. Litig. in New York State Courts § 35:4 Discovery developments in the
Commercial Division, (4th ed.) ........................................................................................ 17
6B Carmody-Wait 2d § 39:77 ................................................................................................... 18
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PRELIMINARY STATEMENT
Pursuant to Sections 3103 and 3214 of the Civil Practice Law and Rules, Defendants
Fiorello Pharmaceuticals, Eric Sirota and Susan Yoss (collectively, “the Defendants”), by their
attorneys, Izower Feldman, LLP, respectfully submit this memorandum of law in support of their
motion for a stay of discovery pending resolution of Defendants’ anticipated motion to dismiss the
Amended Complaint, and for a protective order, striking those document requests and
interrogatories (collectively, “the Requests”) of Plaintiffs Cresco Labs, New York, LLC
(“CLNY”) and Cresco Labs, LLC (collectively, “Plaintiffs”) dated November 20, 2018.
Plaintiffs’ Requests, both in terms of their content and procedural context within this
Action, served simultaneously with the Amended Complaint, present to the Court the precise
circumstances which warrant a protective order and stay of discovery in accordance with the usual
rule of CPLR 3214(b).
The basis of the Amended Complaint—identical to that of the original Complaint—is
Plaintiffs’ allegation that Fiorello breached a certain letter of intent (“LOI”) by which CLNY
sought to acquire 100% of Fiorello’s stock from all of its shareholders. None of those shareholders
were party to the LOI. This Court has already expressed grave doubts as to the sufficiency and
viability of Plaintiff CLNY’s original Complaint, denying CLNY’s motion for a temporary
restraining order and preliminary injunction finding no likelihood of success on the merits of such
claims. (See Exhibit (“Ex.”) C to Affirmation of Ronald D. Lefton, Esq. (“RDL Affirm.”),
Transcript of Proceedings of July 10, 2018.) The Court found that the LOI is “not even an
agreement to agree,” and does not bind the shareholders—nor even name them as parties to any
agreement—to sell their shares whatsoever, let alone make such sale to CLNY.
Now, having joined new Plaintiff Cresco to the caption of the Action, without serving
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Defendants with a supplemental summons or order or stipulation to properly join Cresco as a party
(id., ¶ 25; see N.Y. C.P.L.R. § 305(a)), the Amended Complaint is simply a re-characterization of
the same claims for breach of contract based upon the same document—the letter of intent—and
suffer from the same insufficiencies previously noted by the Court. (See id., Ex. C, Tr. at 7:16-
9:13, 11:19-13:13.)
Thus, in as much as the Requests seek nearly unlimited information concerning a
hypothetical sale agreement between Fiorello’s shareholders and unnamed third parties (see
generally Requests (RDL Affirm., Exs. H and I), such requests are immaterial, demonstrably
overbroad and can only have the intent to serve as a “fishing expedition” designed to harass
Defendants and cripple Defendants’ ability to meet its own licensure deadlines with the New York
Department of Health. In view of the suspect nature of Plaintiff’s claims on “not even an
agreement to agree”, it is unreasonable to demand that Fiorello go through the expense and burden
of the propounded discovery before the Court decides Defendants’ upcoming motion to dismiss.
This is compounded by the present procedural context of the Action: (i) issue has not been joined;
(ii) there has been no preliminary conference, or even a “meet and confer” discovery conference
among counsel for the parties; and (iii) the Court has yet to issue any discovery schedule or
preliminary conference order, as required pursuant to the Court’s Commercial Division Rules. See
22 N.Y.C.R.R. § 202.70, Rule 8, et seq.; RDL Affirm., ¶¶ 25-29.
Additionally, Plaintiffs themselves have made it clear by their own conduct that there is no
need for expedited discovery in this action, having delayed and agreed to extend multiple filing
and response deadlines in this Action to date, rather than aggressively pursuing their claims.
In light of these facts, and for those reasons set forth herein below, the instant case falls
squarely into the category of cases which warrant a stay discovery in accordance with CPLR
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Sections 3103(a) and 3214(b) and comports with Rule 11 of the Commercial Division’s Rules.
FACTUAL BACKGROUND
A. Factual History Underlying the Action
This action arises from an Equity Purchase Agreement Letter of Intent, dated February 14,
2018, executed between Cresco and CLNY on the one part and Fiorello on the other (the “LOI”).
(RDL Affirm., Ex. A.) Defendant Fiorello is a New York entity to whom the New York State
Department of Health (“DOH”) has issued one vertically integrated license for the cultivation and
processing of medical cannabis as well as the establishment of four (4) medical cannabis
dispensary licenses within the State of New York. (Id.) Pursuant to the LOI, Cresco and CLNY
sought to acquire 100% of the stock of Fiorello from all of its shareholders. The LOI was a
proposal to negotiate a potential acquisition of 100% of the shares of Fiorello from all 17 of its
shareholders. (Id.) Fiorello itself is not defined as the seller of the shares; rather the LOI makes
clear that, if a sale were to be completed, the sellers would be all of Fiorello’s shareholders. (Id.)
None of those shareholders were parties to the LOI even though it explicitly contemplated a stock
purchase transaction, not a corporate merger.
The Parties intended that the LOI was to be “supplanted by a definitive agreement through
the Parties’ good faith negotiation, execution of delivery of one or more definitive agreements and
ancillary documents (collectively, the ‘Definitive Agreement’).” (Id.) The LOI required that the
parties complete due diligence and draft and execute a Definitive Agreement, “at the earliest
possible date but not later than thirty (30) business days from the date of the execution of the LOI
(unless otherwise extended by the mutual terms of the Parties.” (Id. (emphasis in original.) In
addition, under the LOI, any Definitive Agreement would be subject to approval by all of (i) the
Boards of Directors of each company, (ii) the members of Cresco and CLNY, (iii) the New York
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State Department of Health (“DOH”) and (iv) 100% of all of Fiorello’s individual shareholders,
all as conditions of closing. The LOI is silent as to what might happen if less than 100% of
Fiorello’s shareholders agreed to sell. (Id.) Thus, none of the contemplated sellers were parties to
the LOI. There was no “lock up” or other provision requiring even the members of Fiorello’s
board of directors to sell their shares.
March 29, 2018 was the 30th business day in which to negotiate and execute a Definitive
Agreement to then propose to Fiorello shareholders. March 29, 2018 came and went without
Cresco’s completion of its due diligence and no Definitive Agreement and necessary related
documents having been prepared. (Id., ¶ 7.) There being no such Definitive Agreement, and a
host of open issues, the LOI expired according to its terms on March 29, 2018. (Id.) Fiorello
promptly notified Cresco that the LOI had expired, and while there were efforts between the parties
during the first week of April 2018 to negotiate a new letter of intent, these were not successful.
(Id., ¶ 8.)
B. Procedural History
On May 11, 2018, a full six (6) weeks after the expiration of the LOI, CLNY (but not
Cresco) commenced the instant action for breach of contract against Fiorello by filing a summons
with notice. (Id., ¶ 9.)
On June 26, 2018, more than six (6) weeks after it had commenced the action, and a full
twelve (12) weeks after the expiration of the LOI, CLNY filed a complaint. (Id., ¶ 10, Ex. B.) In
addition to Fiorello it added Sirota and Yoss and certain John Does as defendants. (Id.)
Simultaneously with its Complaint, on June 26, 2018, CLNY also filed an order to show cause for
a temporary restraining order and preliminary injunction to enjoin Fiorello from entering into or
performing an agreement with any other party to sell its license, assets, or stock to any other entity.
(Id., ¶ 11.) After a full hearing on the application by CLNY, the Court denied any provisional
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relief, finding no likelihood of success on the merits. (Id., ¶ 13, Exs. C and D.) The Court noted
that there was no meaningful agreement to enforce because the essential sellers, i.e.Fiorello’s
shareholders, were not party to the LOI. As observed by the Court during this hearing:
Let’s look at what’s being sought here in the order to show cause.
They are seeking to enjoin defendants from negotiating sale of the
company from its business operations, including its license.
...
So the only question before me is whether or not we have a contract
that stops – that would prohibit the defendants from selling the
corporation; right; the corporation’s business operations, including
its license.
(Id., Ex. C, Tr. at 4:5-8, 4:12-16.)
The Court noted that Plaintiffs failed to set forth any evidence that Fiorello is being sold
to another party in violation of the LOI, observing inter alia, “that Fiorello owns a license that
cannot be transferred without the consent of the State of New York,” and that since “what was
really intended was the sale of the stock,” where there was never any “agreement with the
shareholders in which they agree to engage in whatever the contract provides for them towards the
sale of their stock to [Cresco],” that Cresco is therefore “alleging, on no information but on belief,
that this was a solicited offer [and [a]t this point we have no evidence there was a solicitation by
Fiorello dangling this alleged offer.” (Id., Tr. at 7:16-9:13.) The Court thus concluded, in part,
that the LOI was “not even an agreement to agree,” but merely an agreement to try and convince
the shareholders to sell their stock:
How can the company agree to sell the stock when the company
doesn’t own its own stock? You got a contract that makes no legal
sense. . . . All I understand Fiorello as the buyer can do, as your
client can do, is make an offer to the shareholders. You can’t bind
the shareholders . . The definitive agreement is not going to be
binding on the shareholders unless they consent to it. They are the
ones who own the stock. . . . This is an agreement for somebody else
to agree, not even an agreement to agree. It is an agreement for the
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corporation to see if it can convince the shareholders to sell their
stock.
(Id., Tr. at 11:19 – 13:13.)
Consequently, the Court refused even to sign the order to show cause and denied CLNY’s
application and motion. (Id., ¶ 17, Ex. D.)
On August 10, 2018, although individual Defendants Sirota and Yoss had yet to be served
with process in the Action, Defendants filed a motion to dismiss the complaint in its entirety, and
the parties entered into a briefing schedule. (Id., ¶ 19, Ex. E.) A few days before CLNY’s
opposition papers were due on September 11, 2018, CLNY’s counsel requested more time and
advised that another firm was going to substitute as CLNY’s counsel. As a matter of courtesy,
Defendants’ counsel agreed to such extension. (Id., ¶¶ 20-22.)
Approximately two weeks later, on September 21, 2018, CLNY’s new counsel filed a
substitution and appeared in the Action. They sought to further extend the time to oppose the
motion to dismiss so that the parties could perhaps settle their disputes. (Id., ¶ 21.) Defendants
once again in good faith and as a showing of professional courtesy agreed to their counsel’s
request. (Id., ¶ 22.) However, in the course of such discussions—which were not fruitful—counsel
for CLNY advised that they intended to amend the complaint. Rather than compel motion practice
for leave to amend well past the statutory time limits, Defendants yet again agreed to grant this
request. (Id.)
The parties then negotiated and agreed to both (1) a schedule for the filing of the amended
complaint, and (2) a briefing schedule for Defendants’ motion to dismiss Plaintiff’s anticipated
amended compliant. (Id., ¶ 22.) These schedules were noted to the Court at a status conference
on November 12, 2018 and subsequently filed on the Court’s Docket. (Id., Ex. E.)
CLNY served the Amended Complaint on November 20, 2018. (Id., Ex. F.) Despite
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amending the case caption to include Cresco as a second named plaintiff in the Action, at no point
did CLNY serve Defendants with a supplemental summons, move to add Cresco as an additional
party, or propose a stipulation to Defendants for adding a party plaintiff. (See id., Ex. F and ¶ 25.)
Upon review of the Amended Complaint, Defendants confirmed with Plaintiffs that they would
file a motion to dismiss and by another stipulation, the parties agreed to a return date of March 21,
2019. (Id., ¶ 26, Ex. G.)
Simultaneously with the filing of the Amended Complaint, Plaintiffs served defendants
with both a first set of interrogatories and first request for the production of documents
(collectively, “the Requests”). (Id., Exs. H and I.) Defendants objected to such discovery as being
premature in view of there having been no joinder of issue and Plaintiffs’ knowledge of
Defendants’ intent to file a motion to dismiss the Amended Complaint, per the stipulated filing
and briefing schedule. Plaintiffs conveyed that they would proceed with the Requests and would
seek to compel responses. (Id., ¶ 28.) However, Plaintiffs later agreed to enter into a stipulation,
agreeing to await to compel Defendants’ responses to the Requests to allow Defendants to file this
instant motion for a stay on or by January 11, 2018 accordingly and agreeing to a briefing schedule
for same. (Id., ¶ 28.)
All other attempts by the parties to resolve this dispute and stipulate to agree to a discovery
schedule have failed, thus necessitating this motion. (Id.)
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LEGAL ARGUMENT
POINT I:
DEFENDANTS ARE ENTITLED TO A PROTECTIVE ORDER
PRECLUDING PLAINTIFFS FROM OBTAINING DISCOVERY
THAT IS IMMATERIAL TO THEIR CLAIMS, SERVE ONLY AS A
“FISHING EXPEDITION” AND DESIGNED TO HARASS DEFENDANTS
Under CPLR 3103(a), a court “may at any time on its own initiative, or on motion of any
party or of any person from whom discovery is sought, make a protective order denying, limiting,
conditioning or regulating the use of any disclosure device. Such order shall be designed to prevent
unreasonable annoyance, expense, embarrassment, disadvantage, or other prejudice to any person
or the courts.” N.Y. C.P.L.R. § 3103 (McKinney 2018).
New York courts routinely grant protective orders when control of discovery is necessary,
such as if, (i) the demand for disclosure was palpably improper (see In re Williamson, 261 A.D.2d
147 (1st Dep’t 1999)); (ii) the party seeking disclosure failed to show any relevancy of the matter
sought to the case at bar (see Strong v. Brookhaven Memorial Hosp. Medical Center, 240 A.D.2d
726 (2d Dep’t 1997); Hanover Ins. Co. v. Lama, 164 Misc. 2d 843 (N.Y. App. Term 1995);
Mangialino v. White Haven Memorial Park, 132 A.D.2d 970 (4th Dep't 1987); Columbia Gas of
New York, Inc. v. New York State Elec. & Gas Corp., 35 A.D.2d 620 (3d Dep’t 1970)); (iii)
discovery was unnecessary (see Bandike Associates, Inc. v. B.B.M. Realty Corp., 55 A.D.2d 999
(3d Dep’t 1977)); (iv) the disclosure sought amounted to a “fishing expedition” (see Rodolitz v.
Beneficial Nat. Life Ins. Co., 41 A.D.2d 707 (1st Dep’t 1973)); or (v) the disclosure process was
being used to harass or unduly burden a party. See Jones v. Maples, 257 A.D.2d 53 (1st Dep’t
1999); Barouh Eaton Allen Corp. v. International Business Machines Corp., 76 A.D.2d 873 (2d
Dep’t 1980).
For myriad reasons, the Court should grant a protective order herein.
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A. A Protective Order Striking the Requests Is Necessary To Preclude Plaintiffs From
Obtaining Discovery That The Court Has Already Ruled Is Irrelevant and
Immaterial To Their Claims
First, the courts will issue protective orders where discovery sought is neither material nor
necessary to the prosecution or defense of the action. Neos v. Neos, 212 A.D.2d 678 (2d Dep’t
1995) (reversing and granting plaintiff protective order; requests in interrogatories to plaintiffs,
and documents which court directed plaintiff to produce, were neither material nor necessary to
prosecution or defense of action).
Plaintiffs’ broad discovery requests, served prior to the testing of its complaint or joinder
of issue, disregard the prior proceedings in this case which indicates that such requests are
irrelevant and immaterial. The Court found no likelihood of success on the merits on CLNY’s
claims for breach of contract, specific performance and tortious interference, and consequently
denied CLNY’s order to show cause for a temporary restraining order and preliminary injunction
to enjoin Fiorello from entering into or performing an agreement with any other party to sell its
license, assets, or stock to any other entity. (RDL Affirm., Ex. C (Transcript of Hearing on July
10, 2018) (“Tr.”) and Ex. D (Order Denying Motion).) Specifically, the Court noted that there
was no meaningful agreement to enforce, because the essential sellers, i.e. Fiorello’s shareholders,
were not party to the subject letter of intent (“LOI”). As observed by the Court during that hearing:
THE COURT: Let’s look at what’s being sought here in the order
to show cause. They are seeking to enjoin defendants from
negotiating sale of the company from its business operations,
including its license.
...
So the only question before me is whether or not we have a contract
that stops – that would prohibit the defendants from selling the
corporation; right; the corporation’s business operations, including
its license.
(Id., Transcript (“Tr.”) at 4:5-8, 4:12-16.)
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The Court observed that Cresco failed to set forth any evidence that Fiorello is being sold
to another party in violation of the LOI, and thus Cresco failed to demonstrate a likelihood of
success on the merits where Plaintiffs:
THE COURT: You have to come in here and show me you have a
likelihood of success on the merits in order to get an injunction. . . .
I believe, in discussions we have had before off the record, that this
corporation owns a license that cannot be transferred without the
consent of the State of New York. Number two, the defendants or
the counsel representing the defendants never contends that – I think
both parties contended that what was really intended was the sale of
the stock. Is that true?
MR. LEFTON [Defendants’ counsel]: Yes, Your Honor.
THE COURT: Is that true?
MR. BALABANIAN [Cresco’s counsel]: That is true, Your Honor.
THE COURT: All right. Do you have an agreement with the
shareholders in which they agree to engage in whatever the contract
provides for them towards the sale of their stock to your client? ...
Again, we are faced with a problem, and that is you’re alleging, on
no information but on belief, that this was a solicited offer. At this
point we have no evidence there was a solicitation by Fiorello
dangling this alleged offer.
(Id., Tr. at 7:16-8:9, 9:9-13.)
Justice Ramos concluded, in part, that the LOI was “not even an agreement to agree,” but merely
an agreement to try and convince the shareholders to sell their stock:
THE COURT: How can the company agree to sell the stock when
the company doesn’t own its own stock?
MR. LEFTON: Correct, Your Honor.
(Id., Tr. at 11:19-21.)
Moreover, Cresco’s counsel concurred when the Court alluded to the fact that the LOI was not
binding upon the shareholders whatsoever:
MR. BALABANIAN: Your Honor, putting that aside for a moment
–
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THE COURT: Putting that aside? How can we put itaside? You
got a contract that makes no legal sense. . . . All I understand Fiorello
as the buyer can do, as your client can do, is make an offer to the
shareholders. You can’t bind the shareholders.
MR. BALABANIAN: Correct.
(Id., Tr. at 11:22-12:15.)
The Court found that even if a definitive agreement was executed by and between CLNY
and Fiorello, such agreement would neither be binding upon the shareholders, nor compel them to
sell their stock to CLNY. In other words, the LOI has even less import and enforceability than an
“agreement to agree”:
THE COURT: The definitive agreement is not going to be binding
on the shareholders unless they consent to it. They are the ones who
own the stock. . . . This is an agreement for somebody else to agree,
not even an agreement to agree. It is an agreement for the corporation
to see if it can convince the shareholders to sell their stock.
(Id., Tr. at 13:5 – 13:13.)
The Court also found that the LOI in no way prevents Fiorello from hearing about, let alone
to consider, other offers for the sale of its stock, finding that it “is not a violation of this contract”
for Fiorello to have received unsolicited offers. (Id. at 14:3-15:6.) Cresco’s claims of tortious
interference based upon the LOI were thus found to be without merit.
The Court did not consider Cresco to be able to demonstrate a probability of success on the
merits of any of its claims based upon the LOI, and, refused even to sign the order to show cause.
The Court instead denied the application and underlying motion. (Id., Tr. at 16:16-18.)
1. Plaintiffs’ Claims In The Amended Complaint Are Substantially The Same
To Those In The Original Complaint Which This Court Found Insufficient
Despite filing an Amended Complaint, all of the claims in this Action remain premised
upon an alleged breach of the LOI and largely restate what was alleged in the original complaint.
In both pleadings Cresco alleged breach of what it now characterizes as a “no shop” provision,
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improper delay, and bad faith performance. (See generally RDL Affirm., ¶¶ 24-25, 31-32, Exs. B
and F.) The Court’s prior findings that the LOI is “not even an agreement to agree,” and that
Fiorello receiving unsolicited offers “is not a violation” of the LOI, demonstrates the insufficiency
of the Amended Complaint.
Plaintiffs may allege that the allegations in the Amended Complaint differ. To the contrary,
the Amended Complaint relies upon the same provisions of the same documentation—the LOI—
as does the original Complaint as the basis for its causes of action. The Amended Complaint
alludes to supposed terms in the LOI, such as the alleged “no shop” provision (see RDL Affirm.,
Ex. F, Amended Compliant at ¶¶ 2, 18-19); however, this is merely Plaintiffs using a different
moniker to allude to the exact same terms in the LOI, terms which the Court found deficient to
sustain their claims for breach of contract. Paragraphs 50 through 53 and 60 of the original
Complaint in the first cause of action for breach of contract alleged a “breach of the exclusivity
clause”; while the Amended Complaint shifts its focus, the core allegations remain and refer to the
same language of the LOI: Plaintiffs now refer to the “exclusivity clause” as a “no shop provision”
in the Amended Complaint. (Id.,
Preview
FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 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 LABS LLC, Index No.: 652343/2018 an Illinois limited liability company, Hon. Andrew Borrok Plaintiffs, Mot. Seq. No. -against- FIORELLO PHARMACEUTICALS, INC., a New York corporation, ERIC SIROTA, an individual, SUSAN YOSS, an individual, and JOHN DOES 1-10, Defendants. ------------------------------------------------------------------X DEFENDANTS’ MOTION FOR A PROTECTIVE ORDER AND A STAY OF DISCOVERY PURSUANT TO C.P.L.R. §§ 3103 AND 3124(b) IZOWER FELDMAN, LLP Attorneys for Defendants Fiorello Pharmaceuticals, Eric Sirota and Susan Yoss 85 Broad Street, Floor 18 New York, New York 10004 Tel: (646) 688-3232 Fax: (646) 304-7071 On the brief Ronald D. Lefton Stephanie R. Feldman 1 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 TABLE OF CONTENTS TABLE OF AUTHORITIES ....................................................................................................... ii PRELIMINARY STATEMENT .................................................................................................. 1 FACTUAL BACKGROUND ...................................................................................................... 3 A. Factual History Underlying the Action..................................................................... 3 B. Procedural History .................................................................................................. 4 LEGAL ARGUMENT ................................................................................................................ 8 POINT I: DEFENDANTS ARE ENTITLED TO A PROTECTIVE ORDER PRECLUDING PLAINTIFFS FROM OBTAINING DISCOVERY THAT IS IMMATERIAL TO THEIR CLAIMS, SERVE ONLY AS A “FISHING EXPEDITION” AND DESIGNED TO HARASS DEFENDANTS ........................................................... 8 A. A Protective Order Striking the Requests Is Necessary To Preclude Plaintiffs From Obtaining Discovery That The Court Has Already Ruled Is Irrelevant and Immaterial To Their Claims ............................................... 9 1. Plaintiffs’ Claims In The Amended Complaint Are Substantially The Same To Those In The Original Complaint Which This Court Found Insufficient ........................................................................................ 11 B. Plaintiffs’ Discovery Requests Are Demonstrably Overbroad And Serve Only As A “Fishing Expedition” Designed To Harass Defendants And Chill Plaintiffs’ Competition In The Market.......................................................... 14 POINT II: A STAY OF DISCOVERY PURSUANT TO CPLR 3214(b) IS WARRANTED PENDING DISPOSITION OF DEFENDANTS’ MOTION TO DISMISS ...................................................................................... 16 A. Based Upon The Court’s Prior Rulings Of No Likelihood of Success, The Court Should Impose A Discovery Stay Under CPLR 3214 ........................... 16 B. Service Of Discovery At This Juncture Is Premature Since Issue Has Yet To Be Joined, Plaintiffs Failed to Properly Join Cresco, And Defendants Have Yet To Be Served With An Amended Summons .......................................... 18 C. Defendants Will Be Prejudiced Should Discovery Be Allowed To Proceed .......... 20 CONCLUSION ........................................................................................................................ 23 i 2 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 TABLE OF AUTHORITIES CASES Andon ex rel Andon v. 302-304 Mott St. Assoc., 94 N.Y.2d 740 (2000) ..................................... 15 Bandike Associates, Inc. v. B.B.M. Realty Corp., 55 A.D.2d 999 (3d Dep’t 1977) ....................... 8 Barouh Eaton Allen Corp. v. International Business Machines Corp., 76 A.D.2d 873 (2d Dep’t 1980) ............................................................................................................... 8 Bielat v Montrose, 249 A.D.2d 103 (1st Dep’t 1998)................................................................. 21 Capoccia v. Spiro, 88 A.D.2d 1100 (3d Dep’t 1982); app dismd. 57 N.Y.2d 774 (1982) ........... 15 Cascardo v Cascardo, 136 A.D.3d 729 (2d Dep’t 2016) ........................................................... 13 Columbia Gas of New York, Inc. v. New York State Elec. & Gas Corp., 35 A.D.2d 620 (3d Dep’t 1970) ............................................................................................................................... 8 Dubow v. Ames Home Pub. Co., 2 A.D.2d 675 (1st Dep’t 1956) ............................................... 18 Hanover Ins. Co. v Lama, 164 Misc. 2d 843 (App. Term 1995) ............................................ 8, 15 In re Williamson, 261 A.D.2d 147 (1st Dep’t 1999) .................................................................... 8 Jones v. Maples, 257 A.D.2d 53 (1st Dep’t 1999) ................................................................. 8, 13 Lipin v. Bender, 84 N.Y.2d 562 (1994); rearg. den. 84 N.Y.2d 1027 (1995) ............................. 21 Mangialino v. White Haven Memorial Park, 132 A.D.2d 970 (4th Dep't 1987) ........................... 8 Martinez v. Patel, 126 Misc.2d 985 (Sup. Ct., Kings Cty., 1985)............................................... 18 Montalvo v CVS Pharm., Inc., 102 A.D.3d 842 (2d Dep’t 2013) ............................................... 13 Neos v. Neos, 212 A.D.2d 678 (2d Dep’t 1995) ........................................................................... 9 Parimist Funding Corp. v. Rydzinski, 215 A.D.2d 738 (2d Dep’t 1995) .............................. 15, 16 Rappaport v. Blank, 99 Misc.2d 1020 (Sup. Ct., N.Y. Cty.) rev’d on other grounds 72 A.D.2d 717 ................................................................................................................................ 16 Rawlins ex rel. Rawlins v St. Joseph’s Hosp. Health Ctr., 108 A.D.3d 1191 (4th Dep’t 2013) ... 13 Reuters Ltd. v. Dow Jones Telerate, 231 A.D.2d 337 (1st Dep’t 1997) ...................................... 14 Rodolitz v. Beneficial Nat. Life Ins. Co., 41 A.D.2d 707 (1st Dep’t 1973 ..................................... 8 ii 3 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 Stever v. Stever, 10 A.D.3d 358 (2d Dep’t 2004) ....................................................................... 15 Strong v. Brookhaven Memorial Hosp. Medical Center, 240 A.D.2d 726 (2d Dep’t 1997) .......... 8 Wegman v. Wegman, 37 N.Y.2d 940 (1975) .............................................................................. 21 STATUTES AND RULES 22 N.Y.C.R.R. § 202.70 .................................................................................. 2, 16-17, 17 n.1, 20 N.Y. C.P.L.R. § 305 (McKinney 2018) ................................................................................. 2, 18 N.Y. C.P.L.R. § 1003 (McKinney 2018) ................................................................................... 19 N.Y. C.P.L.R. § 3101 (McKinney 2018) ................................................................................... 20 N.Y. C.P.L.R. § 3103 (McKinney 2018) .................................................................... 1, 3, 7-8, 13 N.Y. C.P.L.R. § 3214 (McKinney 2018) ................................................................ 1, 3, 16-17, 20 ADDITIONAL CITATIONS 4 N.Y. Prac., Com. Litig. in New York State Courts § 35:4 Discovery developments in the Commercial Division, (4th ed.) ........................................................................................ 17 6B Carmody-Wait 2d § 39:77 ................................................................................................... 18 iii 4 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 PRELIMINARY STATEMENT Pursuant to Sections 3103 and 3214 of the Civil Practice Law and Rules, Defendants Fiorello Pharmaceuticals, Eric Sirota and Susan Yoss (collectively, “the Defendants”), by their attorneys, Izower Feldman, LLP, respectfully submit this memorandum of law in support of their motion for a stay of discovery pending resolution of Defendants’ anticipated motion to dismiss the Amended Complaint, and for a protective order, striking those document requests and interrogatories (collectively, “the Requests”) of Plaintiffs Cresco Labs, New York, LLC (“CLNY”) and Cresco Labs, LLC (collectively, “Plaintiffs”) dated November 20, 2018. Plaintiffs’ Requests, both in terms of their content and procedural context within this Action, served simultaneously with the Amended Complaint, present to the Court the precise circumstances which warrant a protective order and stay of discovery in accordance with the usual rule of CPLR 3214(b). The basis of the Amended Complaint—identical to that of the original Complaint—is Plaintiffs’ allegation that Fiorello breached a certain letter of intent (“LOI”) by which CLNY sought to acquire 100% of Fiorello’s stock from all of its shareholders. None of those shareholders were party to the LOI. This Court has already expressed grave doubts as to the sufficiency and viability of Plaintiff CLNY’s original Complaint, denying CLNY’s motion for a temporary restraining order and preliminary injunction finding no likelihood of success on the merits of such claims. (See Exhibit (“Ex.”) C to Affirmation of Ronald D. Lefton, Esq. (“RDL Affirm.”), Transcript of Proceedings of July 10, 2018.) The Court found that the LOI is “not even an agreement to agree,” and does not bind the shareholders—nor even name them as parties to any agreement—to sell their shares whatsoever, let alone make such sale to CLNY. Now, having joined new Plaintiff Cresco to the caption of the Action, without serving MEMORANDUM OF LAW -1- 5 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 Defendants with a supplemental summons or order or stipulation to properly join Cresco as a party (id., ¶ 25; see N.Y. C.P.L.R. § 305(a)), the Amended Complaint is simply a re-characterization of the same claims for breach of contract based upon the same document—the letter of intent—and suffer from the same insufficiencies previously noted by the Court. (See id., Ex. C, Tr. at 7:16- 9:13, 11:19-13:13.) Thus, in as much as the Requests seek nearly unlimited information concerning a hypothetical sale agreement between Fiorello’s shareholders and unnamed third parties (see generally Requests (RDL Affirm., Exs. H and I), such requests are immaterial, demonstrably overbroad and can only have the intent to serve as a “fishing expedition” designed to harass Defendants and cripple Defendants’ ability to meet its own licensure deadlines with the New York Department of Health. In view of the suspect nature of Plaintiff’s claims on “not even an agreement to agree”, it is unreasonable to demand that Fiorello go through the expense and burden of the propounded discovery before the Court decides Defendants’ upcoming motion to dismiss. This is compounded by the present procedural context of the Action: (i) issue has not been joined; (ii) there has been no preliminary conference, or even a “meet and confer” discovery conference among counsel for the parties; and (iii) the Court has yet to issue any discovery schedule or preliminary conference order, as required pursuant to the Court’s Commercial Division Rules. See 22 N.Y.C.R.R. § 202.70, Rule 8, et seq.; RDL Affirm., ¶¶ 25-29. Additionally, Plaintiffs themselves have made it clear by their own conduct that there is no need for expedited discovery in this action, having delayed and agreed to extend multiple filing and response deadlines in this Action to date, rather than aggressively pursuing their claims. In light of these facts, and for those reasons set forth herein below, the instant case falls squarely into the category of cases which warrant a stay discovery in accordance with CPLR MEMORANDUM OF LAW -2- 6 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 Sections 3103(a) and 3214(b) and comports with Rule 11 of the Commercial Division’s Rules. FACTUAL BACKGROUND A. Factual History Underlying the Action This action arises from an Equity Purchase Agreement Letter of Intent, dated February 14, 2018, executed between Cresco and CLNY on the one part and Fiorello on the other (the “LOI”). (RDL Affirm., Ex. A.) Defendant Fiorello is a New York entity to whom the New York State Department of Health (“DOH”) has issued one vertically integrated license for the cultivation and processing of medical cannabis as well as the establishment of four (4) medical cannabis dispensary licenses within the State of New York. (Id.) Pursuant to the LOI, Cresco and CLNY sought to acquire 100% of the stock of Fiorello from all of its shareholders. The LOI was a proposal to negotiate a potential acquisition of 100% of the shares of Fiorello from all 17 of its shareholders. (Id.) Fiorello itself is not defined as the seller of the shares; rather the LOI makes clear that, if a sale were to be completed, the sellers would be all of Fiorello’s shareholders. (Id.) None of those shareholders were parties to the LOI even though it explicitly contemplated a stock purchase transaction, not a corporate merger. The Parties intended that the LOI was to be “supplanted by a definitive agreement through the Parties’ good faith negotiation, execution of delivery of one or more definitive agreements and ancillary documents (collectively, the ‘Definitive Agreement’).” (Id.) The LOI required that the parties complete due diligence and draft and execute a Definitive Agreement, “at the earliest possible date but not later than thirty (30) business days from the date of the execution of the LOI (unless otherwise extended by the mutual terms of the Parties.” (Id. (emphasis in original.) In addition, under the LOI, any Definitive Agreement would be subject to approval by all of (i) the Boards of Directors of each company, (ii) the members of Cresco and CLNY, (iii) the New York MEMORANDUM OF LAW -3- 7 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 State Department of Health (“DOH”) and (iv) 100% of all of Fiorello’s individual shareholders, all as conditions of closing. The LOI is silent as to what might happen if less than 100% of Fiorello’s shareholders agreed to sell. (Id.) Thus, none of the contemplated sellers were parties to the LOI. There was no “lock up” or other provision requiring even the members of Fiorello’s board of directors to sell their shares. March 29, 2018 was the 30th business day in which to negotiate and execute a Definitive Agreement to then propose to Fiorello shareholders. March 29, 2018 came and went without Cresco’s completion of its due diligence and no Definitive Agreement and necessary related documents having been prepared. (Id., ¶ 7.) There being no such Definitive Agreement, and a host of open issues, the LOI expired according to its terms on March 29, 2018. (Id.) Fiorello promptly notified Cresco that the LOI had expired, and while there were efforts between the parties during the first week of April 2018 to negotiate a new letter of intent, these were not successful. (Id., ¶ 8.) B. Procedural History On May 11, 2018, a full six (6) weeks after the expiration of the LOI, CLNY (but not Cresco) commenced the instant action for breach of contract against Fiorello by filing a summons with notice. (Id., ¶ 9.) On June 26, 2018, more than six (6) weeks after it had commenced the action, and a full twelve (12) weeks after the expiration of the LOI, CLNY filed a complaint. (Id., ¶ 10, Ex. B.) In addition to Fiorello it added Sirota and Yoss and certain John Does as defendants. (Id.) Simultaneously with its Complaint, on June 26, 2018, CLNY also filed an order to show cause for a temporary restraining order and preliminary injunction to enjoin Fiorello from entering into or performing an agreement with any other party to sell its license, assets, or stock to any other entity. (Id., ¶ 11.) After a full hearing on the application by CLNY, the Court denied any provisional MEMORANDUM OF LAW -4- 8 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 relief, finding no likelihood of success on the merits. (Id., ¶ 13, Exs. C and D.) The Court noted that there was no meaningful agreement to enforce because the essential sellers, i.e.Fiorello’s shareholders, were not party to the LOI. As observed by the Court during this hearing: Let’s look at what’s being sought here in the order to show cause. They are seeking to enjoin defendants from negotiating sale of the company from its business operations, including its license. ... So the only question before me is whether or not we have a contract that stops – that would prohibit the defendants from selling the corporation; right; the corporation’s business operations, including its license. (Id., Ex. C, Tr. at 4:5-8, 4:12-16.) The Court noted that Plaintiffs failed to set forth any evidence that Fiorello is being sold to another party in violation of the LOI, observing inter alia, “that Fiorello owns a license that cannot be transferred without the consent of the State of New York,” and that since “what was really intended was the sale of the stock,” where there was never any “agreement with the shareholders in which they agree to engage in whatever the contract provides for them towards the sale of their stock to [Cresco],” that Cresco is therefore “alleging, on no information but on belief, that this was a solicited offer [and [a]t this point we have no evidence there was a solicitation by Fiorello dangling this alleged offer.” (Id., Tr. at 7:16-9:13.) The Court thus concluded, in part, that the LOI was “not even an agreement to agree,” but merely an agreement to try and convince the shareholders to sell their stock: How can the company agree to sell the stock when the company doesn’t own its own stock? You got a contract that makes no legal sense. . . . All I understand Fiorello as the buyer can do, as your client can do, is make an offer to the shareholders. You can’t bind the shareholders . . The definitive agreement is not going to be binding on the shareholders unless they consent to it. They are the ones who own the stock. . . . This is an agreement for somebody else to agree, not even an agreement to agree. It is an agreement for the MEMORANDUM OF LAW -5- 9 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 corporation to see if it can convince the shareholders to sell their stock. (Id., Tr. at 11:19 – 13:13.) Consequently, the Court refused even to sign the order to show cause and denied CLNY’s application and motion. (Id., ¶ 17, Ex. D.) On August 10, 2018, although individual Defendants Sirota and Yoss had yet to be served with process in the Action, Defendants filed a motion to dismiss the complaint in its entirety, and the parties entered into a briefing schedule. (Id., ¶ 19, Ex. E.) A few days before CLNY’s opposition papers were due on September 11, 2018, CLNY’s counsel requested more time and advised that another firm was going to substitute as CLNY’s counsel. As a matter of courtesy, Defendants’ counsel agreed to such extension. (Id., ¶¶ 20-22.) Approximately two weeks later, on September 21, 2018, CLNY’s new counsel filed a substitution and appeared in the Action. They sought to further extend the time to oppose the motion to dismiss so that the parties could perhaps settle their disputes. (Id., ¶ 21.) Defendants once again in good faith and as a showing of professional courtesy agreed to their counsel’s request. (Id., ¶ 22.) However, in the course of such discussions—which were not fruitful—counsel for CLNY advised that they intended to amend the complaint. Rather than compel motion practice for leave to amend well past the statutory time limits, Defendants yet again agreed to grant this request. (Id.) The parties then negotiated and agreed to both (1) a schedule for the filing of the amended complaint, and (2) a briefing schedule for Defendants’ motion to dismiss Plaintiff’s anticipated amended compliant. (Id., ¶ 22.) These schedules were noted to the Court at a status conference on November 12, 2018 and subsequently filed on the Court’s Docket. (Id., Ex. E.) CLNY served the Amended Complaint on November 20, 2018. (Id., Ex. F.) Despite MEMORANDUM OF LAW -6- 10 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 amending the case caption to include Cresco as a second named plaintiff in the Action, at no point did CLNY serve Defendants with a supplemental summons, move to add Cresco as an additional party, or propose a stipulation to Defendants for adding a party plaintiff. (See id., Ex. F and ¶ 25.) Upon review of the Amended Complaint, Defendants confirmed with Plaintiffs that they would file a motion to dismiss and by another stipulation, the parties agreed to a return date of March 21, 2019. (Id., ¶ 26, Ex. G.) Simultaneously with the filing of the Amended Complaint, Plaintiffs served defendants with both a first set of interrogatories and first request for the production of documents (collectively, “the Requests”). (Id., Exs. H and I.) Defendants objected to such discovery as being premature in view of there having been no joinder of issue and Plaintiffs’ knowledge of Defendants’ intent to file a motion to dismiss the Amended Complaint, per the stipulated filing and briefing schedule. Plaintiffs conveyed that they would proceed with the Requests and would seek to compel responses. (Id., ¶ 28.) However, Plaintiffs later agreed to enter into a stipulation, agreeing to await to compel Defendants’ responses to the Requests to allow Defendants to file this instant motion for a stay on or by January 11, 2018 accordingly and agreeing to a briefing schedule for same. (Id., ¶ 28.) All other attempts by the parties to resolve this dispute and stipulate to agree to a discovery schedule have failed, thus necessitating this motion. (Id.) MEMORANDUM OF LAW -7- 11 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 LEGAL ARGUMENT POINT I: DEFENDANTS ARE ENTITLED TO A PROTECTIVE ORDER PRECLUDING PLAINTIFFS FROM OBTAINING DISCOVERY THAT IS IMMATERIAL TO THEIR CLAIMS, SERVE ONLY AS A “FISHING EXPEDITION” AND DESIGNED TO HARASS DEFENDANTS Under CPLR 3103(a), a court “may at any time on its own initiative, or on motion of any party or of any person from whom discovery is sought, make a protective order denying, limiting, conditioning or regulating the use of any disclosure device. Such order shall be designed to prevent unreasonable annoyance, expense, embarrassment, disadvantage, or other prejudice to any person or the courts.” N.Y. C.P.L.R. § 3103 (McKinney 2018). New York courts routinely grant protective orders when control of discovery is necessary, such as if, (i) the demand for disclosure was palpably improper (see In re Williamson, 261 A.D.2d 147 (1st Dep’t 1999)); (ii) the party seeking disclosure failed to show any relevancy of the matter sought to the case at bar (see Strong v. Brookhaven Memorial Hosp. Medical Center, 240 A.D.2d 726 (2d Dep’t 1997); Hanover Ins. Co. v. Lama, 164 Misc. 2d 843 (N.Y. App. Term 1995); Mangialino v. White Haven Memorial Park, 132 A.D.2d 970 (4th Dep't 1987); Columbia Gas of New York, Inc. v. New York State Elec. & Gas Corp., 35 A.D.2d 620 (3d Dep’t 1970)); (iii) discovery was unnecessary (see Bandike Associates, Inc. v. B.B.M. Realty Corp., 55 A.D.2d 999 (3d Dep’t 1977)); (iv) the disclosure sought amounted to a “fishing expedition” (see Rodolitz v. Beneficial Nat. Life Ins. Co., 41 A.D.2d 707 (1st Dep’t 1973)); or (v) the disclosure process was being used to harass or unduly burden a party. See Jones v. Maples, 257 A.D.2d 53 (1st Dep’t 1999); Barouh Eaton Allen Corp. v. International Business Machines Corp., 76 A.D.2d 873 (2d Dep’t 1980). For myriad reasons, the Court should grant a protective order herein. MEMORANDUM OF LAW -8- 12 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 A. A Protective Order Striking the Requests Is Necessary To Preclude Plaintiffs From Obtaining Discovery That The Court Has Already Ruled Is Irrelevant and Immaterial To Their Claims First, the courts will issue protective orders where discovery sought is neither material nor necessary to the prosecution or defense of the action. Neos v. Neos, 212 A.D.2d 678 (2d Dep’t 1995) (reversing and granting plaintiff protective order; requests in interrogatories to plaintiffs, and documents which court directed plaintiff to produce, were neither material nor necessary to prosecution or defense of action). Plaintiffs’ broad discovery requests, served prior to the testing of its complaint or joinder of issue, disregard the prior proceedings in this case which indicates that such requests are irrelevant and immaterial. The Court found no likelihood of success on the merits on CLNY’s claims for breach of contract, specific performance and tortious interference, and consequently denied CLNY’s order to show cause for a temporary restraining order and preliminary injunction to enjoin Fiorello from entering into or performing an agreement with any other party to sell its license, assets, or stock to any other entity. (RDL Affirm., Ex. C (Transcript of Hearing on July 10, 2018) (“Tr.”) and Ex. D (Order Denying Motion).) Specifically, the Court noted that there was no meaningful agreement to enforce, because the essential sellers, i.e. Fiorello’s shareholders, were not party to the subject letter of intent (“LOI”). As observed by the Court during that hearing: THE COURT: Let’s look at what’s being sought here in the order to show cause. They are seeking to enjoin defendants from negotiating sale of the company from its business operations, including its license. ... So the only question before me is whether or not we have a contract that stops – that would prohibit the defendants from selling the corporation; right; the corporation’s business operations, including its license. (Id., Transcript (“Tr.”) at 4:5-8, 4:12-16.) MEMORANDUM OF LAW -9- 13 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 The Court observed that Cresco failed to set forth any evidence that Fiorello is being sold to another party in violation of the LOI, and thus Cresco failed to demonstrate a likelihood of success on the merits where Plaintiffs: THE COURT: You have to come in here and show me you have a likelihood of success on the merits in order to get an injunction. . . . I believe, in discussions we have had before off the record, that this corporation owns a license that cannot be transferred without the consent of the State of New York. Number two, the defendants or the counsel representing the defendants never contends that – I think both parties contended that what was really intended was the sale of the stock. Is that true? MR. LEFTON [Defendants’ counsel]: Yes, Your Honor. THE COURT: Is that true? MR. BALABANIAN [Cresco’s counsel]: That is true, Your Honor. THE COURT: All right. Do you have an agreement with the shareholders in which they agree to engage in whatever the contract provides for them towards the sale of their stock to your client? ... Again, we are faced with a problem, and that is you’re alleging, on no information but on belief, that this was a solicited offer. At this point we have no evidence there was a solicitation by Fiorello dangling this alleged offer. (Id., Tr. at 7:16-8:9, 9:9-13.) Justice Ramos concluded, in part, that the LOI was “not even an agreement to agree,” but merely an agreement to try and convince the shareholders to sell their stock: THE COURT: How can the company agree to sell the stock when the company doesn’t own its own stock? MR. LEFTON: Correct, Your Honor. (Id., Tr. at 11:19-21.) Moreover, Cresco’s counsel concurred when the Court alluded to the fact that the LOI was not binding upon the shareholders whatsoever: MR. BALABANIAN: Your Honor, putting that aside for a moment – MEMORANDUM OF LAW -10- 14 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 THE COURT: Putting that aside? How can we put itaside? You got a contract that makes no legal sense. . . . All I understand Fiorello as the buyer can do, as your client can do, is make an offer to the shareholders. You can’t bind the shareholders. MR. BALABANIAN: Correct. (Id., Tr. at 11:22-12:15.) The Court found that even if a definitive agreement was executed by and between CLNY and Fiorello, such agreement would neither be binding upon the shareholders, nor compel them to sell their stock to CLNY. In other words, the LOI has even less import and enforceability than an “agreement to agree”: THE COURT: The definitive agreement is not going to be binding on the shareholders unless they consent to it. They are the ones who own the stock. . . . This is an agreement for somebody else to agree, not even an agreement to agree. It is an agreement for the corporation to see if it can convince the shareholders to sell their stock. (Id., Tr. at 13:5 – 13:13.) The Court also found that the LOI in no way prevents Fiorello from hearing about, let alone to consider, other offers for the sale of its stock, finding that it “is not a violation of this contract” for Fiorello to have received unsolicited offers. (Id. at 14:3-15:6.) Cresco’s claims of tortious interference based upon the LOI were thus found to be without merit. The Court did not consider Cresco to be able to demonstrate a probability of success on the merits of any of its claims based upon the LOI, and, refused even to sign the order to show cause. The Court instead denied the application and underlying motion. (Id., Tr. at 16:16-18.) 1. Plaintiffs’ Claims In The Amended Complaint Are Substantially The Same To Those In The Original Complaint Which This Court Found Insufficient Despite filing an Amended Complaint, all of the claims in this Action remain premised upon an alleged breach of the LOI and largely restate what was alleged in the original complaint. In both pleadings Cresco alleged breach of what it now characterizes as a “no shop” provision, MEMORANDUM OF LAW -11- 15 of 27 FILED: NEW YORK COUNTY CLERK 01/11/2019 06:33 PM INDEX NO. 652343/2018 NYSCEF DOC. NO. 72 RECEIVED NYSCEF: 01/11/2019 improper delay, and bad faith performance. (See generally RDL Affirm., ¶¶ 24-25, 31-32, Exs. B and F.) The Court’s prior findings that the LOI is “not even an agreement to agree,” and that Fiorello receiving unsolicited offers “is not a violation” of the LOI, demonstrates the insufficiency of the Amended Complaint. Plaintiffs may allege that the allegations in the Amended Complaint differ. To the contrary, the Amended Complaint relies upon the same provisions of the same documentation—the LOI— as does the original Complaint as the basis for its causes of action. The Amended Complaint alludes to supposed terms in the LOI, such as the alleged “no shop” provision (see RDL Affirm., Ex. F, Amended Compliant at ¶¶ 2, 18-19); however, this is merely Plaintiffs using a different moniker to allude to the exact same terms in the LOI, terms which the Court found deficient to sustain their claims for breach of contract. Paragraphs 50 through 53 and 60 of the original Complaint in the first cause of action for breach of contract alleged a “breach of the exclusivity clause”; while the Amended Complaint shifts its focus, the core allegations remain and refer to the same language of the LOI: Plaintiffs now refer to the “exclusivity clause” as a “no shop provision” in the Amended Complaint. (Id.,