Cresco Labs N.Y. v. Fiorello Pharm.

Full title: Cresco Labs New York, LLC, CRESCO LABS LLC, AN ILLINOIS LIMITED LIABILITY…

Court: Supreme Court, New York County

Date published: Dec 2, 2022

2022 N.Y. Slip Op. 51178 (N.Y. Sup. Ct. 2022)

Opinion

No. 2022-51178

12-02-2022

Cresco Labs New York, LLC, CRESCO LABS LLC, AN ILLINOIS LIMITED LIABILITY COMPANY, Plaintiff, v. Fiorello Pharmaceuticals, Inc., ERIC SIROTA, SUSAN YOSS, JOHN DOES 1 - 10, Defendant.

Plaintiffs by: Jenner & Block LLP. Defendants by: Izower Lefton, LLP.

Andrew Borrok, J.

Unpublished Opinion

Plaintiffs by: Jenner & Block LLP.

Defendants by: Izower Lefton, LLP.

Andrew Borrok, J.

The following e-filed documents, listed by NYSCEF document number (Motion 011) 221, 222, 283, 284, 285, 286, 287, 288, 289, 290, 291, 292, 293, 294, 295, 296, 297, 298, 299, 300, 301, 302, 303, 304, 305, 306, 307, 308, 309, 310, 311, 312, 313, 314, 315, 316, 317, 318, 319, 320, 321, 322, 323, 324, 325, 326, 327, 328, 329, 330, 331, 332, 333, 334, 335, 336, 337, 338, 339, 340, 341, 342, 343, 344, 345, 346, 347, 348, 349, 350, 351, 352, 353, 354, 355, 356, 357, 358, 359, 360, 361, 362, 363, 364, 365, 366, 367, 368, 369, 370, 371, 372, 373, 374, 375, 376, 377, 378, 379, 380, 381, 382, 383, 384, 385, 386, 387, 388, 389, 390, 391, 392, 393, 394, 395, 396, 397, 398, 399, 400, 401, 402, 403, 404, 405, 406, 407, 408, 409, 410, 411, 412, 413, 414, 415, 416, 417, 419, 420, 421, 422, 423, 424, 434, 435, 436, 437, 438, 439, 440, 441, 442, 443, 444, 445, 446, 447, 448, 449, 450, 451, 452, 453, 454, 455, 456, 457, 458, 459, 460, 461, 462, 463, 464, 465, 466, 467, 468, 469, 470, 471, 472, 473, 474, 475, 476, 477, 478, 479, 480, 482, 483, 484, 485, 486, 487, 488, 489, 490, 491, 492, 493, 494, 495, 496, 497, 498, 499, 500, 501, 502, 503, 504, 505, 506, 507, 508, 509, 510, 511, 512, 513, 514, 515, 516, 517, 518, 519, 520, 521, 522, 523, 524, 525, 526, 527, 528, 529, 530, 689, 690, 691, 692, 693, 694, 695, 696, 697, 698, 699, 700, 701, 702, 703, 704, 705, 706, 707 were read on this motion to/for SUMMARY JUDGMENT(AFTER JOINDER.

The following e-filed documents, listed by NYSCEF document number (Motion 012) 223, 224, 558, 559, 560, 561, 562, 563, 564, 565, 566, 567, 568, 569, 570, 571, 572, 573, 574, 575, 576, 577, 578, 579, 580, 581, 582, 583, 584, 585, 586, 587, 588, 589, 590, 591, 592, 593, 594, 595, 596, 597, 598, 599, 600, 601, 602, 603, 604, 605, 606, 607, 609, 610, 611, 612, 613, 614, 615, 616, 617, 618, 619, 620, 621, 622, 623, 624, 625, 626, 627, 628, 629, 630, 631, 632, 633, 634, 635, 636, 637, 638, 639, 640, 641, 642, 643, 644, 645, 646, 647, 648, 649, 650, 651, 652, 653, 654, 655, 656, 657, 658, 659, 660, 661, 662, 663, 664, 665, 667, 668, 669, 670, 671, 672, 673, 674, 675 were read on this motion to/for DISMISS DEFENSE.

Fiorello Pharmaceuticals, Inc. (Fiorello) is not entitled to summary judgment and dismissal based on its arguments that Cresco Labs New York LLC and Cresco Labs LLC (hereinafter, collectively, Cresco) breached a letter of intent for Cresco's purchase of Fiorello (the LOI [hereinafter defined]) or that Cresco can not prove causation sufficient to establish damages for breach of contract.

The undisputed facts establish that (i) Fiorello breached the "no-shop" and confidentiality provisions set forth in the LOI almost immediately after the LOI was executed, (ii) Fiorello was able to consummate a transaction for the sale of Fiorello, (iii) Cresco was capable of acquiring a company in New York with a cannabis license and (iv) both Fiorello and Cresco were capable of working with counterparties to modify their transactions to obtain shareholder and New York Department of Health (DOH) approval.

In addition, Fiorello is not entitled to summary judgment that damages in this case should be limited to out-of-pocket costs.

In New York, as the Court of Appeals stated in Goodstein Constr. Corp. v City of New York, 80 N.Y.2d 366 (1992) , "under the accepted rule of Hadley v Baxendale (9 Exch 341, 156 Eng Rep 145 [1854]), it must be shown' that the particular damages were fairly within the contemplation of the parties to the contract at the time it was made' (Kenford Co. v County of Erie, 67 N.Y.2d 257, 261)". Therefore, under a garden variety letter of intent that is only an agreement to agree, expectation damages must be limited to out-of-pocket costs.

However, the record here firmly establishes the LOI was not a garden variety agreement to agree but was instead an agreement that contained specific provisions that reflected the express expectations of the parties that if they were unable to complete the transaction, each party would incur significant damages and would need to cover by doing a buy/sell transaction with another party. Put another way, the record firmly establishes that the LOI was predicated on the parties' express understanding that (i) there were only a few DOH cannabis licenses that had been issued in New York, (ii) only two licensed cannabis companies were potentially available for purchase (Fiorello and Valley [hereinafter defined]) and owning a New York cannabis license was critical to Cresco's going-public business strategy, (iii) Fiorello needed to consummate a sale transaction because of looming capital pressure tied to Fiorello's need to become operational to maintain its New York cannabis license, (iv) the LOI "no-shop" and confidentiality provisions were highly negotiated because of the highly competitive nature of the New York licensed cannabis market (few sellers and few buyers), and (v) absent this transaction, both sides would need to cover by doing another transaction if the Fiorello/Cresco transaction could not close.

Thus, although much of the LOI was only an agreement to agree, the undisputed facts show that as to certain express provisions here expectation damages included the difference between what it would have cost to do a deal between Fiorello and Cresco and the cover price of having to acquire an alternative company, Valley. These damages are based on the actual expectations of the parties at the time the binding LOI was executed, as reflected in the "no-shop" and confidentiality provisions, such that damages should not be limited to out-of-pocket costs tied only to the LOI (Hadley v Baxendale 9 Exch 341, 156 Eng Rep 145 [1854]; cf Goodstein, 80 N.Y.2d at 366).

Finally, the affirmative defenses predicated on Cresco's breach of the LOI must be dismissed because the record facts firmly establish that Cresco did not breach the LOI. Among other things, as discussed below, the Investment Deck did not identify Fiorello by name or otherwise have the effect of identifying Fiorello or that Cresco's LOI was with Fiorello or any of the terms of the LOI (even without the change apparently requested by Ms. Yoss), as Mr. Gulliver, Liberty Health Sciences' (Liberty) CFO, the only person who received the Investment Deck without the change, testified.

The Relevant Facts and Circumstances

This case involves the sale of a weed company, Fiorello, and its immediate willful breach of "no-shop" and confidentiality provisions set forth in a binding Letter of Intent (the LOI; NYSCEF Doc. No. 287), dated February 14, 2018, by and between Fiorello and Cresco. Indeed, on the record facts before the Court, and as discussed below, Eric Sirota and Susan Yoss, Fiorello's Co-CEOs, never intended to honor the "no-shop" or the confidentiality provisions in the LOI and actively sought to conceal Fiorello's willful breach of those LOI provisions.

Reference is made to an Amended Decision and Order of this Court (the Prior Decision; NYSCEF Doc. No. 142), dated October 15, 2019. The background facts are set forth in the Prior Decision ¹. Familiarity is presumed. Terms used but not defined shall have the meaning ascribed thereto in the Prior Decision.

1 The Court notes that in the Prior Decision, among other things, the Court dismissed the unjust enrichment claims against Mr. Sirota and Ms. Yoss. In the Prior Decision, the Court noted that the elements of an unjust enrichment claim are (1) the other party was enriched, (2) at that party's expense and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered (citing Georgia Malone & Co., Inc. v Rieder, 19 N.Y.3d 511, 516 [2012]). The Court held that the complaint failed to assert that Mr. Sirota and Ms. Yoss were enriched at Cresco's expense and only indicated that Mr. Sirota and Ms. Yoss stood to benefit from Fiorello's breaches of contract by receiving a large proportion of the additional compensation that Fiorello would receive from selling itself to a third party and otherwise failed to allege how Mr. Sirota and Ms. Yoss actually benefited in anyway way at Cresco's expense or that Cresco suffered any cognizable loss (citing Edelman v. Starwood Capital Group, KKC, 70 A.D.3d 246, 251 [1st Dept 2009]). Subsequently, Cresco sought leave to file a Second Amended Complaint asserting a claim sounding in unjust enrichment against Mr. Sirota and Ms. Yoss based on the fact that Fiorello did consummate a transaction with GTI (hereinafter defined), and that Mr. Sirota and Ms. Yoss received substantial compensation (i.e., $20 million) in that transaction. This Court denied the motion explaining that the unjust enrichment claim was palpably insufficient because the damages of the transaction costs and the cover cost (i.e., the delta between the new purchase price paid by Cresco for a replacement transaction and the $20 million which Mr. Sirota and Ms. Yoss received from a third-party purchaser) did not benefit Mr. Sirota and Ms. Yossi.e., those damages did not enrich Mr. Sirota and Ms. Yoss (citing Georgia Malone and Swain v. Brown. 135 A.D.3d 629, 632 [1st Dept 2016] ["[u]njust enrichment occurs when a defendant enjoys the benefit bestowed by the plaintiff"]). On appeal, the Appellate Division affirmed (NYSCEF Doc. No. 418) indicating that the unjust enrichment claim was palpably insufficient because the compensation received from the third party, GTI, was not paid by plaintiffs and therefore not at their expense (citing E.J. Brooks Co. v. Cambridge Sec. Seals, 31 N.Y.3d 441, 456 [2018]). Now, following discovery, and based on the facts set forth in this Decision and Order, it appears that leave should be granted to file a second amended complaint (CPLR 3025; see Kimso Apartments, LLC v Gandhi, 24 N.Y.3d 403, 411 [2014] ["a party may amend a pleading "at any time by leave of court", "before or after judgment to conform the pleading to the evidence"]) asserting an aiding and abetting breach of contract claim against Mr. Sirota and Ms. Yoss. While generally an officer or director cannot be held liable for a corporation's breach of contract when they act in good faith, they can be held liable where they commit independent tortious conduct or where their action results in personal profit (Stern v H. DiMarzo, Inc., 77 A.D.3d 730, 731 [2d Dept 2010]; see Gottehrer v Viet-Hoa Co., 170 A.D.2d 648, 649 [2d Dept 1991]). Additionally, given Jonathan Canarick's testimony that NYS Pharma (hereinafter defined) controlled Fiorello's ability to do a deal (and that he and Andrew Stone controlled NYS Pharma) and that he was not even told that Fiorello and Cresco were talking about a transaction until after the LOI expired, Mr. Sirota and Ms. Yoss appear to have breached their fiduciary duties to Fiorello as Fiorello may well have been sold for a lot more money. To wit, Cresco paid over $120 million for the alternative company, Valley, and had NYS Pharma been told of the flurry of activity as Mr. Sirota and Ms. Yoss had fiduciary obligations to do as part of the presentation of any offer to the board and shareholders of Fiorello, and had Cresco been told about the other offer as Fiorello was obligated to tell them as part of their good faith obligations pursuant to the LOI, a bidding war for Fiorello likely would have ensued. The fact that Cresco paid over $120 million for the alternative company is proof positive of this result.

Briefly, Cresco is a multistate vertically integrated operator in the regulated cannabis business holding licenses across ten states (NYSCEF Doc. No. 344, ¶ 2). New York is one of the most important markets for medical cannabis. At the time of the LOI, Cresco did not own a company that was licensed in New York. The DOH had issued only ten vertically integrated licenses for the cultivation and processing of medical cannabis as well as the establishment of medical cannabis dispensaries. Three of the ten licensees had recently been acquired and therefore were not likely available for purchase. Four licensees were already owned and operated by multistate operators and therefore were not likely available for purchase. One licensee had been owned by an operational company and Cresco understood it was also not available for sale. Thus, of the ten licenses, practically, only two were potentially available for acquisition - Fiorello and Valley Agriceuticals, LLC (Valley) (id., ¶¶ 3-7).

Cresco was smoldering to roll an acquisition because Cresco was planning to become a publicly traded company in Canada and critical to their go-public transaction was establishing itself as a multistate United States cannabis company (id., ¶ 6). Therefore, Cresco looked to Fiorello and Valley as potential targets. Fiorello understood this. According to Charles Bachtell, Cresco's CEO, "Fiorello also knew that if Cresco could not complete an acquisition to acquire Fiorello, Cresco would be left competing against other multistate operators for the last remaining target, or Cresco could be shut out of the New York market altogether" (id., ¶ 10).

Fiorello was a New York corporation that possessed one of the ten licenses that permitted operation of a medical cannabis business in New York. Mr. Sirota and Ms. Yoss were the Co-CEOs of Fiorella. As of June 25, 2018, Fiorello had 15 shareholders of common stock: David Pompei, Elisha Rothman, Mr. Sirota, John Sullivan, Judith Tytel, Lauren Handel, Marla Lacy, Mingleridge Business Resources LLC, MK Insights LLC, Neil Leibowitz, Plant Consulting Group, LLC, Sonic Health Corporation, Ms. Yoss, Terrace Corporation of New York, and The Clinic New York LLC (NYSCEF Doc. No. 47). Fiorello also had one shareholder of common stock warrant, RKR Holdings LLC, and seven shareholders of Series A preferred stock: Elisha Rothman, Mr. Sirota, Judith Tytel, Neil Leibowitz, NYS Pharmaceutical Investors LLC (NYS Pharma), Sonic Health Care Corporation, and Ms. Yoss (id.).

Mr. Canarick, the founder and one of the two co-managing members of NYS Pharma, testified that NYS Pharma held the majority position of the Series A preferred stock in Fiorello at the time of the LOI (NYSCEF Doc. No. 284, ¶ 2). NYS Pharma was formed in 2015 by Mr. Canarick. He managed NYS Pharma with Mr. Stone (id.). Significantly, Mr. Canarick testified that, by reason of NYS Pharma's majority position of the Series A preferred stock, NYS Pharma had the power to approve or veto any change of control of Fiorello and that there could be no merger transaction with Cresco or any other company without NYS Pharma's concurrence (id., ¶ 3).

Pursuant to their DOH New York cannabis license, Fiorello could have four dispensaries in certain designated counties (NYSCEF Doc. No. 283, ¶ 6). Fiorello was however not operational and needed to become operational to maintain its New York license (id., ¶ 49). Indeed, Mr. Sirota, one of Fiorello's co-CEOs, testified that in conversations with Cresco and other potential counterparties, Fiorello emphasized "Fiorello's desire and need to move quickly. To maintain its status in good standing with DOH as a registered organization, Fiorello needed to take affirmative steps toward beginning operations" (NYSCEF Doc. No. 283, ¶ 10). This is reflected in the LOI by the inclusion of the requirement that the parties would negotiate a Management Oversight Agreement (discussed below) and that Fiorello wanted Cresco to provide certain funding needs (although no demands were actually made) between the LOI and the closing of the Definitive Agreement.

In other words, both Fiorello and Cresco were jonesing to do a deal and deeply committed to an accelerated timetable. Inasmuch as the market was competitive, both companies were interested in ensuring that they worked exclusively together and did not "shop" any proposed deal. Given the few cannabis licenses issued by the DOH, and the ownership structure of the licensees, both parties understood the potential harm in not consummating a deal with each other - including that Cresco would need to cover by seeking to do a deal expeditiously with another licensee.

Prior to the execution of the LOI in February, 2018, Fiorello was engaged in a series of unsuccessful attempts to make a deal for the sale of Fiorello with a number of different companies (NYSCEF Doc. No. 343 ¶ 7). One company was Green Thumb Industries (GTI). On December 12, 2017, Ben Kovler of GTI emailed Ms. Yoss and Mr. Sirota with an offer to acquire Fiorello, for $4 million cash, 412 million GTI stock, and assumption of $3.7 million liabilities (NYSCEF Doc. No. 370). At that time, Mr. Sirota responded that the Board "decided that there was either too much uncertainty or insufficient valuation to move forward" (id.). Another company was Liberty, a cannabis company based in Florida. These conversations extended well into January, 2018 - a mere few weeks before Fiorello decided to execute the LOI. In fact, on January 18, 2018, Brian Vincente wrote in an email to Fiorello's Co-CEO's Mr. Sirota and Ms. Yoss, "So great to meet with you this morning. I wanted to 'introduce' you to George Scorsis (cc'd) from Liberty Health Sciences. George is a great guy and his company is looking at a number of potential acquisitions in the U.S. market. New York is of interest to him, so I'll let you guys take it from here" (NYSCEF Doc. No. 360). Nothing came of any of their pre-LOI contacts prior to the execution of the LOI. ²

2 Ultimately as discussed below, a deal was consummated with GTI.

Notwithstanding the significant amount of buzz surrounding Fiorello, Fiorello negotiated and executed the binding LOI with Cresco on February 14, 2018. As discussed below, Fiorello did not honor the LOI even for a nanosecond-both immediately continuing to meet with potential acquirers, shopping the deal they had with Cresco, and then actively working with other potential acquirers to conceal their concerted breach of the "no-shop" and confidentiality provisions of the LOI.

The LOI Highlighted the Parties' Expectations of Consummating a Transaction

As discussed above, the exclusivity and "no-shop" provisions were critically important to both Fiorello and Cresco. Indeed, according to Mr. Bachtell, it was Fiorello that expanded upon the exclusivity period from 15 to 30 business days and the "no-shop" provision language that exists in the LOI discussed below (NYSCEF 344 ¶ 9; see also, NYSCEF Doc. No. 407).

According to Mr. Bachtell, Cresco agreed to give up its valuable right to pursue an alternative transaction in New York with the other potential target (i.e., a company called Valley) during a crucial time for Cresco's expansion. Cresco was looking to add New York to its portfolio given their imminent desire to undertake a going-public transaction, and saw the New York cannabis market as poised to take off. Hence, Cresco was giving up a lot by agreeing to focus on closing a deal with Fiorello, and made this commitment only because Fiorello mutually committed not to pursue or even discuss a third-party transaction during the 30 business day exclusivity period. And, as discussed above, Fiorello knew that if Cresco could not complete its acquisition of Fiorello, Cresco would be left competing against other multistate operations for the likely only available remaining licensed company or be shut out of the New York market (NYSCEF Doc. No. 344, ¶10).

Although the LOI was not the Definitive Agreement contemplated by the parties, the LOI indicated that it was binding, and it contained many of the material terms that would form the basis of a Definitive Agreement. For example, the parties agreed to the purchase price and the timing of the payments of the purchase price. Pursuant to Section 1 of the LOI, the parties agreed that Cresco would pay $22.5 million (the Funding Amount) for the acquisition of Fiorello (NYSCEF Doc. No. 287, at 1) in three installments (i.e., $10 million upon the closing of a Definitive Agreement, $6.25 million on the first anniversary of the Closing Date and $6.25 million on the second anniversary of the Closing Date:

(1) An initial payment of Ten Million Dollars ($10,000,000) (the "Initial Payment") will be delivered to Fiorello and/or the Shareholders of Fiorello (the "Shareholders") upon the date of the closing of the Definitive Agreement (the "Closing Date"), payable in cash or, at the election of Shareholders, an amount of ownership units in Cresco equal to such payment amount as calculated based on the then-current valuation of Cresco as determined by: (a) the price of units of Cresco in its most recently closed capital-raising transaction or (b) in the event that Cresco is negotiating a material capital-raising transaction as of the date that such payment is due (a "Pending Transaction"), the proposed price of the units of Cresco in such Pending Transaction as of the date that such payment is due (the "Payment Date Price"); provided, however, in the event that the Pending Transaction does not close, or results in a valuation lower than that contemplated by the Payment Date Price, additional units of Cresco will be issuable to Shareholders who have elected to receive units, in such amount necessary to account for the Pending Transaction not closing or closing at a lower valuation, as follows:

a. Fiorello will receive a portion of the Initial Payment (the "Fiorello Initial Payment") equal to the amount of liabilities of Fiorello as of the Closing Date minus the amount of cash of Fiorello as of the Closing Date, and

b. the Shareholders will receive a portion of the Initial Payment equal to the amount of the Initial Payment minus the Fiorello Initial Payment.

(2) Six Million Two Hundred and Five Thousand Dollars ($6,250,000) will be payable to the Shareholders upon the first anniversary of the Closing Date, payable in cash, pursuant to a promissory note providing for interest payable at customary rates or, at the election of Shareholders, an amount of ownership units in Cresco equal to such payment amount as calculated based on the then-current valuation of Cresco as determined by: (a) the price of units of Cresco in its most recently closed capital-raising transaction or (b) in the event of a Pending Transaction, the Payment Date Price; provided, however, in the event that the Pending Transaction does not close, or results in a valuation lower than that contemplated by the Payment Date Price, additional units of Cresco will be issuable to Shareholders who have elected to receive units, in such amount necessary to account for the Pending Transaction not closing or closing at a lower valuation.

(3) Six Million Two Hundred and Fifty Thousand Dollars ($6,250,000) will be payable to the Shareholders upon the second anniversary of the Closing Date, payable in cash, pursuant to a promissory note providing for interest payable at customary rates or, at the election of Shareholders, an amount of ownership units in Cresco equal to such payment amount as calculated based on the then-current valuation of Cresco as determined by: (a) the price of units of Cresco in its most recently closed capital-raising transaction or (b) in the event of a Pending Transaction, the Payment Date Price; provided, however, in the event that the Pending Transaction does not close, or results in a valuation lower than that contemplated by the Payment Date Price, additional units of Cresco will be issuable to Shareholders who have elected to receive units, in such amount necessary to account for the Pending Transaction not closing or closing at a lower valuation (id., at 1-2).

The parties also agreed to a refundable good faith deposit. To wit, Cresco was obligated to make a good faith payment of $500,000 (the Good Faith Payment) upon execution of the LOI. The Good Faith Payment was to be credited to the Initial Payment (as such term is defined in the LOI). The parties also agreed that the Good Faith Payment was fully refundable if Cresco was not satisfied with the Due Diligence review of Fiorello or if the parties were not able to close the Definitive Agreement for any reason other than illegal actions, intentional misconduct or gross negligent conduct committed by the Buyer:

Buyer shall pay Fiorello Five Hundred Thousand Dollars ($500,000) as a good faith payment ("Good Faith Payment"), due and payable upon the execution and delivery of this LOI. Upon the satisfactory closing of the Definitive Agreement, the Good Faith Payment will be credited against the Initial Payment to be paid to Fiorello on the Closing Date. The Good Faith Payment shall be refunded to Buyer in the event: (i) Buyer is not able to satisfactorily complete its Due Diligence review of Fiorello within thirty (30) days of the execution of this LOI due to Fiorello's failure to timely provide requested customary reasonable diligence materials; or (ii) the Parties are not able to close the Definitive Agreement for any reason other than any illegal actions, intentional misconduct or grossly negligent conduct committed by Buyer (id., at 3).

Recognizing that Fiorello was worth more if New York legalized the sale of marijuana for adults, the parties even used the LOI to agree to a contingent payment (the Contingent Payment) to account for the legalization of the sale of marijuana to adults in New York if a bill was signed into law on or before the fourth anniversary of the Closing Date (NYSCEF Doc. No. 287, at 2). The amount of the Contingent Payment, if any was to be due, was dependent on the timing of any such legalization (i.e., $10 million if legalization occurred on or before the second anniversary of the Closing Date, $7.5 million if legalization occurred on or before the third anniversary of the Closing Date and $5 million if legalization occurred on or before the fourth anniversary of the Closing Date) (id., at 2-3). The LOI also provided that Cresco Labs, LLC would "provide a corporate guarantee for all payments to Buyer" ³ (id., at 3).

3 Presumably "to Buyer" is a typo and the parties meant "to Seller".

Inasmuch as Fiorello needed to become operational and had certain funding needs, the parties agreed to enter into a Management Oversight Agreement as soon as practicable pursuant to which Cresco would manage the operations of Fiorello for the period of time from the execution of the LOI until the Closing Date and provide certain funding to Fiorello (NYSCEF Doc. No. 287, at 3). The LOI does not contain a specific funding amount requirement and the record indicates, as discussed below, that subsequent to the execution of the LOI, Cresco made inquiry to find out what in fact Fiorello needed, but that no Management Oversight Agreement was ever executed.

Recognizing that the LOI was not the final Definitive Agreement, the parties understood that, as part of the process in moving forward towards a Definitive Agreement, Cresco would need to perform its due diligence of Fiorello's by-laws, Board minutes, incorporation documents and other items that were customary and reasonable not included on the list of due diligence items (NYSCEF Doc. No. 287, at 4). Fiorello was also entitled to conduct its own due diligence review and Cresco agreed to provide whatever relevant materials and documentation Fiorello reasonably requested (id.). The parties agreed to complete due diligence as promptly as practicable and that the due diligence information and their negotiations were subject to certain confidentiality provisions in the LOI:

The Parties confirm that all future negotiations and disclosures will be subject to the following confidentiality provisions:

1. In the course of discussions, each Party will each have access to and will be entrusted with detailed confidential information relating to the other Party;

2. The right to maintain the confidentiality of this information constitutes a proprietary right which the other Party is entitled to protect and which shall be respected and honored;

3. Neither Party will at any time disclose any confidential information or use same for any purpose which would give it or any competitor or other interested party an advantage over its counterpart in these discussions;

4. At the end of these discussions, and subject to any other agreement reached, all copies of any documentation or records referring to or containing confidential information belonging to the other Party shall be returned or destroyed, to be confirmed by a statutory declaration if so requested; and

5. The execution of this LOI and the contemplated completion of this transaction will be kept strictly confidential and will not be disclosed to customers, suppliers, employees or other persons without the consent of both Parties; this provision shall not apply to disclosure to professional advisors or appraisers, provided they agree to maintain the same level of confidentiality required by Parties.

The Parties will enter into a separate Confidentiality and Non-Disclosure Agreement as part of the Definitive Agreement that will incorporate the aforementioned terms (NYSCEF Doc. No. 287, at 5).

Significantly, as discussed above, the parties also negotiated a "no-shop" provision:

they will each use their respective best efforts to complete and execute the Definitive Agreement and conclude due diligence consistent with the terms of this LOI at the earliest possible date but no later than thirty (30) business days from the date of the execution of this LOI (unless otherwise extended by the mutual agreement of the Parties). 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 medical marijuana company in the State of New York by Buyer (id., at 4).

The parties also agreed (i) on a closing date (i.e., on or about April 15, 2018 - approximately 60 days from the execution of the LOI) "subject to the completion of the Parties' satisfactory due diligence and the approval of the respective Parties' boards of directors and shareholders/members and the NYSDOH" and (ii) to execute the Definitive Agreement reflecting the same as soon as practicable (NYSCEF Doc. No. 287, at 3).

The importance of the LOI to this particular transaction, and the parties' determination to complete a transaction with each other, is further highlighted by the parties agreeing in the LOI to certain customary terms typically set forth in a Definitive Agreement including a representation that Cresco (Buyer) would have the necessary amounts needed to consummate the transaction. Hence, Cresco represented its ability to fund its obligations when due:

Buyer currently has, and will represent and warrant in the Definitive Agreement that it has, adequate funding to make each and all installments of the Funding Amount as each comes due, in accordance with the Definitive Agreement. Failure to fund any installment of the Funding Amount when such installment becomes dues will be an event of default pursuant to the Definitive Agreement, unless otherwise agreed by the Parties (id., at 3-4).

The parties also agreed with reasonable diligence to do all things and provide reasonable assurance to consummate the transaction:

The Parties shall, with reasonable diligence, do all such things and provide all such reasonable assurances as may be required to consummate the transaction and each Party shall provide such further documents or instruments required by the other Party as may be reasonably necessary or desirable to affect the purposes of this LOI and carry out its provisions.

(id., at 4) ⁴

4 Notwithstanding this obligation, Mr. Canarick testified (NYSCEF Doc. No. 284) that he did not learn until April, 2018 (i.e., after the LOI expired) that Cresco and Fiorello had entered into negotiations for the outstanding stock of Fiorello. This is significant because according to Mr. Canarick, his approval was necessary for any transaction with Cresco and he had certain concerns (discussed below) over the transaction both related to price and the security for the installment payments:

1. I am a managing partner of North Castle Partners, a small private equity firm. I have personal knowledge of the matters set forth herein.

2. In 2015, I formed NYS Pharmaceuticals LLC ("NYS Pharma") which invested in Fiorello Pharmaceuticals, Inc. ("Fiorello") preferred stock in two tranches. The first tranche of 10% was to fund the expenses of Fiorello in applying for a license to be a registered manufacturer and dispenser of medical marijuana in the state of New York (the "license"). The second tranche of 90% was to be funded after Fiorello received its license. The aggregate investment was approximately $1.2 million and constituted a majority position of the Series A Preferred Stock of Fiorello. Initially, Fiorello's application for a license was rejected. When the opportunity arose to reapply, certain new investors replaced prior investors. At that time Andrew Stone invested and became co-managing member with me of NYS Pharma.

3. By reason of our preferred stock majority position, NYS Pharma had the power to approve, or to veto, any change of control in connection with a liquidation event. Without the concurrence of NYS Pharma there could be no merger transaction with Cresco, nor anyone else.

4. In 2017, I made an introduction of Cresco Labs LLC ("Cresco") to Fiorello. At the time, the only thing I knew about Cresco was that it was a medical marijuana company that was interested in expanding into New York and that one of its executive officers, David Ellis, was the brother-in-law of a very good friend of mine. I made the introduction as a courtesy. The companies were free to discuss whatever they liked. I was not privy to those discussions, did not authorize Fiorello to act for me, and Fiorello could neither bind NYS Pharma nor curtail its rights as a Fiorello Preferred Shareholder.

5. I subsequently learned that Cresco and Fiorello had entered negotiations for Cresco to possibly acquire the outstanding stock of Fiorello from its shareholders. Until April 2018, I did not know any of the terms that Fiorello and Cresco were discussing and had never seen, nor even known of, a letter of intent.

6. On or about April 16, 2018, I received an irate telephone call from Mr. Ellis telling me that Fiorello had breached the letter of intent and, if necessary, Cresco would bring suit to enforce the letter of intent and would also go to the New York Department of Health ("DOH") to attack Fiorello's standing as a registered owner because of Fiorello's lack of operations. Mr. Ellis also emailed to me a copy of the letter of intent. Annexed hereto as Exhibit KK is a true and correct copy of Mr. Ellis's April 20, 2018 email and the attached letter of intent. I subsequently learned that what Mr. Ellis transmitted was a near final draft of the LOI dated February 9, 2018, which was executed by Cresco but not by Fiorello. Mr. Ellis' telephone call was the first I had learned any of the details of any possible transaction with Cresco, and the first time I had seen the letter of intent, even in draft form. Until my April 2018 communications with Mr. Ellis I had no knowledge of what pricing and other terms had been negotiated between Cresco and Fiorello

9. On several occasions I expressed my concern and objection to any transaction with Cresco and would not have approved any transaction contemplated by the LOI as drafted. In addition to price, I was especially concerned about the lack of security for the two installment payments that were to be made one and two years after closing and which represented over 50% of the total consideration as well as the significant potential contingent payment based on adult legalization in New York (id. [emphasis added] ).

Given the foregoing, it's not clear that Mr. Sirota and Ms. Yoss had actual authority to execute the LOI on behalf of Fiorello. Additionally, given the need for NYS Pharma's shareholder approval, subsequent to execution, disclosure to NYS Pharma of an imminent transaction was required both as part of the execution Mr. Sirota and Ms. Yoss' fiduciary duties and also in acting in good faith pursuant to the terms of the LOI.

Fiorello Immediately Begins Breaching the LOI and Undermining the Cresco Transaction

Notwithstanding the LOI provisions, Fiorello kept pursuing other potential suitors even after the LOI was executed. Indeed, the very next day after the LOI was executed, Mr. Scorsis, CEO of Liberty emailed Mr. Sirota, Co-CEO of Fiorello, asking if he and Ms. Yoss had "a moment to connect" (id.). Rather than not responding or saying that he could not speak, Mr. Sirota did the exact opposite - responding "[s]ure do you have time now?" and provided dial in information (id.). The call lasted for 25 minutes (NYSCEF Doc. No. 416, at 12).

After the telephone call, Mr. Scorsis organized an in-person meeting, the subject of which he labeled "Fiorello meet Aphria/Liberty" (NYSCEF Doc. No. 361). The meeting was scheduled to last for half an hour at the "Ai Fiori @ 400 5th Ave in the Langham Hotel" and the invitation was sent to Ms. Yoss (id.). Mr. Sirota confirmed the meeting with Mr. Scorsis over text (NYSCEF Doc. No. 323, at 1) ⁵.

5 Under the circumstances, and given the pre-LOI conversations with Liberty, this is unquestionably prima face evidence of a breach of the LOI's exclusivity and "no-shop" provisions.

This was not the only non-Cresco hit that Fiorello took the day after the LOI was executed. On February 15, 2018, David Scalzo, a shareholder of Fiorello, forwarded an email to Mr. Sirota and Ms. Yoss from Jackson Peddy of Sea Hunter Holdings (Sea Hunter), a cannabis company operating in four states (NYSCEF Doc. No. 365) with a teaser about Sea Hunter and its fundraising.

Ms. Yoss emailed Mr. Sirota the same day, writing "[w]e should contact them today before we sign Agree?" (id.). She sent a follow-up email the same day asking "Too Late?????" (id.). To be clear, the record does not show a response to Mr. Scalzo informing him that Fiorello had executed the LOI and could not meet with anyone to discuss a sale of Fiorello during the "no-shop" period ⁶.

6 This too raises serious fiduciary duty issues. Indeed, Mr. Sirota and Ms. Yoss seem to have failed to inform the other owners of Fiorello during the "no-shop" period that Fiorello had executed the LOI, nor advised them as to its terms during the "no-shop" period.

Two days later, on February 17, 2018, Ms. Yoss emailed Robert Leidy, Jr., a managing partner at Sea Hunter, to request a meeting (NYSCEF Doc. No. 367). Mr. Leidy confirmed an in-person meeting at Fiorello's office for February 22, 2018 (id.) - seven days after the LOI was executed. This meeting took place at Fiorello's WeWork office (NYSCEF Doc. No. 368). The same day, on February 22, 2018, Mr. Leidy emailed a fully executed Non-Disclosure Agreement to Ms. Yoss, dated as of January 29, 2018, indicating that he had signed the agreement (NYSCEF Doc. No. 369) ⁷ for the purpose of discussing a possible transaction (id., at 2).

7 Given the record as to when the correspondence and the substance of Ms. Yoss' emails and when the meeting took place, this NDA appears to have been backdated to be effective prior to the date of the LOI for the purpose of concealing the interaction and so that they could do what Ms. Yoss indicated in her emails she wanted to do - consider a deal with Sea Hunter.

Four days after the execution of the LOI, Mr. Sirota emailed Mr. Bachtell: "Now that the LOI is signed, please let us know how you want to move forward wth [sic] diligence and the management oversight and definitive agreements" (NYSCEF Doc. No. 320, at 1). On the record before the Court, that appears to be the only time the parties discussed the Management Oversight Agreement contemplated by the LOI. When asked at his deposition about the lack of a Management Oversight Agreement, Mr. Bachtell testified "just saying Fiorello wasn't that excited by doing a managed service agreement. They wanted a Definitive Agreement signed before they allowed us to do a lot of things, like even talk to the Department of Health. That was at their request. They didn't want to do many things that were an action of moving forward until a Definitive Agreement was executed" (tr at 214-215, lines 19-2 [NYSCEF Doc. No. 560]). Indeed, the record is bereft of further discussions of a Management Oversight Agreement or of any request for a payment. Moreover, because no Management Oversight Agreement was ever entered into, Cresco was not obligated to make any payments pursuant to that agreement as no specific amounts are required to be funded by the binding LOI.

Following the execution of the LOI, Cresco made the Good Faith Payment on March 1, 2018 - i.e., approximately two weeks after the LOI was executed. Fiorello did not reject the payment or otherwise indicate that they were not prepared to proceed with the LOI. They accepted it. ⁸

8 Fiorello now claims that the delay in making a payment constituted a breach of the LOI. Having accepted the payment and not contemporaneously asserted a breach and/or terminated the LOI, the argument fails.

Hence, Fiorello had no reason to doubt Cresco's ability to close the transaction, nor any reason to doubt that the transaction was moving forward. Cresco also moved promptly at the time to work towards closing a deal. On March 1, 2018, the same day that Cresco sent the Good Faith Payment, Cresco also sent the first draft of a Definitive Agreement to Fiorello (NYSCEF Doc. No. 366) and provided its list of due diligence requests to Fiorello on March 1, 2018 (NYSCEF Doc. No. 376).

Also on March 1, 2018, Ken Amann, Cresco's CFO, sent a comprehensive investor presentation to Mr. Bachtell of Cresco and Mr. Gulliver at Liberty (the Investment Deck; NYSCEF Doc. No. 310) for their review outlining Cresco's growth strategy. The Investment Deck indicated that Cresco was in a "unique position to establish a national operation in this complex and developing industry" and that Cresco planned "to create a national brand by executing on the following actions:

Increase upon our successful market penetration in Illinois, complete expansion of our cultivation space to meet increased patient demand

Following license award, gain market leadership in Pennsylvania and Ohio in cultivation and dispensary operations

Build out cultivation facility in Nevada with 53K sq ft facility

Finalize equity partnership with existing cultivation and processing license holder in California, including [redacted] sq ft facility on [redacted] acres of land with capacity to expand to over [redacted] sq ft of cultivation

Finalize acquisition of existing license in New York to open cultivation and processing operations, and 4 dispensary locations (1 of only 4 allowed in Manhattan)

Finalize acquisition of existing cultivation, processing, and dispensary operations in Massachusetts which includes a [redacted] sq ft facility and three dispensary locations

Finalize equity partnership with existing vertical license holder in Arizona

Complete application process for new states beginning medical cannabis programs such as [redacted]

Create licensing and/or distribution partnerships to expand Mindy Segal edible products into existing markets such as [redacted]

Pursue acquisition opportunities in other existing legal cannabis markets

As it related to its New York strategy, the presentation indicated:

On July 7, 2014, Governor Andrew Cuomo signed the New York State Compassionate Care Act which, upon implementation, made New York the 23rd state to permit the use of cannabis for medicinal purposes. The New York State medical cannabis program officially began operating in January 2016, but the program initially rolled-out, has proven to be rather restrictive, limiting patient adoption and market growth. As of June 2017, 22,496 patients have been certified for the program. The State has recently moved to remedy the program's deficiencies by authorizing Nurse Practitioners and Physica Assistants to recommend medical cannabis and recently approved establishing chronic pain as a qualifying condition which should significantly increase patient counts:

COVERED CONDITIONS / SYMPTONS

Cancer

HIV / AIDS

ALS

Parkinson's

Multiple Sclerosis

Spinal Cord Injury

Wasting Syndrome

Cachexia

Epilespy

Inflammatory Bowl disease

Neuropathy

Huntington's disease

Chronic Pain

Persistent Muscle Spasms

Severe Nausea

Cresco Labs has executed a binding LOI to acquire 100% of an vertically integrated license in New York which includes cultivation, processing, and up to four dispensary locations. Our partner did not win one of the initial five licenses awarded by New York State. Their application placed in the top ten on the evaluation list of forty-three companies. Since that time, New York State Department of Health has announced that it will expand the program and has advised the company that it is awarding an additional five licenses for those who finished 6 - 10 in the initial application process. Our partner was officially awarded a provisional license in July, 2017. There are currently only 10 licenses currently issued in New York

Cresco Labs will develop and implement the cultivation and processing operation.

Cresco Labs' suite of branded products will be sold through this venture. The upfront capital required to purchase the license is $10 million.

(id., at 7). The Investment Deck also disclosed certain projected financial information.

It is undisputed that Fiorello was not mentioned by name in the Investment Deck and that Mr. Gulliver of Liberty testified that the Investment Deck did not put him on notice that Cresco and Fiorello were engaged in the transaction contemplated by the LOI or the LOI. ⁹

9 As discussed below, Fiorello contends that the Investment Deck violated the LOI because it breached the confidentiality provision. The argument fails. In support of this contention, they argue that subsequently, Cresco removed the language "1 of only 4 allowed in Manhattan" (NYSCEF Doc. No. 595) because it makes Fiorello identifiable. In support of this contention, when Mr. Bachtell was asked at his deposition (i) whether the language referred to the New York LOI, he indicated that it did and (ii) why he had asked Mr. Amann to delete those words from Cresco's investment deck, he responded that he believed "[t]hat would have been identifying who or what was involved in an LOI with us". However, he also testified that the Investment Deck had been sent "to Susan" because it was to be published and that it was not otherwise sent out to the best of his knowledge. It appears that change was made at Ms. Yoss' request merely to satisfy her concerns. In an email on April 11, 2018, Mr. Amann wrote to Mr. Bachtell "[j]ust to be clear, Susan and Eric have had our investment deck since March 19th" to which Mr. Bachtell replied "I know-and I specifically told her what we were doing and how it would be worded on March 2nd (when she told me her concerns about being identified, which we addressed)" (NYSCEF Doc. No. 315, at 1). In any event, the language did not have the effect of identifying Fiorello or that Cresco and Fiorello had executed the LOI. Mr. Gulliver of Liberty testified that he did not know whether Cresco's LOI was with Fiorello or not (tr at 47-48, lines 23-12 [NYSCEF Doc. No. 569]). In fact, Mr. Gulliver testified that he understood that Cresco and Fiorello were talking not from Cresco but because he met with Mr. Sirota and Ms. Yoss and based on that interaction, he surmised that Fiorello and Cresco were talking.

Q: Okay.ú And did - did anyone from Cresco ever tell you anything more about their interests or attempts to purchase an entity in New York?

MS. IZOWER-FADDE:ú Objection.

BY THE WITNESS: A: No.ú I do not recall that, no.

BY MR. ASCHER: Q: So I take it, you don't recall anyone from Cresco ever telling you that they had a deal with Fiorello?

A: No.

MS. IZOWER-FADDE: Objection.

BY MR. ASCHER: Q: Did there ever come a time when you kind of put two and two together and thought, it's possible that Cresco is talking to Fiorello?

MS. IZOWER-FADDE: Objection.

BY THE WITNESS: A: Well, yes. I think when we met with Susan and - and Eric in New York, you know, they had talked about other people approaching them. So we only surmised who it could be and

that Cresco was one of them.ú I mean, there were other people doing acquisitions, you know, doing the same thing. So - but, you know, didn't know for sure if it was Cresco or not.

BY MR. ASCHER: Q: And who are the other ones you thought it could be?

A: Well, at - at the time, you know, we had talked to a - a number - iAnthus.ú We - we had talked to GTI.ú They were very active looking for - for deals. So those - those two in particular come to mind.ú We also had talked to Harvest, Acreage.ú So all of the big players you hear about today, we all had discussions with them at some point. So it could have been any number of them.

(tr at 47-48, lines 23-25 [NYSCEF Doc. No. 569]) [emphasis added]. Furthermore, it is undisputed that the Investment Deck was changed and it was not sent to anyone else without this change.

The next day, on March 2, 2018, Charles Bachtell and Joe Caltabiano, Cresco's CEO and President respectively, met with Mr. Sirota and Ms. Yoss to discuss the draft and Cresco agreed to certain requested changes. Later that day, Mr. Bachtell sent a follow-up email with certain questions and clarifications (e.g., Cresco was to complete due diligence prior to signing the definitive agreement including verifying that the state license related condition and non-operational status of Fiorello was not a regulator concern and that Cresco's owners could acquire Fiorello and indicating confusion over the "working capital" language, among other things). (NYSCEF Doc. No. 377).

Meanwhile, during this time and unknown to Cresco, Mr. Sirota and Ms. Yoss continued to talk to Liberty. In fact, later that day, Mr. Scorsis texted Mr. Sirota "[w]e are sending you an unsolicited ¹⁰ int hr [sic] next 24 hours" and asked "[s]hould I send to the board or to you[?]" (NYSCEF Doc. No. 323, at 1). Mr. Sirota called Mr. Scorsis twelve minutes after the texts were sent and they spoke for eight minutes (NYSCEF Doc. No. 416, at 17).

10 Under the circumstances, and following the telephone conversation, the fact that the text indicates that Liberty is sending an "unsolicited" offer is at best suspect and the fact that it was a better offer than the amount set forth in the LOI is also deeply concerning and constitutes evidence of a breach of the LOI's "no-shop" and confidentiality provisions.

And, on March 3, 2018, Mr. Scorsis emailed Ms. Yoss and Mr. Sirota an email directed to the Board of Directors, stating that "[t]he purpose of this email is that Liberty Health Services is interested in the 100% acquisition of Fiorello Pharmaceuticals" (NYSCEF Doc. No. 324, at 1). Mr. Scorsis also attached a letter of intent outlining the terms for consideration (id.) ¹¹. Upon receipt of the Liberty Letter of Intent, Ms. Yoss texted Mr. Sirota "[t]he offer is much better thinking about how we can consider it" (NYSCEF Doc. No. 362). In other words, Ms. Yoss did not indicate that they needed to call Cresco and let them know that as a part of the presentation of the Cresco deal to the Board for approval, they would have to let them know that the Fiorello had received an "unsolicited" offer from Liberty. Indeed, it appears that Mr. Sirota and Ms. Yoss never disclosed any information about the "unsolicited" offer it received and instead concealed it and tried to devise ways to consider it in breach of the LOI. Inexplicably, as discussed above and based on Mr. Canarick's testimony, in orchestrating the presentation of Liberty's offer, it is not clear that the Board ever knew of Cresco's LOI. Fiorello's controlling shareholder, NYS Pharma, certainly never knew of any such Cresco offer.

11 Under the circumstances, this appears to confirm Mr. Sirota's personal active orchestration of the manner in which Liberty made an "unsolicited offer" and, as discussed above, that the offer received from Liberty appears to be anything but unsolicited.

For Cresco's part, on March 4, 2018, Mr. Bachtell followed up with Mr. Sirota and Ms. Yoss and asked when Cresco would receive the requested documents (NYSCEF Doc. No. 383, at 3). Mr. Sirota replied that day that they were working on the documents "and should probably have it to you by mid-week" (id.).

Four days later, on March 8, 2018, when Mr. Bachtell had not received the documents, he replied that he could "start reviewing piecemeal if there are some due diligence sections that are completed" (id., at 2). Mr. Sirota replied the same day and said "[w]e are close on diligence and should have that to you shortly" (id.). Ms. Yoss replied later that day that "[o]ur lawyers are finalizing the review of the legal diligence files to make sure it is responsive and complete. We should have it to you later today as well" (id., at 1). Fiorello ultimately sent the due diligence Dropbox to Cresco on March 9, 2018 (NYSCEF Doc. No. 384).

On March 8, 2018, incorporating comments from counsel, Cresco sent Fiorello a revised definitive agreement (NYSCEF Doc. No. 378).

Five days later on March 13, 2018, when Cresco still had not received certain documents from Fiorello, Katherine Lewis, counsel for Cresco, emailed Scott Linsky, counsel for Fiorello, and asked if he could "please give us a sense of timing on the schedule and disclosure schedules, and any feedback on the documents?" (NYSCEF Doc. No. 379, at 1). Mr. Linsky replied, "I expect to provide comments to the documents, as well as the schedules, tomorrow" (id.). This did not happen.

On March 15, 2018, when Cresco still had not heard from Fiorello or their lawyer, Ms. Lewis emailed Fiorello's lawyer "following up to understand timing of your feedback" (NYSCEF Doc. No. 380) and Mr. Bachtell emailed Mr. Sirota and Ms. Yoss "we're all pretty good on the due diligence" (NYSCEF Doc. No. 385). Fiorello ultimately did not respond with comments until March 26, 2018 - another approximately two weeks later (NYSCEF Doc. No. 381) and 18 days after Cresco sent the revised documents.

Meanwhile, and unbeknownst to Cresco, on March 15, 2018, Mr. Scorsis emailed Rene Gulliver, Liberty's CFO, and instructed him with respect to an email to Fiorello "I would copy both Eric and Susan to make it appear as if we have not had discussions" (NYSCEF Doc. No. 363 [emphasis added]). In so doing, Liberty confirmed that they understood that Fiorello had executed the LOI and that there was a "no-shop" provision which Fiorello was violating and that they were actively tortiously interfering with the LOI. This also unquestionability confirms the breach of the confidentiality provision of the LOI by Fiorello. The next day, Mr. Gulliver emailed a revised letter of intent to Fiorello (NYSCEF Doc. No. 326).

Back to Fiorello/Cresco Four days later on March 19, 2018, Christopher Walker, counsel for Cresco, emailed Mr. Linsky a revised due diligence request list and wrote "[i]n most cases, we simply want to confirm that the information provided is complete, and that we have seen all of the documents that are responsive to each request" (NYSCEF Doc. No. 386). He also gave a list of items that remained outstanding (id.). Ms. Lewis followed up by email dated March 26, 2018, and wrote "we had made some additional due diligence requests, including re: capitalization of Fiorello. To the extent you could provide the requested documents (stock certs, etc.) that would help us move our diligence forward" (NYSCEF Doc. No. 387).

Despite the foregoing, and for the avoidance of doubt, Fiorello did not ultimately end up doing a deal with either Liberty or with Sea Hunter. They did one with GTI - the company that they had received an offer from (as discussed above) in the end of 2017. Mr. Kovler emailed Mr. Sirota and Ms. Yoss on March 14, 2018, requesting a meeting (NYSCEF Doc. No. 372). He sent a follow up email on March 17, 2018, requesting a meeting to update them on GTI's position (id.). Mr. Sirota called Mr. Kovler with Ms. Yoss twice on March 20, 2018 (NYSCEF Doc. No. 359, at 13) ¹². Mr. Kovler testified that after he spoke with Mr. Sirota, he directed Bret Kravitz, GTI's lawyer, to work on a letter of intent with Fiorello (tr at 109, lines 8-11 [NYSCEF Doc. No. 354]). The same day, Mr. Kovler emailed a letter of intent to Mr. Sirota and Ms. Yoss for a proposed purchase price of $25 million (NYSCEF Doc. No. 327). Putting aside their active breach of the LOI, on the record before the Court, the facts show that Mr. Sirota and Ms. Yoss did not communicate this offer to Cresco either, nor did they explain to them that as a part of the consideration of Cresco's offer they would need to let the Board know that Fiorello had received another offer. This they were obligated to do both based on the LOI and also based on the fiduciary duties that they owed to Fiorello.

12 Mr. Sirota and Ms. Yoss testified at their depositions that none of the conversations with any of these other companies included discussions of a transaction for the acquisition of Fiorello. This testimony appears false given the documentary evidence, including Ms. Yoss' own emails inquiring as to how these other offers could be considered.

Cresco Seeks to Complete Due Diligence and Proceed with the Transaction

As to Cresco, on March 28, 2018, two days after receiving Fiorello's comments, Mr. Bachtell told Mr. Sirota and Ms. Yoss that he had a call that afternoon with counsel to discuss their feedback and requesting an update from the DOH (NYSCEF Doc. No. 382). Mr. Sirota replied that they had not heard back from the DOH, but that he had a standing call with them on March 30, 2018, if he did not hear back prior (id., at 1).

By email dated March 29, 2018, Mr. Linsky emailed Ms. Lewis to request an extension of the LOI and informing her that the Good Faith Payment was subject to return:

By the way, please note that we will also need to address the expiration of the LOl, as it is now 30 business days after the execution of the LOI on February 14, 2018. I have advised Fiorello of this expiration and Fiorello is seeking an extension to the LOI to continue moving forward with the definitive agreement. As a technical matter, the Good Faith Deposit is now subject to return until such time as the LOI is extended, and we have advised our client that it must be prepared to return these funds (NYSCEF Doc. No. 603, at 1 [emphasis added]) ¹³.

13 It is undisputed that Fiorello never returned the refundable Good Faith Payment.

On March 30, 2018, Mr. Bachtell replied to Mr. Sirota:

For the most part, our responses will be that we use the most normal/typical treatment for any of the items at issue. The one request from your draft that was most notable was that the election of Cresco stock in lieu of cash on the first and second anniversary be based on Cresco's valuation at the time without the inclusion of the NY asset - we couldn't agree to that and it would be a material change from the terms of the LOI. If Fiorello shareholders at such time want to take equity in Cresco instead of the cash payment, per the LOI, it would be based on Cresco's valuation at the time as determined by the latest applicable capital raise.

The main issue outstanding is the Appendix A issue. We're going to do whatever we need to do to make sure the equity swap is a non-taxable event for Fiorello shareholders - if that means that Cresco Labs, LLC (parent company) needs to be linked to the transaction, we're going to have a lot of investors to disclose unless NY allows for us to exclude investors that have less than 1% ownership in Cresco (there are only 9 or so people that own more than 1% of the company; there are a lot that own <1%). We'll do what needs to be done but that will be a fairly large burden. 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. The sooner we can sit face to face with the DOH, the better - I know you don't want to do that until the definitive doc is signed. If we get everything else ironed out but the Appendix A issue, I would recommend we draft language into the definitive doc that addresses that outstanding issue but would allow us to execute the agreement and move forward so we can get that answer (NYSCEF Doc. No. 382, at 1). Fiorello Pursues Another Transaction-Forcing Cresco to do the Same

After working to avoid its transaction with Cresco, Fiorello immediately entered into another transaction. The facts surrounding that transaction-and an alternative transaction that Cresco then managed to complete-show that Fiorello and Cresco could have navigated licensing issues relating to the New York State authorities, and that Fiorello cannot use licensing issues to excuse its breaches as to Cresco.

Despite Mr. Linsky's (counsel to Fiorello) request for an extension of the LOI on March 29, 2018, and Mr. Bachtell writing to Mr. Sirota on March 30, 2018, indicating his desire to enter into a definitive agreement that week, Fiorello did not honor the LOI or their requested extension or return the Good Faith Payment. Indeed, notwithstanding the foregoing, Mr. Sirota testified that "[o]n March 30, 2018, we contacted Liberty and GTI to tell them that we were now free to talk" (NYSCEF Doc. No. 283, ¶ 33). He also testified that, at the same time, "we continued to negotiate with Cresco" (id.). In the amended complaint, Cresco alleges that Fiorello determined on April 6, 2018, that a new agreement would need to be executed and that on April 12, 2018, Fiorello's counsel sent an email stating that Fiorello was ending discussion with Cresco and offering to return the Good Faith Payment (NYSCEF Doc. No. 60, ¶¶ 30, 32). Mr. Bachtell testified that he did not believe that the exclusivity period of the LOI had expired and that Cresco and Fiorello would continue to work together to close the acquisition even after 30 business days from the execution of the LOI (NYSCEF Doc. No. 344, ¶ 11). He further testified that Cresco did not reach out to Valley until June 27, 2018, when it became clear that Cresco would not be able to acquire Fiorello (id., see NYSCEF Doc. No. 408).

Fiorello ultimately did a deal with GTI. The deal was structured as a merger and the merger agreement was dated June 29, 2018 (NYSCEF Doc. No. 391). Significantly, the original deal was not approved by the DOH. According to Fiorello, the merger was initially not approved by the DOH because (i) Fiorello was not operational and (ii) the transaction included a contingent payment dependent on New York legalizing adult use of marijuana.

On September 25, 2018, the DOH sent a letter to Mr. Sirota stating:

This is in response to your correspondence to me dated August 31, September 4 and September 5, 2018, seeking to amend Fiorello's submission for a change in ownership and change the Department's position as expressed in my letter to you dated August 23, 2018.

Pursuant to 10 NYCRR § 1004.8, the registration issued to Fiorello is non-transferrable. The Department has reviewed your amended request and hereby denies the proposed change in ownership, as it would still constitute a direct transfer of the registration. Among other reasons, Fiorello has no satisfactory tangible operational assets to sell to Green Thumb Industries (GTI), except its registration, which is prohibited pursuant to 10 NYCRR § 1004.8 (NYSCEF Doc. No. 339). The DOH sent a follow up letter to Mr. Sirota on October 5, 2018, stating:

Pursuant to 10 NYCRR § 1004.9, if a registered organization fails to begin operations, to the satisfaction of the Department, of a manufacturing or dispensing facility within six months of the date of issuance of the registration, it is required to surrender its registration to the Department of Health (Department) upon written notice and demand. To date, the Department has been very flexible in allowing Fiorello Pharmaceuticals, Inc. additional time to begin operations. Fiorello Pharmaceuticals, Inc. however, was issued a registration on August 1, 2017 and has yet to begin operations. This letter serves as written notice to Fiorello Pharmaceuticals, Inc. that it must begin operations, to the satisfaction of the Department, by January 31, 2019.

To begin operations to the satisfaction of the Department, and avoid surrender of your registration, Fiorello Pharmaceuticals, Inc. must, at a minimum, have two operational dispensing facilities and begin manufacturing within six months prior to the expiration of its registration.

In addition, please be aware that 10 NYCRR § 1004.7(a) requires Fiorello Pharmaceuticals, Inc. to file an application for renewal to the Department four to six months prior to the expiration of its registration on July 31, 2019. As of right now, there is insufficient criteria to justify renewing Fiorello Pharmaceuticals, Inc.'s registration, since Fiorello Pharmaceuticals, Inc. does not have any operational facilities.

Please submit a confirmatory email to ROCommunications&commat;health.ny.gov to acknowledge receipt of this letter and provide a weekly written narrative documenting Fiorello Pharmaceuticals, Inc.'s specific progress toward meeting the requirements listed above to begin operations beginning 1/31/19. Should you have any questions concerning this letter, please contact me directly at (518) 402-0705 (NYSCEF Doc. No. 340 [emphasis in original]).

This was not the end of the Fiorello/GTI story (as it undoubtedly would not have been the end of the Cresco/Fiorello story). In order to comply with the DOH directives, Fiorello and GTI entered into an amendment to the merger agreement dated October 25, 2018, to remove the contingent payment for the legalization of adult use of marijuana and instead required GTI to issue an additional 1.7 million subordinate voting shares of GTI to securityholders of Fiorello at the time of closing (NYSCEF Doc. No. 394). In a letter to Fiorello securityholders dated October 29, 2018, in summarizing the October 25, 2018 merger agreement, Fiorello also told securityholders that the parties agreed to "add covenants to the Merger Agreement requiring GTI and Fiorello and their respective affiliates to use their reasonable best efforts to cause Fiorello to begin operations to the satisfaction of the NYDOH by January 31, 2019" (NYSCEF Doc. No. 331, at 3). Mr. Sirota testified:

Fiorello met DOH's operational requirements by January 31, 2019. On March 8, 2019, Fiorello renewed its request that DOH approve the proposed Fiorello/GTI merger, but DOH required Fiorello to go through the license renewal process before it would approve the GTI merger even under the amended deal terms. On August 6, 2019, DOH renewed Fiorello's registration and approved the new proposed Restated and Amended Merger Agreement with GTI that had been approved by Fiorello's shareholders on October 29, 2018. Yoss and I resigned from our co-CEO positions effective August 23, 2019, the day the renegotiated merger closed (NYSCEF Doc. No. 283, ¶ 53).

Ultimately, Fiorello signed another merger agreement with GTI dated December 21, 2018, pursuant to which Fiorello sold its stock to GTI for $42.6 million in cash and 1.7 million shares of GTI (NYSCEF Doc. No. 392).

Cresco responded by acquiring Valley, the other company which had a license that was potentially available for purchase. Like Fiorello, Valley was a pre-operational company and by letter dated October 5, 2018, the DOH also required Valley becoming operational:

Pursuant to 10 NYCRR § 1004.9, if a registered organization fails to begin operations, to the satisfaction of the Department, of a manufacturing or dispensing facility within six months of the date of issuance of the registration, it is required to surrender its registration to the Department of Health (Department) upon written notice and demand. To date, the Department has been very flexible in allowing Valley Agriceuticals, LLC additional time to begin operations. Valley Agriceuticals, LLC however, was issued a registration on August 1, 2017 and has yet to begin operations. This letter serves as written notice to Valley Agriceuticals, LLC that it must begin operations, to the satisfaction of the Department, by January 31, 2019.

To begin operations to the satisfaction of the Department, and avoid surrender of your registration, Valley Agriceuticals, LLC must, at a minimum, have two operational dispensing facilities and begin manufacturing within six months prior to the expiration of its registration.

In addition, please be aware that 10 NYCRR § 1004.7(a) requires Valley Agriceuticals, LLC to file an application for renewal to the Department four to six months prior to the expiration of its registration on July 31, 2019. As of right now, there is insufficient criteria to justify renewing Valley Agriceuticals, LLC's registration, since Valley Agriceuticals, LLC does not have any operational facilities.

Please submit a confirmatory email to ROCommunications&commat;health.ny.gov to acknowledge receipt of this letter and provide a weekly written narrative documenting Valley Agriceuticals, LLC's specific progress toward meeting the requirements listed above to begin operations beginning 1/31/19. Should you have any questions concerning this letter, please contact me directly at (518) 402-0705 (NYSCEF Doc. No. 410 [emphasis in original]).

Cresco entered into a merger agreement with Valley dated October 24, 2018 (NYSCEF Doc. No. 396). Like with the Fiorello/GTI initial deal, the DOH denied Cresco's attempt to acquire Valley in a letter dated November 14, 2018 because it had not become operational:

This letter is in response to your email dated October 12, 2018, requesting the review and approval of the New York State Department of Health (Department) for an ownership change of Valley Agriceuticals, LLC (Valley) to Cresco Labs. The proposed ownership change would result in Cresco Labs, a proposed new investor, merging with Valley's parent company, Gloucester Street Capital, resulting in Gloucester Street Capital becoming a wholly owned subsidiary of Cresco Labs, and ultimately Cresco owning one hundred percent of Valley. Valley requested a response by October 31, 2018 to secure a new location in Brooklyn and to build out a 60,000 square foot facility rather than commencing manufacturing operations with a 6500 square foot facility. The Department acknowledged receipt of Valley's request for a change in ownership on October 12, 2018 and responded again on October 31, 2018 to put Valley on notice that the Department's response to the request for a change in ownership would not be completed by October 31, 2018.

The Department issued a registration to Valley on August 1, 2017. Valley was informed by the Department on October 5, 2018 that it had not demonstrated progress toward beginning operations. Pursuant to 10 NYCRR § 1004.9, a registered organization is required to surrender its registration to the Department upon written notice and demand if the registered organization fails to begin operations, to the satisfaction of the Department, of a manufacturing and/or dispensing facility within six months of the date of issuance of the registration. The Department has provided flexibility with this requirement to help support a phased-in approach of new registered organizations. Pursuant to 10 NYCRR § 1004.8, the registration issued to Valley is non-transferrable. The Department has reviewed your request and hereby denies the proposed change in ownership, as it would constitute a direct transfer of the registration.

While Valley provided Appendix A affidavits for investors listed in the Cresco Labs capitalization table, the submission did not include all investors. In addition, Valley only provided a memorandum summarizing the principal terms of the merger, rather than the actual proposed merger agreement between Valley and Cresco Labs. Should Valley choose to resubmit a revised change in ownership request for Department consideration, please include the actual proposed merger agreements, as well as any operating agreements, partnership agreements and other applicable documents and agreements between Cresco, Valley and any of their subsidiaries, parent or holding companies. Valley must also provide a list of Gloucester Street Capital's assets including but not limited to properties owned by Valley Agriceuticals Real Estate, machinery, lab equipment, growing equipment, lease agreements, intellectual property rights, and other assets that Cresco would be receiving.

Please submit a confirmatory email to mmp&commat;health.ny.gov to acknowledge receipt of this letter. Should you have any questions concerning this letter, please feel free to contact me directly at (518) 402-0705 (NYSCEF Doc. No. 411).

Mr. Bachtell testified "on January 24 and 25, 2019, DOH approved operations at two of Valley's dispensaries and at its manufacturing facility, successfully complying with DOH's January 31 deadline" (NYSCEF Doc. No. 344, ¶ 19). The DOH ultimately renewed Valley's license and approved the merger with Cresco by letter dated August 6, 2019 (NYSCEF Doc. No. 396). Cresco and Valley entered into an amendment to their agreement dated October 4, 2019 (NYSCEF Doc. No. 398). Pursuant to this amendment, Cresco ultimately acquired Valley for $129.6 million, including cash, equity, warrants, and deferred consideration. Thus, it is undisputed that Cresco was willing to restructure any deal that could have been made with Fiorello and their appetite for a New York based company was significantly higher than the original $22 million in the LOI. In the Cresco/Valley deal which was approved, the parties agreed to a contingent payment pursuant to which shareholders would be entitled to an additional 13,333 shares if New York legalized recreational use of cannabis (NYSCEF Doc. No. 414).

Discussion

On a motion for summary judgment, the movant must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issue of fact (Alvarez v Prospect Hosp., 68 N.Y.2d 320, 324 [1986]). Failure to make such a showing requires denial of the motion, regardless of the sufficiency of the opposing papers (id.). Once such a showing has been made, the burden shifts to the party opposing the motion to produce evidentiary proof in admissible form sufficient to establish the existence of a material issue of fact requiring trial (id.).

Fiorello is not entitled to summary judgment that (A) Cresco breached the LOI, (B) Fiorello did not breach the LOI and (C) that any breach by Fiorello was not the "but for" cause as to why a deal was not consummated

Cresco did not breach the LOI

Fiorello argues that Cresco breached the LOI by (i) delaying in making the Good Faith Payment, (ii) delaying in providing materials for due diligence, (iii) failing to make payment for the benefit of the Management Oversight Agreement, (iv) revealing confidential information in the Investment Deck and (v) by breaching their obligation that they currently had and would represent in the LOI and in the Definitive Agreement that they had adequate funding to make each and all installments of the Funding Amount as each comes due.

These arguments all fail and are flatly contradicted by undisputed facts in the record.

As discussed above, Fiorello accepted the Good Faith Payment when it was made and did not claim a breach or otherwise object to the payment. They cannot do so now (Lambert v Schiller, 156 A.D.3d 1285, 1288 [3d Dept 2017] ["by accepting plaintiff's late payments over time, defendants waived their right to demand timely payments "]).

On the record before the Court, it does not appear that Cresco delayed in providing information for Fiorello to conduct its due diligence. In fact, quite the opposite. The delays appear to have been caused by Fiorello, not Cresco as Fiorello simultaneously pursed other clandestine transactions with other potential suitors in breach of the LOI.

As discussed above, the record also does not demonstrate a demand by Fiorello for any operational payments or that Fiorello moved expeditiously and that Cresco dragged its feet including with respect to a Management Oversight Agreement. As discussed above, the record demonstrates that the opposite is true. Having failed to move diligently to consummate a deal, or otherwise make a demand, they can not now claim that it was Cresco that did not meet its obligations to enter into the Management Oversight Agreement or fund any operational needs.

The Investment Deck also did not breach the confidentiality provision of the LOI. As discussed above, the Investment Deck did not mention Fiorello by name and the version of the Investment Deck which included the language "1 of only 4 allowed in Manhattan" was only sent to Liberty. As discussed above, Mr. Gulliver from Liberty testified that this language did not put him on notice that Fiorello/Cresco had entered the LOI (tr at 47-48, lines 23-25 [NYSCEF Doc. No. 569]). This is dispositive. Additionally, the "change" appears to have been made at the request of Ms. Yoss and the Investment Deck appears to have been sent to both Ms. Yoss and Mr. Sirota on March 2, 2018. Put another way, the change appears to have been made merely to satisfy Ms. Yoss' concern and it appears she signed off on the Investment Deck before it went to any other potential investors in Cresco.

Finally, the argument that Cresco breached their obligation to represent that they had adequate funding to make each and all installments of the Funding Amount as each comes due, in the LOI and accordance with the Definitive Agreement also fails. Pursuant to the terms of the LOI, Cresco was obligated to make the Good Faith Payment. It made the Good Faith Payment. Pursuant to the not yet consummated Definitive Agreement, Cresco was obligated to pay $10 million on the closing of the Definitive Agreement. As discussed above, Cresco had over $15 million in its accounts on February 28, 2018 (NYSCEF Doc. No. 590). Mr. Sirota and Ms. Yoss were aware that Cresco was raising additional capital so that it would have the additional $6.25 million required in one year from the Closing of the Definitive Agreement and $6.25 million two years from the Closing of the Definitive Agreement as they were sent the Investment Deck on March 2, 2018. Most importantly, the fact that Cresco paid $129.6 million for Valley on October 4, 2019 establishes that Cresco would have been able to pay the installment payments and that the representation in the not finalized Definitive Agreement would have been true.

Thus, Fiorello is not entitled to summary judgment that Cresco breached the LOI.

Fiorello actively breached the "no-shop" provision and the confidentiality provision of the LOI

Undisputed facts show that Fiorello breached the "no-shop" provision of the LOI not just by talking to other potential buyers and soliciting buyers, but by not telling Cresco that it had received "unsolicited" offers. This it had to do as part of good faith negotiations under the LOI. Fiorello was obligated to let Cresco know that, as part of the submission to the board of directors and the shareholders for approval of the transaction, other offers would be presented. Fiorello agreed to work diligently to contemplate the transaction contemplated by the LOI. This would have included presenting the LOI and the offer to the board of directors and shareholders. Mr. Canarick testified, as discussed above, that he was not even made aware of the LOI or the proposed transaction until April 2018, after the exclusivity period had expired. If Fiorello was truly interested in the deal and was negotiating in good faith, it would have engaged Mr. Canarick to approve the deal because he could block any transaction. He was not merely a passive shareholder with a de minimis interest.

Fiorello also breached the confidentiality provision of the LOI. The record demonstrates that, while Fiorello was discussing a potential acquisition with other purchasers in violation of the "no-shop" provision, the other parties were aware of the LOI and it appears that they were told about the negotiated price. As discussed above, Mr. Scorsis at Liberty knew that he needed to present Liberty's offer as an "unsolicited" offer and instructed Mr. Gulliver to write his email to make it seem as if they had not been in discussions with Mr. Sirota and Ms. Yoss. This clearly is evidence of a violation of confidentiality provision which required the parties to keep the existence of the LOI and the proposed transaction confidential. It is a troubling coincidence that the "unsolicited offer" was higher than Cresco's offer and Ms. Yoss and Mr. Sirota's self-serving testimony to the contrary does not create an issue of fact (Phillips v Bronx Lebanon Hosp., 268 A.D.2d 318, 320 [1st Dept 2000]).

Cresco can establish "but for" causation

Fiorello argues that it did not cause Cresco's damages because (x) Cresco's damages are not directly traceable to Fiorello's breach, and (y) Fiorello's breach was not the "but for" cause of Cresco's damages. In particular, Fiorello argues that it did not cause Cresco's damages because Cresco cannot demonstrate that (i) Fiorello slow walked negotiations with Cresco and decided not to deal with Cresco, (ii) the parties would have agreed on terms for a definitive agreement, and (iii) the definitive agreement would have been approved by Fiorello's shareholders and the DOH. These arguments also fail.

The undisputed facts unequivocally establish that Fiorello did not use best efforts to provide due diligence materials, comments on documents or otherwise provide necessary and required information to Cresco including the "unsolicited offers" that it received so that it could secretively pursue other transactions and hold Cresco in abeyance in case these other deals did not work out.

It does not matter that Fiorello's shareholders would not have approved the deal set forth in the LOI as cast or that the DOH would have required certain modifications of the deal. What matters is that Mr. Sirota and Ms. Yoss prevented Cresco from a good faith negotiation to enter into a Definitive Agreement which could have been approved (Bi-Econ Mkt. v Harleysville Ins. Co., 10 N.Y.3d 187, 192-193 [2008]). The fact that Fiorello did a deal with GTI for approximately $42.6 million (or 1.5-2.0X of the LOI amount) and Cresco ultimately did a deal with Valley paying for over $120 million (more than 5X the LOI agreed upon amount) and that DOH approval was obtained for both transactions and that the Cresco/Valley transaction did contemplate a contingent payment firmly resolves the causation issue. Moreover, having hidden the potential deal from its controlling shareholder, Fiorello cannot now argue that they would not have approved it (RSB Bedford Assocs., LLC v Ricky's Williamsburg, Inc., 91 A.D.3d 16, 23 [1st Dept 2011]). Thus, Fiorello is not entitled to summary judgment dismissal based on Cresco not being able to establish causation.

Damages are not limited to out-of-pocket expenses

Fiorello argues that even if Fiorello did breach the LOI, damages should be limited to out-of-pocket expenses. To wit, Fiorello argues that courts consistently hold that expectation damages are limited to out-of-pocket costs when there has been a breach of a good faith obligation to enter into an agreement - i.e., breach of an agreement to agree - because expectation damages can not be predicated on a completed definitive agreement as there was no complete definitive agreement. Fiorello relies on Goodstein, 80 N.Y.2d at 366, Sands Bros. & Co., Ltd. v Generex Pharmaceuticals, 279 A.D.2d 377 (1st Dept 2001), 180 Water Street Associates, L.P. v Lehamn Brothers Holdings, Inc., 7 A.D.3d 316 (1st Dept 2004), Fairbrook Leasing, Inc. v Mesaba Aviation, Inc., 519 F.3d 421 (8th Cir 2008), L-7 Designs, Inc. v Old Navy, LLC, 647 F.3d 419 (2d Cir 2011), Imperium Capital, LLC v Krasilovsky (Mercer) Family Ltd. Partnership, 2013 WL 4013491 (Sup Ct, NY County 2013, Kornreich, J.), BW HVAC Operations, LLC v Lambro Industries, Inc., 2014 WL 2738049 (Sup Ct, NY County 2014, Bransten, J.), MG W. 100 LLC v St. Michael's Prot. Episcopal Church, 127 A.D.3d 624 (1st Dept 2015), GE Oil & Gas, Inc. v Turbine Generation Services, LLC, 2016 WL 865318 (Sup Ct, NY County 2016, Kornreich, J.), Raven Capital Management LLC v Georgia Film Fund 72, LLC, 2021 WL 465980 (Sup Ct, NY County 2021, Sherwood, J.), and Noor Staffing Group, LLC v Christoforou-Gioules, 2022 WL 2101611 (Sup Ct, NY County 2022, Cohen, J.).

A review of these decisions, however, yields a more nuanced legal principle than that offered by Fiorello. Specifically, the cases do not merely stand for the proposition that damages of a breach of a letter of intent are always limited to only out-of-pocket costs. Rather, the cases stand for the proposition that expectation damages are limited to those" contemplated as likely to result from the nature of the agreement" (Goodstein, 80 N.Y.2d at 374 [emphasis added]; see Hadley v Baxendale (9 Exch 341, 156 Eng Rep 145 [1854])

Stated differently, expectation damages of a breach of a garden variety letter of intent without more means that the only sums that the parties could legitimately expect to recover at the time of entering into a binding letter of intent and that stem naturally from a breach are out-of-pocket costs and not lost profits or the benefits of the agreement that was not consummated.

However, as discussed above, the LOI has more. The LOI was not a garden variety letter of intent. The LOI included both "no-shop" and confidentiality provisions. These highly negotiated provisions have commercial value and significance and reflect Cresco and Fiorello's expectations at the time the binding LOI was executed - i.e., the desire to complete a transaction or, failing that, that Cresco and Fiorello would do a different transaction and a breach by either party would necessarily subject that party to the costs of cover that the non-breaching party would endure.

Accordingly, to this extent, Cresco does not seek to recover lost profits or the benefits of the agreement that was not consummated. They seek to recover damages based on the parties' expectations at the time the binding LOI was executed and the damages that naturally flow from Fiorello's breach of the "no-shop" and confidentiality provisions - damages stemming from the cost of cover. Thus, and as discussed below, the LOI and undisputed facts here show that New York law including Goodstein and its progeny do not limit damages to mere out-of-pocket costs and actually mean that damages include the delta between the cost of the alternative transaction that Cresco consummated and the cost that Cresco would have incurred in doing the transaction with Fiorello -the amount that Fiorello was prepared to, and did, sell for, as this is exactly what was contemplated as likely to result from the nature of the agreement.

In Goodstein, the City of New York entered into two letter agreements for the development of two separate sites within the Washington Street Urban Renewal Area with a joint venture engaged in construction and real estate projects. By the terms of the letter agreements, the plaintiff was designated to exclusively negotiate the land disposition agreements (LDA) with the Department of Housing Preservation and Development. Any binding obligation on the City under the LDA was contingent upon fulfillment of certain legal requirements including approval from the affected Community Board and the City Planning Commission under the Uniform Land Use Review Procedure mandated by section 197-c of the 1975 New York City Charter and by the City's then existing Board of Estimate. The letter agreements imposed a number of obligations on the plaintiff during the negotiating period including furnishing a $100,000 letter of credit for each site to assure diligent prosecution of the negotiations. The City retained the right to terminate negotiations at any time and it could decide not to extend the negotiations period. Subsequently, the City notified the plaintiff that it had been "dedesignated" as exclusive negotiator for the two sites because the City had decided that it was in the best interests of the City to reserve the two sites for commercial development by back office users, many of whom wished to construct their own building. No LDA was ever concluded. The plaintiff sued seeking $800 million in damages, all but $1 million of which represented lost profits grounding claims, among other things, in breach of the letter agreements, failing to exercise good faith in carrying out its obligation and purporting to terminate the plaintiff's exclusive rights in the letter agreements. The City moved for summary judgment dismissing the complaint in its entirety. The IAS Court granted partial summary judgment and dismissed the causes of action in so far as they sought loss of anticipated profits concluding that although plaintiff might be entitled to recover out-of-pocket expenses, it could not recover for future profits because the viability of the damages (tort and contract) was contingent upon the LDA having been consummated and then approved by the necessary agencies and there was no way of knowing whether such agreement would be concluded or such approvals obtained. The Appellate Division reversed reasoning that the letter agreements indicate that the plaintiff reasonably anticipated, and the City must have believed, that the agreements were entered into by the plaintiff for profit-making purposes and it was an issue of fact whether such damages were fairly within the contemplated of the parties. Upon appeal, the Court of Appeals reversed holding that under the seminal case of Hadley v Baxendale, because the contract was subject to various levels of government approvals, lost profits could not have been reasonably contemplated as damages between the parties:

Under the accepted rule of Hadley v Baxendale (9 Exch 341, 156 Eng Rep 145 [1854]), it must be shown" that the particular damages were fairly within the contemplation of the parties to the contract at the time it was made" (Kenford Co. v County of Erie, 67 N.Y.2d 257, 261). The letter agreements under which plaintiff makes its claim, it must be noted, were terminable by the City, and the LDA, had its terms ultimately been accepted by the HPD, was subject to various layers of governmental approval before it could be binding, including approval by the Board of Estimate. The City argues that under the rule of Hadley v Baxendale, loss of profits based on fulfillment of the terms of the contract being negotiated could not have been reasonably contemplated as damages for a breach of the agreement to negotiate those very contractual terms. We agree.

(Goodstein, 80 N.Y.2d at 374 [emphasis added]). The Court reasoned that the claims were only founded on an agreement to negotiate and awarding the plaintiff lost profits based on the projected improvements would be illogical and without any basis:

It is simply not conceivable that the City officials could have contemplated that in entering into the exclusive negotiating agreements they were subjecting the City to such an unfair and one-sided allocation of the risks (see, Restatement [Second] of Contracts § 351 [3] [1979]; see, Kenford Co. v County of Erie, 73 N.Y.2d, at 321 ; Kenford Co. v County of Erie, 108 A.D.2d, at 149-150, supra) (id., at 375).

As discussed above, the agreement in Goodstein is different than the LOI. The LOI, unlike the agreement in Goodstein, reflects the parties' contemporaneous understanding that the failure to contemplate a transaction would result in cover and that, as such, cover damages naturally flow from a breach of the "no-shop" and confidentiality provisions. Thus, under Goodstein, because the cover damages were fairly within the contemplation of the parties as reflected in the LOI, they are recoverable.

In Sands Bros., the Appellate Division modified a decision by the IAS court (Ramos, J.) that granted a petition to confirm an arbitration award to the extent of vacating the portion of the award directing the issuance of stock warrants to the petitioner and remanding the matter to the original arbitration panel. The Appellate Division held that the award directing the issuance of stock warrants "tracks a provision of the agreement providing equity participation compensation to petitioner for its banking and financial services to respondents where the number, price and exercise period of the warrants are specifically set forth" (Sands Bros., 279 A.D.3d at 377). The Appellate Division held that neither the arbitration panel nor the IAS court adequately addressed a provision of the agreement requiring that the warrants contain such terms and conditions as were satisfactory in form and substance to the petitioner (id., at 377-378). Neither the award nor the judgment provided any guidance as to how the unstated terms and conditions of the warrants "satisfactory in form and substance" be resolved, other than by agreement of the parties (id., at 378). Thus, the Appellate Division held that the portion of the award directing the issuance of stock was too indefinite to be enforceable and remanded to the panel, allowing the panel to consider a new remedy to take the place of the unenforceable portion or to adhere to the stock warrant remedy if it explicitly found, based on competent proof, that all that remained open were "boilerplate provisions established by custom and usage in the financial community" (id.). On remand, the IAS court (Ramos, J.) denied the claimant's motion to confirm an arbitration award, granted the respondents' motion to vacate the award, and remanded the issue of arbitrator disqualification to the New York Stock Exchange, de novo, to consider whether potentially conflicted panel members should be disqualified. On appeal, the Appellate Division modified on the law and the facts to remand the issue of damages to a new panel of arbitrators holding that the arbitration award had failed to comply with the Appellate Division's directive regarding consideration of the requirement of the parties' agreement that the warrants contain such terms and conditions as were satisfactory in form and substance to the petitioner (Sands Bros. & Co. v Generex Pharms., 298 A.D.2d 307 [1st Dept 2002]). Upon the initial remand to the initial arbitration panel, the panel awarded stock warrants without first finding based upon competent proof that all that remained open were boilerplate provisions established by custom and usage in the financial community. Failure to follow the Appellate Division's directive warranted vacatur of the panel's award (id., at 307). The Appellate Division also noted that the award was totally irrational because the claimant submitted a draft warrant agreement after executing the engagement letter which contained terms not included in the parties' initial agreement and claimant's own expert testified that there were terms contained which were still open and not boilerplate (id.). The Appellate Division further noted that after the claimant had obtained the initial award, its attorney wrote demanding items contained in the draft warrant agreement (id.). In light of the fact that the then ordered remand is the second remand and there was an issue as to whether two of the arbitrators had conflicts of interest, the Appellate Division remanded the issue of damages to a new panel of arbitrators, limited to reliance damages and not to include an award of lost profits (id., at 307-308).

In other words, Sands Bros too emphasizes that Cresco is not entitled to disgorgement predicated on a $22 million purchase price or lost profits but damages within the contemplation of the parties are in fact recoverable. As discuss above, cover, was within the contemplation of the parties, and is recoverable.

180 Water Street involved a letter agreement between a commercial building and a prospective tenant pursuant to which the parties agreed to negotiate in good faith toward a final lease and to do so on an exclusive basis. The commercial building sued the prospective tenant, alleging that from the beginning the prospective tenant had breached the agreement by negotiating with other landlords (180 Water Street, 7 A.D.3d at 317). The IAS court granted the prospective tenant's motion to dismiss and dismissed the commercial building's causes of action for breach of contract and for fraud. The Appellate Division modified and reinstated the cause of action for breach of contract. In so holding, the Appellate Division agreed that the letter agreement was too vague to be enforced as a lease but held that the letter was sufficiently definite to provide an adequate basis for determining whether negotiations were being conducted in good faith and that as such out-of-pocket losses were the proper measure for recovery of any damages (id.).

Put another way, 180 Water also stands for the proposition that damages stemming from the breach of a binding good faith obligation to agree are based on the legitimate expectations of the parties at the time. In that case, enforcement of the lease itself based on the letter agreement was inappropriate because the letter agreement was too vague to constitute an agreement. And, in this case, the LOI itself is subject to too many contingencies to be enforced according to its terms - i.e., based on a $22 million purchase price. But, the LOI is not too indefinite to enforce the breach of the "no-shop" and confidentiality provisions and to award damages based on the legitimate expectations of the parties which included the costs of cover - the delta between the deal Fiorello actually made and the costs stemming from breach of the "no-shop" and confidentiality provisions.

Fairbrook Leasing involved a regional airline, subsidiaries of a Swedish airplane manufacturer, and a leasing company who entered into a term sheet whereby the airline would purchase thirty new airplanes from the manufacturer and sublease twenty used aircraft from the leasing company. Pursuant to the term sheet, the parties agreed to negotiate a definitive agreement in substantially the same form as the term sheet (Fairbrook Leasing, 519 F.3d at 423). Ultimately, the airline sublet twenty-three airplanes from the leasing company, each time executing interim subleases for each airplane and extending the term sheet's deadline for execution of a final sublease agreement (id., at 424). The airline ultimately returned the airplanes it had sublet and stopped making lease payments. The leasing company commenced a declaratory judgment action to enforce the term sheet, including the twelve-year sublease term for each aircraft contemplated therein. The district court granted the leasing company partial summary judgment, holding that the term sheet was an enforceable contract to, at a minimum, negotiate the open terms of the term sheet in good faith, and that the airline breached the duty to negotiate in good faith (id., at 425). The Circuit Court affirmed, holding that the airline had a duty to negotiate the remaining terms of the term sheet in good faith. The Circuit Court held that expectancy damages based on a definitive agreement were not appropriate.

Thus, under Fairbank Leasing, Cresco would not be entitled to recover expectancy damages based on a $22 million purchase price or lost profits. But, as discussed above Cresco does not seek lost profits and Fairbank Leasing, does not otherwise preclude damages based on the legitimate expectations of the parties which flow from the breach which, as discussed above, include the cost of cover as reflected by the "no-shop" and confidentiality provisions predicated on the deal Fiorello was willing to do (and did with GTI) and the cover price which Cresco paid (which far exceeded the amount paid to Fiorello by GTI).

L-7 Designs involved (i) a creative services agreement whereby the plaintiff was to develop and launch a branded line of merchandise to be sold exclusively in defendant's stores and (ii) a licensing agreement whereby plaintiff's principal was to provide design services. The parties agreed pursuant to the licensing agreement that the specific terms and conditions of this agreement would be negotiated and agreed upon by the parties in a separate agreement (L-7 Designs, 647 F.3d at 423). After months of attempting to negotiate and delays by the defendant, the defendant informed the plaintiff that it wished to indefinitely delay signing a separate agreement as contemplated under the licensing agreement. The plaintiff subsequently sent a notice of breach and a demand for damages, that was refused. The plaintiff sued, alleging claims for wrongful termination, trade disparagement, breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud. The district court granted the defendant's motion to dismiss (id., at 427). In dismissing the claim for breach of contract, the district court held that the licensing agreement created an obligation for the defendant to negotiate in good faith but found that the plaintiff's claim that the defendant did not negotiate in good faith was not plausible (id., at 428). The Circuit Court modified to the extent of reinstating claims for failure to negotiate in good faith and for wrongful termination of an agreement for plaintiff's principal to provide design services. In so holding, the Circuit Court held that the plaintiff stated a plausible claim for breach of the licensing agreement for failure to negotiate in good faith, including by alleging that the defendant never provided a substantive comment on a draft agreement, made material, false representations about its willingness to negotiate, and proposed terms in bad faith (id., at 431). The Circuit Court held that lost profits were not available because no agreement was reached, but that out-of-pocket expenses incurred in the course of good faith partial performance were appropriate.

In Imperium Capital, the plaintiff, a real estate investment and development company, and defendant, owner of certain property in lower Manhattan, entered into a letter of intent whereby defendant would sell the property to plaintiff. Pursuant to the letter of intent, (i) the parties agreed to enter into negotiations to sell the property, (ii) the plaintiff indicated it was prepared to buy the property for $3.75 million, (iii) the parties agreed to prepare a definitive agreement in accordance with the terms of the letter of intent and any other mutually agreeable terms, and (iv) any offer was subject to the tenant's right of first refusal (Imperium Capital, 2013 WL 4013491, at * 2). Notably, the letter of intent contained no exclusivity period and no representations or warranties (id.). The defendant notified the plaintiff that it would not proceed with the sale contemplated under the letter of intent because it had received a higher offer from another buyer (id., at * 3). This notification came after the defendant had already signed a contract to sell the property to a non-party (id.). The plaintiff sued, seeking a declaratory judgment that the letter of intent was binding and ordering the defendant to sell the property to the plaintiff. The plaintiff also filed a notice of pendency against the property (id.). The trial court granted the motion to dismiss, finding that the letter of intent contained no intent to be bound and that the letter of intent was not binding. The trial court noted that, while in certain circumstances, a letter of intent can be enforceable to the extent of obligating the parties to negotiate in good faith, the complaint here did not advance that theory (id., at * 5). The court also noted that the damages in such a case would have been limited to the plaintiff's out-of-pocket expenses incurred as a result of its reliance on the letter of intent (id.).

Put another way, the court held that expectancy damages based on that letter of intent only would have included out-of-pocket expenses. But, as discussed above, the LOI here is commercially different than the letter of intent in Imperium Capital and reflects the parties understanding that each party needed to do a deal and would do a deal with a counterparty. As discussed above, the fact that each party did a deal with a counterparty and for more money confirms that expectancy damages flowing from breach of the "no-shop" and confidentiality provisions confirms this result.

In BW HVAC Operations, the parties entered into a letter of intent for the plaintiff to purchase the defendants' business. The defendants manufactured and provided venting and duct products for residential and commercial customers. Pursuant to the letter of intent, the plaintiff would acquire substantially all of defendants' assets for $3 million at closing with no financial contingency (BW HVAC Operations, 2014 WL 2738049, at * 1). The letter of intent was predicated on key assumptions about the defendants' financial statements, assets, outlook, and other factors (id.). The letter of intent was not a binding commitment and was subject to (i) satisfactory completion of due diligence, (ii) final approval of the plaintiff's board of directors, and (iii) execution and delivery of final documentation (id.). The letter of intent also contained an exclusivity period of sixty days whereby the defendants were to direct and cause all officers, directors, and employees not to, directly or indirectly, solicit, initiate, or facilitate an investment proposal or inquiry thereto (id.). The letter of intent by its terms was a non-binding agreement except for the exclusivity period (id., at * 2). The plaintiff alleged that the defendants' employees and managers prevented the plaintiff from conducting its due diligence and solicited alternative proposals (id.). The plaintiff sued, alleging claims for breach of the exclusivity period, breach of the duty to work towards a final binding agreement in good faith, and promissory fraud. The trial court held that the defendants breached the exclusivity provision because employees solicited alternative offers and the defendants' acknowledged at least one such solicitation in writing. In so holding, the court held that the plaintiff was not seeking to recover damages occasioned by the failure to reach a final agreement, but damages for expended funds and attempts to conduct due diligence. The court held that, at the motion to dismiss stage, the plaintiff sufficiently alleged damages. In other words, the Court held that in that case and based on those facts that expectancy damages included their due diligence and out-of-pocket costs. This case too does not in any way change the law that expectancy damages are based on the legitimate expectations of the parties at the time the contract was execution, which in this case, and as discussed above, included the cost of cover.

In MG W. 100 LLC the parties entered into a memorandum of understanding pursuant to which the plaintiffs were to develop a condominium building on property owned by the defendant, a church. The memorandum contemplated that the plaintiffs would then be able to enter into contracts for the condominium building (MG W. 100 LLC, 127 A.D.3d, at 626). The memorandum was a preliminary agreement by which the parties planned to proceed with their initial efforts on the construction project (id.). When the parties did not agree, the plaintiff sued, alleging, among other things, causes of action for specific performance for conveyance of the property, breach of contract, an injunction barring the defendant from selling the property, unjust enrichment, and quantum meruit. The plaintiff also filed a notice of pendency against the property. The trial court granted the defendant's motion for summary judgment dismissing these causes of action and canceling the notice of pendency. The Appellate Division affirmed, finding, among other things, that the plaintiff was not entitled to recover consequential damages or lost profits because such losses were not within the contemplation of the parties at the time they entered into the memorandum of understanding (id.). As such, under MG W. 100 LLC, Cresco is not entitled to seek damages based on a $22 million purchase price and a deal as cast in the LOI. They are however under MG W. 100 LLC entitled to damages within the contemplation of the parties at the time the binding LOI was executed - namely, damages predicated on cover.

GE Oil & Gas involved a series of written agreements, including a senior secured promissory note, a term sheet, and a guaranty agreement for a joint venture divided between fracking and power generation lines of business between an equipment and services provider (plaintiff) in the oil and gas industry and a company (defendant) established to design, assemble, and service turbine or gas engine power units for use in oil field production. The business contemplated by the term sheet was never formed. The plaintiff moved for partial summary judgment with respect to the promissory note and the guaranty agreement. The court held that these agreements created an obligation to negotiate in good faith and that the plaintiff was entitled to judgment but declined to enter judgment based on the unexecuted promissory note and guaranty agreement (GE Oil & Gas, 2016 WL 865318, at * 3 and 5). Thus, again, like under the cases discussed above, under GE Oil & Gas, Cresco is simply not entitled to judgment based on the $22 million price contained in the LOI. They are however entitled to damages predicated on the delta between the amount Fiorello accepted (and which Cresco was clearly willing to pay) and the amount they actually paid by virtue of Fiorello's breach of the "no-shop" and confidentiality provisions.

In Raven Capital, the plaintiffs, a private equity fund manager and investment advisor, entered into a term sheet pursuant to which the plaintiffs were to acquire from the defendant, a film production company, the exclusive rights to distribute a certain film within the United States. The term sheet required the parties to use commercially reasonable efforts to negotiate and enter into a definitive distribution agreement and provided that certain specified terms of the term sheet were binding and would survive termination of the term sheet (Raven Capital, 2021 WL 465980, at * 1). The term sheet also established an initial 21-day exclusivity period, automatically renewable for successive 14-day periods, unless a party gave written notice at least 48 hours prior to the end of the current period (id., at * 2). Pursuant to the term sheet, if the defendant breached the exclusivity provision, it was liable for $250,000 to the plaintiffs. The plaintiffs subsequently learned that the defendant had previously granted certain distribution rights to another company and that the agreement had not been terminated. The plaintiff sued, alleging causes of action for breach of the term sheet, a declaratory judgment that a valid oral distribution agreement existed, breach of the oral distribution agreement, fraud, and breach of the implied covenant of good faith and fair dealing. The trial court held that the plaintiffs could not recover lost profits that they hoped to have earned under an exclusive distribution agreement. The court held that the plaintiffs were limited to the $250,000 fee for breach of the exclusivity period (id., at * 8). Put another way, the court held that the parties had negotiated a specific liquidated damages provision which reflected their expectation for damages at the time the agreement was executed. Thus, under Raven Capital, the parties were not limited to their out-of-pocket costs. They were entitled to receive their expectation damages reflected in the agreement - which in that agreement was codified in a liquidated damages provision. In the LOI at issue in this case, the damages of cover are codified in the "no-shop" and confidentiality provisions. As discussed above, both parties were hot to do a deal and understood that each party would seek to cover with a counterparty in the event a deal could not be reached between them. Inasmuch as there were few DOH licenses in total, and only two likely available, Cresco's damages in covering by purchasing Valley was well within the contemplation of the parties set forth in the LOI and stem directly from Fiorello's breach.

Lastly, in Noor Staffing Group, the plaintiff and defendants entered into an employment agreement that contained a provision that the parties would negotiate a separate administrative-services agreement between plaintiff and the defendants' company. The successful negotiation of the administrative-services agreement was a condition precedent to any contractual obligation to retain plaintiff. The plaintiff claimed that the defendants' breached their duty in the employment agreement to negotiate the administrative-services agreement in good faith. The defendants moved for partial summary judgment to strike the plaintiff's claim for damages based on the employment agreement. The IAS court held that although the defendants had a duty to negotiate in good faith, they were not bound to agree to a contract or to continue the negotiating process (Noor Staffing Group, 2022 WL 2101611, at * 1) and that, as such, damages predicated on the completed administrative-services agreement were inappropriate because they were not legitimate expectation damages (id., at * 2). Thus, under Noor, Cresco would too not be entitled to damages predicated on a $22 million purchase price. As set forth above, Cresco would however be entitled to damages based on the deal which Fiorello actually did and the price Cresco had to pay to acquire Valley as this cover price was well within the contemplation of the parties as reflected by the "no-shop" and confidentiality provisions of the LOI.

At the risk of gilding the lily. The seminal case is Hadley v. Baxendale. In Hadley v. Baxendale the plaintiffs ran a mill that was powered by a steam engine. When the engine broke, they contracted with a non-party for a new shaft to be made and the defendants, common carriers, to deliver the broken shaft to the non-party creating the new shaft, so that the non-party could design the shaft correctly. The defendants negligently delayed in delivering the broken shaft. As a result of the delay, the mill was closed for longer than expected and the plaintiffs were unable to work or make money from their mill while being required to continue paying their workers. The plaintiffs sued to recover, among other things, the lost profits they would have otherwise earned had the broken shaft been timely delivered. The court declined to award lost profits and only awarded damages for the losses that were "the natural and necessary consequence of the defendants' default" relying on the general rule that" the defendant shall be held liable for those damages only which both parties may fairly be supposed to have at the time contemplated as likely to result from the nature of the agreement" This is commonly referred to as expectation damages and as discussed above, courts have looked to what was fairly contemplated at the time the agreement was consummated.

In this case, Cresco seeks disgorgement or replacement costs. Cresco argues that they do not seek lost profits and as such that Goodstein and its progeny do not limit damages to out-of-pocket costs. Specifically, and as discussed above, they correctly point out that the Goodstein line of cases did not include letters of intent that contain "no-shop" and confidentiality provisions. This distinction and the facts surrounding this LOI are meaningful.

As an initial matter, this Court notes that Cresco is not entitled to disgorgement. Cresco's argument that disgorgement (i.e., the difference between the LOI purchase price and what Fiorello was actually sold for) is not lost profits is a distinction without a difference in this context. Both lost profits and disgorgement of Fiorello's "profit" are predicated on a Fiorello/Cresco transaction being consummated for the purchase price of $22 million set forth in the LOI. This is simply not legitimate expectation damages as the parties did not have an obligation to consummate a transaction as cast in the LOI and thus could not have expected to do a deal at that particular price.

However, Cresco is entitled to seek damages stemming from its replacement costs equal to the difference between what it paid to acquire the only other potential company available, Valley, and what Fiorello actually accepted in consideration from GTI (with a credit in the amount of the unreturned Good Faith Payment ¹⁴). The legitimate expectations of the parties at the time that the LOI was executed was not only that they would merely negotiate in good faith, but they would not violate either the "no shop" or confidentiality provisions. These provisions were highly negotiated and demonstrated the parties' legitimate expectations at the time including that if a deal could not be entered into that Cresco would cover by acquiring Valley as one of the only potential companies with a NY cannabis license. These damages are not speculative and are consistent with the holdings of Hadley v. Baxendale and Goodstein and its progeny. It is beyond cavil that Fiorello was sold for approximately $42.6 million. This is what Fiorello was willing to accept to do a deal and that Cresco was willing to pay $129.6 million to do a deal and that each company was willing to structure a transaction to obtain DOH approval. Thus, Fiorello is not entitled to summary judgment that damages should be limited to out-of-pocket expenses. To hold otherwise would be to attach no commercial value as to the "no-shop" and confidentiality provisions and to ignore the legitimate expectations of the parties reflected in this carefully and highly negotiated LOI.

14 Fiorello is not entitled to retain the Good Faith Payment. As discussed above, on the record before the Court, there were no illegal actions, intentional misconduct or grossly negligent conduct committed by Cresco.

Although not binding on this Court, but consistent with Goodstein and its progeny discussed above, as the Delaware Chancery Court observed in NACCO Industries, Inc. v Applica Inc., 997 A.2d 1 (Del Ch Ct 2009):

Parties bargain for provisions in acquisition agreements because those provisions mean something. Bidders in particular secure rights under acquisition agreements to protect themselves against being used as a stalking horse and as consideration for making target-specific investments of time and resources in particular acquisitions. Target entities secure important rights as well. It is critical to our law that those bargained-for rights be enforced, both through equitable remedies such as injunctive relief and specific performance, and, in the appropriate case, through monetary remedies including awards of damages (id., at 19).

For completeness, in NACCO, the plaintiff owned a company that designed, made, and distributed electric household and commercial appliances and products. The defendant owned a company that distributed household appliances. The parties signed a non-disclosure agreement, exchanged confidential information, and entered into discussions for a strategic transaction. The defendant initially broke off talks but reengaged a year later under an updated non-disclosure agreement that included a standstill provision limiting the plaintiff's ability to act to acquire the defendant. Shortly after the parties resumed discussions, the defendant announced publicly that it was exploring alternatives and began contacting potential partners. The parties entered into a merger agreement whereby the plaintiff would spin off its subsidiary to acquire the defendant in a stock-for-stock merger. The merger agreement contained a "no-shop" provision to limit the defendant's ability to explore competing transactions. Shortly after the updated non-disclosure agreement was entered into, a non-party began acquiring stock in the defendant. After the merger agreement was executed, the same non-party announced a bid to acquire all of the defendant's shares. The plaintiff alleged that the non-party was advised of the parties' discussions and merger agreement in violation of the non-disclosure agreement. The defendant ultimately terminated the merger agreement to enter into a merger agreement with the non-party. The plaintiff and the non-party engaged in a bidding war for the defendant, but the non-party already held a 40% ownership in the defendant and the shareholders approved the merger with the non-party. The plaintiff sued for, among other things, breach of the "no-shop" provision of its merger agreement with the defendant. The Chancery Court held that, if the plaintiff was ultimately successful in its cause of action for breach of the "no-shop" provision, it would be entitled to argue that it should not be limited as expectancy damages to out-of-pocket expenses and should be entitled to prove an alternative damages measure (id., at 19).

Cresco is entitled to summary judgment dismissing (A) Fiorello's second, third, and fourth counterclaims, and (B) Fiorello's fifth, sixth, and seventh affirmative defenses

Fiorello's second, third, and fourth counterclaims are dismissed

Fiorello's second counterclaim predicated on the late payment of the Good Faith Payment must be dismissed because the obligation was not a time is of the essence obligation and in any event Fiorello accepted the Good Faith Payment when received. They can not now claim default. The second counterclaim must also be dismissed because, as discussed above, Cresco did not breach its obligation in the LOI In fact, if anything, Fiorello did. Fiorello's third counterclaim for breach of the confidentiality provision of the LOI must also be dismissed because, as discussed above, the Investment Deck did not breach the LOI. The change which was apparently requested by Ms. Yoss apparently was not necessary. The Investment Deck without the change only went to Liberty and its CEO, Mr. Gulliver, testified unequivocally that the Investment Deck did not identify Fiorello or that Fiorello/Cresco had entered the LOI or the terms of the LOI. For the same reasons, the fourth counterclaim for injunctive relief to prevent further breaches of the confidentiality provision must be dismissed.

Fiorello's fifth, sixth, and seventh affirmative defenses must be dismissed

For the reasons set forth above, Fiorello's fifth affirmative defense that Cresco breached the LOI is properly dismissed. As discussed above, Cresco did not breach the LOI. The sixth affirmative defense that any damages Cresco is owed should be offset by any damages Cresco owes to Fiorello must also be dismissed. Cresco did not breach the LOI. The seventh affirmative defense that Cresco is barred by the doctrine of unclean hands is also properly dismissed. The doctrine of unclean hands is an equitable defense that is unavailable in an action exclusively for damages (Manshion Joho Center Co., Ltd. v Manshion Joho Center, Inc., 24 A.D.3d 189, 190 [1st Dept 2005]). It is available only where a party is guilty of immoral or unconscionable conduct directly related to the subject matter (Citibank, N.A. v American Banana Co., Inc., 50 A.D.3d 593, 594 [1st Dept 2008]). This is an action for damages only, so the doctrine of unclean hands is not applicable. Even if it were, there is nothing in the record to support the notion that Cresco engaged in immoral or unconscionable behavior. The seventh affirmative defense therefore must be dismissed.

The Court has considered the parties' remaining contentions and finds them unavailing.

It is hereby ORDERED that Fiorello's motion for summary judgment (Mtn. Seq. No. 011) is denied in its entirety; and it is further

ORDERED that Cresco's motion for summary judgment (Mtn. Seq. No. 012) is granted to the extent of dismissing Fiorello's second, third, and fourth counterclaims and fifth, sixth, and seventh affirmative defenses.