Case 1:21-cv-00422-WMS Document 77 Filed 01/18/22 Page 1 of 38
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`UNITED STATES DISTRICT COURT
`WESTERN DISTRICT OF NEW YORK
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`THAR PROCESS, INC.,
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`Plaintiff/Counter-Defendant,
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`
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`v.
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`v.
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`SOUND WELLNESS, LLC,
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`Defendant/Counterclaimant/Third-
`Party Plaintiff,
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`
`
` DECISION AND ORDER
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` 21-CV-422S
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`PLANT SCIENCE LABORATORIES, LLC, AND
`MICHAEL BARNHART,
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`Third-Party Defendants.
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`I. INTRODUCTION
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`This is a case about hemp that was processed into low-quality and unmarketable
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`CBD1 oil. Plaintiff Thar Process, Inc. (“Thar”), a hemp processor, brought breach-of-
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`contract claims against Defendant Sound Wellness, LLC, (“Sound Wellness”) when
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`Sound Wellness refused to pay for CBD oil that Thar had processed. Sound Wellness, in
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`turn, brought counterclaims against Thar, alleging that Thar committed fraud and
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`breached the parties’ contract when it failed to inform Sound Wellness that the oil it
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`processed would be of unmarketably low potency and then supplied Sound Wellness with
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`CBD oil, or cannabidiol, is an oil made from cannabinoid hemp. “Cannabinoid hemp is any product
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`processed or derived from hemp, that is used for human consumption including for topical application for
`its cannabinoid content, that does not contain more than 0.3% THC. Cannabidiol or ‘CBD’ products are an
`example of cannabinoid hemp products and can come in a variety of different forms including but not limited
`to tinctures (CBD oil), pills, capsules, balms, lotions and food or beverage products.” “What is Cannabinoid
`Hemp?” https://health.ny.gov/regulations/hemp/faqs.htm, accessed 1/10/2022 at 12:48 p.m.
`1
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`Case 1:21-cv-00422-WMS Document 77 Filed 01/18/22 Page 2 of 38
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`that low-quality oil. Sound Wellness also brought third-party claims against the original
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`sellers of the hemp—Third-Party Defendants Plant Science Laboratories, LLC, and
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`Michael Barnhart (collectively “PSL”)—alleging that they fraudulently induced Sound
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`Wellness to buy low-potency hemp, among other things.
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`Presently before this Court are PSL’s and Thar’s motions to dismiss Sound
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`Wellness’s third-party claims and counterclaims, respectively, pursuant to Rules 12 (b)(6)
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`and (b)(9) of the Federal Rules of Civil Procedure. (Docket Nos. 64, 66.) For the following
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`reasons, PSL’s motion will be denied in part and granted in part, and Thar’s motion will
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`be granted.
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`II. BACKGROUND
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`This Court assumes the truth of the following factual allegations contained in
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`Sound Wellness’s amended counterclaims and amended third-party complaint. (Docket
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`Nos. 23, 40.) See Hosp. Bldg. Co. v. Trs. of Rex Hosp., 425 U.S. 738, 740, 96 S. Ct.
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`1848, 48 L. Ed. 2d 338 (1976); see also Hamilton Chapter of Alpha Delta Phi, Inc. v.
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`Hamilton Coll., 128 F.3d 59, 63 (2d Cir. 1997). This Court also considers documents
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`Sound Wellness attached to its counterclaims against Thar: a certificate of analysis of the
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`Biomass done on October 19, 2018 (Docket No. 23-2) (the “NY COA”); the purchase
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`agreement between Sound Wellness and PSL (Docket No. 23-3) (“the PSL Agreement”);
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`the contract between Sound Wellness and Thar (Docket No. 23-5) (“the Thar
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`Agreement”); and a certificate of analysis of the Biomass done on June 10, 2019. (Docket
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`No. 23-6.)2
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`In determining whether dismissal is warranted, a court may consider: “(1) facts alleged in the
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`complaint and documents attached to it or incorporated in it by reference, (2) documents ‘integral’ to the
`complaint and relied upon in it, even if not attached or incorporated by reference, (3) documents or
`information contained in defendant's motion papers if plaintiff has knowledge or possession of the material
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`Case 1:21-cv-00422-WMS Document 77 Filed 01/18/22 Page 3 of 38
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`A.
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`Facts
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`Sound Wellness is a New York limited liability company with offices in Florida.
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`(Amended Third-Party Complaint, Docket No. 40, ¶ 6.) The sole member of Sound
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`Wellness is Sound Wellness Holdings, Inc., a Delaware corporation. (Docket No. 7 at p.
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`1.)3 Thar is a Pennsylvania corporation with a principal place of business in Pennsylvania.
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`(Id., ¶ 14.)4 PSL is a New York limited liability company whose sole member, Michael
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`Barnhart, is a resident of Buffalo, New York. (Id., ¶ 10.)5 At all times described in Sound
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`Wellness’s pleadings, Thar and PSL were “engaged in a joint venture arrangement,” in
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`which Thar held a 60% interest and PSL held a 40% interest. (Id., ¶¶ 13, 44.)
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`1. Sound Wellness negotiates with PSL and Barnhart
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`In November 2018, Sound Wellness and its parent company Jushi entered into
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`negotiations with Michael Barnhart, the CEO of PSL, to buy hemp biomass and finished
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`CBD products from PSL. (Id., ¶¶ 22, 30.) Barnhart also facilitated meetings between
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`Sound Wellness and other sellers of biomass who were affiliated with PSL, namely Be
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`Well NY, LLC and Donald Spoth Farm. (Id., ¶¶ 24-32.) The biomass that Sound Wellness
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`ultimately bought from all three sellers (collectively referred to as “the Biomass”) was
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`and relied on it in framing the complaint, …, and [4] facts of which judicial notice may properly be taken
`under Rule 201 of the Federal Rules of Evidence.” Healthnow New York Inc. v. Catholic Health Sys., Inc.,
`No. 14-CV-986S, 2015 WL 5673123, at *2–3 (W.D.N.Y. Sept. 25, 2015) (Skretny, J.) (citing In re Merrill
`Lynch & Co., Inc., 273 F. Supp. 2d 351, 356–357 (S.D.N.Y. 2003) (footnotes omitted), aff'd 396 F.3d 161
`(2d Cir. 2005), cert. denied, 546 U.S. 935, 126 S. Ct. 421, 163 L. Ed. 2d 321 (2005)).
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`3 Sound Wellness is therefore a citizen of both Florida and Delaware, the citizenship of its sole
`member. See Handelsman v. Bedford Vill. Assocs. Ltd. P’ship, 213 F.3d 48, 51-52 (2d Cir. 2000) (a limited
`liability company has the citizenship of each of its members).
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` 4
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` Thar is therefore a citizen of Pennsylvania. See 28 U.S.C. § 1332(c)(1). (“a corporation shall be
`deemed to be a citizen of any State by which it has been incorporated and of the State where it has its
`principal place of business”).
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` Both PSL and Barnhart are therefore citizens of New York.
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`Case 1:21-cv-00422-WMS Document 77 Filed 01/18/22 Page 4 of 38
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`grown by Donald Spoth Farm. (Id., ¶ 33.)
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`In connection with these meetings, PSL provided the NY COA, which analyzed the
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`CBD content of the portion of the Biomass that Sound Wellness was considering
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`purchasing from Be Well. The NY COA showed that the relevant portion of the Biomass
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`had a CBD content of 13.1%. (Id., ¶ 49.) Sound Wellness purchased the relevant portion
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`of the Biomass from Be Well for $65,000. (Id., ¶ 50.)
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`PSL also provided the NY COA in connection with the formation of a contract for
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`Sound Wellness to buy a portion of the Biomass from PSL (Id., ¶¶ 56-61), and in
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`connection with the formation of a contract for Sound Wellness to buy a portion of the
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`Biomass from PSL and Donald Spoth Farms, LLC, as joint sellers. (Id., ¶ 71.)
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`Sound Wellness alleges that the NY COA analysis was not representative of the
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`Biomass as a whole, but rather, was gleaned by PSL intentionally selecting only certain,
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`high-potency, parts of the Biomass. (Id., ¶¶ 78-79.) Sound Wellness further alleges that
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`PSL knew that the NY COA analysis was false but nevertheless provided it to Sound
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`Wellness to induce it to enter the PSL Agreement and other purchase agreements. (Id.,
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`¶¶ 80-82.) Sound Wellness alleges that Thar knew of this false representation, and knew
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`throughout its relations with Sound Wellness that the Biomass had a low CBD content,
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`due to its joint venture with PSL. (Docket No. 40, ¶ 52; Docket No. 23, ¶¶ 118-24.)
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` During negotiations in November 2018, Barnhart verbally represented to Sound
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`Wellness that, while PSL’s facility was not yet ready to process the Biomass, it would
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`have equipment from Thar installed and be ready to begin processing by late December
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`2018 or early January 2019. (Docket No. 40, ¶ 34.) Barnhart also stated that by mid-
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`January 2019, the PSL facility would be able to process 2,000 pounds of hemp per day.
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`(Id., ¶ 35.) Barnhart mentioned that PSL was in a joint venture with Thar. (Id., ¶ 36.) Sound
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`Wellness alleges that Barnhart’s representations about its ability to timely process were
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`untrue, that Barnhart knew that they were untrue when he said them, and that he said
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`them to induce Sound Wellness to enter into the PSL Agreement. (Id., ¶ 65.)
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`Sound Wellness maintains that it relied on Barnhart’s representations in entering
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`the PSL Agreement. (Id., ¶ 42.) The PSL Agreement provided that Sound Wellness would
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`buy 2,000 pounds of hemp biomass and 30 kilograms of “50/50 crude” oil from PSL. (See
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`PSL Agreement, Docket No. 23-3, pp. 2-17.) Sound Wellness also agreed to purchase
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`an additional 15 kilograms of “50/50 crude” by January 31, 2019. PSL agreed to process
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`the crude oil into a soft gel by February 7, 2019. (Id. at p. 2; see also Docket No. 40, ¶
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`66.) The PSL Agreement guaranteed that the Biomass sold to Sound Wellness would
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`have a CBD content of at least 10%. (Docket No. 40, ¶ 67.)
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`The “standard terms and conditions” of the PSL Agreement define “Products and
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`Services” as including “Existing Crude, Additional Crude, mix for soft gels, tincture mix,
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`Biomass, Biomass Extract and Finished Products.” (Docket No. 23-3 at p. 7.) Pursuant to
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`the PSL Agreement, Sound Wellness was to have “reasonable access to all Products and
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`a reasonable time to inspect and reject non-conforming Products.” (Id.) Sound Wellness
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`further retained the right to “access all Products prior to delivering payment, and whether
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`or not before third party or Seller testing results [were] available, to designate a qualified
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`individual to obtain a sample of any Product and arrange” for a laboratory to perform
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`analysis. (Id.) PSL warranted that the finished products would “be of merchantable
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`quality” and would “meet or exceed the governing standards.” (Id. at p. 8.) Exhibit D to
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`the PSL Agreement, titled “Biomass Extraction Services,” states that the potency range
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`of the Biomass PSL was selling, would be “greater than 10% but less than 18% CBD.”
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`(Id. at p. 15.)
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`Sound Wellness purchased the Biomass covered by the PSL Agreement for
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`$120,000. (Docket No. 40, ¶ 68.) Sound Wellness entered into two other purchase
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`agreements for other portions of the Biomass: the “Be Well Memorandum of
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`Understanding” with nonparty Be Well, an affiliate of PSL, (id., ¶¶ 31, 48-49) and “the
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`PSL-Spoth agreement” with PSL and nonparty Donald Spoth Farm as joint sellers. (Id.,
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`¶¶ 69-70.)
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`Thar is not mentioned anywhere in the PSL Agreement, nor did Thar or its
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`representatives sign it. Sound Wellness alleges Barnhart told it that Thar and PSL were
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`“joint venturers” in an agreement involving the installation of the Thar equipment at the
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`PSL facility. (Id., ¶ 17.) Barnhart and Thar told Sound Wellness that Thar had a 60%
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`interest in the joint venture and PSL held a 40% interest. (Id., ¶ 20.) Sound Wellness
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`alleges that, because of the joint venture, Thar knew of the NY COA, knew that it was
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`false, and knew that Sound Wellness was relying on it when it entered the PSL
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`Agreement. (Docket No. 23, ¶¶ 28, 35, 37.)
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`2. Processing challenges with PSL and new processing contract with Thar
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`The hemp processing did not proceed as planned. First, PSL failed to install the
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`Thar processing equipment by January 2019. (Docket No. 40, ¶ 87.) Then, in February
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`2019, Thar and PSL informed Sound Wellness that, because the processing would be
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`done on Thar equipment, Sound Wellness would have to sign an agreement with Thar,
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`the “Thar Agreement.” (Docket No 40, ¶ 94; see also Docket No. 23-5 at p. 13.)
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`Sound Wellness negotiated certain terms of the Thar Agreement, but Thar
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`Case 1:21-cv-00422-WMS Document 77 Filed 01/18/22 Page 7 of 38
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`leveraged poor market conditions and an absence of competition to force Sound Wellness
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`to accept its form agreement with only three negotiated terms. (Docket No. 23, ¶ 68; see
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`also Thar Agreement, Docket No. 23-5 at p. 11.) These additional terms were that (1)
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`Thar would have an employee or staff member on site during the extraction of Sound
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`Wellness’s Biomass, (2) a machinery issue causing a 15-day delay not covered by the
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`Force Majeure clause would allow Sound Wellness to terminate the Agreement, and (3)
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`Sound Wellness would have the right to a weekly inspection of the extraction facility.
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`(Docket No. 23-5 at p. 11.) Sound Wellness executed the Thar Agreement on March 4,
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`2019. (Docket No. 23, ¶ 70.)
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`Under the Thar Agreement, Thar was to perform extraction processing on Biomass
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`owned by Sound Wellness to produce “extracted oil.” (Id., ¶ 71.) Sound Wellness was to
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`pay 50% of the processing cost up front, and 50% upon completion of Thar’s work. (Id.,
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`¶ 72.) Sound Wellness made an up-front payment of $130,000 to Thar on or about May
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`22, 2019. (Id., ¶ 73.) Thar and PSL represented that the Biomass would be processed at
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`the PSL facility in New York on the Thar equipment. (Id., ¶ 75.)
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`3. More processing problems
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`By the end of May 2019, PSL had still not installed the Thar equipment at PSL’s
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`New York facility. (Id., ¶ 80.) Sound Wellness then entered into a verbal agreement with
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`both Thar and PSL to move the Biomass from Western New York to Thar’s facility in
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`Pittsburgh, Pennsylvania, for processing. (Id., ¶ 81.) As part of this verbal agreement,
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`Thar’s president, Todd Palcic, told Sound Wellness that Thar was currently processing
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`biomass originating from the same sources as Sound Wellness’s biomass, and stated
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`that the current biomass was extracting “beautifully.” (Id., ¶ 82.) Sound Wellness relied
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`Case 1:21-cv-00422-WMS Document 77 Filed 01/18/22 Page 8 of 38
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`on Palcic’s representation, and without it, would not have agreed to the processing of its
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`Biomass outside New York State, given the regulatory issues involved in transporting the
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`Biomass to another state. (Id., ¶ 84.) Thar represented to Sound Wellness that, upon
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`receipt of the Biomass, it would test it for contaminants but stated that it did not conduct
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`potency testing on incoming material. (Id., ¶¶ 86-87; Docket No. 40, ¶¶ 128.) Sound
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`Wellness does not allege that Thar knew this statement to be false when it was made or
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`that it was made with any intent of inducing reliance by Sound Wellness.
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`Ultimately the Biomass was moved to Pittsburgh, Pennsylvania, to be processed
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`by Thar.
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`4. Thar’s testing
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`Upon receipt of the Biomass, Thar tested it for e.coli and found that it tested
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`positive. (Id., ¶ 88.) Unbeknownst to Sound Wellness, and contrary to Thar’s prior
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`representation, Thar also tested the CBD potency of the Biomass on June 10, 2019. (Id.,
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`¶ 107.) The potency test showed that the Biomass had a CBD content of 5.8% to 6.01%,
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`far lower than that indicated in the NY COA. (Id., ¶ 109.) Thar did not inform Sound
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`Wellness of the result of this June potency test, even though Thar knew that Sound
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`Wellness was relying on the NY COA supplied by PSL. (Id., ¶¶ 128-30.) On June 10,
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`2019, Thar told Sound Wellness that the Biomass had tested positive for e.coli and that
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`it would not process the material at its Pittsburgh facility. (Id., ¶¶ 129, 131.) Sound
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`Wellness alleges that Thar intentionally withheld the potency test result to induce Sound
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`Wellness to continue with processing instead of terminating the contract immediately.
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`(Docket No. 23, ¶ 115.)
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`5. Processing by PSL and testing by Sound Wellness
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`The Biomass was transferred back to PSL’s New York facility on or around July
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`10, 2019. (Docket No. 40, ¶ 133.) From late August through early September 2019, the
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`Biomass was processed at PSL’s facility. (Id., ¶ 136.) At some point during the
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`processing, Sound Wellness became concerned about the ultimate quality of the output
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`of this processing. (Id., ¶ 139.) Sound Wellness therefore tested the Biomass and found
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`exceedingly low potency such that the material had no commercial value. (Id., ¶ 141.) On
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`or about September 30, 2019, Thar told Sound Wellness that it had, in fact, conducted
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`potency testing in June 2019 and disclosed those test results. (Id., ¶¶ 152-53.) Sound
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`Wellness took delivery of the extracted oil from PSL on or about November 6, 2019. (Id.,
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`¶ 188.) Sound Wellness refused to make the second contractual payment of $130,000 to
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`Thar. (Id.)
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`B.
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`Procedural History
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`Thar sued Sound Wellness in the Court of Common Pleas of Alleghany,
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`Pennsylvania, on May 20, 2020, alleging breach of contract and breach of the implied
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`covenant of good faith and fair dealing. (Docket No. 1-1 at p.1.) On June 25, 2020, Sound
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`Wellness removed the action to the Western District of Pennsylvania. (Docket No. 1.) On
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`July 1, 2020, Sound Wellness answered Thar’s complaint and asserted counterclaims.
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`(Docket No. 2.) On July 15, 2020, Sound Wellness filed a third-party complaint against
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`PSL and Barnhart. (Docket No. 10.)
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`Thereafter, Sound Wellness filed amended counterclaims against Thar and an
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`amended third-party complaint against PSL and Barnhart. (Docket Nos. 23, 40.) PSL and
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`Barnhart moved to dismiss Sound Wellness’s claims for lack of personal jurisdiction or
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`improper venue. (Docket No. 42.) In the alternative, PSL and Barnhart asked the court to
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`Case 1:21-cv-00422-WMS Document 77 Filed 01/18/22 Page 10 of 38
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`transfer the case to the Western District of New York. Over Thar’s and Sound Wellness’s
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`objections, District Judge Marilyn Horan transferred the entire case to this District in the
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`interest of justice. (Docket No. 53, 54.) In transferring the case, the court denied without
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`prejudice PSL’s and Thar’s motions to dismiss Sound Wellness’s amended counterclaims
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`and amended third-party complaint. On May 21, 2021, both PSL and Thar filed motions
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`to dismiss in this Court. (See Docket Nos. 64, 66.) Sound Wellness opposes both motions.
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`III. DISCUSSION
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`Both PSL and Thar move to dismiss Sound Wellness’s claims pursuant to Rules
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`12 (b)(6) and 9 (b) of the Federal Rules of Civil Procedure, for failure to state a claim upon
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`which relief can be granted and for failure to allege fraud with sufficient specificity.
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`A. Rule 12 (b)(6)
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`Rule 12 (b)(6) allows dismissal of a complaint for “failure to state a claim upon
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`which relief can be granted.” Fed. R. Civ. P. 12 (b)(6). “A motion to dismiss a counterclaim
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`is evaluated under the same standard as a motion to dismiss a complaint.” Tradeshift,
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`Inc. v. Smucker Servs. Co., No. 20-CV-3661 (MKV), 2021 WL 4463109, at *3 (S.D.N.Y.
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`Sept. 29, 2021) (quoting Inter-Am. Dev. Bank v. IIG Trade Opportunities Fund N.V., No.
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`16 CIV. 9782 (PAE), 2017 WL 6025350, at *4 (S.D.N.Y. Dec. 4, 2017) (internal citations
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`and quotations omitted)).
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`Federal pleading standards are generally not stringent: Rule 8 requires only a short
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`and plain statement of a claim. Fed. R. Civ. P. 8(a)(2). But the plain statement must
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`“possess enough heft to show that the pleader is entitled to relief.” Bell Atl. Corp. v.
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`Twombly, 550 U.S. 544,127 S. Ct. 1955, 1966, 167 L. Ed. 2d 929 (2007).
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`When determining whether a complaint states a claim, the court must construe it
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`liberally, accept all factual allegations as true, and draw all reasonable inferences in the
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`plaintiff’s favor. Goldstein v. Pataki, 516 F.3d 50, 56 (2d Cir. 2008); ATSI Commc’ns, Inc.
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`v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007). Legal conclusions, however, are not
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`afforded the same presumption of truthfulness. See Ashcroft v. Iqbal, 556 U.S. 662, 678,
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`129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009) (“The tenet that a court must accept as
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`true all of the allegations contained in a complaint is inapplicable to legal conclusions.”)
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`“To survive a motion to dismiss, a complaint must contain sufficient factual matter,
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`accepted as true, to ‘state a claim to relief that is plausible on its face.’” Iqbal, 556 U.S.
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`at 678 (quoting Twombly, 550 U.S. at 570). Labels, conclusions, or “a formulaic recitation
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`of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. Facial
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`plausibility exists when the facts alleged allow for a reasonable inference that the
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`defendant is liable for the misconduct charged. Iqbal, 556 U.S. at 678. The plausibility
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`standard is not, however, a probability requirement: the pleading must show, not merely
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`allege, that the pleader is entitled to relief. Id.; Fed. R. Civ. P. 8(a)(2). Well-pleaded
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`allegations in the complaint must nudge the claim “across the line from conceivable to
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`plausible.” Twombly, 550 U.S. at 570.
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`A two-pronged approach is thus used to examine the sufficiency of a complaint,
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`which includes “any documents that are either incorporated into the complaint by
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`reference or attached to the complaint as exhibits.” Blue Tree Hotels Inv. (Can.), Ltd. v.
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`Starwood Hotels & Resorts Worldwide, Inc., 369 F.3d 212, 217 (2d Cir. 2004). This
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`examination is context specific and requires that the court draw on its judicial experience
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`and common sense. Iqbal, 556 U.S. at 679. First, statements that are not entitled to the
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`Case 1:21-cv-00422-WMS Document 77 Filed 01/18/22 Page 12 of 38
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`presumption of truth—such as conclusory allegations, labels, and legal conclusions—are
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`identified and stripped away. See id. Second, well-pleaded, non-conclusory factual
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`allegations are presumed true and examined to determine whether they “plausibly give
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`rise to an entitlement to relief.” Id. “Where the well-pleaded facts do not permit the court
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`to infer more than the mere possibility of misconduct,” the complaint fails to state a claim.
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`Id.
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`A. Rule 9 (b)
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`“Beyond the requirements of Rule 12(b)(6), a complaint alleging fraud must satisfy
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`the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) by stating
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`the circumstances constituting fraud with particularity.” Tradeshift, 2021 WL 4463109, at
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`*4 (citing ECA & Local 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co., 553
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`F.3d 187, 196 (2d Cir. 2009)). Rule 9 (b) requires that a complaint “(1) specify the
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`statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state
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`where and when the statements were made, and (4) explain why the statements were
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`fraudulent.” DiMuro v. Clinique Labs., LLC, 572 F. App'x. 27, 30 (2d Cir. 2014). Put
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`another way, Rule 9(b) “requires that a plaintiff set forth the who, what, when, where and
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`how of the alleged fraud.” Tradeshift, 2021 WL 4463109, at *4. Fraudulent intent may be
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`alleged generally, but plaintiffs “are still required to plead the factual basis which gives
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`rise
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`to a
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`‘strong
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`inference’ of
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`fraudulent
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`intent.”
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`Id. (quoting Stephenson v.
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`PricewaterhouseCoopers, LLP, 482 F. App'x 618, 622 (2d Cir. 2012)).
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`B. Sound Wellness’s Third-Party Claims against PSL and Barnhart
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`The parties agree that the contract between Sound Wellness and PSL is governed
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`Case 1:21-cv-00422-WMS Document 77 Filed 01/18/22 Page 13 of 38
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`by New York law.6 Their briefing cites New York law and neither party contests its
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`application. PSL moves to dismiss Sound Wellness’s first and third causes of action,
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`which allege fraud in the inducement and fraud. PSL does not move to dismiss Sound
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`Wellness’s breach-of-contract claim.
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`1. Fraudulent Inducement
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`Sound Wellness alleges that PSL fraudulently induced it to enter contracts with
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`PSL and two other parties to purchase the Biomass, and with PSL to process the
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`Biomass, by making misrepresentations as to (1) the CBD potency of the Biomass and
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`(2) PSL’s ability to timely process the Biomass. (Docket No. 40, ¶¶ 206-08, 211-212.) It
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`alleges that, in pre-contract discussions, PSL offered it the NY COA, which
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`misrepresented that the Biomass had a CBD content of around 13.1%. (Id., ¶ 206.) Sound
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`Wellness also alleges that PSL knowingly and falsely stated that Thar’s processing
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`equipment would timely be installed at the PSL facility, that PSL could process the
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`Biomass by February 7, 2019, and that PSL could process the Biomass without help from
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`Thar. (Id., ¶ 212.)
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`PSL argues: (1) that Sound Wellness’s fraudulent-inducement claim cannot go
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`If “[t]he parties' briefs assume that New York substantive law governs the issues ... such implied
`6
`consent is, of course, sufficient to establish the applicable choice of law.” Arch Ins. Co. v. Precision Stone,
`Inc., 584 F.3d 33, 39 (2d Cir. 2009) (quoting Golden Pac. Bancorp v. FDIC, 273 F.3d 509, 514 n.4 (2d Cir.
`2001)). See also Am. Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997) (“[W]here the
`parties have agreed to the application of the forum law, their consent concludes the choice of law inquiry.”);
`Walter E. Heller & Co. v. Video Innovations, Inc., 730 F.2d 50, 52 (2d Cir. 1984) (“[I]n the absence of a
`strong countervailing public policy, the parties to litigation may consent by their conduct to the law to be
`applied.”).
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`The contract between the parties was formed in New York and provides for the application of New
`York law. It deals with hemp that was grown in New York and to be processed in New York. Both PSL and
`Sound Wellness exclusively cite New York law in their arguments, and this Court identifies no public policy
`against the application of New York law. For all these reasons, this Court will apply New York law to the
`claims at issue here.
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`Case 1:21-cv-00422-WMS Document 77 Filed 01/18/22 Page 14 of 38
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`forward because it is duplicative of its breach-of-contract claim; (2) that Sound Wellness
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`has not stated a claim for fraudulent inducement; (3) that Sound Wellness has failed to
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`allege its claims with sufficient particularity; (4) that Sound Wellness has failed to join
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`necessary parties; and (5) that Sound Wellness cannot bring fraud claims individually
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`against Barnhart, because he was acting as an officer of PSL.
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`a. Legal Standards
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`Under New York law, to state a claim for fraudulent inducement a plaintiff must
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`allege: (1) a material misrepresentation or omission of fact, (2) made by the defendant
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`with knowledge of its falsity (3) and an intent to defraud; (4) reasonable reliance on the
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`part of the plaintiff; and (5) resulting damage to the plaintiff. Mandarin Trading Ltd. v.
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`Wildenstein, 944 N.E.2d 1104 (2011); see also Crigger v. Fahnestock & Co., 443 F.3d
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`230, 234 (2d Cir. 2006).
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`Under the enhanced pleading requirements of Rule 9 (b), plaintiffs “must not only
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`allege that the content is false, but ‘they must demonstrate with specificity why and how
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`that is so.’” Tradeshift, 2021 WL 4463109, at *5 (quoting Travelex Currency Servs., Inc.
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`v. Puente Ents., Inc., 449 F. Supp. 3d 385, 395 (S.D.N.Y. 2020). Furthermore, plaintiffs
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`“are … required to plead the factual basis which gives rise to a ‘strong inference’ of
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`fraudulent intent.” President Container Grp., II, LLC v. Systec Corp., 467 F. Supp. 3d 158,
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`166 (S.D.N.Y. 2020). Plaintiffs may assert a strong inference of fraudulent intent by
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`alleging facts that either (1) show that the defendant had the “motive and opportunity” to
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`commit the alleged fraud, or (2) “constitute strong circumstantial evidence of conscious
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`misbehavior or recklessness.” Lerner v. Fleet Bank., N.A., 459 F.3d 273, 290-91 (2d Cir.
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`2006).
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`Case 1:21-cv-00422-WMS Document 77 Filed 01/18/22 Page 15 of 38
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`Under New York law, “where a fraud claim arises out of the same facts as plaintiff's
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`breach of contract claim, with the addition only of an allegation that defendant never
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`intended to perform the precise promises spelled out in the contract between the parties,
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`the fraud claim is redundant and plaintiff's sole remedy is for breach of contract.” Telecom
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`Int'l Am., Ltd. v. AT & T Corp., 280 F.3d 175, 196 (2d Cir. 2001). On the other hand, a
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`plaintiff may maintain parallel contract and tort actions where the allegations “involve
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`misstatements and omissions of present facts, not contractual promises regarding
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`prospective performance.” Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171,
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`184 (2d Cir. 2007) (emphasis added); see also 320 W. 115 Realty LLC v. All Bldg. Constr.
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`Corp., 149 N.Y.S. 3d 28, 29 (App. Div. 2021) (citing Deerfield Comm'n Corp. v.
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`Chesebrough-Ponds, Inc., N.E.2d 1003 (1986)). “Such cause of action enjoys a
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`longstanding pedigree in New York.” Capax Discovery, Inc. v. AEP RSD Invs., LLC, 285
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`F. Supp. 3d 579, 586–87 (W.D.N.Y. 2018) (internal quotation marks and citations
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`omitted).
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`A party claiming fraud by omission must allege that the defendant had a duty to
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`disclose the omitted information. “New York recognizes a duty by a party to a business
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`transaction to disclose material facts in certain circumstances, including where the party
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`has made a partial or ambiguous statement; when the parties stand in a fiduciary or
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`confidential relationship with each other; and where one party possesses superior
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`knowledge, not readily available to the other, and knows that the other is acting on the
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`basis of mistaken knowledge.” Sofi Classic S.A. de C.V. v. Hurowitz, 444 F. Supp. 2d
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`231, 244 (S.D.N.Y. 2006) (citing Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d
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`Cir. 1993)).
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`b. The assertions in the NY COA support a separate cause of
`action for fraudulent inducement.
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`PSL argues that Sound Wellness’s claim for fraudulent inducement is duplicative of
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`
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`its breach-of-contract claim. It argues that, because the NY COA represented a CBD
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`content of 13% and the contract then guaranteed a final CBD content of at least 10%, the
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`allegedly fraudulent COA is duplicative of the contract. But this argument does not
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`comport with New York precedent. It is true that “a fraud claim should be dismissed as
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`redundant when it merely restates a breach of contract claim, i.e., when the only fraud
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`alleged is that the defendant was not sincere when it promised to perform under the
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`contract.” First Bank of Americas v. Motor Car Funding, Inc., 690 N.Y.S.2d 17, 20–21
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`(App. Div. 1999) (citing Gordon v. Dino De Laurentiis Corp., 529 N.Y.S.2d 777 (App. Div.
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`1998)). But “a cause of action for fraud may be maintained where a plaintiff pleads a
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`breach of duty separate from, or in addition to, a breach of the contract.” Id. (citing Non–
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`Linear Trading Co. v. Braddis Assocs., Inc., 675 N.Y.S.2d 5 (App. Div. 1998)). “[I]f a
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`plaintiff alleges that it was induced to enter into a transaction because a defendant
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`misrepresented material facts, the plaintiff has stated a claim for fraud even though the
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`same circumstances also give rise to the plaintiff's breach of contract claim.” Id. (citing
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`RKB Enters Inc. v. Ernst & Young, 582 N.Y.S.2d 814 (App. Div. 1992)). “Unlike a
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`misrepresentation of future intent to perform, a misrepresentation of present facts is
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`collateral to the contract (though it may have induced the plaintiff to sign the contract) and
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`therefore involves a separate breach of duty.” Id. (citing Deerfield Comm’n, 510 N.Y.S.2d
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`88).
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`Here, Sound Wellness’s claim goes beyond a mere claim that PSL “never intended
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`to provide CBD oil of at least 10%” and concerns a material misrepresentation of a present
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`Case 1:21-cv-00422-WMS Document 77 Filed 01/18/22 Page 17 of 38
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`fact presented on an allegedly false certificate of analysis. The fraudulent inducement
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`and contract claims are not duplicative, and this argument by PSL is unavailing.
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`c. Sound Wellness states a claim for fraudulent inducement.
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`
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`PSL also argues that Sound Wellness has failed to state a claim for fraudulent
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`inducement. This Court finds, to the contrary, that Sound Wellness has sufficiently alleged
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`that PSL made a material misrepresentation, with knowledge of its falsity and intent to
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`induce Sound Wellness to enter a contract, on which Sound Wellness reasonably relied,
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`and that Sound Wellness suffered harm as a result. See Mandarin Trading,