Thar Process, Inc. v. Sound Wellness, LLC

• Decision Date: 18 January 2022
• Docket Number: 21-CV-422S
• Parties: THAR PROCESS, INC., Plaintiff/Counter-Defendant, v. SOUND WELLNESS, LLC, Defendant/Counterclaimant/Third-Party Plaintiff, v. PLANT SCIENCE LABORATORIES, LLC, AND MICHAEL BARNHART, Third-Party Defendants.
• Court: U.S. District Court — Western District of New York

THAR PROCESS, INC., Plaintiff/Counter-Defendant,
v.
SOUND WELLNESS, LLC, Defendant/Counterclaimant/Third-Party Plaintiff,
v.
PLANT SCIENCE LABORATORIES, LLC, AND MICHAEL BARNHART, Third-Party Defendants.

No. 21-CV-422S

United States District Court, W.D. New York

January 18, 2022

DECISION AND ORDER

WILLIAM M. SKRETNY, United States District Judge.

I. INTRODUCTION

This is a case about hemp that was processed into low-quality and unmarketable CBD^[1] oil. Plaintiff Thar Process, Inc. (“Thar”), a hemp processor, brought breach-of-contract claims against Defendant Sound Wellness, LLC, (“Sound Wellness”) when Sound Wellness refused to pay for CBD oil that Thar had processed. Sound Wellness, in turn, brought counterclaims against Thar, alleging that Thar committed fraud and breached the parties' contract when it failed to inform Sound Wellness that the oil it processed would be of unmarketably low potency and then supplied Sound Wellness with

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that low-quality oil. Sound Wellness also brought third-party claims against the original sellers of the hemp-Third-Party Defendants Plant Science Laboratories, LLC, and Michael Barnhart (collectively “PSL”)-alleging that they fraudulently induced Sound Wellness to buy low-potency hemp, among other things.

Presently before this Court are PSL's and Thar's motions to dismiss Sound Wellness's third-party claims and counterclaims, respectively, pursuant to Rules 12 (b)(6) and (b)(9) of the Federal Rules of Civil Procedure. (Docket Nos. 64, 66.) For the following reasons, PSL's motion will be denied in part and granted in part, and Thar's motion will be granted.

II. BACKGROUND

This Court assumes the truth of the following factual allegations contained in Sound Wellness's amended counterclaims and amended third-party complaint. (Docket Nos. 23, 40.) See Hosp. Bldg. Co. v. Trs. of Rex Hosp., 425 U.S. 738, 740, 96 S.Ct. 1848, 48 L.Ed.2d 338 (1976); see also Hamilton Chapter of Alpha Delta Phi, Inc. v. Hamilton Coll., 128 F.3d 59, 63 (2d Cir. 1997). This Court also considers documents Sound Wellness attached to its counterclaims against Thar: a certificate of analysis of the Biomass done on October 19, 2018 (Docket No. 23-2) (the “NY COA”); the purchase agreement between Sound Wellness and PSL (Docket No. 23-3) (“the PSL Agreement”); the contract between Sound Wellness and Thar (Docket No. 23-5) (“the Thar Agreement”); and a certificate of analysis of the Biomass done on June 10, 2019. (Docket No. 23-6.)^[2]

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A. Facts

Sound Wellness is a New York limited liability company with offices in Florida. (Amended Third-Party Complaint, Docket No. 40, ¶ 6.) The sole member of Sound Wellness is Sound Wellness Holdings, Inc., a Delaware corporation. (Docket No. 7 at p. 1.)^[3] Thar is a Pennsylvania corporation with a principal place of business in Pennsylvania. (Id., ¶ 14.)^[4] PSL is a New York limited liability company whose sole member, Michael Barnhart, is a resident of Buffalo, New York. (Id., ¶ 10.)^[5] At all times described in Sound Wellness's pleadings, Thar and PSL were “engaged in a joint venture arrangement, ” in which Thar held a 60% interest and PSL held a 40% interest. (Id., ¶¶ 13, 44.)

1. Sound Wellness negotiates with PSL and Barnhart

In November 2018, Sound Wellness and its parent company Jushi entered into negotiations with Michael Barnhart, the CEO of PSL, to buy hemp biomass and finished CBD products from PSL. (Id., ¶¶ 22, 30.) Barnhart also facilitated meetings between Sound Wellness and other sellers of biomass who were affiliated with PSL, namely Be Well NY, LLC and Donald Spoth Farm. (Id., ¶¶ 24-32.) The biomass that Sound Wellness ultimately bought from all three sellers (collectively referred to as “the Biomass”) was

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grown by Donald Spoth Farm. (Id., ¶ 33.)

In connection with these meetings, PSL provided the NY COA, which analyzed the CBD content of the portion of the Biomass that Sound Wellness was considering purchasing from Be Well. The NY COA showed that the relevant portion of the Biomass had a CBD content of 13.1%. (Id., ¶ 49.) Sound Wellness purchased the relevant portion of the Biomass from Be Well for $65, 000. (Id., ¶ 50.)

PSL also provided the NY COA in connection with the formation of a contract for Sound Wellness to buy a portion of the Biomass from PSL (Id., ¶¶ 56-61), and in connection with the formation of a contract for Sound Wellness to buy a portion of the Biomass from PSL and Donald Spoth Farms, LLC, as joint sellers. (Id., ¶ 71.)

Sound Wellness alleges that the NY COA analysis was not representative of the Biomass as a whole, but rather, was gleaned by PSL intentionally selecting only certain, high-potency, parts of the Biomass. (Id., ¶¶ 78-79.) Sound Wellness further alleges that PSL knew that the NY COA analysis was false but nevertheless provided it to Sound Wellness to induce it to enter the PSL Agreement and other purchase agreements. (Id., ¶¶ 80-82.) Sound Wellness alleges that Thar knew of this false representation, and knew throughout its relations with Sound Wellness that the Biomass had a low CBD content, due to its joint venture with PSL. (Docket No. 40, ¶ 52; Docket No. 23, ¶¶ 118-24.)

During negotiations in November 2018, Barnhart verbally represented to Sound Wellness that, while PSL's facility was not yet ready to process the Biomass, it would have equipment from Thar installed and be ready to begin processing by late December 2018 or early January 2019. (Docket No. 40, ¶ 34.) Barnhart also stated that by mid-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 Wellness alleges that Barnhart's representations about its ability to timely process were untrue, that Barnhart knew that they were untrue when he said them, and that he said them to induce Sound Wellness to enter into the PSL Agreement. (Id., ¶ 65.)

Sound Wellness maintains that it relied on Barnhart's representations in entering the PSL Agreement. (Id., ¶ 42.) The PSL Agreement provided that Sound Wellness would buy 2, 000 pounds of hemp biomass and 30 kilograms of “50/50 crude” oil from PSL. (See PSL Agreement, Docket No. 23-3, pp. 2-17.) Sound Wellness also agreed to purchase an additional 15 kilograms of “50/50 crude” by January 31, 2019. PSL agreed to process the crude oil into a soft gel by February 7, 2019. (Id. at p. 2; see also Docket No. 40, ¶ 66.) The PSL Agreement guaranteed that the Biomass sold to Sound Wellness would have a CBD content of at least 10%. (Docket No. 40, ¶ 67.)

The “standard terms and conditions” of the PSL Agreement define “Products and Services” as including “Existing Crude, Additional Crude, mix for soft gels, tincture mix, Biomass, Biomass Extract and Finished Products.” (Docket No. 23-3 at p. 7.) Pursuant to the PSL Agreement, Sound Wellness was to have “reasonable access to all Products and a reasonable time to inspect and reject non-conforming Products.” (Id.) Sound Wellness further retained the right to “access all Products prior to delivering payment, and whether or not before third party or Seller testing results [were] available, to designate a qualified individual to obtain a sample of any Product and arrange” for a laboratory to perform analysis. (Id.) PSL warranted that the finished products would “be of merchantable quality” and would “meet or exceed the governing standards.” (Id. at p. 8.) Exhibit D to 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.” (Id. at p. 15.)

Sound Wellness purchased the Biomass covered by the PSL Agreement for $120, 000. (Docket No. 40, ¶ 68.) Sound Wellness entered into two other purchase agreements for other portions of the Biomass: the “Be Well Memorandum of Understanding” with nonparty Be Well, an affiliate of PSL, (id., ¶¶ 31, 48-49) and “the PSL-Spoth agreement” with PSL and nonparty Donald Spoth Farm as joint sellers. (Id., ¶¶ 69-70.)

Thar is not mentioned anywhere in the PSL Agreement, nor did Thar or its representatives sign it. Sound Wellness alleges Barnhart told it that Thar and PSL were “joint venturers” in an agreement involving the installation of the Thar equipment at the PSL facility. (Id., ¶ 17.) Barnhart and Thar told Sound Wellness that Thar had a 60% interest in the joint venture and PSL held a 40% interest. (Id., ¶ 20.) Sound Wellness alleges that, because of the joint venture, Thar knew of the NY COA, knew that it was false, and knew that Sound Wellness was relying on it when it entered the PSL Agreement. (Docket No. 23, ¶¶ 28, 35, 37.)

2. Processing challenges with PSL and new processing contract with Thar

The hemp processing did not proceed as planned. First, PSL failed to install the Thar processing equipment by January 2019. (Docket No. 40, ¶ 87.) Then, in February 2019, Thar and PSL informed Sound Wellness that, because the processing would be done on Thar equipment, Sound Wellness would have to sign an agreement with Thar, the “Thar Agreement.” (Docket No. 40, ¶ 94; see also Docket No. 23-5 at p. 13.)

Sound Wellness negotiated certain terms of the Thar Agreement, but Thar

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leveraged poor market conditions and an absence of competition to force Sound Wellness to accept its form agreement with only three negotiated terms. (Docket No. 23, ¶ 68; see also Thar Agreement, Docket No. 23-5 at p. 11.) These additional terms were that (1) Thar would have an employee or staff member on site during the extraction of Sound Wellness's Biomass, (2) a machinery issue causing a 15-day delay not covered by the Force Majeure clause would allow Sound Wellness to terminate the Agreement, and (3) Sound Wellness would have the right to a weekly inspection of the extraction facility. (Docket No. 23-5 at p. 11.) Sound Wellness executed the Thar Agreement on March 4...