Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 1 of 25

1 Paul A. Conant, 012667

CONANT LAW FIRM, PLC
2 2398 East Camelback Road #925
Phoenix, Arizona 85016-9002
3 Telephone: 602.508.9010

4 Facsimile: 602.508.9015
Email: docket@conantlawfirm.com
5 Attorneys for Plaintiffs

6
IN THE UNITED STATES DISTRICT COURT
7 FOR THE DISTRICT OF ARIZONA
8
Harvest Health & Recreation Inc., a British Case No.
9 Columbia, Canada corporation; Harvest
Enterprises, Inc., a Delaware corporation; COMPLAINT
10 Harvest of California LLC, a California (PETITION TO COMPEL
limited liability company; Harvest ARBITRATION UNDER FEDERAL
11 California Acquisition Corp., a Delaware ARBITRATION ACT)
corporation;
12
Plaintiffs,
13
vs.
14 Falcon International, Corp, a Delaware
corporation; James Kunevicius, an
15
individual; Edlin Kim, an individual;
16 Falcon California, Inc., a Delaware
corporation; Falcon Brands, Inc. a
17 Delaware corporation; Coastal Harvest II,
LLC, a California limited liability
18 company; First Canyon Holdings, LLC, a
Delaware limited liability company; G1
19
Perez, LLC, a Delaware limited liability
20 company; V1 Perez, LLC, a Delaware
limited liability company; Industrial Court
21 L11, LLC, a Delaware limited liability
company; A1 Canyon, LLC, a Delaware
22 limited liability company; B1 Canyon,
LLC, a Delaware limited liability company;
23
C1 Canyon, LLC, a Delaware limited
24 liability company; D1 Canyon, LLC, a
Delaware limited liability company; E1
25
-1-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 2 of 25

1 Canyon, LLC, a Delaware limited liability

company; Industrial Court L5, LLC, a
2 Delaware limited liability company;
Industrial Court L6, LLC, a Delaware
3
limited liability company; Kane Concepts,
4 LLC, a Delaware limited liability company;
MK Point, LLC, a Delaware limited
5 liability company; Cannoisseur Capital,
LLC, a Florida limited liability company;
6 BAM668, LLC, a California limited
liability company; Rhino Group, LLC, a
7
Delaware limited liability company; Grey
8 Ghost Services, LLC, a Delaware limited
liability company; Betterworld Ventures,
9 LLC, a California limited liability
company; Swoish Family Trust, an entity;
10 Albert Kim, an individual; John “Johnny”

11 Nasori, an individual; Noah Novello, an

individual; David Mitchell, an individual;
12 Brian Brown, an individual; Danielle
Brown, an individual,
13
Defendants.
14

15 NATURE OF ACTION

16 Pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (“FAA”), Plaintiffs seek an

17 order compelling Defendants to arbitrate all claims and issues set forth herein, including

18 termination and rescission of the Merger Agreement between Harvest and Defendant Falcon

19 on grounds including that, even though Harvest has fully performed all of its legal obligations

20 under the Merger Agreement as of this date, Falcon has been unable and unwilling to: (1)
21 produce auditable financial information or records concerning its business operations and

22 revenue despite repeated requests by Harvest for such records and an obligation by Falcon to

23 do so (as a publicly traded company Harvest cannot rely on the preliminary financial data

24 originally provided by Falcon which Harvest has been unable to receive Falcon’s cooperation

25
-2-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 3 of 25

1 to substantiate); (2) rebut recently revealed evidence that it has transported marijuana across

2 state lines, and failed to disclose that to Harvest as required by due diligence obligations; (3)

3 rebut recently revealed evidence that it has failed to comply with California state law

4 concerning the regulation of the sale of marijuana, and failed to disclose that to Harvest as

5 required by its due diligence obligations. Falcon’s reckless business practices have also

6 threatened to put Harvest at risk of being named as a defendant, along with Falcon, in a

7 whistleblower lawsuit in California, if it were to proceed to closing the planned merger with

8 Falcon. As part of Harvest’s performance prior to the recent revelations and Falcon’s inability

9 or refusal to provide financial information to substantiate its activities, and Falcon’s failure

10 and refusal to disclose key details of its business practices, Harvest paid Falcon’s control

11 persons $4,100,000.00 personally for assets they personally sold to Harvest separate from

12 Falcon, and further advanced over $47,000,000.00 in cash and equipment (e.g., processing,

13 manufacturing and packaging equipment and IT equipment) to Falcon. Despite Harvest

14 having paid over $50,000,000.00 in cash and in-kind advances to Falcon and its principles,

15 they are unhappy with the deal they struck with Harvest, and have been attempting to

16 manufacture ways to avoid Falcon’s obligations under the Merger Agreement. Given what

17 Harvest now knows and believes about Falcon’s business practices, and given other conduct

18 by Falcon and its control persons described more fully below, and applicable law, Harvest is

19 entitled to terminate and rescind the Merger Agreement and seek and return and recovery of

20 all monies and things of value provided to Falcon and its control persons to date, in arbitration.
21 Because Falcon has been, on information and belief, harboring a dispute with Harvest of

22 which it failed to seek resolution under mandatory language of the Merger Agreement,

23 Harvest is entitled to seek an order compelling arbitration now.

24

25
-3-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 4 of 25

1 This Complaint and Petition to Compel arbitration seeks to place all disputes herein

2 and between the parties into arbitration, pursuant to the Parties’ Agreement, where Harvest

3 will: (1) seek restitution damages and other relief for the return of all monies and consideration

4 provided to Falcon, and to put Harvest in the same financial position as it was vis-à-vis Falcon

5 ante the Parties’ Agreements; (2) seek appointment of a Receiver for all of Falcon’s business

6 and assets and to operate same in compliance with both state and federal law, pending

7 payment in full to Plaintiffs of the monies, damages and other relief to which they are entitles.

8 Plaintiffs Harvest Health & Recreation Inc., a British Columbia, Canada corporation,

9 (“Harvest”), Harvest Enterprises, Inc., a Delaware corporation (“Harvest Enterprises”),

10 Harvest of California LLC, a California limited liability company (“Harvest of California”),

11 Harvest California Acquisition Corp., a Delaware corporation (“Harvest Acquisition”) alleges

12 as follows:

13 THE PARTIES
14 1. Plaintiff Harvest Health & Recreation Inc. is a British Columbia, Canada

15 corporation in good standing, with its principal place of business in Tempe, Arizona, and is a

16 party to the transactions contemplated by the Merger Agreement alleged herein.

17 2. Plaintiff Harvest Enterprises, Inc. is a Delaware corporation in good standing

18 and a party to the transactions contemplated by the Merger Agreement alleged herein.

19 3. Plaintiff Harvest of California LLC is a California limited liability company in

20 good standing and a party to certain agreements as alleged herein.

21 4. Plaintiff Harvest California Acquisition Corp. is a Delaware corporation in good

22 standing, with its principal place of business in Tempe, Arizona.

23 5. Defendant Falcon International, Corp (“Falcon”) is a Delaware corporation in

24 good standing, with its principal place of business in California.

25
-4-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 5 of 25

1 6. Defendant James Kunevicius is an individual and resident of California.

2 7. Defendant Edlin Kim is an individual and resident of California.

3 8. Defendant Falcon California, Inc. is a Delaware corporation in good standing,

4 with its principal place of business in California and is referred to herein, from time to time,

5 as a Note Debtor Defendant.

6 9. Defendant Falcon Brands, Inc. is a Delaware corporation in good standing with

7 its principal place of business in California and is referred to herein, from time to time, as a

8 Note Debtor Defendant

9 10. Defendant Coastal Harvest II, LLC is a California limited liability company in

10 good standing with its principal place of business in California and is referred to herein, from

11 time to time, as a Note Debtor Defendant.

12 11. Defendant First Canyon Holdings, LLC is a Delaware limited liability company

13 in good standing with its principal place of business in California and is referred to herein,

14 from time to time, as a Note Debtor Defendant.

15 12. Defendant V1 Perez, LLC is a Delaware limited liability company in good

16 standing with its principal place of business in California and is referred to herein, from time

17 to time, as a Note Debtor Defendant.

18 13. Defendant Industrial Court L11, LLC is a Delaware limited liability company

19 in good standing with its principal place of business in California and is referred to herein,

20 from time to time, as a Note Debtor Defendant.

21 14. Defendant A1 Canyon, LLC is a Delaware limited liability company in good

22 standing with its principal place of business in California and is referred to herein, from time

23 to time, as a Note Debtor Defendant.

24

25
-5-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 6 of 25

1 15. Defendant B1 Canyon, LLC is a Delaware limited liability company in good

2 standing with its principal place of business in California and is referred to herein, from time

3 to time, as a Note Debtor Defendant.

4 16. Defendant C1 Canyon, LLC is a Delaware limited liability company in good

5 standing with its principal place of business in California and is referred to herein, from time

6 to time, as a Note Debtor Defendant.

7 17. Defendant D1 Canyon, LLC is a Delaware limited liability company in good

8 standing with its principal place of business in California and is referred to herein, from time

9 to time, as a Note Debtor Defendant.

10 18. Defendant E1 Canyon, LLC is a Delaware limited liability company in good

11 standing with its principal place of business in California and is referred to herein, from time

12 to time, as a Note Debtor Defendant.

13 19. Defendant F1 Canyon, LLC is a Delaware limited liability company in good

14 standing with its principal place of business in California and is referred to herein, from time

15 to time, as a Note Debtor Defendant.

16 20. Defendant Industrial Court L5, LLC is a Delaware limited liability company in

17 good standing with its principal place of business in California and is referred to herein, from

18 time to time, as a Note Debtor Defendant.

19 21. Defendant Industrial Court L6, LLC is a Delaware limited liability company in

20 good standing with its principal place of business in California and is referred to herein, from
21 time to time, as a Note Debtor Defendant.

22 22. Defendant Kane Concepts, LLC is a Delaware limited liability company in good

23 standing, with its principal place of business in California. Kane Concepts, LLC is owned and

24 controlled by James Kunevicius.

25
-6-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 7 of 25

1 23. Defendant MK Point, LLC is a Delaware limited liability company in good

2 standing, with its principal place of business in California. MK Point, LLC is owned and

3 controlled by Edlin Kim.

4 24. Defendant Cannoissuer Capital, LLC is a Florida limited liability company in

5 good standing, with its principal place of business in Miami, Florida.

6 25. Defendant BAM668, LLC is a California limited liability company in good

7 standing, with its principal place of business in Santa Ana, California.

8 26. Defendant Rhino Group, LLC is a Delaware limited liability company in good

9 standing, with its principal place of business in Delaware.

10 27. Defendant Grey Ghost Services, LLC is a Delaware limited liability company

11 in good standing, with its principal place of business in Anaheim, California.

12 28. Defendant Betterworld Ventures, LLC is a California limited liability company

13 in good standing, with its principal place of business in Temecula, California.

14 29. Defendant Swoish Family Trust is family trust with its principal place of

15 domicile and/or business in California.

16 30. Defendant Albert Kim is an individual whose domicile is in California and is a

17 stockholder of Falcon. Claims alleged against this Defendant are alleged against him

18 individually and in his capacity as a stockholder of Falcon.

19 31. Defendant John “Johnny” Nasori is an individual whose domicile is in

20 California and is a stockholder of Falcon. Claims alleged against this Defendant are alleged
21 against him individually and in his capacity as a stockholder of Falcon.

22 32. Defendant Noah Novello is an individual whose domicile is in California and is

23 a stockholder of Falcon. Claims alleged against this Defendant are alleged against him

24 individually and in his capacity as a stockholder of Falcon.

25
-7-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 8 of 25

1 33. Defendant David Mitchell is an individual whose domicile is presently

2 unknown, but is believed to be California, and is a stockholder of Falcon. Claims alleged

3 against this Defendant are alleged against him individually and in his capacity as a stockholder

4 of Falcon.

5 34. Defendant Brian Brown is an individual whose domicile is presently unknown,

6 but is believed to be California, and is a stockholder of Falcon. Claims alleged against this

7 Defendant are alleged against him individually and in his capacity as a stockholder of Falcon.

8 35. Defendant Danielle Brown is an individual whose domicile is presently

9 unknown, but is believed to be in California and is a stockholder of Falcon. Claims alleged

10 against this Defendant are alleged against him individually and in his capacity as a stockholder

11 of Falcon.

12 THE MERGER AGREEMENT and RELATED TRANSACTIONS

13 36. A Merger Agreement dated February 14, 2019 was entered into by, between

14 and/or among Plaintiff Harvest and Harvest Acquisition and Falcon and certain other

15 Defendants as Shareholders of Falcon (the “Merger Agreement”).

16 37. Among other things, the Merger Agreement includes within it an arbitration

17 clause at Section 9.10, severable or separable from the Merger Agreement itself, in accord

18 with the “doctrine of separability” announced by the United States Supreme Court in Prima

19 Paint Corporation v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).

20 38. Under the “doctrine of separability”, a party seeking to rescind a contract

21 containing an arbitration clause does not, merely by seeking rescission or termination of that

22 main contract, also seek rescission or termination of the arbitration clause, which clause

23 remains in full force and effect even if the main contract is rescinded or terminated.

24

25
-8-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 9 of 25

1 39. In connection with the Merger Agreement, a number of other agreements were

2 executed by and among various parties.

3 40. Promissory notes were made by Falcon and certain Note Debtor Defendants,

4 payable to Harvest Enterprises, Inc.; specifically:

5 a. Falcon entered into a February 15, 2019 Promissory Note in the amount of

6 $10,000,000.00 payable to Harvest Enterprises to memorialize amounts

7 previously advanced by Harvest Enterprises to Falcon (the “2/15 Note”);

8 and,

9 b. Falcon and Note Debtor Defendants Falcon California, Inc. and Falcon

10 Brands, Inc. entered into a February 14, 2019 Promissory Note in the amount

11 of $14,499,000.00 payable to Harvest Enterprises to memorialize amounts

12 previously advanced by Harvest Enterprises to Falcon (the “2/14 Note”).

13 41. The Merger Agreement was amended by the First Amendment to Agreement

14 and Plan of Merger and Reorganization, effective as of June 7, 2019 (the “Amendment”).

15 42. In connection with the Amendment, Falcon and all Note Debtor Defendants

16 entered into a June 7, 2019 Secured Promissory Note in the amount of $40,353,881.12 payable

17 to Harvest Enterprises (“6/7 Note”). Harvest Enterprises funded $23,353,881.12 under the

18 6/7 Note in accordance with its terms and as agreed to by the parties to such note.

19 43. The above-referenced promissory notes may be referred to herein, collectively,

20 from time to time, as the Promissory Notes.

21 44. Substantially contemporaneously with the Amendment, Defendants James

22 Kunevicius and Edlin Kim negotiated a separate but related transaction with Harvest of

23 California (the “Control Person Transaction”) through which they sold to Harvest of

24 California 100% of the membership interests in Industrial Court L8, LLC (“L8”) and

25
-9-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 10 of 25

1 Industrial Court L10, LLC (“L10”) via their personally-owned membership interests in two

2 limited companies called Elemental Concepts, LLC, a North Carolina limited liability

3 company (owned by Defendant James Kunevicius) and Compass Point, LLC, a Delaware

4 limited liability company (owned by Defendant Edlin Kim). The purchase price for the sale

5 of L8 and L10 to Harvest of California was an aggregate of $4,100,000.00, with 50% of that

6 purchase price to go to James Kunevicius and 50% to go to Edlin Kim, pursuant to an (a)

7 Assignment Agreement dated June 7, 2019 with no specified state or federal court venue, (b)

8 a Membership Interest Purchase Agreement dated as of June 7, 2019 (“MIPA”) with no

9 specified state or federal court venue; and, (c) an “Undertaking” dated June 7, 2019 with no

10 specified state or federal court venue. The MIPA specifies that disputes relating to the Control

11 Person Transaction are to be arbitrated with the American Arbitration Association.

12 45. All of the above-referenced agreements were negotiated in substantial part in

13 Arizona, and call for substantial performance in Arizona.

14 JURISDICTION AND VENUE

15 46. As permitted by 9 U.S.C. §4, because but for the arbitration agreement alleged

16 herein, diversity jurisdiction would be proper under 28 U.S.C. § 1332 since Plaintiff Harvest

17 is a citizen of a different jurisdiction than that of all Defendants and the amount in controversy

18 is substantially in excess of $75,000, this United States District Court has jurisdiction to rule

19 on and determine Plaintiff Harvest’s Petition to Compel Arbitration.

20 47. Further, Section 9.11(b) of the Merger Agreement states that “any legal suit,

21 action or proceedings arising out of or based upon this Agreement, the other transaction

22 documents or contemplated transactions may be instituted in the federal courts of the United

23 States of America or the courts of the State of Delaware, in each case located in Maricopa

24

25
-10-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 11 of 25

1 County, Arizona, and each party irrevocably submits to the personal jurisdiction of such

2 courts in any such suit, action or proceeding.”

3 48. Contractually, the venue for any disputes concerning any of the Promissory

4 Notes alleged herein above is within Maricopa County, Arizona, and such disputes are subject

5 to arbitration as well, pursuant to principles of contract and agency law.

6 49. Disputes arising under the Control Person Agreement are subject to arbitration

7 as well, as are the parties to the Control Person Agreement, under principles of contract and

8 agency law.

9 50. Venue is proper in the United States District Court for the District of Arizona

10 pursuant to 28 U.S.C. § 1391(b), Section 9.11(b) of the Merger Agreement, and 9 U.S.C. §4.

11 GENERAL ALLEGATIONS
12 A. Invocation of the Federal Arbitration Act to Compel Arbitration.
13 51. Defendants who or which are signatories are bound by Section 9.10 of the

14 Merger Agreement, which requires, at Section 9.10 (a), the following action: “If there is any

15 dispute or controversy relating to this Agreement or any of the Contemplated Transactions

16 (each, a “Dispute”), such Dispute shall be resolved in accordance with this Section 9.10

17 provided that any Disputes relating to any tax Return shall be resolved as set forth in Section

18 5.06(c).” No Dispute reference herein is subject to Section 5.06(c).

19 52. For some period of time greater than five days before October 30, 2019,

20 Defendants who or which are signatories to the Merger Agreement claimed a dispute or
21 controversy relating to the Merger Agreement, and or any of the Contemplated Transactions,

22 on information and belief.

23 53. During that time, Defendants who or which are signatories to the Merger

24 Agreement nonetheless failed, neglected or refused to arbitrate under a written agreement by

25
-11-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 12 of 25

1 failing to issue a Notice of Dispute in accord with Section 9.10 of the Merger Agreement, and

2 by otherwise failing resolve the dispute or controversy in accord with Section 9.10 of the

3 Merger Agreement.

4 54. Plaintiff Harvest is aggrieved by such failure, neglect or refusal.

5 55. The FAA states, at 9 U.S.C. §4, as follows:

6 A party aggrieved by the alleged failure, neglect, or refusal of

another to arbitrate under a written agreement for arbitration may
7 petition any United States district court which, save for such
agreement, would have jurisdiction under title 28, in a civil action
8
or in admiralty of the subject matter of a suit arising out of the
9 controversy between the parties, for an order directing that such
arbitration proceed in the manner provided for in such agreement.
10 Five days’ notice in writing of such application shall be served
upon the party in default. Service thereof shall be made in the
11 manner provided by the Federal Rules of Civil Procedure. The
court shall hear the parties, and upon being satisfied that the
12
making of the agreement for arbitration or the failure to comply
13 therewith is not in issue, the court shall make an order directing
the parties to proceed to arbitration in accordance with the terms
14 of the agreement. The hearing and proceedings, under such
agreement, shall be within the district in which the petition for an
15 order directing such arbitration is filed. If the making of the
16 arbitration agreement or the failure, neglect, or refusal to perform
the same be in issue, the court shall proceed summarily to the trial
17 thereof. If no jury trial be demanded by the party alleged to be in
default, or if the matter in dispute is within admiralty jurisdiction,
18 the court shall hear and determine such issue. Where such an issue
is raised, the party alleged to be in default may, except in cases of
19 admiralty, on or before the return day of the notice of application,
20 demand a jury trial of such issue, and upon such demand the court
shall make an order referring the issue or issues to a jury in the
21 manner provided by the Federal Rules of Civil Procedure, or may
specially call a jury for that purpose. If the jury find that no
22 agreement in writing for arbitration was made or that there is no
default in proceeding thereunder, the proceeding shall be
23 dismissed. If the jury find that an agreement for arbitration was
24 made in writing and that there is a default in proceeding
thereunder, the court shall make an order summarily directing the
25
-12-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 13 of 25

1 parties to proceed with the arbitration in accordance with the

terms thereof.
2
56. Five days’ notice will be provided to Defendants in accord with 9 U.S.C. §4 and
3
Section 9.10(b) of the Merger Agreement, this Complaint and Petition to Compel Arbitration
4
is and shall also be Plaintiff Harvest’s five day Notice of Dispute thereunder, and the same
5
shall be served in the manner provided in the Federal Rules of Civil Procedure. Plaintiff
6
Harvest petitions and moves for an order compelling arbitration in accord with the foregoing
7
cited arbitration clause and authorities. This is Harvest’s mandatory Notice of Dispute.
8
57. The arbitration clause in the Merger Agreement, as amended, states as follows
9
at Section 9.10(c):
10
Any arbitration hereunder shall be conducted in accordance with
11
the rules of the American Arbitration Association then in effect.
12 The Company [Falcon] and the Parent [Harvest] shall each select
one arbitrator, and the two arbitrators so selected shall select a
13 third arbitrator, and the three arbitrators shall resolve the Dispute.
The arbitrators will be instructed to prepare in writing as promptly
14 as practicable, and provide to the Parent and the Company
Stockholders, such arbitrators’ determination, including factual
15
findings and the reasons on which the determination was based.
16 The decision of the arbitrators will be final, binding and
conclusive and will not be subject to review or appeal and may be
17 enforced in any court having jurisdiction over the Parties. Each
party shall initially pay its own costs, feels and expenses
18 (including, without limitation, for counsel, expert and
19 presentation of proof) in connection with any arbitration or other
action or proceeding brought under this Section 9.10, and the fees
20 of the arbitrators shall be share[d] equally, provided, however,
that the arbitrators shall have the power to award costs and
21 expenses in a different proportion.
22 58. Harvest Enterprises and the Note Debtor Defendants are subject to the
23 arbitration clause in the Merger Agreement and Harvest Enterprises petitions and moves for

24

25
-13-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 14 of 25

1 an order compelling arbitration of the disputes arising under the Promissory Notes, and in

2 connection with the Merger Agreement, as alleged herein.

3 59. Harvest of California is entitled to arbitration as against Defendants James

4 Kunevicius and Edlin Kim for the Control Person Transaction, and petitions and moves for

5 an order compelling arbitration of the disputes concerning the Control Person Transaction, as

6 alleged herein, including its exercise of the Purchaser Put Option as alleged herein below.

7 B. Notice of Dispute Concerning Disputes Plaintiffs Seek to Have Compelled to

8 Arbitration if not Resolved Within Five Business Days.

9 60. Like many other similarly-situated companies whose underlying operations

10 relate to the state-legalized sale of marijuana or cannabis, and occur in substantial part in the

11 United States, Harvest is a public company whose stock trades principally on the Canadian

12 Securities Exchange and the OTCQX tier of the U.S. OTC Markets.

13 61. The Merger Agreement states that the consideration to be paid is, inter alia,

14 $155,000,000.00 in Multiple Voting Shares of stock of Plaintiff Harvest, which trades on,

15 inter alia, the Canadian Securities Exchange, with the number of Multiple Voting Shares to

16 be issued on the Closing Date to be determined by contractually agreed-upon formulae set

17 forth therein.

18 62. While the Merger Agreement was executed by the parties as of February 14,

19 2019, it was not structured to close until after the occurrence of numerous events and actions,

20 which might conceivably take many months, including potentially up to a year or more.
21 63. The Merger Agreement has not closed, to date.

22 64. So-called “Hart Scott Rodino”, or “HSR” review of potential merger

23 transactions by the United States Department of Justice is commonplace.

24

25
-14-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 15 of 25

1 65. The Merger Agreement was subject to almost immediate HSR review, which

2 has the practical effect to barring a proposed merger from closing until after the government’s

3 HSR review is completed.

4 66. But for the HSR review experienced in connection with the Merger Agreement,

5 it was Harvest’s belief and expectation that the transactions contemplated by the Merger

6 Agreement would close quickly.

7 67. The initiation of HSR review by the government caused the closing not to occur

8 quickly.

9 68. After the Merger Agreement was executed as of February 14, 2019, and

10 beginning in about March and April 2019, the trading prices of publicly-traded stocks in the

11 marijuana company sector began to recede, as did Harvest’s.

12 69. A general representation of the industry-wide trend in that regard is reflected in

13 the graphic below, generated by the BI Global Cannabis Index for the relevant market sector:

14

15

16

17

18

19

20
21

22

23

24

25
-15-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 16 of 25

1 70. The Merger Agreement contained no provisions or language which would

2 allow Defendants to back out and not proceed to Closing just because of Harvest’s stock price

3 changes, including of the type depicted in the graphic above.

4 71. Nonetheless, as publicly-traded marijuana company stock prices, and Harvest’s,

5 began to recede in the general manner depicted in the trend shown in the graphic above,

6 Defendants began to engage in conduct which is now questioned in this Petition, Complaint,

7 and Notice of Dispute, as summarized herein below.

8 72. Initially, Defendants James Kunevicius and Edlin Kim reacted to the stock price

9 trend referenced above by seeking to renegotiate the Merger Agreement resulting in the June

10 7, 2019 Amendment.

11 73. The June 7, 2019 Amendment increased the stock consideration due under the

12 Merger Agreement to $240,000,000.00.

13 74. Defendants James Kunevicius and Edlin Kim also negotiated the June 7, 2019

14 Control Person Transaction, providing for them to personally split a payment of $4,100,000

15 without any apparent value or consideration to be realized by the non-controlling shareholders

16 of Falcon.

17 75. By June 7, 2019, the Merger Agreement, Amendment, Promissory Notes and

18 the Control Person Transaction (collectively, “the Parties’ Agreements”) together provided

19 for lucrative consideration to be paid to Defendants James Kunevicius and Edlin Kim and

20 entities they owned or controlled.

21 76. Pursuant to the Parties’ Agreements, Plaintiffs collectively provided substantial

22 consideration to Defendants, which they received and kept, including in-kind consideration

23 and draw-downs on loans pending Closing, to be used for specific purposes prior to Closing

24 of the Merger Agreement as amended.

25
-16-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 17 of 25

1 77. The Control Person Transaction actually closed, resulting in the payment to

2 James Kunevicius and Edlin Kim of $4,100,000.00 in cash consideration.

3 78. While Defendants James Kunevicius and Edlin Kim required the execution of

4 documents reflecting the Control Person Transaction as an effective condition of the

5 Amendment, calling for Harvest of California to purchase their interests in two non-

6 operational limited liability companies with California marketplace processing licenses,

7 Plaintiffs now question whether Defendants James Kunevicius and Edlin Kim adequately

8 disclosed the terms of the Control Person Transaction to all other defendants, and may

9 investigate and take further action on that issue.

10 79. Harvest of California would not have entered into the Control Person

11 Transaction with Defendants James Kunevicius and Edlin Kim had it not believed that the

12 Merger Agreement would move forward to closing, and that Defendants James Kunevicius

13 and Edlin Kim were also committed to moving forward to closing, and would cause Falcon

14 to comply with its obligations under the Merger Agreement, as amended, and refrain from

15 withholding vital information which would give rise to a Material Adverse Effect (as that term

16 is defined in the Merger Agreement), and/or repudiating the Merger Agreement.

17 80. During a period of time in August and September 2019, when Harvest was

18 engaged in discussions with Falcon about Falcon attempting to rationalize its’s use and timing

19 of the loan proceeds, its business operations, and reasonable efforts to fulfill its obligations

20 set forth in the Merger Agreement prior to Closing, Falcon instructed its lawyer named Sander
21 Zagzebski to issue a “Notice of Breach and Pending Parent Default” dated September 5, 2019

22 (the “Zagzebski letter”) stating, inter alia, that Falcon wanted certain monies from Harvest,

23 and that if it did not comply, Harvest would be in default under the Merger Agreement.

24

25
-17-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 18 of 25

1 81. By that time, Harvest had already advanced loans to Falcon in the total amount

2 of $47,852,881.12 as required under the terms of the 2/14 Note, the 2/15 Note and the 6/7

3 Note and, while the advances under the 6/7 Note were not funded on the exact schedule Falcon

4 specified in the Zagzebski letter, Falcon received and accepted all loan advances, and did not

5 return any of those monies or, for that matter, any of the consideration provided to it by

6 Harvest or any of the Plaintiffs, or any of the consideration provided by any of the Plaintiffs

7 to or for the benefit of any of the Defendants.

8 82. Knowing of Harvest’s view that it was not in default or breach under the Merger

9 Agreement, Falcon also did not provide Harvest with any required Notice of Dispute

10 concerning either the matter of the monies addressed in the Zagzebski letter, any action it was

11 considering or might consider in follow up to the Zagzebski letter, or any issue of any type

12 under the Merger Agreement, as amended.

13 83. After Falcon received all of the monies referenced above, Falcon appeared to

14 be working forward with Harvest to a Closing of the Merger Agreement, as amended.

15 84. On September 24, 2019, Harvest and Falcon both certified “substantial

16 compliance” with a common legal requirement relating to federal antitrust law jurisprudence

17 under HSR rules, a so-called “Request for Additional Information and Documentary Materials

18 issued by the United States Department of Justice” regarding Harvest’s proposed acquisition

19 of Falcon by merger.

20 85. As announced, the certification of substantial compliance commenced a 30 day

21 waiting period, after which the HSR-related delay which had been in effect since at or about

22 the time of the announcement of the Merger Agreement, Harvest and Falcon would be free to

23 close their planned merger transaction, meaning that the Closing could occur on or after

24

25
-18-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 19 of 25

1 October 23, 2019 unless the United States Department of Justice raised federal antitrust law

2 concerns under HSR rules in a specific manner.

3 86. Harvest did not expect the United States Department of Justice to raise any HSR

4 concerns after expiration of the waiting period nor, on information and belief, did Falcon.

5 87. While Falcon appeared to continue to work with Harvest toward Closing after

6 the HSR substantial compliance certification was completed and the 30 day waiting period

7 began, Falcon had ignored providing financial information to Harvest which it had been

8 requesting regularly for a number of weeks, and which was necessary for Closing.

9 88. As more time passed and October 23, 2019 approached with no responses from

10 Falcon to its requests for financial information, Harvest wrote to Falcon on October 16, 2019,

11 at its official address for receipt of notices under the Merger Agreement.

12 89. The October 16, 2019 letter stated “we are a short way from completing the

13 merger and are committed to working with your finance and operational teams to complete

14 the needed financial information and request for information outlined in this letter”, and

15 further expressed concerns about the status of Falcon’s books and records, its financial

16 disclosures and about early, emerging information about Falcon being presented by a

17 whistleblower that appeared potentially troubling.

18 90. Rather than responding substantively to Harvest’s October 16, 2019 letter,

19 Falcon instead negotiated for a “standstill agreement” with Harvest, which was ultimately

20 signed as of October 30, 2019 (“Standstill Agreement”).

21 91. Effects of the October 30, 2019 Standstill Agreement included that, during the

22 30 day “standstill period”:

23 a. Harvest was prevented from declaring Falcon to be in breach or default;

24

25
-19-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 20 of 25

1 b. Falcon would not have to respond to Harvest’s October 16, 2019 letter

2 seeking financial information and more details about the potential

3 whistleblower’s evidence; and,

4 c. Falcon could -- without disclosing to Harvest the financial information it

5 had requested in the October 16, 2019 letter -- seek debt financing from

6 some other source, besides Harvest.

7 92. Nothing in the Standstill Agreement provided for progress towards a Closing to

8 be halted.

9 93. Into November 2019, Harvest officials continued to request financial and other

10 information from Falcon as contemplated under the Merger Agreement and important for the

11 Closing.

12 94. Falcon provided none of the financial or other information important for

13 Closing that Harvest requested from it in September, October and November 2019.

14 95. As the Standstill Agreement was scheduled to end, Falcon instead negotiated an

15 extension of the Standstill Agreement to January 5, 2020, to which Harvest agreed.

16 96. During the standstill period, as extended, Harvest representatives have met for

17 business meetings with Falcon personnel at a marijuana business convention to discuss the

18 status of the Merger Agreement.

19 97. The business meetings at the convention were non-productive, with one Falcon

20 representative (Edlin Kim) appearing at the meeting with visibly large amounts of cash in his
21 front pocket and back pocket and in a bag, and wearing what appeared to be many tens of

22 thousands of dollars in men’s jewelry made of gold, and with both Falcon representatives

23 (Edlin Kim and James Kunevicius) expressing no interest in doing any work to move the

24 planned transaction with Harvest forward and, instead, stating openly that Falcon would not

25
-20-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 21 of 25

1 close the Merger Agreement, as amended, due exclusively to the decline in Harvest’s stock

2 price.

3 98. Also during the standstill period, as extended, Harvest has additionally learned

4 more information about Falcon which has led it to reasonably believe that Falcon cannot close

5 the transactions contemplated by the Merger Agreement, as amended, without breaching its

6 terms because Harvest is informed and believes that:

7 a. Falcon has misrepresented to Harvest that it had no undisclosed liabilities;

8 b. Falcon has misrepresented to Harvest that it had complied and was

9 complying with all Laws applicable to its business other than any

10 noncompliance which would not result in a Material Adverse Effect (as

11 those capitalized terms are defined under the Merger Agreement, as

12 amended);

13 c. Falcon misrepresented to Harvest that it had not made any untrue statement

14 of material fact in Merger Agreement representations and warranties or

15 statements in Disclosure Schedules; and,

16 d. Falcon misrepresented to Harvest that its Interim Balance Sheet fairly

17 presented its financial condition within applicable accounting categories

18 within 5% margins.

19 99. Harvest is informed and believes that the above-referenced misrepresentations

20 constitute false representations of fact, were known to be false or were made with reckless
21 indifference to the truth, were made to induce Harvest to act or refrain from acting, Harvest’s

22 action or inaction was taken in justifiable reliance upon the misrepresentations, and Harvest

23 has suffered damage as a result of its reliance.

24

25
-21-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 22 of 25

1 100. Specifically, evidence exists that Falcon was knowingly engaged in a pattern of

2 ongoing violations of law and regulations governing its conduct as a marijuana/cannabis

3 business, on information and belief, including (a) providing marijuana/cannabis in violation

4 of California Bureau of Cannabis Control (“CBCC”) regulations and (b) interstate

5 transportation of marijuana/cannabis before the Merger Agreement was executed, and (c) that

6 it engaged in ongoing CBCC regulation violations after the Merger Agreement was executed.

7 101. Falcon’s transportation of marijuana/cannabis across state lines as alleged

8 above constitutes a Material Adverse Effect, an undisclosed liability, and renders material

9 statements of fact made by Falcon in the Merger Agreement untrue.

10 102. Falcon’s prior and ongoing violations of CBCC regulations as alleged above

11 constitute a Material Adverse Effect, an undisclosed liability, and renders material statements

12 of fact made by Falcon in the Merger Agreement untrue.

13 103. Further, evidence exists that Falcon’s Interim Balance Sheet, on information

14 and belief, did not fairly present its financial condition within applicable accounting

15 categories within 5% margins, including that Falcon has remained unable or unwilling to

16 provide documentation indicating that its books and records have been properly maintained,

17 despite previous and repeated written requests by Harvest for such information.

18 104. In addition, Harvest believes that Falcon erroneously harbors a contention that

19 it is not estopped from asserting, or barred by laches from asserting, the purported validity of

20 the Zagzebski letter as a basis for claiming to terminate the Merger Agreement, as amended,
21 and seek to keep for itself, and not repay, the consideration which all Defendants have

22 received to date from Plaintiffs, or any of them.

23

24

25
-22-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 23 of 25

1 105. Based on the foregoing, Harvest intends to pursue in an American Arbitration

2 Association (“AAA”) arbitration proceeding, as provided in the Merger Agreement, as

3 amended, at least the following claims:

4 a. Rescission and/or termination of the Merger Agreement, as amended,

5 effective immediately, and all of the other related agreements alleged herein

6 above, including any and all: (i) employment agreements; (ii) services

7 agreements; (iii) the Control Person Transaction; (iv) and/or any other

8 contract, obligation or agreement entered into, made, or which has arises as

9 a result of the Merger Agreement, as amended;

10 b. An award of damages from Defendants, and each of them, including

11 restitution damages, including any and all monies or in-kind payments

12 advanced on any Promissory Note to Falcon or any Note Debtor Defendant,

13 and to reverse and restore to the proper Plaintiff any and all assets,

14 properties, monies or other rights restorable as restitution, damages or other

15 like relief, or any other relief proper at law or in equity;

16 c. Confirmation, as needed, that all Defendants are bound to arbitrate the

17 disputes summarized herein under contractual arbitration clauses, the

18 Federal Arbitration Act, and/or principles of contract and agency law,

19 including equitable estoppel and third party beneficiary law, and the conduct

20 of all Defendants in embracing and relying upon and making assertions

21 under, direct or otherwise, the Parties Agreements containing the obligation

22 to arbitrate;

23 d. As to the Control Person Transaction, to confirm and/or effectuate the

24 Purchaser Put Option set forth in Section 8.2(a) of the MIPA, such that

25
-23-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 24 of 25

1 Defendants James Kunevicius and Edlin Kim repay to Harvest of California

2 all of the consideration paid in connection with that transaction, with this

3 constituting the notice of exercise of the “Purchaser Put Option” provided

4 for therein, given that, on information and belief, Defendants James

5 Kunevicius and Edlin Kim contend that they are entitled to keep the

6 $4,100,000 that they were paid, and will decline to repay it;

7 e. For a declaration that, to the extent Falcon seeks to rely to the Zagzebski

8 letter as support for any claim of right, that it is estopped from doing so

9 and/or barred by laches from doing so;

10 f. Pursuant to AAA Rule 34, Interim Measures, for the protection and

11 conservation of Harvest’s monies and property which are supposed to still

12 be in the possession, custody and/or control of Falcon and/or one or more of

13 the other defendants, and/or the proceeds thereof, including appointment of

14 an equity receiver pendente lite on grounds of waste, fraud, abuse, illegal

15 conduct, to take charge of Defendants’ business, to report to the AAA

16 arbitration panel as to its status, and to take any and all reasonable measures,

17 to be more fully specified in a proposed Receivership Order, to protect

18 Plaintiff’s expectancies of recovery; and,

19 g. For an award of attorneys’ fees, forum fees, costs and expenses incurred by

20 Plaintiffs, or any of them, in connection with this matter.

21 WHEREFORE, Plaintiffs respectfully requests that this Court grant the following

22 relief:

23 A. Make an order, pursuant to 9 U.S.C. §4, and the arbitration clauses quoted

24 above, as well as alternatively the doctrines of agency, equitable estoppel

25
-24-
26
 Case 2:20-cv-00035-DLR Document 1 Filed 01/06/20 Page 25 of 25

1 and/or third party beneficiary law, or other applicable law, compelling all

2 Defendants to arbitrate the claims summarized above in this Petition and

3 Notice of Dispute, before the American Arbitration Association; and,

4 B. Make such other orders and rulings in furtherance and aid of the order

5 compelling arbitration requested herein above.

6 Respectfully submitted this 6th day of January, 2020.

7 By: /s/ Paul A. Conant

Paul A. Conant, 012667
8 CONANT LAW FIRM, PLC
2398 East Camelback Road #925
9 Phoenix, Arizona 85016-9002
10 Telephone: 602.508.9010
Facsimile: 602.508.9015
11 Email: docket@conantlawfirm.com

12

13

14

15

16

17

18

19

20
21

22

23

24

25
-25-
26