A $500,000 loan to a Colorado company intended for a medical-marijuana facility doesn't have to be paid back because pot is illegal under federal law, a county judge has ruled.
The bombshell ruling, (tip of the hat to lawyer Richard Keyt's medical-marijuana blog), has major implications for the budding dispensary industry in Arizona. Applications for dispensaries are set to be accepted this month, and state-authorized, medical-pot retail and grow centers are expected to open by late summer.
Although this isn't a precedent-setting ruling that other judges must consider, the basic concept of the April 17 ruling is a wake-up call for lenders and investors.
As Keyt wrote in his blog, if this goes to an appeals court and is upheld, "any contract that has a purpose related to Arizona medical marijuana may be unenforceable and not worth the paper it is written on!"
In reading the ruling by Maricopa County Superior Court Judge Michael McVey, it's easy to see how Keyt came to that conclusion.
The case involves two simultaneous $250,000 loans by Valley residents Michele Hammer and Mark Haile to Today's Health Care II, a Colorado corporation. The company is affiliated with Today's Health Care, a dispensary in Colorado Springs.
Hammer and Haile lent the money in August 2010 for the stated purpose of financing a "retail medical marijuana sales and growth center," according to loan documents signed by each side. Today's Health Care agreed to make an interest payment every month.
By March 12, 2011, the dispensary failed to make a timely payment. It defaulted on the loan agreement a week later.
Judge McVey wrote that the only relevant legal issue was whether or not the loan documents are enforceable.
He says they're not, because the U.S. Controlled Substances Act makes all aspects of pot sales and cultivation illegal.
An agreement is unenforceable if the acts to be performed would be illegal or would violate public policy... The explicitly stated purpose of these loan agreements was to finance the sale and distribution of marijuana. This was in clear violation of the laws of the United States. As such, this contract is void and unenforceable. This Court recognizes the harsh result of this ruling.
Harsh is right. Half a million bucks -- up in smoke.
Randy Nussbaum, managing partner at the Valley law firm that represented Haile and Hammer, says his clients are "not by any means wealthy," that he doesn't think they had any previous experience in the marijuana industry, and that they believed lending money to an existing Colorado business would be legal.
"They were provided with what they thought was a legitimate business opportunity, and they entered into this agreement in good faith," Nussbaum says.
Keyt's blog post says landlords, dispensary employees and others involved with marijuana operations may end up screwed because of this type of ruling.
He's got a point, but the dispensary industry has survived for years in Colorado and other states despite the uncertainty over contract and loan issues. Where there is money to be made, entrepreneurs will find a way.
Still, McVey's ruling serves to emphasize the risk inherent in the medical-marijuana business.
William Kozub, who represented Today's Health Care II, agrees that the Colorado company could, in theory, use the same argument to avoid paying his bill.
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Kozub says he's worked for dispensary owners in previous cases that have had nothing to do with marijuana, and the client is "honest." The dispensary didn't bring the lawsuit to court and may not have sued if the two sides had been able to work out their disagreements, he says.
However, the dispute over the loan did end up in court. And when it did, Kozub began analyzing how to win the case. He soon realized that his client could simply claim that the loan contract was no good because of the federal law against marijuana.
That worked well for him and his client. But Kozub acknowledges that the argument could come back to bite his client someday. The "blatant" conflict between federal and state law presents the same problems for Today's Health Care as it does for any other dispensary, he says.
What a mess. One easy way to end the conflict, though, would be for the feds to end the failed policy of marijuana prohibition.