May 12, 2012— -- Sometimes even the best-laid plans go up in smoke. And sometimes these plans end up costing a lot of money.
That's what happened to Mark Haile and Michele Hammer, two Arizona businesspeople who in August, 2010, each loaned $250,000 to Today's Health Care II (THC), a Colorado-based medical marijuana dispensary. The agreements specifically stated that THC was using the loan proceeds for "a retail medical marijuana sales and grow center," but neither Haile nor Hammer thought that would ever be a problem.
Marijuana is legal in Arizona and Colorado (along with 14 other states and the District of Columbia); patients simply need a physician's prescription and they are legally allowed to obtain pot for medicinal purposes.
In fact, as far as Haile and Hammer were concerned, it was a smart business move. In California, for example, medical cannabis is an estimated $1.3 billion industry (Colorado is the nation's second-largest market). Why not get in on a potentially lucrative enterprise?
Talk about a pot of gold.
But in March 12, 2011, THC defaulted on its loan. According to the original terms, THC had five days to re-pay its debt. If it didn't, Haile and Hammer were entitled to repayment of the principal loan amount at a default interest rate of 21 percent, plus attorney fees.
By March 17, THC still hadn't paid anything, so Hammer and Haile sued, clearly expecting to win.
But they didn't. Instead, in his April 17 ruling, Judge Michael McVey, of Maricopa County Superior Court, dismissed the suit, stating that he couldn't enforce the loan agreement because the money was for an illegal purpose under the U.S. Controlled Substances Act, a federal law. While he recognized his ruling was "harsh," federal law trumps state law, and THC doesn't have to repay any part of either loan (although it will have to report the $500,000 as taxable income).
Lawyers for Haile and Hammer could not be reached for comment. But in a Phoenix New Times, story Randy Nussbaum, managing partner of the law firm that represented them, expressed surprise. Haile and Hammer "were provided with what they thought was a legitimate business opportunity, and they entered into this agreement in good faith," he said.
William Kozub, THC's lawyer, was not surprised with the verdict. "It's a classic supremacy issue--federal versus state," he said. "Take the marijuana out of it. Just make it a regular commercial dispute for something that's illegal under federal law. It's that simple. Drug lords from Colombia cannot come to court and say 'They sold me bad cocaine.' The Taliban can't sue in US federal court because they had a kidnapping gone awry. Certain things are just illegal."
Though the case can't set legal precedent, it does raise interesting questions for people involved in the medical marijuana industry, or those interested in getting involved: banks, individual investors, landlords, suppliers, medical directors, independent contractors and yes, even patients.
Over the last year, the Drug Enforcement Agency has raided dozens of dispensaries across the country, most notably in California.
It is unclear whether Haile or Hammer will appeal. But Morgan Fox, a spokesperson for the Marijuana Policy Project, a national non-profit marijuana reform organization, thinks the entire issue needs to be resolved. "In 2009, the Department of Justice announced that they were not going to use resources going after people who were in compliance with state medical marijuana laws, effectively saying they were choosing not to enforce federal law under certain conditions," he said. "Since that time, those conditions have evolved. The definition of who the DOJ is choosing to ignore and what they consider to be in compliance with state law is certainly getting narrower, but it is also becoming more and more vague."
Richard Keyt, a business attorney in Phoenix who runs a medical marijuana law web site, agreed. "Clearly, lenders need to take notice of this case because they might not be able to enforce their loan, which is what's happening in this particular case," he said. "But it has a broader meaning--it may mean that no contract involving medical marijuana dispensaries, or anything relating to medical marijuana, would be enforced. They're going to be the bad boy for the dispensary industry. Who wants to do business with somebody if you can't enforce your contract?"