Introduction

On February 1, Senior U.S. District Judge R. Brooke Jackson of the U.S. District Court for the District of Colorado denied Mackie A. Barch (Mackie) and Trellis Holdings Maryland, Inc. (Trellis and together with Mackie, defendants) motion to vacate the original judgment entered into on September 7, 2022, awarding $6.4 million to David J. Bartch (plaintiff) as a result of defendants’ breach of contract. In reaching his ruling, Judge Jackson was unpersuaded by defendants’ argument that the court lacks subject matter jurisdiction over this matter because the plaintiff’s injury is not redressable by a federal court because marijuana is illegal under federal law, and federal courts therefore cannot adjudicate marijuana cases. Judge Jackson further went on to specify that the conduct at the center of this dispute (defendants’ agreement to return plaintiff’s ownership interest upon the successful licensing of Doctor’s Orders Maryland (DOMD)) would not have “affected the amount of cannabis that the company [DOMD] cultivated or distributed” in violation of the Controlled Substances Act (CSA). The decision to ultimately defend and extend Article III jurisdiction in cases arising out of cannabis business disputes is an interesting shift that highlights the sway of public opinion to the side of the legalization of marijuana on the federal level.

Background

The original case was tried in the U.S. District Court for the District of Colorado from July 11 to July 14, 2022. The case arose out of a contractual dispute regarding the ownership of DOMD. Plaintiff and Mackie began their relationship through a partnership on plaintiff’s Denver business, Doctor’s Orders Denver. After the success of such business, plaintiff and Mackie contemplated a new business venture in Maryland, which had recently legalized medical marijuana. Plaintiff founded DOMD on June 6, 2015. At the time of formation, plaintiff owned 70% of DOMD as Class A dilutable shares through a subsidiary, DO Maryland OP LLC (DOMD OP). A prominent philanthropic family, the Weinbergs, owned the other 30% as Class B non-dilutable shares.

DOMD’s sole business objective was obtaining a license from the Maryland Medical Cannabis Commission. Plaintiff’s cannabis experience and the Doctor’s Orders brand were important contributors to DOMD’s optimism about receiving a license. Although the inclusion of plaintiff in DOMD’s application was important for the company’s prospective licensing in Maryland, his inclusion could adversely affect the successful grant of the license due to the fact that plaintiff entered into a deferred judgment in Denver district court for misdemeanor drug possession in 2014. In June 2015, prior to the formation of DOMD[1], the Denver district court further clarified that plaintiff would be in violation of the conditions of his deferred judgment if he owned a marijuana business, but the court would allow plaintiff reasonable time to divest his ownership interests if he so chose.

On November 6, 2015, DOMD submitted its application for licensure in Maryland. Prior to submission, plaintiff and Mackie, with the assistance of its attorneys at Vicente Sederberg (Vicente), conspired to misrepresent the ownership and management of DOMD to increase the likelihood of a successful licensure. Ultimately, plaintiff was not listed on the final application submitted by DOMD. A new operating agreement enacted the date before submission of DOMD’s application outlined a new ownership structure: Herb Wilkins acquired a 5% interest in exchange for a $1M, DOMD OP held 60.5%, and Vicente held 4.5%. As further described in the new operating agreement, plaintiff was not the sole owner of DOMD OP, now Jeff Black and Ashley Peebles owned DOMD OP.

In August 2016, DOMD was pre-approved for two licenses in Maryland. In the coming months, DOMD’s ownership changed, which diluted DOMD OP’s ownership interest. Black and Peebles transferred the majority of their interest in DOMD OP to Mackie through Trellis. Consistent with prior practice and discussions, plaintiff took the position that half of the interest transferred to Trellis was rightfully his. On November 23, 2018, plaintiff filed a complaint, asserting seven claims against defendants: (1) for a declaratory judgment that Trellis legally holds and is obligated to transfer 50% of its Class A member interest in DOMD to plaintiff; (2) civil theft; (3) conversion; (4) constructive trust; (5) breach of contract (specific performance); (6) breach of contract (damages); and (7) unjust enrichment. Ultimately, the court found the defendants liable for breach of contract due to their refusal to return plaintiff’s ownership interest in DOMD, and awarded plaintiff $6.4 million.

Bartch v. Barch et al. – U.S. District Court for the District of Colorado

On September 5, 2023, defendants filed a motion to vacate the court’s previous final judgment entered on September 7, 2022, as amended on November 14, 2022, and December 12, 2022. Defendants argued that the court lacks subject matter jurisdiction. They reasoned that plaintiff’s injury is not redressable by a federal court because marijuana is illegal under federal law, thereby preventing federal courts from adjudicating marijuana cases.

In denying the defendants’ motion to vacate, the court found that (i) honoring the contract at issue does not violate the CSA, and (ii) it is not the law that federal courts cannot hear or resolve dispute arising from cannabis companies. The basis of the motion to vacate, in part, was based on the premise that marijuana is a Schedule 1 controlled substance under the CSA, and as such it is unlawful “to manufacture, distribute, or dispense” marijuana. The conduct at the heart of this case — Mackie’s agreement to restore plaintiff’s partial ownership in DOMD upon successful licensure in Maryland — is not the manufacturing, distribution or dispensing of marijuana.

Despite the fact that the true intention of DOMD was to cultivate and possess marijuana, the court found that the actual conduct of honoring the contract regarding ownership interests would not have affected the amount of cannabis being cultivated or distributed. In its motion to vacate, defendants relied almost exclusively on Next Step Advisors LLC v. True Harvest Holdings Inc. 641 F. Supp. 3d 655 (D.Ariz. 2022) for their argument against subject matter jurisdiction. In that case, the court held it did not have jurisdiction to enforce an asset purchase agreement between marijuana companies because the only available remedy would violate the CSA. However, in a recent case more persuasive to Judge Jackson, the Ninth Circuit found that a plaintiff has Article III standing to bring claims for damages under RICO based on alleged harms to their cannabis business. Judge Jackson further found that the requirements for diversity of citizenship were fully established in the five years this matter was before the court.

Ultimately, the decision by Judge Jackson to uphold his judgment and deny defendants’ motion to vacate serves as a monumental shift in federal cannabis jurisprudence. Not only does it provide cannabis companies a forum to resolve their business disputes and issues, but it also arguably indicates a shift towards treating cannabis companies similarly to those companies not engaged in the manufacturing and distribution of CSA substances.

Our Cannabis Practice provides advice on issues related to applicable federal and state law. Marijuana remains an illegal controlled substance under federal law.

[1] The Parties proceeded with formation of DOMD less than a month after the clarification made by the Denver District Court because they thought DOMD was technically not a marijuana business, rather it was a corporate entity exploring the possibility of applying for licenses to become a marijuana company.