District of Nevada declines to dismiss cannabis-related contract dispute

01.15.2019

A recent decision from the District of Nevada demonstrates the federal judiciary’s increasing willingness to enforce cannabis-related contracts, so long as doing so will neither promote nor mandate a violation of the federal Controlled Substances Act. In Bart St. III v. ACC Enterprises, LLC, 2018 WL 4682318, at *5 (D. Nev. Sept. 27, 2018), the District of Nevada declined to dismiss a dispute involving a lender’s claim that a cannabis cultivation business, to whom it lent money, breached the underlying loan notes by (1) failing to use the funds to purchase land and pay debt, (2) failing to provide the lender with the right to first refusal to purchase its cannabis business, and (3) failing to repay an operating capita loan. The court held that the notes could be enforced insofar as they required the loans to be used to purchase land and pay debt, since doing so would neither promote nor compel a violation of the CSA. However, the court declined to enforce those provisions that provided the lender with the right to first refusal, and the right to repayment of the operating capital loan, since if found that doing so would directly promote the company’s cannabis operations, and therefore a violation of the CSA. Bart St. III v. ACC Enterprises, LLC, 2018 WL 4682318, at *5 (D. Nev. Sept. 27, 2018).

Interestingly, the District of Colorado has even enforced insurance policies related to cannabis operations. In Green Earth Wellness Center, a medical marijuana company sued its insurance carrier for failing to pay a claim aftter a fire destroyed its cannabis crop. The court declined to find the insurance policy void as against public policy given the parties’ “mutual intent to treat marijuana products as insurable commodities” and the “continued erosion of any clear and consistent federal public policy in this area.” Green Earth Wellness Ctr., LLC v. Atain Specialty Ins. Co., 163 F. Supp. 3d 821, 835 (D. Colo. 2016).

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01.15.2019  |  PRACTICE AREAS: Litigation and Dispute Resolution  |  INDUSTRIES: Cannabis

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