Arizona Medical Marijuana Ruling Highlights Risks When Cannabis Investments, Partnerships Sour

What legal recourse do lenders have if a medical marijuana business defaults on its loan? None, apparently.

At least that’s the case for two individuals in Arizona who provided $500,000 in loans to Today’s Health Care II, a dispensary located in Colorado Springs, Colorado. The lenders filed a lawsuit in Arizona, claiming that the medical marijuana center failed to repay the loan on time and did not cover interest and other fees as stipulated in a written agreement between the two sides.

But the judge dismissed the lawsuit, saying he could not enforce a loan contract tied to medical marijuana because the drug is still illegal federally.

“The explicitly stated purpose of these loan agreements was to finance the sale and distribution of marijuana,” the judge wrote in the ruling. “This was in clear violation of the laws of the United States. As such, this contract is void and unenforceable.”

It’s an extremely negative development for medical marijuana professionals, as it has the potential to destroy a fundamental pillar of business for the MMJ industry: the option to take legal action if another party violates an agreement.

The implications could be significant.

If other judges follow the same reasoning, companies involved in the medical marijuana space could find themselves without legal protection on any matter involving a contract or agreement. That would deter everyone from lawyers and landlords to bankers and insurance companies from doing business with the MMJ industry, and it would present another huge challenge for cannabis businesses that are looking for financing.

Khurshid Khoja, principal of Greenbridge Corporate Counsel in San Francisco, told MMJ Business Daily that the ruling “is indeed problematic.”

But he said medical marijuana companies have another way to resolve contract disputes: arbitration. If the parties agree ahead of time – and in writing – to work out differences via this process rather than litigation, they can sidestep the courts and therefore avoid the issue involved in the Arizona case.

“These arbitration provisions are enforceable even in contracts that courts might deem unlawful given the current conflict between state and federal laws on cannabis, Khoja said. “This means that the courts are barred from intervening in a contractual dispute between parties to an arbitration agreement except in instances where consent to the arbitration agreement itself was fraudulently obtained. I think we’ll see the widespread use of broad arbitration provisions to mitigate the damage” of the Arizona ruling.