The Guardian: “Marijuana farms have been engulfed by California wildfires over the summer as firefighters work to contain blazes across northern California that have already burned through more than 70,000 acres. While the marijuana crops destroyed are unlikely to cause any statewide supply issues, it could drive up some prices, put small farmers out of business – and disseminate a familiar smell.
Los Angeles Times: “Ohio will vote on a constitutional amendment to legalize marijuana in November, state officials announced Wednesday. If the measure passes, Ohio would become the fifth state and the first in the Midwest to legalize the recreational use of marijuana, in addition to the District of Columbia. A pro-marijuana group, ResponsibleOhio, gathered enough signatures to place the measure on the upcoming ballot, Secretary of State Jon Husted said in a statement.”
Associated Press: “Edible marijuana products in Colorado may soon come labeled with a red stop sign, according to a draft of new rules released Wednesday by state marijuana regulators. The state may also ban the word “candy” from edible pot products“
Arizona Daily Star: “A judge has rejected efforts by a marijuana advocacy group to quash limits set by the Department of Health Services on how and when patients with post-traumatic stress disorder can legally use the drug. In a ruling Wednesday, Maricopa County Superior Court Judge Crane McClennen said there was ‘substantial evidence’ to support the restrictions imposed last year by Will Humble, who was state health chief at the time. And McClennen said adopting the views of the Arizona Cannabis Nurses Association that the restrictions are inappropriate would amount to requiring him to substitute his own judgment for that of the health chief, something he legally cannot do.”
Arizona Republic: “Three medical-marijuana companies are eyeing the Scottsdale Airpark for new dispensary locations as they look to tap into one of Arizona’s highest concentrations of patients authorized to use the drug. . . . The Scottsdale City Council on July 1 awarded a permit for Green Sky Patient Center, which could become the city’s second operating dispensary. . . . Scottsdale Dispensary, has applied for city approval to move its existing dispensary from Mayer — a community of 1,400 people near Prescott — into the Scottsdale Airpark”
The author of this website, Richard Keyt, is mentioned several times in this Arizona Republic story.
Yahoo News: “As cannabis bans are relaxed in more U.S. states, the race is on to develop an instant roadside breathalyzer for police to test drivers who may be taking the ‘high’ road. Vancouver-based Cannabix Technologies Inc, founded by a retired Royal Canadian Mounted Police officer, expects to be first out of the gate with a ‘pot breathalyzer‘ – a handheld device similar to those used to detect alcohol.”
Section 280E of the Internal Revenue Code is legalized marijuana businesses worst nightmare. This statute disallows deductions from federal taxable income of all typical business expenses except the cost of goods sold. See my previous articles below:
After losing in the U.S. Tax Court, the Vapor Room’s owner appealed to the 9th Circuit Court of Appeals. On July 9, 2015, the Court of Appeals issued its opinion Olive vs. Commissioner, and affirmed the Tax Court’s decision.
In a Forbes.com article called “Big Court Defeat For Marijuana Despite Record Tax Harvests” the author said,
“Should marijuana businesses pay tax on gross profits or net profits? It sounds like a silly question. Virtually every business in every country pays tax only on net profits, after expenses. But the topsy-turvy rules for marijuana seem to defy logic. . . . Now, in another blow to the budding industry, is the IRS has convinced the influential Ninth Circuit Court of Appeals that marijuana dispensaries cannot deduct business expenses, must pay taxes on 100% of their gross income. The case, Olive v. Commissioner, was an appeal from a U.S. Tax Court decision.”
Another Forbes.com article called “Ninth Circuit: Legal Or Not, Marijuana Facility Cannot Deduct Its Expenses” states,
“a decades-old provision of the federal tax code remains firmly in place, threatening to administer a painful amount of tax on marijuana facilities, and serving as a greater barrier to entry into the industry than any outdated notion of moral or ethical impropriety. The IRS has been wielding a little known Code section — Section 280E, to be exact — to wage war on medicinal and recreational marijuana facilities. Section 280E provides that no deduction — other than the cost to purchase or grow the marijuana inventory, or Cost of Goods Sold (COGS) — shall be allowed for any amount incurred in a business that consists of ‘trafficking in controlled substances’.”
Martin Olive argued that even though he could not deduct expenses arising from his marijuana business he should able to deduct expenses attributable to his side businesses that did not involve selling marijuana. The Court of Appeals acknowledged the concept, but after giving an example of multiple businesses it concluded that Martin Olive did not, in fact, have any business other than the marijuana business. The Court gave the following hypotheticals:
“An analogy may help to illustrate the difference between the Vapor Room and the business at issue in CHAMP. Bookstore A sells books. It also supplies some complimentary amenities: patrons can sit in comfortable seating areas while considering whether to buy a book; they can drink coffee or tea and eat cookies, all of which the bookstore offers at no charge; they can obtain advice from the staff about new authors, book clubs, community events, and the like; they can bring their children to a weekend story time or an after-school reading circle. The ‘trade or business’ of Bookstore A ‘consists of’ selling books. It’s many amenities do not alter that conclusion; presumably, the owner hopes to attract buyers of books by creating an alluring atmosphere. By contrast, Bookstore B sells books but also sells coffee and pastries, which customers can consume in a café-like seating area. Bookstore B has two ‘trades or businesses,’ one of which consists of selling books and the other of which ‘consists of’ selling food and beverages.
CHAMP
[the tax payer in a Tax Court case where the court found the taxpayer had more than one line of businesses], the court concluded, was Bookstore B. The Vapor Room, on the other hand, was Bookstore A.See also “Why Your Dispensary Needs to Rent More Space than Needed for its Retail Store,” which discusses the CHAMP case.
The Fresno Bee: ” The cost of inaction couldn’t be more clear. Acres of ancient trees are disappearing and illegal marijuana farms are popping up in their place. Streams and rivers are being sucked dry, diverted sometimes miles away through plastic pipes into tanks. Several species of fish, along with a rare breed of wild rodent, are on the verge of extinction. All of this is happening now, all across California, but particularly in the North Coast and in our national parks in the San Joaquin Valley. All of this environmental destruction is occurring to grow marijuana and meet consumer demand. While there’s plenty of blame to go around for how things have turned out in the nearly 20 years since California legalized medical marijuana, much of it must land at the feet of consumers, and of lawmakers.
Florence Reminder & Blade Tribune: “Rocky Pahwa finally received from Pinal County what he could never get from Florence in years of trying: a permit to operate a medical marijuana dispensary. . . . The location is just outside the town boundary at a former RV repair shop, in a county island off Arizona 79B.” The dispensary will be owned and operated by Healing Healthcare 3, Inc.
Today I am one of several people speaking at the Arizona State Bar convention on a topic called “Representing Clients Regarding the Development, Finance and Operation of Medical Marijuana Dispensaries.” The real estate section of the Bar is presenting this panel discussion by me and attorneys Ryan Hurley, William Kozub, Carolyn Goldman, Robert Itkin and Lindsay Schube.
Bloomberg Business: “People are flocking to buy weed, but they’re not paying as much for it. . . . [P]rices are declining faster than some had expected, while the number of people visiting the stores has increased. . . . Since last June, the average price of an 1/8th ounce of recreational cannabis has dropped from $50-$70 to $30-$45 currently; an ounce now sells for between $250 and $300 on average compared to $300-$400 last year. More competition and expansion of grow facilities contributed to this price decline, but it is also a natural result for any maturing industry as dispensaries try to find the market’s equilibrium price.
Eloy News: “Have a little reefer … it won’t kill you. Or will it? To believe what Pinal County attorney Lando Voyles and Maricopa County attorney Bill Montgomery preach about marijuana is akin to believing a little movie called “Reefer Madness” that was released in 1936. . . . I used to be a staunch critic of legalizing pot. But I looked closer at the facts and the scientific data. I evolved, and now feel a little silly for holding those prior beliefs. America has evolved as well.”
Associated Press: “Marijuana is only legal for medical purposes in California, but that isn’t stopping purveyors of pot-infused cupcakes, nuts and other edible forms of the drug from putting on an outdoor food festival to showcase their wares. The ‘Get Baked Sale’ happening Saturday at a food truck hub in San Francisco comes as marijuana advocates are working to legalize recreational use of the drug through a statewide voter initiative in November 2016.
KTLA 5: “During a police raid on an unpermitted pot shop in Santa Ana late last month, hidden cameras caught officers eating marijuana-laced “edibles,” playing darts and displaying other questionable behavior, according to an attorney who plans to sue the city in connection with the raid. The incident occurred at Sky High Holistic, a medical marijuana dispensary operating without a business permit, officials with the Santa Ana Police Department confirmed. . . . Video of the raid was taken by the regular surveillance cameras the shop had in place, as well as a hidden one set up in anticipation of a police visit.”
The Aspen Times: “These are interesting and challenging times for Jordan Lewis, CEO of Silverpeak Apothecary, which sells both recreational and medical marijuana in Aspen. Lewis will appear before Pitkin County commissioners . . . in a work session focused on the marijuana smells that some neighbors say are wafting from High Valley Farms, the midvalley pot farm that Lewis owns and operates. . . . Neighbors are upset about the smell, and commissioners are listening. . . . The license is up for renewal in September, and commissioners have said they won’t approve it should the stench persist.”
myfoxny.com: “Colorado is full of all-inclusive ranch resorts where guests hike, fish, play horseshoes and roast marshmallows. This one has a new offering – smoking pot. The 170-acre CannaCamp opening July 1 in Durango in southwest Colorado calls itself the nation’s first cannabis-friendly ranch resort. Guests won’t be given marijuana, because that violates state law. Instead, the resort allows guests to bring their own pot and use it while at the resort.”
USA Today: “Emotions appeared to be sky high at the newly formed First Church of Cannabis after the Internal Revenue Service granted it nonprofit status. The designation means donors can deduct gifts to the church on their federal tax returns if they itemize and the church is eligible for a property-tax exemption in Indiana. The organization has raised $10,905 in a gofundme.com solicitation but has not found a home yet. “What a GLORIOUS DAY it is folks,” the founder and grand poohbah, Bill Levin, wrote May 26 in a Facebook post announcing the church’s IRS approval as 501 (c) (3) charitable organization.
Vice News: “When Andre Maestas decided he wanted to sit down in the street — the sort of random, possibly dangerous thing college students do sometimes — he didn’t think it would lead to his current legal conflagration. He says he was taking a cigarette break from a movie night with a friend on Arizona State University’s main campus in Tempe when his troubles first started. ‘I was in the process of standing back up to go back into the dorm to finish watching the movie we were watching,’ he said about the night in March 2014, ‘and as I was getting back up, that’s when the cop’s lights went on and he came out and started yelling at me’. . . . Mark Johnson, an Arizona State University spokesperson, said the university’s policies are rooted in the same rules. ‘Marijuana on campus is prohibited by state law and by federal laws, including several that specifically apply to institutions of higher learning,’ Johnson said.
“
ABC15.com: “The Arizona Supreme Court recently agreed to review an appeals court decision that decided drivers who have medical marijuana cards can be prosecuted for driving under the influence if they’re found to have marijuana in their system. In two cases, defendants who had medical marijuana cards argued they should be able to use their medical marijuana cards as defense like other prescription drugs are used. But, the District One appeals court disagreed. The court ruled the medical marijuana law doesn’t provide immunity for patients because it’s not prescribed by a doctor, it’s recommended.”
Arizona Republic: “Second marijuana initiative filed . . . The Campaign to Legalize and Regulate Marijuana filed paperwork last week for a competing effort to legalize marijuana, potentially jeopardizing any effort to legalize the drug in 2016. Like the first initiative, the group seeks to let adults carry up to an ounce of marijuana and proposes a 15 percent tax to help fund public education. However, those who carry more than 8 ounces of marijuana could be slapped with a misdemeanor, as opposed to a felony, as the first initiative proposes.”
ABC15.com: “Go on Craigslist and search for marijuana, and you’ll likely come across quite a few posts advertising for ‘patient-to-patient’ exchanges or delivery of the drug. The ads will ask for other medical marijuana patients only and, often, they’ll ask for a ‘donation’ fee. . . . calling the money exchanged a donation, doesn’t help either. ‘That donation, 100 percent of the time that I’ve had interaction with that
See also “Are Arizona Cannabis Clubs Legal Under Arizona’s Medical Marijuana Laws?“
Phoenix New Times: “A popular medical-marijuana club that hosted regular ‘Farmer’s Markets’ was raided by a Glendale SWAT team on Wednesday, resulting in nine arrests at five different locations. . . . The 7Ten Club advertises with a slick website and frequently updated Facebook page, billing itself as “Arizona’s Premier Medical Marijuana Club.”
Phoenix New Times: “A law-enforcement task force in Yavapai County cut a $50,000 check from RICO funds to a substance-abuse group dedicated to fighting marijuana legalization in Arizona, New Times has learned. The deal between the Yavapai County-based Partners Against Narcotics Trafficking (PANT) task force and MATFORCE was made soon after the Marijuana Policy Project announced it would launch a 2016 legalization campaign in Arizona — and more public funding against legalization could be on the way. Last week, Arizona Attorney General Mark Brnovich issued an opinion, based on a question by Yavapai County Attorney Sheila Polk, that public resources could continue to “educate” the public about the alleged evils of marijuana legalization.”
Riddell Williams: “Given the disconnect between federal law and that of an increasing number of states, marijuana-related businesses and their landlords, vendors, and lenders are confronted with dicey legal issues. The availability of bankruptcy relief is one of the latest. A bankruptcy court was recently asked to decide whether it could (or should) enter an involuntary order of relief against a medical marijuana dispensary management entity, even though the debtor-entity’s business activities are illegal under federal law. In re Medpoint Management, LLC, 528 B.R. 178, 182 (Bankr. D. Az.). The court answered in the negative, consistent with earlier cases barring bankruptcy relief for debtors engaged in the marijuana business or in leasing to marijuana businesses. . . . Under Arenas, individual debtors engaged in the marijuana business should be aware that the bankruptcy discharge is probably not available to them. Debtors who simply lease space to marijuana businesses can expect to be barred from obtaining relief under the Bankruptcy Code under Rent-Rite. Under Medpoint, anyone considering extending loans or trade credit to marijuana businesses should proceed with the utmost caution and cannot count on seeking a remedy in bankruptcy court if a marijuana business fails to pay.
The Foothills Focus: “The Zen Dispensary, which provides medical marijuana, is now open in New River. . . . [It is] located at 46639 N. Black Canyon Highway, in the Riverside Plaza. ” See Zen’s website.
Constitutional Daily: “Comments from a GOP presidential contender and a federal judge have put the issue of states legalizing marijuana back on the constitutional front burner. As many people know, four states and the District of Columbia have passed laws to make recreational pot use legal under certain circumstances. And 23 states and the federal district have legalized marijuana for medical use. . . . The conflict between state laws that allow limited marijuana use and the federal law that bars it, in theory, falls somewhere in the domain of the Constitution’s Supremacy Clause.”
USA Today: “The smell of marijuana hung heavy over the city this weekend as partiers celebrated the unofficial “420” pot holiday. April 20 has long been an important date within the marijuana community, and Denver for several years has hosted a massive marijuana festival to mark the day. This year was no different — except that pot smokers were joined in the city by investment bankers, lawyers and angel investors looking to cash in on the newly legal and fast-growing industry.”
On April 10, 2015, Zoned Properties, Inc., filed a lawsuit against Duke Rodriguez, Ultra Health, LLC, and Cumbre Investment, LLC. These parties apparently like to litigate. Since 2011 Duke has been a litigant in seven lawsuits filed in Maricopa County Superior Court. This is the fifth time since March 5, 2014, that Zoned Properties, Inc., has been a party to a lawsuit filed in Maricopa County Superior Court.
Cumbre Investment, LLC, owned by Duke Rodriguez, is a major stockholder (12.18%) of Zoned Properties. The Complaint contains a fraud count and the following allegations (paragraph numbers correspond to the paragraph numbers in the Complaint):
9. This lawsuit concerns Defendants’ collective failure to deliver to Zoned Properties a 1,536 square foot modular building (the “Building”) that was to be built and permanently installed on vacant land located at 988 S. 182nd Place, Gilbert, Arizona 85296 (the “Property”) for use as a licensed medical marijuana dispensary.
15. In or around January 2014, Rodriguez verbally represented to Zoned Properties, individually and on behalf of Ultra Health and Cumbre, that if Zoned Properties purchased the Property, Rodriguez, individually and on behalf of Ultra Health and Cumbre, would ensure that the Building would be sold to Zoned Properties, that the Building would be built and installed on the Property, and that the requisite authorizations to operate the Building as a licensed medical marijuana dispensary had been obtained.
21. . . . Ultra Health purportedly sold the Building to Zoned Properties for $675,000 – the same Building that cost $135,566.50.
24. In exchange for the consulting fee, Ultra Health agreed to “ensure the dispensary received its authorization to operate prior to August 6, 2014 pursuant to the terms and guidelines under the Arizona Medical Marijuana Act for the Gilbert E CHAA (the ‘Project’).”
27. From February 2014 until November 2014, Rodriguez, in his individual capacity and on behalf of Ultra Health and Cumbre, repeatedly made verbal representations to Bryan McLaren, Chief Executive Officer of Zoned Properties (“McLaren”), that the Building was being constructed, that the installation of the Building was imminent, and that Rodriguez already had obtained the requisite authorizations to operate the Building as a licensed medical marijuana dispensary.
28. In an article published by The Arizona Republic on June 20, 2014, Rodriguez is quoted as saying that “his company” had invested more than $1 million into developing the anticipated dispensary in Gilbert, and that the Building was “nearly complete and could be opened before the end of the year.”
31. . . . Pac-Van never constructed the Building and Cumbre never took ownership of the Building.
32. Since Cumbre never took ownership of the Building, it had no ownership rights in the Building
34. . . . Ultra Health did not own the Building, or have any ownership interest in the Building, at the time that it purportedly sold the Building to Zoned Properties
35. The Building still has not been constructed and the Property remains vacant.
36. In sum, Rodriguez orchestrated a series of straw transactions that culminated with the purported sale to Zoned Properties of a Building that neither Cumbre nor Ultra Health has ever owned and that has never existed, for a grossly inflated price.
Duke Rodriguez & Cumbre Investment, LLC, Ask Gilbert for Special Use Permit
Zoned Properties’ Complaint contains a fraud count against Duke Rodriguez. The text below might help Zoned Properties prove its case.
On June 4, 2014, Duke Rodriguez and Jeffrey Kaufman, as attorney for Zoned Properties, Inc., spoke to the Gilbert, Arizona, Planning Commission in an attempt to convince the Planning Commission not to revoke a conditional use permit issued by the Planning Commission to Ultra Health, LLC, to operate a medical marijuana dispensary at the Property. The Minutes of the Meeting contain the following statements (references are to the speaker and the page number of the Minutes where the statement is located):
the Town was concerned whether the applicant supplied a valid dispensary registration certificate as required by code and the conditions of approval of the Use Permit. . . . Ms. Lorbeer said that she had handed out a response that staff received from the state showing that the certificate supplied by the applicant, Duke Rodriguez, to town staff on April 10, 2014 is not recognized by the state as valid Catherine Lorbeer, Town of Gilbert Zoning Administrator, Minutes page 21.
Mr. Kaufman stated that he represents Zone Properties which purchased the piece of property at issue . . . . Zone Properties entered into a partnership agreement with Ultra Health which is Duke Rodriguez’s company to participate in this venture and Mr. Rodriguez’s company has a contract with East Valley Patient Wellness Group. . . . Mr. Rodriguez’s company has a contract with East Valley Patient Wellness Group. Jeffrey Kaufman, Minutes page 22.
he was the original applicant. . . . the facility is being built and $1 million has been invested. Duke Rodriguez, Minutes, page 23.
If you look in the original application for UP13-07, it was the applicant as being Duke Rodriguez and the company being Cumbree Investments. It also says that the applicant has the dispensary registration certificate for CHAA 77 in east Gilbert. . . . In the application, it says that Duke Rodriguez is the applicant and it also says that the applicant has the dispensary registration certificate for CHAA 77. Dane Nielsen, Minutes, page 23.
The town granted UP13-07 on the belief that the applicants were the holder of the registration certificate which was not true as provided by Arizona Department of Health Services. Arizona Department of Health Services also confirmed that the applicant provided a copy of a dispensary registration certificate that had a DBA that mentioned one of their entities, Ultra Health, but the Arizona Department of Health Services has returned that and marked it void. Dane Nielsen, Minutes, page 23.
In March 2013 they met with a couple of agents with Stone Pass Realty. They referred the Sanchez’s to Duke Rodriguez to help them find a suitable location in Gilbert. When he found the location in question unbeknownst to the Sanchez’s he placed it in his own LLC. . . . Mr. Sanchez stated again that no contract was ever signed with any of them. David Sanchez, Minutes, page 24.
Patricia Haugland, Gilbert Arizona, came forward. Ms. Haugland said that she was the owner of Stone Pass Real Estate and Dave and Kathy Sanchez did come to her office and asked if her company would be able to assist in locating a piece of property in the Town of Gilbert for the CHAA that they had the license for. At that time she and Duke Rodriguez had worked for the firm approximately 30 days and she in turn referred the Sanchez’s to Mr. Rodriguez to represent them solely as a real estate agent. What then occurred was that Mr. Rodriguez met with Dave and Kathy Sanchez, got information about their business and about the medical marijuana industry and then went and locked up the real estate that was available in the town knowing that there was no other real estate in town for the Sanchez’s to get approved by the city. After that occurred and Ms. Haugland found out all the information about what she believed to be fraudulent activity on the part of an agent that worked for her firm she immediately terminated Mr. Rodriguez’s license. Ms. Haugland said that she wanted everyone to understand what her position was in terms of how she saw it unfold as an owner and broker of the company and watching his activities as it is at a minimum unethical. Patricia Haugland, Minutes, page 25.
Cumbree is the development company who agreed to develop the site. Duke Rodriguez, Minutes, page 25.
Commissioner Cavenee asked Mr. Rodriguez if he had an executed contract giving him the right to use this license . . . . Commissioner Cavenee said that was not his question. His question was did he have a contract to use this license. Mr. Rodriguez said that he does have a contract.Commissioner Cavenee asked why he did not present that contract, wouldn’t that have been crucial. . . . Commissioner Cavenee said that it seems to him that the crux of the matter is who has the right to utilize this licenseand represent the Use Permit, and proof of that relationship would have been crucial. That seems obvious. Commissioner Cavenee, Minutes, page 26.
Mr. Rodriguez said that this was not the only license that they have done like this. They have done this in other communities. This is how it works in Clifton; this is how it works in Safford. Duke Rodriguez, Minutes, page 26. Author’s Comment: Neither Duke nor any of his affiliated entities got a dispensary in Clifton or Safford, but his company did enter into a lease for real property with the City of Clifton that provided that the tenant would operate a medical marijuana dispensary in the premises.
When he was then asked to supply the proof to staff because it is a condition of the approval and a requirement of the code, he provided one which is not valid. Ms. Lorbeer, Minutes, page 28. See Dispensary Certificate.
See the relevant documents attached to the Minutes:
To learn more about the litigious Zoned Properties read:
Take the following ingredients, stir the pot and you have a recipe for a big-time lawsuit:
The lawsuit filed in Maricopa County Superior Court on March 26, 2015, is CA2 Capital, LLC; Alan B. Abrams; Broken Arrow Herbal Center, Inc.; & CJK, Inc.; vs. Duke Rodriguez, a/k/a Rueben Duke Montenegro Rodriguez; Stormwind Group, LLC; Cumbre Investment, LLC; CVUH, LLC; & Sold By Group, LLC. The litigation is a fight over money and control of two Arizona medical marijuana dispensaries and Ultra Health, LLC. Alan Abrams seeks court approval of his attempt to remove Duke Rodriguez as a manager of Ultra Health and a director and officer of Broken Arrow and CJK.
This is the sixth seventh (Duke was sued again after this case was filed) time since 2011 that Duke Rodriguez, Arizona’s would-be medical marijuana czar, has been a party in a Maricopa County Superior Court lawsuit. The lawsuits are CV2011-095146, CV2013-055265, CV2014-003047, CV2014-005642, CV2014-007302, CV2015-003778 and CV2015-004225. To learn about the seventh Duke Rodriguez lawsuit read “Zoned Properties, Inc., Sues Duke Rodriguez for Fraud.”
Summary of the Complaint
For those of you who don’t have the time to read the juicy allegations in the Complaint that are quoted below, here’s a short summary of the plaintiffs’ allegations:
Here are the court documents filed in the case as of April 1, 2015:
Plaintiffs’ Documents
Defendants’ Documents
Public Company Zoned Properties, Inc.
Alan Abrams, Christopher Carra and Cumbre Investments, LLC, (owned by Duke Rodriguez) are all shareholders of Zoned Properties, Inc., a publicly traded corporation (symbol ZDPYD) that claims to “focus on properties in the medical marijuana industry.” See page 8 of ZPI’s April 15, 2014, Company Information & Disclosure Statement. In 2014, Zoned Properties, Inc., was involved in three property purchase transactions with Ultra Health, LLC according to Note 3 of its 2014 annual report issued on March 31, 2015. To learn more about Zoned Properties, Inc., read “Zoned Properties, Inc. Public Disclosures.”
Zoned Properties, Inc., had a market value of $926,315,200 on April 1, 2015, despite a 2014, year end financial statement that disclosed:
Zoned Properties, Inc.’s Total Cash Flow From Operating Activities for the years 2011 – 2014 was -$1,184,000. Its total revenue for the same four year period was $439,887.
Adversaries Alan Abrams and Duke Rodriguez Acquire Control of Two Arizona Medical Marijuana Dispensaries
Broken Arrow Herbal Center, Inc. and CJK, Inc. are Arizona non-profit corporations that have licenses to operate Arizona medical marijuana dispensaries. Alan Abrams and Duke Rodriguez gained control of these two corporations in 2014. AZDHS regulation R9-17-306.A states: “A dispensary may not transfer or assign the dispensary registration certificate.” Does change of control constitute a transfer of the dispensary license?
Duke Rodriguez claims that Alan Abrams was a founding stockholder of Zoned Properties, Inc. See Exhibit 1 – Declaration of Duke Rodriguez. As of March 31, 2015, Zoned Properties’ major stockholders were Alan Abrams (19.08%), Christopher Carra (11.06%) and Cumbre Investment, LLC (12.18%), which is owned by Duke. What is the relationship, if any, between Zoned Properties, Inc., and the two dispensaries now controlled by major stockholders of Zoned Properties, Inc.?
The Players
Here’s a score card to help keep track of the players in this lawsuit:
Plaintiff Entities
Defendant Entities
Allegations Stated in the Complaint
Here are some of the more interesting allegations made in the 45 page Complaint (paragraph numbers are the paragraph numbers in the Complaint):
1. Plaintiff CA2 Capital, LLC . . . (“CA2”) . . . has provided and . . . nearly $12,000,000.00 . . . in financing for an entity known as Ultra Health, LLC, . . . (“Ultra Health”).
5. Defendant Duke Rodriguez . . .
[is] the former Manager of Ultra Health, who has been removed as Manager of Ultra Health and is succeeded in that role by the current Manager of Ultra Health, plaintiff Alan B. Abrams.14. Plaintiffs have invested nearly $12,000,000.00 . . . in Ultra Health or on its behalf, by directly financing and arranging for financing which has occurred in that amount to date, essentially all of the funding by, for and behalf of that entity.
35. On information and belief, Rodriquez did not have substantial personal assets in the Summer of 2013.
39. In the Summer of 2013, Rodriguez caused to be produced and distributed a written investment prospectus which he used to solicit investment in Ultra Health (the “Ultra Health Prospectus“), entitled “Financial and Market Analysis & Recommendations on Entering the Arizona Medical Marijuana Market”.
41. The Ultra Health Prospectus contained numerous false and misleading statements.
42. Ultra Health, LLC (UH) was awarded three dispensary certificates: Duncan/Morenci (No. 83), Graham County (no. 84), and Gilbert E (No. 77). With these certificates, UH has the right to acquire, possess, cultivate, manufacture, deliver, transfer, supply, sell, and dispense medical marijuana to qualifying patients and designated caregivers.
44. Ultra Health was, in fact, “awarded” zero dispensary registration certificates.
Author’s Comment: This allegation states a fact. See “Arizona Dept. of Health Services Confirms Ultra Health, LLC Lacks a License for a Medical Marijuana Dispensary.” See also the letter from the Arizona Department of Health Services, submitted to the judge on March 14, 2014, that contains the statement “AZDHS can confirm that it does not recognize Ultra Health, LLC as a holder of this or any other dispensary registration certificate.”
47. The Ultra Health Prospectus also represented . . . that Ultra Health “has made a capital call of $300,000 to its partners to be used as start-up capital.” Ultra Health Prospectus, p. 23.
49. The statement which Rodriguez caused to be made in the Ultra Health Prospectus that a $300,000 capital call has been “made” on Ultra Health’s “partners” was false, on information and belief.
51. Rodriguez provided the Ultra Health Prospectus to Abrams and Christopher Carra as part of an investment presentation he made to them, and which he referenced in numerous related discussions in which he repeatedly but falsely represented to Abrams and Carra that Ultra Health “was awarded three dispensary certificates“.
52. As a result of the false representations Rodriguez made in the Ultra Health Prospectus, and his identical, false oral representations, Rodriguez successfully convinced Abrams and Carra became investors in Ultra Health through an entity named MACCAM, LLC, an Arizona a limited liability company (“MACCAM”).
53. MACCAM later transferred its investment in Ultra Health to CA2 with the knowledge and consent of Ultra Health.
54. Abrams made substantial payments and incurred substantial out of pocket costs in making the initial investments encouraged by Rodriguez, which roughly total around one-half of Abrams’ total investment of nearly $12,000,000.00 . . . .
57. He later learned that Ultra Health in fact had not been awarded three dispensary registration certificates, but instead had been awarded zero dispensary registration certificates.
60. Rodriguez made reassuring but false representations to Abrams at that time that Ultra Health could still obtain those three dispensary registration certificates through litigation with the non-profit companies which had actually been awarded the three certificates.
Author’s Comment: This is a troubling allegation. See “Zoned Properties, Inc. & Duke Rodriguez Lawsuits.” This article starts “Holistic Patient Wellness Group, LLC, East Valley Patient Wellness Group, LLC, and Natural Remedy Patient Center, LLC (all clients of mine) hold Dispensary Registration Certificates issued by the Arizona Department of Health Services. These companies were involved in lawsuits with Duke Rodriguez, Zoned Properties, Inc. (aka ZDPYD), Ultra Health, LLC, and Cumbre Investment, LLC.”
67. Abrams’ funds were indeed used to pay for litigation with the control persons of the non-profits which held the three dispensary registration certificates which Rodriguez had represented had been “awarded” to Ultra Health, funded the acquisition of control and management rights for two additional non-profit companies awarded dispensary registration certificates, and funded the acquisition of a large medical marijuana cultivation facility in Chino Valley, Arizona and related real estate and water rights.
68. The aggregate investment of CA2 in Ultra Health today is nearly $12,000,000.00 . . . substantially all of which consists of funds invested by Abrams in or for Ultra Health through MACCAM and CA2. A true and correct compilation of documents summarizing much of the plaintiffs’ monies invested as alleged herein is attached hereto as Exhibit 4.
69. Rodriguez represented to Abrams that he (Rodriguez) had invested $1,000,000.00 of his own money in Ultra Health which, on information and belief, was untrue.
72.g. Rodriguez has placed himself in a position of substantial ownership of Ultra Health’s cultivation facility in Chino Valley and has not transferred ownership of that property and facility to Ultra Health
72.l. [Rodriguez] has not caused the preparation of audits for either of the two nonprofit dispensary companies managed by Ultra Health, nor has he properly accounted for financial transactions between Ultra Health and those entities
73. Rodriguez’s conduct alleged herein constitutes acts or omissions in breach of the OA [Operating Agreement] and or which constitute fraud, gross negligence, willful misconduct and or breach of fiduciary duty to Ultra Health and or plaintiffs
74. . . . Rodriguez convinced Abrams and CA2 to make substantial payments for and on behalf of Ultra Health to entities controlled by Rodriguez, which entities were supposed to convey their assets into Ultra Health and or for the benefit of CA2 and Abrams, but Rodriguez has failed or refused to cause those transfers to occur.
75. Specifically the following entities have received transfers from Abrams and/or CA2 directly of monies intended to be used to acquire assets for Ultra Health, which were supposed to have been ultimately conveyed to and for the benefit of Ultra Health, but with respect to which, today, substantial monies, and assets purchased with those monies, remain m the possession, custody and control of the entities and not Ultra Health: Cumbre; Stormwind; CVUH; Sold By Group.
Plaintiffs’ Claims for Relief
The plaintiffs’ Complaint asks for the following twelve claims for relief:
1. First Claim for Relief: The court issue a declaratory judgment that: (i) Rodriguez has been removed, effective as of March 26, 2015, as the Manager of Ultra Health, and (ii) Rodriguez is not entitled to any indemnity under the OA on grounds that his wrongful conduct as alleged herein constitutes acts or omissions in breach of the OA, constituted fraud, gross negligence willful misconduct and or breach of fiduciary duty to Ultra Health and or plaintiffs.
2. Second Claim for Relief: The court issue temporary and preliminary injunctive relief that Rodriguez was removed as a manager of Ultra Health.
3. Third Claim for Relief: CA2 and Abrams request for Uniform Fraudulent Transfer Act (“UFTA”) injunctive relief and will file a motion for appointment of a Special Master pursuant to Rule 53(a), Ariz. R. Civ. P. Plaintiffs seek a UFTA injunction on a temporary and preliminary basis against Rodriguez, Stormwind, Cumbre, Sold By Group and CVUH.
4. Fourth Claim for Relief: CA2 seeks damages and specific performance.
5. Fifth Claim for Relief: CA2 seeks damages for breach of fiduciary duty.
6. Sixth Claim for Relief: CA2 and Abrams seek damages for violations of the Arizona Consumer Fraud Act.
7. Seventh Claim for Relief: CA2 and Abrams seek any and all applicable restitutionary remedies from Rodriguez, Stormwind, Cumbre, Sold By Group and CVUH with respect to any monies or assets, if any, not otherwise covered by the investment contract, the OA, including without limitation disgorgement.
8. Eighth Claim for Relief: Broken Arrow seeks two declaratory judgments against Rodriguez, first for his removal from the board of directors and second for a determination that he is not entitled to indemnification from the corporation.
9. Ninth Claim for Relief: Plaintiff Broken Arrow seeks temporary and preliminary injunctive relief that Rodriguez was removed as an officer and director.
10. Tenth Claim for Relief: CJK seeks two declaratory judgments against Rodriguez, first for his removal from the board of directors and second for a determination that he is not entitled to indemnification from the corporation.
11. Eleventh Claim for Relief: CJK seeks temporary and preliminary injunctive relief that Rodriguez was removed as an officer and director.
12. Twelfth Claim for Relief: CA2 and Abrams seek punitive damages.
Defendants’ Response to the Complaint
The defendants filed an Opposition to Application for Temporary Restraining Order in which they generally deny all of the allegations made in the Complaint. A hearing was held on the plaintiffs’ application for a temporary restraining order and the court denied the application. The following are interesting statements in the Opposition to Application for Temporary Restraining Order (paragraph numbers are from the Opposition):
II. Having passed through the difficult start-up period, CA2 Capital and Mr. Abrams are attempting a coup that would oust Mr. Rodriguez from the company he founded to take control over the operations.
II.B. Messrs. Abrams and Carra arc founding shareholders of an entity known as Zoned Properties, Inc. . . . Upon information and belief virtually all of the properties Zoned Properties holds are properties operated by Ultra Health, with one critical exception – the Chino Valley Property. The Chino Valley Property would be a great additional asset for Zoned Properties, Inc. to acquire and then lease-back to Ultra Health. Unfortunately, however, Ultra Health retains ownership and control over the Chino Valley Property through its wholly owned subsidiary CVUH, LLC and it is not in Ultra Health’s best interest to sell the property to Zoned Properties under an exorbitant lease-back scenario. The only group this would benefit is the Zoned Properties, Inc. shareholders – Abrams and Carra aka CA2 Capital, LLC. [Author’s Comment: Duke Rodriguez’ company Cumbre Investments, LLC, owns 12.18% of Zoned Properties.]
II.B. [Mr. Carra] has experience selling and promoting penny stocks, such as Zoned Properties, Inc. (OTC: ZDPY). In fact, Mr. Carra entered into a Letter of Consent with FINRA and paid a fine arising from FINRA’s allegations that he used multiple names or “handles” on internet message boards to promote certain stocks. Attached here as Exhibit 2.
Stay tuned. This case should get very interesting.
Reuters: The Marijuana Policy Project “Arizona voters can anticipate being courted by both marijuana advocates and their opponents over the coming year, as the state becomes one of the latest battlegrounds in the debate over the legalization of recreational weed. Supporters submitted a ballot initiative to legalize recreational marijuana in Arizona Friday. If they collect 150,642 signatures of registered voters before June of next year, the question of whether to permit pot to be smoked in private residences will be put to the state’s voters in 2016.