Courthouse News Service:  “Singh Dispensary Solutions dba weGrow Phoenix . . . . [filed a lawsuit in which it claims] ‘Defendants Sunlight Systems, Hydrofarm, BWGS, and R & M Supply Inc., seized upon their substantial market power and the fewness of firms in Arizona to exclusively control the wholesale hydroponics supply market in the state of Arizona, all to the detriment of plaintiff and Arizona consumers’.”

See also “Arizona weGrow Franchise Accuses Rivals of Forming ‘Cartel’ to Sink Phoenix Store.”

East Valley Tribune:  “Prosecutors urged a judge Friday to declare medical marijuana dispensaries and growing facilities as preempted by federal law.  Maricopa County Attorney Bill Montgomery said there’s no question but that marijuana remains illegal under federal law. And he told Judge Michael Gordon that law classifies marijuana as a Schedule 1 drug for which there is no legitimate medical use. What that means, Montgomery argued, is the state is powerless to do anything that ultimately results in the state issuing a license to someone to sell marijuana. If nothing else, he said the requirements of the 2010 voter-approved law for public officials to act put them in the position where they could be prosecuted under federal law for aiding someone else in obtaining the drug.”

See “Judge doesn’t rule following two-hour marijuana hearing” which says “Lawyers for Arizona and the state’s most populous county argued in court Friday that federal drug laws pre-empt Arizona’s voter-approved medical marijuana law.” See also “Arizona Medical-Marijuana Law Debated in Court; Judge Criticizes Wording of 2010 Law” which says the judge in the case said “‘Ultimate irony is that Arizona could have decriminalized pot and said it’s not going to be prosecuted under state law’.”

Arizona Republic:  “The top lawyers for the state and county, strong opponents of Arizona’s medical-marijuana laws, will argue in court today that federal drug laws pre-empt the voter-approved law.  Attorneys arguing on behalf of White Mountain Health Center of Sun City, meanwhile, charge that state law does not require anyone to violate federal laws by issuing permits for medical-marijuana activities since the state has decriminalized those acts. In their lawsuit, they also allege that Maricopa County illegally rejected the center’s registration certificate, which is among the state requirements to become a medical-marijuana dispensary applicant.  At stake is the future of medical marijuana in Arizona.”

East Valley Tribune:  “The American Civil Liberties Union is asking a judge to rebuff efforts by Attorney General Tom Horne to block state licensing of medical marijuana dispensaries.  In legal papers filed Thursday, attorneys for the group want Maricopa County Superior Court Judge Michael Gordon to rule [in the White Mountain Health Center lawsuit] that Arizona is constitutionally entitled to determine what it does and does not want to make a crime. They acknowledged the federal Controlled Substances Act makes possession, sale and transportation of marijuana a felony. But they told Gordon that none of that criminalizes the activities of state and local employees in processing the paperwork for everything from licenses to zoning permits, the reason Horne and Maricopa County Attorney Bill Montgomery contend that part — if not all — of the state law is void.”

AZ Daily Sun:  “The state’s top prosecutor asked a judge Thursday to void a key provision in Arizona’s 2-year-old medical marijuana law.  In legal papers filed in Maricopa County Superior Court, Attorney General Tom Horne argued that voters are legally powerless to authorize anyone to sell marijuana as long as it remains illegal under federal law.  The real goal is to get a ruling declaring the state and federal laws in conflict. Horne said that will then allow him to direct the state Department of Health Services to halt the current process of licensing up to 126 dispensaries to sell the drugs even before the first one has opened its doors.”

The following is the text of a press release issued by Arizona Attorney General Tom Horne on August 23, 2012:

Maricopa County Attorney Bill Montgomery and Arizona Attorney General Tom Horne are each filing separate motions for summary judgment in Superior Court today seeking to resolve conflicting issues raised by the Arizona Medical Marijuana Act (AMMA). Today’s filings are the latest response to a lawsuit filed by White Mountain Health Center against Maricopa County and the Arizona Department of Health Services (DHS) and ask the Court to determine whether the AMMA is preempted by federal law prohibiting the possession, distribution and cultivation of marijuana.

“It is the County’s position that the AMMA is in direct violation of the federal Controlled Substances Act and therefore cannot be implemented without exposing County employees to the risk of federal prosecution,” Montgomery said. “The AMMA also runs afoul of the Supremacy Clause enshrined in the U.S. Constitution by our Founding Fathers, which preempts state law that conflicts with federal law,” he added.

Attorney General Tom Horne stated: “I was recently asked by 13 out of the 15 County Attorneys in Arizona to issue an Opinion on whether the AMMA is pre-empted by federal law. The two most recent cases, from California and Oregon, clearly hold that states may not authorize what federal law prohibits. These rulings stem from Article Six of the U.S. Constitution, which, in case of conflict gives supremacy to federal law. Therefore, state authorization for growing or selling marijuana is prohibited under federal law and we are therefore asking the court to dismiss the Plaintiff’s complaint.”

On June 20, 2012 White Mountain Health Center sued Maricopa County and DHS after the County, on the advice of the County Attorney, declined to issue the necessary zoning permits that would allow the Center to operate a non-profit medical marijuana dispensary and cultivation site in Sun City. The case is being heard by Judge Michael D. Gordon.

Related stories: “AG files court papers to ultimately halt licensing of Arizona medical marijuana dispensaries” and “Tom Horne and Bill Montgomery Make Their Move to Nix Arizona’s Medical Marijuana Law.”

Bill Buckmaster interviewed Arizona Attorney General Tom  Horne on August 21, 2012, about his legal opinion that the Arizona Medical Marijuana Act is partially preempted by federal law.  The AG said his office will intervene in a Maricopa County Superior Court case and seek a court ruling that confirms his nonbinding legal opinion.

Arizona Republic:  “Two Arizonans lent a medical-marijuana company in Colorado $500,000, but the company didn’t pay them back.  So, what did they do? They sued, of course.  But instead of forcing the company to pay back the loan, a Maricopa County Superior Court judge told the two Valley business partners they were out of luck as far as he was concerned.”

This story mentions KEYTLaw attorney Richard Keyt, the creator of this website, and says “Keyt wrote that the ruling could mean ‘that people who enter into contracts that relate in any way to Arizona medical marijuana will have to hope the other side to the contract satisfies his/her/its obligations because it may not be possible to sue for breach of contract and get a judgment against the party who defaults’.”  Keyt broke this story with his May 7, 2012, article called “Maricopa County Superior Court Ruling May be Last Nail in the Coffin of the Unborn Arizona Medical Marijuana Dispensary Industry.”

On April 17, 2012, Maricopa County, Arizona, Superior Court Judge Michael R. McVey signed a Judgment of Dismissal that could be the death blow to Arizona’s fledgling medical marijuana dispensary industry.  The case is Michele Rene Hammer v. Today’s Health Care II, a Colorado corporation (“THC”).  Although the judge’s decision has not yet been appealed and may not be appealed, the legal significance of the case cannot be ignored by anybody who is considering becoming involved in a prospective or actual  Arizona medical marijuana dispensary or anybody who is a party to or may become a party to a contract that involves the growing, transporting, storing, infusing, processing, selling or dealing in any way with marijuana in Arizona.

Hammer v. Today’s Health Care II involves a very common situation.  Michele Hammer and Mark Haile each loaned $250,000 to Today’s Health Care II, a Colorado corporation.  Each lender and borrower signed a loan agreement that stated:

“Borrower shall use the loan proceeds for a retail medical marijuana sales and grow center.”

THC defaulted on both loans.  Although the loan proceeds were to be used only in Colorado, a state where medical marijuana is legal, each lender sued in Maricopa County Superior Court to collect the amounts owed under the promissory notes signed by THC.  The two cases (Hammer v. THC and Mark W. Haile v. Todays Health Care II) were consolidated.  The plaintiffs and defendant filed motions for summary judgment.  On April 17, 2012, the judge signed the Judgment of Dismissal in which he ruled that THC is not obligated to repay all or any part of either loan.  Judge McVey stated:

“The explicitly stated purpose of these loan agreements was to finance the sale and distribution of marijuana. This was in clear violation of the laws of the United States. As such, this contract is void and unenforceable. This Court recognizes the harsh result of this ruling.  Although Plaintiffs did not plead any equitable right to recovery such as unjust enrichment, or restitution, this Court considered whether such relief may be available to these Plaintiffs.  Equitable relief is not available when recovery at law is forbidden because the contract is void as against public policy.”

Result:  The borrower can keep the $500,000 and it has no legal obligation to repay the loans.  The borrower does not get to keep all of the money, however, because it will be required to report $500,000 as taxable income on its 2012 federal income tax return.  Forgiveness of a debt causes “discharge of indebtedness income” that must be reported to the IRS and taxed at the taxpayer’s marginal tax rate.

There is an equitable concept in the law called unjust enrichment.  There are many cases where a court has ruled that even though the plaintiff could not prove a legal basis on which the plaintiff should be paid damages, a court of equity looking at all of the facts gave the plaintiff a judgment for money because the actions of the plaintiff caused the defendant to be unjustly enriched and it would not be fair for the defendant to keep the economic benefit bestowed on the defendant.  Judge McVey wrote that he considered ruling in favor of the lenders on the basis of unjust enrichment, but that remedy is also denied when the contract involved is void as against public policy.

Judge McVey based his decision on the fact the purpose of the loan was for a purpose that is illegal under federal law.  He did not examine whether the loans should be enforced because they were legal under state law.  After all, collection of a loan arises from legal obligations and rights created under state law, not federal criminal law.  It seems logical and lawful to me that the judge could have ruled in favor of the plaintiffs had he considered the legality of the loans under state law.

This case does not have the legal precedent of a written opinion from the Arizona Court of Appeals or the Arizona Supreme Court.  Nevertheless Hammer v. Today’s Health Care II stands for a very important principle that everybody who is contemplating becoming involved with the Arizona medical marijuana industry cannot ignore, i.e.:

Unless and until an Arizona appellate court rules that contracts involving Arizona medical marijuana are enforceable under Arizona law (as opposed to unenforceable under federal law), any contract that has a purpose related to Arizona medical marijuana may be unenforceable and not worth the paper it is written on!

What Does the Case Mean to People Considering Becoming Involved in Arizona Medical Marijuana Dispensaries?

Until an Arizona appellate court reverses the result in this case it means that people who enter into contracts that relate in any way to Arizona medical marijuana will have to hope the other side to the contract satisfies his/her/its obligations because it may not be possible to sue for breach of contract and get a judgment against the party who defaults.  This case should cause the following people to think twice or three times before getting involved:

• Landlords who lease to dispensaries.  The lease may not be enforced.  If a dispensary tenant defaults on the rent would a court evict the tenant or give the landlord a money judgment for damages for breach of the lease?

• Investors in dispensaries.  Would the investment be treated the same as a loan with no legal way to force the dispensary to repay the investment or profits?

• Lenders who loan to dispensaries.  This is the same facts as Hammer v. Today’s Health Care II.  Why would any person or entity make a loan to a dispensary when there is a good chance a court would refuse to enforce the loan?

• Medical directors of dispensaries.  What if the dispensary doesn’t pay for the doctor’s services?

• High paid employees or independent contractors.  Are you willing to work and have the dispensary refuse to pay and dare you to sue?

The above list is not complete.  If you are contemplating entering into any type of contract (oral or written) with a prospective or actual Arizona medical marijuana dispensary you are taking a risk that an Arizona court may rule that the contract is unenforceable.

You might think that the ultimate winner as a result of Hammer v. Today’s  Health Care II is the Arizona medical marijuana dispensary.  Perhaps, but I submit that dispensaries are actually the ultimate losers because this case stands for the proposition that it will be very difficult if not impossible for Arizona medical marijuana dispensaries to operate because prudent people and businesses will not want to contract with dispensaries until an Arizona appellate court rules that the contracts are enforceable under Arizona law.

Update:  Richard Keyt and Judge McVey’s ruling are discussed in the following stories:

• ABC News:  “$500,000 Medical Marijuana Loan Up In Smoke” quotes “Richard Keyt, a business attorney in Phoenix who runs a medical marijuana law web site.”

• Phoenix New Times reporter Ray Stern’s article called “Marijuana Dispensary Loan for $500,000 Doesn’t Need to be Paid Back, Judge Rules, Because Pot is Illegal Under Federal Law” in which he gives me credit for breaking this story.

• Arizona Republic story called “Arizona Medical-pot Ruling may Reverberate.”

• Fox News Chicago story called “Contracts with medical marijuana companies unenforceable, Arizona court rules.”