In August of 2010, Michelle Hammer and Mark Haile entered into a loan agreement with Today’s Health Care II (THC). Hammer and Haile each loaned $250,000 to THC so THC could operate a medical marijuana dispensary in Colorado. The loan was at 12% interest and it required THC make monthly payments on the 12th of each month. If THC failed to pay within five days of each scheduled payment, it would be liable for repayment of the entire loan at a default interest rate of 21%, plus attorneys’ fees.
On March 12, 2011, THC failed to make a required monthly loan payment and Hammer and Haile sued THC in Arizona State court to enforce the terms of the loan contract. Both parties moved for summary judgment, which led the court to consider whether the contract was void and unenforceable because it involved cannabis, which remains illegal on the federal level.
Judge Michael R. McVey of the Superior Court of Arizona in Maricopa County found that the contract was not enforceable and issued a Judgment of Dismissal. His analysis first examined the legality of the dispensary. Judge McVey did not address whether the dispensary complied with Colorado’s medical marijuana laws, instead turning to the U.S. Controlled Substances Act (CSA) which makes it illegal to manufacture, distribute, or dispense marijuana. The CSA also makes it unlawful to knowingly open, lease, rent, use, or maintain property for manufacturing, storing, and distributing marijuana. Judge McVey then discussed Gonzales v. Raich, the U.S. Supreme Court decision that held Congress has authority to prohibit marijuana sales and that marijuana is illegal under federal law, regardless of state law.
After establishing marijuana as illegal under federal law, Judge McVey turned to Arizona state law regarding contract enforceability. Arizona courts have held that an agreement is unenforceable if the acts to be performed are illegal or would violate public policy.
Judge McVey held that the contract was unenforceable and provided the following explanation:
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.
As a result, THC was not required to repay Hammer and Haile for their $500,000 loan.
Judge McVey did not issue a written opinion for this case, so it does not stand as legal precedent in Arizona or in any other state. However, the case illustrates the risk of entering into a contract in the cannabis industry. If a court refuses to enforce a contract due to illegality, then the contract is not worth the paper on which it’s printed. See Cannabis Contracts: Is Arbitration the Key?