Illegal Cannabis Business Agreement Prevents Plaintiff’s Recovery Under Contract Terms  

Entering into contracts without the proper licensure can expose cannabis growers to significant liability.  As you will read, using a caregiver license to run a grow operation, for example, can literally burn the grower. 

Under the Michigan Medical Marihuana Act (MMMA), the Section 4 immunity provision applies in the civil context. However, it is unknown whether a licensed primary caregiver can use Section 4 immunity to prevent the wrongful conduct rule from voiding a contract involving a grower facility.

In Zachary Varela v Brad Spanski, et al, Case No. 343137, 2019 WL 3046864 (Mich Ct App July 11, 2019), the plaintiff entered into a five-year lease and partnership agreement with investors that agreed to buy a warehouse and finance start-up costs for a cannabis grow facility. In return, the plaintiff agreed to grow and harvest cannabis, and transfer the product to a third party for distribution. 

Importantly, the plaintiff did not maintain a Michigan Medical Marihuana Facilities Licensing Act (MMFLA) grower license. However, he was a registered patient and a qualified caregiver to five patients, which allowed him to maintain up to 72 plants. The plaintiff possessed 70 marijuana plants within the warehouse. 

The partnership agreement also required the plaintiff to pay the defendants $16,700 per month in rent and produce approximately 35 pounds of usable marijuana per month.There were no issues until the warehouse was robbed and the plaintiff’s first harvest was stolen.  Thereafter, the investors sold the property and the new owners refused to let the plaintiff enter the property. The plaintiff was not permitted to retrieve his marijuana plants or his personal belongings.

In response, the plaintiff filed suit against the investors, alleging breach of the lease agreement, breach of the partnership agreement, tortious interference with contracts, conversion, misappropriation of trade secrets, unjust enrichment, and breach of implied covenant of good faith and fair dealing. The plaintiff also demanded injunctive relief(i.e., entrance to the property). In response, the defendant-investors sought to dismiss the plaintiff’s claims pursuant to the wrongful conduct rule.

The trial court agreed, and the plaintiff appealed.  Even though he was not a licensed grower under the MMFLA, the plaintiff argued that he was immune from the wrongful conduct rule because he was MMMA compliant. The Michigan Court of Appeals applied the Section 4 immunity standard, previously used in the criminal context, to the plaintiff’s situation and found for the defendant-investors. The appellate court held that in order to be immune under Section 4 of the MMMA, the following procedural and substantive requirements must be met:

the party:

    (i)  possessed a valid registry identification card,

    (ii)  complied with the requisite volume limitations of §4(a) and §4(b),

    (iii)  stored any marijuana plants in an enclosed, locked facility, and

    (iv)  was engaged in the medical use of marijuana[.]

The analysis is two-pronged. First, the complaining party must successfully plead facts showing compliance with Section 4; and second, the party must demonstrate the wrongful conduct rule is a  “penalty in any manner, or [the denial of] any right or privilege” because of the medical use of marijuana. In other words, the plaintiff needed to first illustrate his operation complied with MMMA, and second, he needed to persuade the appellate court that using the wrongful conduct rule to void a MMMA-based contract was the denial of a right or privilege because of the medical use of cannabis.

Unfortunately, the appellate court did not rule whether the MMMA defeats the wrongful conduct rule because the plaintiff did not comply with Section 4. The plaintiff failed to meet the limitation requirement, and he could not show the cannabis was for medical use, as required under Section 4.

Under the MMMA, as a qualifying patient and caregiver to five qualifying patients, the plaintiff could possess no more than 15 ounces of usable cannabis and 72 plants at any given time. However, the plaintiff’s partnership deal with the defendants required him to produce approximately 35 pounds of usable cannabis per month from his 70 plants. 

Given the projected output of the grow operation, as well as the monthly rental payment, no reasonable inference could be drawn from the pleadings that the plaintiff met the volume limitations of Section 4, or that the  cannabis was purely for medical use. Additionally, the partnership agreement indicated that the plaintiff intended to transfer the cannabis to his business partner for sale and distribution. Such a transfer to a third person, without proper MMFLA licensing, is not permissible. 

Since the plaintiff was not immune from the denial of a right, the wrongful conduct rule applied to bar recovery. Under the wrongful conduct rule, a claim is barred if the plaintiff must rely on his own illegal conduct for recovery. 

The rule bars recovery where: (1) the plaintiff’s conduct is prohibited or almost entirely prohibited under a penal or criminal statute; (2) a sufficient causal nexus exists between the plaintiff’s illegal conduct and the plaintiff’s damages; and (3) the defendant’s culpability is not greater that the plaintiff’s culpability.” 

First, plaintiff’s conduct—manufacturing, possessing, and delivering cannabis—is prohibited under the Public Health Code, MCL 333.7401(d). Next, a causal nexus existed: The genesis of the plaintiff’s claims was the illegal contract with his investors to cultivate, possess, sell, and deliver marijuana.  Absent the existence of that arrangement, the plaintiff would have no injury. 

Finally, the appellate court found both parties equally culpable because they voluntarily entered into the illegal agreement with one party responsible for the financing and the other responsible for the operating of the venture. Because the appellate court found the parties to equally culpable, the wrongful conduct rule continued to bar the plaintiff from recovery.

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