While many continue to push for the federal legalization of cannabis, one cannabis company is strategically using its illegality as a shield. The strange case of Thor 942 Fulton St., LLC v Future Transactions Holdings, LLC et. al.1provides another example of the complexity of the cannabis industry, which is left up to each state where it is legalized to regulate.
In this case, a New York-based private equity firm, Thor Equities ("Thor"), filed a lawsuit against cannabis company MedMen Enterprises, Inc. ("MedMen"), in the United States District Court for the Southern District of New York alleging it is owed approximately $950,960.02 in unpaid rent on a Chicago property. Although Thor signaled it would voluntarily withdraw its action to re-file elsewhere, MedMen moved for summary judgment before Thor could get the chance.
In its motion, MedMen argued that Thor was simply forum shopping and that the case should be dismissed with prejudice. Specifically, MedMen asserts that marijuana's illegal status under federal law prevents the landlord from enforcing the lease – shielding it from liability for the rent owed. U.S. District Judge J. Paul Oetken ultimately granted Thor's voluntary dismissal of the case without prejudice.
Two days later, MedMen countered with its own lawsuit2, seeking to prevent Thor from hunting for a new venue. Again, MedMen argued that its lease is unenforceable and should be declared void because cannabis is illegal under federal law.
MedMen doesn't dispute that it hasn't paid rent on its 15-year lease since August 2021. Instead, it argues, "It is unlawful under Federal law to lease any place for the purpose of distributing any controlled substance, including marijuana, as Plaintiff did here."
Thor countered that its lease with MedMen specifically prohibits the cannabis company from using the federal illegality of its business as a valid defense to any claim arising from the lease.
Medmen, which went public on the Canadian Securities Exchange in 2018, has struggled financially for several years and sought to restructure this summer. While it grew rapidly in its early years, so did its debt. Layoffs, shedding of assets, canceled acquisitions and refinanced debt followed. In its last few public filings, it has raised concerns about paying its bills and remaining a viable company.
Marijuana companies face unique challenges operating legally on one level and illegally on another
The MedMen case is another example of the complexity cannabis companies face while operating on two levels – legal in some states and illegal at the federal level. This multi-billion dollar industry — global sales are expected to be nearly $150 billion by 2031 — must not only navigate a patchwork of laws in different states, but also traverse the difficulties its dual status brings. Some examples:
- Companies that get approved and licensed at the state level often face difficulty obtaining financing because banks decline to do business with them for risk of running afoul of federal law.
- Struggling cannabis companies can't file for bankruptcy because they are not recognized as legal entities under federal law.
- Insurance companies may hesitate to insure cannabis companies operating legally in some states because their business is illegal at the federal level.
- Federal tax law prevents cannabis companies from reducing their taxable income by business-expense deductions, creating larger income tax liabilities.
The MedMen lawsuit is one that all in the industry should pay close attention to. If MedMen is successful in avoiding payment of all or part of the nearly $1 million owed in rent, it could significantly chill the willingness of commercial real estate landlords to rent to cannabis companies.
Footnotes
1. Thor 942 Fulton St., LLC v Future Transactions Holdings, LLC et. al., 2022 US Dist LEXIS 189256 [SDNY Oct. 17, 2022, No. 22-CV-5880 (JPO)].
2. MM Enterprises USA, LLC and MedMen Enterprises Inc. v Thor 942 Fulton Street, LLC, [SDNY No.22-CV-08905 (JPO)].
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