HMLL LLC v. MJM Holdings Ltd.
2024 COA 85. No. 22CA0822. Marijuana Enforcement Division—Retail Marijuana Rules—Contracts—Equitable Relief—Unclean Hands Doctrine—Unenforceable as Against Public Policy.
August 8, 2024
HMLL LLC is a Florida-based limited liability company that has three members, all of whom resided in Florida during the time frame relevant to this case. In 2016, HMLL’s members sought to invest in the Colorado marijuana industry, which they couldn’t do legally because of the Colorado Marijuana Enforcement Division’s (MED) residency requirements. HMLL’s members devised a plan to obtain a Colorado-based resident owner to obtain an MED-approved ownership license for a marijuana business. On paper, the resident owner would own and operate the business, but HMLL would fund the business and control its operations. If and when the MED approved HMLL’s members for their own ownership license for a Colorado marijuana business, HMLL would buy the business from the resident owner. HMLL obtained MJM Holdings Limited (MJM) and Mistretta as the first resident owners for HMLL. MJM and Mistretta acquired an existing marijuana business and renamed it Sticky Fingerz (the company). The MED approved this transaction, and the scheme proceeded as planned. By spring 2017, HMLL had provided more than $1 million to MJM and Mistretta to fund the company, with the MED having no record of HMLL’s involvement in the company other than as an “unsecured creditor” with an 18% “no equity” interest. In 2018, HMLL obtained a new resident owner, Wellner, who was a Colorado resident. Wellner agreed to become HMLL’s new resident owner with the understanding that he would transfer the company to HMLL if and when its members qualified and were MED-approved for ownership licenses. HMLL formed a new LLC, ORAM, under the new resident owner structure.
HMLL hired attorney Peyser to oversee the change of ownership application that would effectuate the transfer of a 99% ownership interest in the company from MJM and Mistretta to ORAM. As part of the application process, Peyser disclosed to the MED HMLL’s future plans to acquire ORAM. The MED told Peyser that, before it could approve the application, she would have to remove any ownership language pertaining to HMLL from the financial declarations and amend the application to reflect that HMLL had no future interest, including a security interest, in ORAM. Peyser complied, and the MED approved the amended change in ownership application. Shortly thereafter, the relationship between Wellner and the HMLL members deteriorated, and Wellner was pressured to sign the business over to HMLL, consistent with their agreement. Wellner refused, and following unsuccessful negotiations, HMLL brought various equitable and legal claims against Wellner, ORAM, and MJM (defendants). Wellner asserted numerous counterclaims against HMLL. The court denied relief to all parties because it found that they all violated Colorado’s marijuana business regulatory scheme. Thus, the court left the parties where it found them.
On appeal, HMLL contended that the trial court erred by applying the doctrine of unclean hands to deny it equitable relief, including its claims for unjust enrichment and for specific performance of the agreement to transfer ownership of ORAM to HMLL. In support of its contention, HMLL first argued that it relied on its counsel’s advice, so any improper conduct on its part was mitigated. Here, the evidence supports the trial court’s finding that HMLL proceeded despite counsel’s advice on the risks of their course of action, and an advice of counsel defense is not available in such circumstances.
Second, HMLL argued that it was only an unsecured creditor, so the trial court improperly found that it owned and controlled the company. However, the record supports the trial court’s findings that HMLL controlled the company and acted as the de facto owner; under the relevant MED regulations, HMLL held at least a financial interest in the company and acted more like an indirect beneficial interest owner than an unsecured creditor; and none of HMLL’s members followed the MED’s process before they invested in the company or installed the resident owners in 2016 and 2018. Further, HMLL’s equitable claim relies on the notion that it’s entitled to ownership of the company, which contradicts its contention that it’s merely an unsecured creditor.
Third, HMLL contended that, because it was only an unsecured creditor, it had no duty to disclose its relationship with the company to the MED. It asserted that such duty lied with Wellner and ORAM, the licensees of record, so any failure to disclose can’t be attributed to it or weighed against it in an unclean hands analysis. However, as discussed above, HMLL wasn’t simply an unsecured creditor, and the MED rules at the time required disclosure by both the members of HMLL and the licensee of record.
Fourth, HMLL asserted that the trial court improperly applied unclean hands because it created a substantial injustice by allowing defendants, whom the court found were fellow wrongdoers, to reap a substantial windfall at HMLL’s expense. But as discussed above, the trial court didn’t abuse its discretion by applying the doctrine of unclean hands to bar HMLL’s unjust enrichment claims. Accordingly, the court did not err in denying HMLL relief.
HMLL also argued that the trial court erred by holding that it wasn’t entitled to legal relief on its $350,000 promissory note because the entire agreement between Wellner and HMLL was illegal and against public policy. Enforcement of a promissory note may be precluded when the predicating agreement is void as against public policy. Here, the $350,000 promissory note executed by HMLL was used to transfer the ownership interest from MJM and Mistretta, the first illegal resident owners, to Wellner and ORAM, the second illegal resident owners. The record supports the trial court’s conclusion that HMLL’s entire scheme was illegal and devised to evade the MED’s regulations. Accordingly, the trial court did not err in declining to enforce the promissory note as against public policy.
The judgment was affirmed.