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I. INTRODUCTION
Lurking just below the surface of every recreational cannabis investment is the justifiable fear that the federal government will unwind the deal, thereby leaving a vacuum of uncertainty for investors and distributors alike. It is the doomsday scenario that the industry has been planning for since Colorado and Washington first legalized recreational use and distribution of cannabis in 2012.
As the first wave of recreational cannabis-related cases wind their way through courts across the county, this doomsday scenario has now played out through various legal arguments. The most recent iteration of this scenario is cases involving a legal rule called the illegal contract defense. The illegal contract defense is as old as contract law itself and states that a contract requiring an illegal purpose is unenforceable. 1 The illegal act must come from the contract’s performance itself and not some incidental duty or obligation under the contract.
Because the manufacture and distribution of cannabis is illegal at the federal level under the Controlled Substances Act, the argument is that contracts requiring the manufacture or distribution of cannabis are illegal and therefore unenforceable under the illegal contract defense. This argument has been advanced in several jurisdictions, both federal and state, by various parties looking to avoid their contractual obligations. The purpose of this article is to give a “state of the law” review of the illegal contract defense regarding recreational cannabis operations and to provide best practices to avoid the doomsday scenario of a court applying the defense to invalidate your otherwise enforceable contract.
II. THE CASE LAW AS IT STANDS NOWS
A. Federal Courts.
The most recent shot in the illegal contract battle was fired in late 2018 in the federal court of Nevada in Bart Street v. ACC Enterprises, LLC. The case involved the alleged breach of a multimillion-dollar loan agreement. The plaintiffs had loaned substantial sums of money to the defendants, who owned and operated a recreational cannabis cultivation plant in Pahrump, Nevada.2 When the defendants came up short on repayment, they sought to avoid repaying the loans by raising the illegal contract defense in federal court to void the entire agreement.3
1 See Bart Street v. ACC Enterprises, LLC, 2018 WL 4682318 (D. Nev. Sept. 27, 2018).
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