Tenth Circuit Orders Sale of LLC Interest in Marijuana Business By Barch

We have frequently discussed the use of charging orders to enforce judgments against a creditor/member’s interest in an LLC or partnership. But what if the charging order is based on a judgment arising from an illegal agreement, such as one related to the business of marijuana? The US Tenth Circuit Court of Appeals gave us an answer to that question – sort of – in its opinion in Bartch v. Bartch, 2024 WL 3560748 (10th Cir., July 29, 2024).

Josh and Mackie Barch wanted to create a new business called Doctor’s Orders Maryland (“DOMD”) that would be in the marijuana business. But, since Josh had a false drug possession record in Colorado that would have ruined his Maryland license application, Josh temporarily relinquished his interest in DOMD with the understanding that he could later confirm his interest. Mackie agreed with this. But when the time came for Josh to re-enter DOMD, Mackie stopped Josh from doing so. After that, DOMD was renamed Culta LLC and did the marijuana business without Josh.

Josh then sued Mackie, and Mackie’s company (Trellis Holdings Maryland, Inc.) which had a 30% minority interest in Culta. A lawsuit ensued, and Josh won a $6.4 million judgment in the US District Court for the District of Colorado for breach of contract against Mackie and Trellis. Mackie and Trellis never appealed and never paid this judgment. Most importantly, as we shall see, Mackie and Trellis also did not plead that the agreement between Josh and Mackie was illegal under the federal drug laws.

Now it was time for Josh to enforce the sentence. Josh filed a judgment issued by the District of Colorado in the District of Maryland. Josh subsequently obtained a charging order against Trellis’ interest in Culta which required any distribution due to Trellis to be paid to Josh.

Shortly thereafter, the US District Court for the District of Colorado ordered Mackie to sell a 30% interest in Trellis to Culta and give the proceeds of the sale to Josh. Mackie and Trellis appealed the order to the Tenth United States Circuit Court of Appeals, arguing for the first time that Josh lacked standing to prosecute the marijuana business because of the Act Controlled Substances (“CSA”). Mackie and Trellis also argued that the US District Court’s order violated a Colorado statute that barred a judgment creditor’s remedy such as Josh’s to an injunction against Mackie and Trellis’ interests in Culta.

Meanwhile, although they had appealed, Mackie and Trellis also urged the United States District Court to set aside the judgment because, they argued, it upheld an impermissible agreement. is a law under the CSA. The US District Court denied the request, and Mackie and Trellis also appealed to the Tenth Circuit.

All of this resulted in a related Tenth Circuit opinion.

The Tenth Circuit denied Mackie and Trellis’ appeals to set aside the judgment for various technical reasons unrelated to our discussion, so we will overrule those. That brings us to the enforcement of the judgment that is of interest here, which is the District of Colorado’s order that Mackie terminate Trellis’ interest in Culta and pay that amount to Josh.

When a US District Court enforces a judgment that, as here, arises in different jurisdictions, the court will apply the judgment enforcement laws of the state in which the district is located. That means Colorado law on the matter.

Colorado law has two competing statutes, at least according to the Tenth Circuit. First, the Colorado LLC Act provided for a charging order solution. Second, under Colorado Rule of Civil Procedure 69 (g), the court may order the debtor to use the debtor’s property to satisfy the judgment.

Mackie and Trellis argued that an injunction is an “exclusive” remedy that limits the application of Rule 69(g). The problem with that argument, the Tenth Circuit noted, is that the Colorado LLC Act was not written — like many other state laws — to make a liquidation order the exclusive remedy. Therefore, in Colorado at least, the creditor can order that the creditor’s interest in the LLC be sold to satisfy the judgment.

The next argument was that the order that Mackie sell Trellis’ interest to Culta, and give the proceeds to Josh, violated public policy because it enforced a contract that was illegal because marijuana is a controlled substance under federal law. The Tenth Circuit held that the federal controlled substance statute did not apply in this case, as the District of Colorado only ordered Mackie to sell his interest in Trellis to satisfy Josh’s judgment, and not to farm or distribute cannabis.

However, because marijuana is an emotional issue, the Tenth Circuit ultimately granted the issue and remanded the case to the District of Colorado to advance the record regarding the Rule 69(g) order regarding and the marijuana business.

Circuit Judge Baldock argued that Culta was clearly engaged in an illegal activity under federal law, so a federal court should not enforce any contract related to the company’s business. marijuana.

COMPLAINT

The important lesson in this case is that one should not assume that a charging order will be the exclusive remedy available to a creditor against a creditor/LLC member. In the Uniform Limited Liability Company Act (“ULLCA” or “RULLCA” in its revised form) this is clarified, but in various other organic state LLC and partnership statutes it is not. The instant case provides a good example of this lesson.

It is worth noting that the Tenth Circuit’s opinion clarifies some important issues. One of these issues has to do with conflict of laws, or which country’s law should apply to determine the outcome. For example, Josh obtained a charging order against the Trellis interest in Maryland, but a Rule 69(g) order for that interest in Colorado. The latter state does not mandate charging as the exclusive remedy, but Maryland (which follows the ULLCA) does. Personally, I believe the Tenth Circuit got the right result in applying Colorado law, but it would be interesting to see a much longer discussion of the issue.

Another notable fact is that Culta was a sole shareholder of the LLC (“SMLLC”), at least when one breaks down the interest in Trellis (which Mackie fully owned) with the interest in Mackie. The purpose of imposing a discretionary remedy is to protect non-creditors from being forced to deal with a creditor voluntarily. Where, as here, both debtors (Mackie and Trellis) were the only members of Culta, or Tellis’s interest would fall to Mackie, there are no non-debtor members in this case whose interests are eligible for the order fee only. The Tenth Circuit also makes this point clear.

The main issue – which I have mentioned in many previous articles – is that the charging only option is like Swiss cheese in that it has many holes. There are many proven ways to get around the unique charging process, which in most cases can’t just be a lie.

Just ask Mackie about that.