Agricann LLC v. Nat. Remedy Patient Ctr.

• Decision Date: 12 May 2022
• Docket Number: 1 CA-CV 20-0231
• Parties: AGRICANN LLC, Plaintiff/Appellee/Cross-Appellant, v. NATURAL REMEDY PATIENT CENTER LLC, Defendant/Appellant/Cross-Appellee, and DAVID SANCHEZ, Defendant/Appellee.
• Court: Arizona Court of Appeals

AGRICANN LLC, Plaintiff/Appellee/Cross-Appellant, v. NATURAL REMEDY PATIENT CENTER LLC, Defendant/Appellant/Cross-Appellee, and DAVID SANCHEZ, Defendant/Appellee.

No. 1 CA-CV 20-0231

Court of Appeals of Arizona, First Division

May 12, 2022

Not for Publication - Rule 111(c), Rules of the Arizona Supreme Court

Appeal from the Superior Court in Maricopa County No. CV2016-001283 The Honorable James D. Smith, Judge

Mills and Woods Law PLLC, Phoenix By Sean A. Woods Co-Counsel for Plaintiff/Appellee/Cross-Appellant

Ahwatukee Law Office, P.C., Phoenix By David L. Abney Co-Counsel for Plaintiff/Appellee/Cross-Appellant

Osborn Maledon, P.A., Phoenix By Eric M. Fraser, Thomas L. Hudson Hayleigh S. Crawford Co-Counsel for Defendant/Appellant/Cross-Appellee

Greenspoon Marder LLP, Scottsdale By Sharon A. Urias, Stuart Knight Pro Hac Vice Co-Counsel for Defendant/Appellant/Cross-Appellee

Presiding Judge D. Steven Williams delivered the decision of the Court, in which Judge Jennifer B. Campbell and Judge James B. Morse Jr. joined.

MEMORANDUM DECISION

WILLIAMS, JUDGE

¶1 Natural Remedy Patient Center, LLC ("Natural Remedy") appeals portions of the superior court's judgment in favor of Agricann, LLC ("Agricann"). Agricann cross-appeals portions of the same judgment granted in favor of Natural Remedy. For reasons that follow, we affirm the judgment, but vacate the damages award for Agricann and remand for further proceedings consistent with this decision.

FACTUAL AND PROCEDURAL HISTORY

¶2 Natural Remedy, a not-for profit entity, which holds a medical marijuana dispensary certificate issued by the Arizona Department of Health Services, formed a joint venture to grow and sell medical marijuana with Agricann, a for-profit entity, which held the lease to a facility suitable for medical marijuana production (the "Grow Facility").

¶3 At the time of the joint venture, David Sanchez and his wife Kathy Sanchez were the principals of Natural Remedy. Shadi Zaki, though not a principal or agent of Natural Remedy, consulted on their behalf. Agricann's principals were Brig Burton and Imran Kazem.

¶4 In May 2014, the parties entered a two-year dispensary agent contract (the "Management Contract") under which Agricann would cultivate and Natural Remedy would sell medical marijuana. The parties formed Natural Agriculture, LLC^[1] ("Natural Agriculture") to pay the joint venture's expenses, including rent, and to hold the lease rights to the Grow Facility.

¶5 Under the Management Contract, profits were to be shared as follows: "[a]ll distributions of [s]ales [i]ncome shall be paid on a pro-rata basis (i.e.[, ] 80% of all gross sales from both the retail and wholesale operations shall be paid to [Agricann], and 20% shall be retained by [Natural Remedy]." Natural Remedy agreed to pay Agricann its share of the profits within five days of receipt of sales income and was subject to an interest penalty of 1% per day for late payments. It appears, however, that profits were not shared in this manner and that the parties later agreed to share profits equally.

¶6 An ongoing dispute developed over what Natural Remedy owed Agricann and whether either party was complying with its obligations under the contract's terms. Agricann then locked Natural Remedy out of the Grow Facility and contemplated suing Natural Remedy for amounts owed under the Management Contract. Consequently, in October 2015, approximately six months before the expiration of the Management Contract, the parties met to avoid a lawsuit and to find an amicable way to end their business relationship.

¶7 At the meeting, the parties contemplated an agreement that would alter their rights and obligations under the Management Contract and under which Natural Remedy would "buy out" Agricann's lease rights to the Grow Facility and obtain title to the equipment therein. During the meeting, a representative from Agricann, either Burton or Kazem, wrote the following terms on a sheet of a paper:

(Image Omitted)

¶8 According to this document, (hereinafter, the "Breakup Deal") Natural Remedy would sublease the Grow Facility for $20, 000.00 a month for three years, beginning on November 15, 2015, and ending with a $400, 000.00 balloon payment. Although not self-evident from the document's four corners, the parties agree the Breakup Deal would include the transfer of title to equipment from Agricann to Natural Remedy and the transfer of Agricann's lease rights in the Grow Facility to Natural Remedy.

¶9 The Breakup Deal was signed by Burton, as Agricann's representative, and by Sanchez, as Natural Remedy's representative.^[2] Nevertheless, the parties dispute whether the Breakup Deal was a binding agreement.

¶10 Following the meeting, the parties continued negotiations regarding additional terms related to the Breakup Deal, and Burton prepared several additional contract documents, including a personal guarantee, a promissory note, a security agreement, and a purchase and settlement agreement and release (the "Release Agreement") under which Agricann agreed to "settle[] and release[] [Natural Remedy] from its obligations, delinquent or otherwise, arising under the [Management Contract]." Burton then sent several emails to Natural Remedy in which he acknowledged that the Breakup Deal was created, in part, "to resolve the [debt] that [Natural Remedy] owes Agricann," and cautioned that, if the documents were not signed, Agricann would likely move to enforce the debts owed under the Management Contract. Unlike the Breakup Deal, these documents were never signed.

¶11 The parties dispute whether Natural Remedy made payments under the Breakup Deal but agree that Agricann was last paid in January 2016. In February 2016, Agricann sued Natural Remedy alleging, as relevant to this appeal, that Natural Remedy breached the Management Contract by failing to pay Agricann 80% of the gross sales, and that Natural Remedy breached the Breakup Deal by failing to make the required payments. In May or June 2016, Natural Remedy moved out of the Grow Facility. Before their departure, Natural Remedy allegedly found a new tenant to occupy the Grow Facility. At some point, Agricann lost its lease rights, which Agricann attributes to Natural Remedy's nonpayment.

¶12 The matter proceeded to a three-day bench trial. At trial, Burton, the signatory for Agricann, testified that it was his intent that the Breakup Deal would be binding. Kazem testified in support, acknowledging that while the parties anticipated signing a formal document, the parties agreed to the terms set forth in the Breakup Deal. Sanchez, the signatory for Natural Remedy, did not testify. Instead, only Zaki, Natural Remedy's independent contractor, who is neither a party to nor a signatory of the Breakup Deal, testified to the parties' intent. Zaki testified that the Breakup Deal reflected only "discussions towards a potential agreement." Burton also testified that under the Breakup Deal, Agricann gave up its rights under the Management Contract "going forward." He did not, however, testify as to whether the Breakup Deal included the settlement of debts owed by Natural Remedy under the Management Contract.

¶13 Agricann claimed damages of approximately $30 million, including interest, for Natural Remedy's breach of the Management Contract. Agricann also claimed damages of $1.065 million in principal, totaling approximately $15.5 million including interest, for Natural Remedy's breach of the Breakup Deal. A damages expert was not used; rather Burton calculated and testified to Agricann's damages. In its closing brief, Natural Remedy argued Agricann did not prove breach of the Management Contract or related damages and contended that the Breakup Deal was unenforceable.

¶14 The superior court ruled against Agricann on the Management Contract and made the following relevant findings: (1) the parties' course of performance and contemporaneous communications modified the Management Contract such that income was split equally, rather than 80/20; (2) Agricann's claim for a daily interest penalty of 1% for late payments of goods sold was unenforceable because it was a "form of liquidated damages" and functioned as an "impermissible penalty rather than enforceable liquidated damages;" (3) Agricann failed to show that Natural Remedy breached the modified, as opposed to original, Management Contract; and (4) Agricann failed to establish its damages persuasively.

¶15 By contrast, the superior court ruled in favor of Agricann on the Breakup Deal, making the following relevant findings: (1) the Breakup Deal was enforceable; (2) the Breakup Deal was a novation of the Management Contract; (3) Natural Remedy paid $20, 000.00 in November 2015, $20, 000.00 in December 2015, and $15, 000.00 in January 2016; and (4) Natural Remedy breached the Breakup Deal by failing to make payments after January 2016. The court determined that Natural Remedy owed $5, 000.00 for January 2016, the remaining thirty-three contract payments of $20, 000.00, and the $400, 000.00 balloon payment, totaling $1.065 million. The court noted that these were "liquidated amounts," and awarded ten percent statutory pre-judgment interest.

¶16 Lastly, the court denied both parties' requests for fees holding that neither side was the successful party.

¶17 Both parties moved for reconsideration and the court denied the motions. The superior court entered judgment. Natural Remedy timely appealed and Agricann timely cross-appealed. We have jurisdiction under Article 6, Section 9, of the Arizona Constitution and A.R.S. § 12-2101(A)(1).

DISCUSSION

I. Natural Remedy Appeals the Superior Court's Ruling on the Breakup Deal

¶18 Natural Remedy argues the Breakup Deal was not an enforceable...