Colorado District Court Release Split Decision in Marijuana Investment Fraud Case

On Monday, the District of Colorado filed a split decision on two motions to dismiss in the case of Senoria, LLC, et al. v. Kaweske, et al. 

According to the order, the case revolves around Clover Top Holdings, Inc. and its founder John Kaweske. The order states that in 2015 Kaweske and two other partners incorporated Clover Top Holdings, Inc. in Delaware with a principal place of business in Colorado to engage in the cannabis business. They are being sued by investors in Clover Top; the court describes the victims as self-described “victims of fraud, theft, and mismanagement.”

In late 2015 Clover Top Holdings and its founders began soliciting investors informing them that Clover Top Holdings was “established to make investments and operate businesses in the burgeoning legal cannabis industry” and for creating “a national brand for medicinal dispensaries, online store and cannabis and hemp-based products.” The order states that from late 2015 until February 2017 Clover Top Holdings received over $630,000 from outside investors who were given allegedly misleading information about their investments and had limited prior knowledge of the marijuana industry or its legality on the federal level. 

As of March 1, 2019 Clover Top Holdings’ corporate status with Delaware became void when it did not pay the annual franchise tax. Further, the investors allege that Clover Top Holdings’s assets and subsidiaries have been transferred away, rendering their investment irrelevant. 

The order states that Kaweske simultaneously created a competing marijuana operation that received ownership of the assets that originally belonged to or were intended to belong to Clover Top Holdings. According to the order, Kaweske and one of Clover Top Holdings’ investors, Manuel Evangelista, transferred Clover Top Holding’s assets and subsidiaries to several other entities. 

Subsequently, the investors filed suit against Clover Top Holdings, Kaweske and his entities, Evangelista and his entities, Kaweske’s partners and the law firm representing Clover Top Holdings and other default entities. The present order addresses Kaweske and Evangelista’s motions to dismiss. 

The defendants at issue argued that the case should be dismissed because the court is unable to remedy the plaintiffs’ damages. They also argue that damages are unavailable to the plaintiffs under the illegality defense because Clover Top Holdings was a national marijuana brand and marijuana is illegal on the federal level. 

When reviewing the motions to dismiss, the court held that the illegality defense does apply, but ​​the mere fact that unlawful activity is involved in some way does not automatically foreclose relief. Therefore, the court granted the motions to dismiss on 12 of the 21 causes of action due to the court’s limitation to provide redress under the illegality defense. However, the court denied the motions in respect to eight of the claims and held that any remedy for those claims is limited to their investment principal and the damages may only be paid from non-marijuana assets.

The plaintiffs are represented by Christiansen Law. The defendants are represented by Wheeler Trigg O’Donnell.