Case Information
*1 Before HOLMES , Chief Judge, BALDOCK , and MATHESON , Circuit Judges.
_________________________________ MATHESON , Circuit Judge.
_________________________________
David Joshua Bartch (“Josh”) and Mackie A. Barch (“Mackie”) were partners in Culta, LLC, a marijuana business licensed to operate under Maryland law. Josh temporarily relinquished his ownership in Culta. Even though Josh and Mackie had agreed Josh could later rejoin the business, Mackie prevented him from doing so. Josh sued Mackie and Mackie’s company, Trellis Holdings Maryland, Inc. (“Trellis”), which holds a minority membership share in Culta, for breach of contract. In response, Mackie and Trellis did not plead an affirmative defense that the contract was illegal under federal drug laws. After a bench trial, the district court found Mackie and Trellis liable for breach of contract and awarded Josh $6.4 million in damages (the “original judgment”). Mackie and Trellis never appealed and also never paid.
Josh sought to enforce the original judgment. The district court granted post- judgment relief, ordering Mackie and Trellis to use their best efforts to sell Trellis’s equity interest in Culta, to turn over the proceeds from any such sale, and to avoid devaluing Trellis’s equity until the sale (the “judgment enforcement order”). Mackie and Trellis appealed ( No. 23-1211 ), arguing—for the first time—that (1) Josh lacked standing to enforce the judgment because the redress he sought would violate the Controlled Substances Act (“CSA”), 21 U.S.C. §§ 801-904; and (2) the district court lacked authority to award the relief under Colorado Rule of Civil Procedure (“C.R.C.P.”) 69(g).
While that appeal was pending, Mackie and Trellis moved the district court to reconsider the original judgment under Federal Rule of Civil Procedure (“F.R.C.P.”) 60(b)(4), making the same CSA standing argument. The court denied the motion (the “original judgment reconsideration order”), and Mackie and Trellis appealed ( No. 24- 1049 ). We consolidated the appeals. We affirm the original judgment. We vacate the judgment enforcement order due to public policy concerns and remand for further proceedings.
This case presents a question about the nature and extent to which a federal court may act to resolve a dispute related to a marijuana business that operates legally under state law. Numerous federal courts have grappled with this question. Like most of them, we do not discern a simple answer. We share the dissent’s public policy concerns about the judgment enforcement order but think the better course is to remand to the district court to address them.
contract term);
Green Earth Wellness Ctr., LLC v. Atain Specialty Ins. Co.
, 163 F.
Supp. 3d 821, 834-35 (D. Colo. 2016) (declining to find marijuana-related insurance
contract void on public policy grounds);
Hemphill v. Liberty Mut. Ins. Co.
, No. 10-
861,
BACKGROUND
A. Factual History Between 2009 and 2015, Josh owned and operated a marijuana business in Colorado. In 2015, Josh and Mackie formed Doctor’s Orders Maryland (“DOMD”) and sought a license to open a similar business in Maryland. But out of concern that Josh’s deferred judgment in Colorado for misdemeanor drug possession could hurt the license application, Josh and Mackie agreed that Josh would temporarily relinquish his ownership of DOMD and that Josh would be reinstated after the license was granted. DOMD received the license, but Mackie refused to reinstate Josh’s ownership interest. The Maryland business, renamed Culta, LLC, operated without Josh. Culta cultivates, processes, and dispenses marijuana.
Culta’s operating agreement permits transfer of “all or any portion of [an] [i]nterest in [Culta]” (a) with the consent of Culta’s other members, App., Vol. II at 294; or (b) without consent if transferred to certain “Permitted Transferee[s],” including another Culta member, an entity controlled by a member’s family, or an “Affiliate[],” id. at 295-96.
Trellis owns a roughly 30 percent membership interest in Culta. Mackie is the sole owner, president, director, and alter ego of Trellis.
B. Judgment Enforcement
A judgment may be enforced in the judicial district where it was filed or in another judicial district if the judgment is registered there. See 28 U.S.C. § 1963. F.R.C.P. 69 provides:
A money judgment is enforced by a writ of execution, unless the court directs otherwise. The procedure on execution—and in proceedings supplementary to and in aid of judgment or execution—must accord with the procedure of the state where the court is located, but a federal statute governs to the extent it applies.
F.R.C.P. 69(a)(1). Maryland and Colorado judgment enforcement procedures are relevant here.
Both states provide for “charging orders”—“a remedy provided to the judgment-creditor of a” limited liability company (“LLC”) or other business entity “member . . . by which the distributions . . . made to a member . . . are attached and diverted to the judgment-creditor in satisfaction of the judgment.” 1 Larry Ribstein & Robert R. Keatinge, Ribstein & Keatinge on Limited Liability Companies § 10:2. Maryland’s charging order provision states that “a creditor of a debtor [who] hold[s] an economic interest in [an LLC]” may request that a court “charge the economic interest of the debtor in the [LLC] for the unsatisfied amount of the debt.” Md. Code Ann., Corps. & Ass’ns § 4A-607(b)(1). Colorado law also permits charging orders. See Colo. Rev. Stat. § 7-80-703.
Colorado law includes an additional relevant procedure: Under C.R.C.P. 69(g), a creditor may request that a court order a debtor “to apply [certain] property . . . towards satisfaction of [a] judgment.”
C. Procedural History
Original Judgment
Josh, invoking diversity jurisdiction, sued Mackie and Trellis in the United States District Court for the District of Colorado for breach of contract, conversion, constructive trust, unjust enrichment, and civil theft. He requested a declaration that Mackie and Trellis hold an interest in Culta for Josh’s benefit, specific performance in the form of an order directing Mackie and Trellis to transfer that interest to Josh, compensatory damages, and treble damages. App., Vol. I at 37. Mackie and Trellis did not plead an affirmative defense of contract illegality. Before trial, “Mackie transferred nearly all of his interest in Trellis to two family trusts.” App., Vol. III at 584 n.2.
After a bench trial, the district court found for Josh on the breach of contract claim and awarded him $6.4 million in damages. As noted above, we refer to this as
the “original judgment.” Mackie and Trellis did not appeal.
Judgment Enforcement Order
Mackie and Trellis failed to pay the $6.4 million judgment. App., Vol. II at 514 (“A little tiny piece of [the $6.4 million] has been paid through garnishment, but [Mackie] has not voluntarily paid any of it.”). Josh served post-judgment discovery requests on Mackie and Trellis and learned that Trellis’s equity interest in Culta was likely the only asset that could fully satisfy the judgment. Josh then sought to enforce his judgment in the United States District Courts for the District of Maryland and the District of Colorado.
a.
Maryland judgment enforcement proceedings
In February 2023, Josh asked the District of Maryland—where he had
registered the original judgment—to issue a charging order against Trellis’s
membership interest in Culta. On May 16, 2023, the court granted Josh’s request,
placing a lien on Trellis’s interest in Culta and directing that Josh receive any Culta
distributions due to Trellis. App., Vol. I at 253. On March 5, 2024, the district court
denied Mackie and Trellis’s motion to vacate the charging order under Federal Rules
of Civil Procedure 60(b)(4) and 60(b)(6).
See
Memorandum Opinion,
Bartch v.
Barch
, No. 1:23-cv-0101,
b. Colorado judgment enforcement proceedings
On May 9, 2023, Josh asked the District of Colorado under F.R.C.P. 69(a)(i) for a C.R.C.P. 69(g) order requiring Mackie and Trellis “to (1) sell or otherwise monetize their equity in Culta and (2) turn over to [Josh] the proceeds of any transaction involving their Culta equity . . . until the judgment is fully satisfied.” App., Vol. I at 74. He did not request a charging order under Colorado law.
On June 8, 2023, the district court granted the motion. As noted above, we refer to this as the judgment enforcement order. It ordered:
(1) Divestment. Mackie and Trellis must “use their best efforts to sell a sufficient portion of [Trellis’s] equity . . . in [Culta] to fully satisfy the [c]ourt’s judgment . . . and to pay [certain] taxes.” App., Vol. II at 335-36. The court directed that any sale comply with “Culta’s operating agreement and applicable Maryland law.” Id. at 336.
(2) Proceeds turnover. If any such sale is “consummate[d],” Mackie and Trellis “shall turn over the proceeds of such transaction(s) to [Josh] until the judgment is satisfied in full.” Id.
(3) No devaluation. Until such sale is consummated, Mackie and Trellis “may not make any sale or pledge in respect of their Culta equity, and may not take any other action, that undermines the value of this equity.” Id.
On June 29, 2023, Mackie and Trellis filed a notice of appeal from the judgment enforcement order— No. 23-1211 .
Original Judgment Reconsideration Order
On September 5, 2023, Mackie and Trellis moved under F.R.C.P. 60(b)(4) for relief from the original judgment, which had found Mackie and Trellis liable for
breach of contract. They argued the district court lacked subject matter jurisdiction to enter the original judgment because the judgment compels a CSA violation.
The district court denied the motion. As noted above, we refer to this as the “original judgment reconsideration order.” Mackie and Trellis timely filed a notice of appeal from this order— No. 24-1049 .
and “Order Not to Devalue.” Aplee. Br. at 9. We refer to the order as the judgment enforcement order to distinguish it from the other orders at issue in this appeal, and we discuss each of the three commands in the order as needed. The district court denied Mackie and Trellis’s request for reconsideration of the
judgment enforcement order.
Appeals
We consolidated the appeals.
In No. 23-1211 , the appeal of the judgment enforcement order, Mackie and Trellis argue that (A) Josh lacked standing to seek an order directing the sale of an interest in a marijuana business because such an order would violate the CSA, and (B) the district court lacked authority to enter the judgment enforcement order under C.R.C.P. 69(g).
In No. 24-1049 , the appeal from the original judgment reconsideration order, Mackie and Trellis similarly argue that Josh lacked standing to seek damages for breach of contract in the original proceeding because the relief requested would violate the CSA.
* * * * To recap, Josh sued Mackie and Trellis, alleging they breached an oral contract to restore his ownership in Culta. Mackie and Trellis did not raise illegality at any time before the district court conducted a bench trial, found a breach, determined the damages amount, and entered judgment. They did not appeal or pay the judgment.
Josh requested and the district court granted a judgment enforcement order directing Mackie and Trellis to pay the judgment by selling their Culta equity. They appealed—No. 23-1211. They next moved to vacate the judgment under Federal Rule of Civil Procedure 60(b)(4) and appealed the denial of that motion— No. 24-1409. In both appeals, they argue Josh lacks standing.
Because resolution of the original judgment reconsideration order appeal, No. 24-1049 , affects the availability of post-judgment relief at issue in No. 23-1211 , we address No. 24-1049 first. We then turn to No. 23-1211 .
NO. 24-1049: RULE 60(b)(4) ORIGINAL JUDGMENT RECONSIDERATION ORDER Mackie and Trellis argue the original judgment was void because Josh lacked standing. We affirm the district court’s original judgment reconsideration order.
A.
Federal Rule of Civil Procedure 60(b)(4)
F.R.C.P. 60(b) “provides an exception to finality that allows a party to seek
relief from a final judgment, and request reopening of his case, under a limited set of
circumstances.”
United Student Aid Funds, Inc. v. Espinosa
,
A judgment is void “only in the rare instance where [the] judgment is premised
on either” a “[t]otal want of jurisdiction” or “a violation of due process that deprives
a party of notice or the opportunity to be heard.”
Espinosa
,
F.R.C.P. 60(b)(4) has no fixed time limit for filing.
See
F.R.C.P. 60(c)(1)
(“A motion under Rule 60(b) must be made within a reasonable time . . . .”);
Misco
Leasing, Inc. v. Vaughn
,
We review a district court’s F.R.C.P. 60(b)(4) ruling de novo. Johnson ,
B. Application
This appeal fails on multiple grounds.
First, although a party may defend against a breach of contract action by
alleging the contract was contrary to public policy,
see, e.g.
,
Kaiser Steel Corp. v.
Mullins
,
Second, faced with this roadblock, Mackie and Trellis try to recast the contract
illegality defense into a jurisdictional challenge, arguing Josh lacked standing. But
because illegality goes to whether Josh has a meritorious contract claim, not whether
Josh has standing, they have not properly challenged jurisdiction.
See Steel Co. v.
Citizens for Better Env’t
,
Third, Mackie and Trellis’s standing argument fails. Article III standing
requires plaintiffs to show (1) they “suffered an injury in fact”; (2) “the injury was
likely caused by the defendant”; and (3) “the injury would likely be redressed by
judicial relief.”
TransUnion LLC v. Ramirez
,
Josh alleged and proved an injury-in-fact: breach of contract. Mackie and Trellis caused Josh’s breach-of-contract injury. And Josh’s breach-of-contract claim was redressable because he asked for and the district court awarded general compensatory damages for Mackie and Trellis’s breach of contract. App., Vol. I at 37, 66.
General compensatory damages may remedy a breach of contract provided the
damages award does not require a losing party to violate federal law.
See Ginsburg
,
v. ICC Holdings, LLC
, No. 3:16-CV-2311,
* * * * The dissent would hold that although Mackie and Trellis never argued before entry of the original judgment that the contract was against public policy, we should find the original judgment invalid. This approach ignores the procedural posture of this appeal and binding Supreme Court precedent. Recall that the district court held a bench trial, found that Mackie and Trellis had breached the contract, and ordered compensatory damages. Because Mackie and Trellis failed to appeal the original judgment, it was final subject to revision only through F.R.C.P. 60(b). The district court denied Mackie and Trellis’s F.R.C.P. 60(b)(4) motion.
Even overlooking Mackie and Trellis’s failure to argue contract illegality,
[8]
we
cannot reverse the district court’s F.R.C.P. 60(b)(4) order without violating
Espinosa
,
which limits F.R.C.P. 60(b)(4) relief to when the court had “total want of jurisdiction” or
violated due process.
* * * * We affirm the district court’s denial of the motion for relief from judgment under F.R.C.P. 60(b)(4).
NO. 23-1211: RULE 69(g) JUDGMENT ENFORCEMENT ORDER
Mackie and Trellis appealed the F.R.C.P. 69 judgment enforcement order,
arguing Josh lacked standing. Aplt. Br. at 13. They contend that the relief he
sought—an order to sell Trellis’s equity in Culta and turn over the proceeds to Josh—
In line with Rule 8(c), which the dissent does not address, we have said that
“the affirmative defense of illegality is waived if not pleaded” and that “it cannot
thereafter be raised for the first time on appeal.”
Int’l Bhd. of Elec. Workers, Loc.
Union Nos. 12, 111, 113, 969 v. Pro. Hole Drilling, Inc.
,
Despite these intervening developments, the old cases may still be good law,
but it does not matter. Our analysis does not depend on waiver of contract illegality.
The dissent would bypass the strictures of F.R.C.P. 60(b)(4) and summarily
dismiss a contract case “
[w]henever the illegality appears
.” Dissent at 2 (quoting
Coppell
,
would require a violation of the CSA, so the district court lacked the power to award it and therefore Josh lacked standing redressability. They further argue that the district court lacked authority to issue the judgment enforcement order under C.R.C.P. 69(g).
We reject Mackie and Trellis’s arguments that Josh lacked standing to pursue enforcement of his judgment and that the district court lacked authority under C.R.C.P. 69(g). But we vacate the order and remand for the district court to consider whether its order would require Mackie and Trellis to violate public policy and, if so, whether the order should not have issued. [10]
A.
Standing
Josh had standing to seek enforcement of his judgment.
[11]
He alleged an
injury-in-fact caused by Mackie and Trellis’s failure to pay the judgment. Mackie
and Trellis challenge only redressability. Their argument fails for reasons similar to
our analysis in
No. 24-1049
: The district court could “fashion a remedy to redress”
their failure to pay the judgment.
Shulman
,
B. Authority Under C.R.C.P. 69(g)
Mackie and Trellis argue the district court lacked authority under C.R.C.P. 69(g) to enter the judgment enforcement order. They offer two reasons. First, “C.R.C.P. 69(g) cannot be used to replace a charging order” because a charging order is the exclusive remedy to apply an LLC member’s equity interest to a judgment. Aplt. Br. at 15 (capitalization altered without notation). Second, even if a charging order is not an exclusive remedy, they lacked sufficient control over Trellis’s Culta equity for the court to order them to divest it. Id. at 19-20. We disagree on both counts.
Standard of Review
We review a district court’s entry of an order under F.R.C.P. 69 for abuse of
discretion.
Compañía de Inversiones Mercantiles S.A. v. Grupo Cementos de
Chihuahua S.A.B. de C.V.
,
Legal Background
The following discusses (a) the federal rule applicable to money-judgment enforcement proceedings and (b) the Colorado procedures for money-judgment enforcement, including C.R.C.P. 69 and charging orders.
a. F.R.C.P. 69
As discussed above, F.R.C.P. 69 directs federal courts to follow state
procedures when enforcing a federal money judgment, unless federal law applies.
F.R.C.P. 69(a)(1);
United Int’l Holdings, Inc. v. Wharf (Holdings) Ltd.
, 210 F.3d
1207, 1235 (10th Cir. 2000),
aff’d
,
To determine the relevant state law, we look to controlling state supreme court
cases, but when none exist, we “attempt to predict how the highest court would
interpret the issue.”
Genzer v. James River Ins. Co.
,
question of state law under F.R.C.P. 69);
see Huddleston v. Dwyer
,
F.R.C.P. 69 requires only “substantial compliance with the procedural
provisions of any controlling state statutes or case law.”
McCarthy v. Johnson
,
b. Colorado judgment enforcement procedures
Colorado provides various procedures for “the seizure and sale of the judgment debtor’s real and personal property.” 1C Stephen A. Hess, Colo. Prac., Methods of Practice § 40:1 (7th ed.). Writs of execution are the standard remedy. C.R.C.P. 69(a) provides that “[e]xcept [in garnishment proceedings] or an order of court directing otherwise, process to enforce a final money judgment shall be by writ of execution.” “A writ of execution is an order issued by the court that directs an officer of the court to seize and sell the property of a judgment debtor and transfer the sale proceeds over to the judgment creditor.” 7 Robert L. Haig, Business and Commercial Litigation in Federal Courts § 71:5 (5th ed.).
But “a writ of execution . . . is not an exclusive remedy.”
First Nat’l Bank of
Denver v. Dist. Ct. in & for City & Cnty. of Denver
,
i. Colo. Rev. Stat. § 7-80-703
As noted above, “[a] charging order is a statutorily created remedy that . . .
allows a judgment creditor to realize the value of a judgment debtor-LLC member’s
distributional interest in an LLC” while also “protect[ing] the LLC’s ability to
continue to operate and the interests of its other members.”
JPMorgan Chase Bank,
N.A. v. McClure
,
Colo. Rev. Stat. § 7-80-703 governs charging orders for LLCs. It allows a court to “charge the membership interest of the member” or even to “foreclos[e]” on a member’s interest. Colo. Rev. Stat. § 7-80-703.
ii. C.R.C.P. 69(g)
C.R.C.P. 69(g) (emphasis added) provides:
The court . . . may order any party or other person over whom the court has jurisdiction, to apply any property other than real property, not exempt from execution, whether in the possession of such party or other person, or owed the judgment debtor, towards satisfaction of the judgment . Any party or person who disobeys an order made under the provisions of
this Rule may be punished for contempt. Nothing in this rule shall be construed to prevent an action in the nature of a creditor’s bill.
“Colorado courts ‘interpret [C.R.C.P.] 69 liberally to assist judgment creditors
in enforcing final money judgments.’”
Compañía de Inversiones Mercantiles S.A.
,
Application
The district court did not exceed its authority under C.R.C.P. 69(g) because (a) a charging order is not an exclusive remedy under Colorado law and (b) Mackie and Trellis have sufficient possession of Trellis’s Culta equity for the district court to order them to apply that equity to the judgment under C.R.C.P. 69(g).
a. Exclusive remedy
Mackie and Trellis argue that a “[c]harging order[]” is the exclusive remedy “for a judgment creditor seeking to execute on a debtor’s membership interest in a limited liability company.” Aplt. Br. at 16. We hold otherwise. Neither the Colorado legislature nor the Colorado Supreme Court has expressly settled this question. Based on the relevant available legal materials, we predict the Colorado Supreme Court would reject Mackie and Trellis’s argument.
First, § 7-80-703 is silent on whether it provides an exclusive remedy for a creditor seeking to enforce a judgment against an LLC member’s interest. Other Colorado charging order provisions (a) are silent on exclusivity, Colo. Rev. Stat. § 7-60-128 (non-transferable interests in a partnership); id. § 7-62-703 (interests in limited partnerships); (b) state they are exclusive, id. § 7-64-504(5) (transferable interests in a partnership); or (c) state they are not exclusive, id. § 7-61-123 (interests of “indebted limited partner[s]”). This varied approach to exclusivity shows the Colorado legislature could have specified that a charging order remedy is exclusive and did not do so with § 7-80-703.
Second, the Colorado Supreme Court has not decided this issue. Mackie and
Trellis contend otherwise, citing
First National Bank of Denver
, Aplt. Br. at 17, but
that case does not help them.
First National Bank of Denver
held that a forced sale
of partnership interests to satisfy a judgment under Colo. Rev. Stat. § 7-60-128 was
void because it did not comply with that provision.
Third, C.R.C.P. 69(g) broadly and unambiguously authorizes an order directing (1) a party to (2) “apply any property” not specifically exempt (3) “towards satisfaction of the judgment.” The judgment enforcement order did that.
Fourth, we recently emphasized that “Colorado courts interpret [C.R.C.P.] 69
liberally to assist judgment creditors in enforcing final money judgments.”
Compañía de
Inversiones Mercantiles S.A.
,
For these reasons, we conclude that the Colorado Supreme Court would hold that a § 7-80-703 charging order is not an exclusive remedy for an LLC judgment creditor member seeking to enforce a judgment against a judgment debtor’s interest in the LLC. The district court did not abuse its discretion in granting the C.R.C.P. 69(g) judgment enforcement order in lieu of a charging order.
b. Sufficient control
Mackie and Trellis also argue that under C.R.C.P. 69(g), a “court cannot force a turnover” of property over which the “debtor lacks control.” Aplt. Br. at 19. They assert that because Trellis cannot “freely sell” its equity, the district court lacked authority to order Mackie and Trellis to apply this property. Id. at 20. We hold that Mackie and Trellis have sufficient “possession” of Trellis’s interest in Culta for the court to reach it under C.R.C.P. 69(g).
“‘[P]ossession’ under [C.R.C.P.] 69(g) does not require actual possession,”
and “‘it is the principle and policy of [C.R.C.P.] 69(g) to subject all property of the
judgment debtor, not specifically exempt, to the payment of his debts.’”
Compañía
de Inversiones Mercantiles S.A.
,
Mackie and Trellis have sufficient control over Trellis’s Culta equity for the district court to direct the sale of that asset under C.R.C.P. 69(g).
C. Whether the Order Violated Public Policy Mackie and Trellis argue that “compliance with the [judgment enforcement] order can only be accomplished by violating the CSA,” Aplt. Br. at 12, and that “federal courts cannot grant relief that violates the CSA,” id. at 9 (capitalization altered without notation). They thus contend the district court’s remedy to collect the money judgment would violate public policy and should be vacated.
Although their argument does not show Josh lacked standing, we agree with
the dissent that the public policy issue deserves further consideration. The district
court’s C.R.C.P. 69(g) order to sell equity in a marijuana business was “injunctive
relief,”
Wharf
,
Culta’s business may be legal under Maryland law, but the CSA fully applies
in states that have de-criminalized marijuana.
See Gonzales v. Raich
,
The judgment enforcement order contains three parts. The first part orders
Mackie and Trellis to “use their best efforts to sell a sufficient portion of [Trellis’s]
equity . . . in [Culta] to fully satisfy the [c]ourt’s judgment.” App., Vol. II at 335-36.
The second requires them to “turn over the proceeds of such transaction(s) to [Josh]
until the judgment is satisfied in full.”
Id.
at 336. This language does not
specifically instruct Mackie and Trellis to cultivate, process, or sell marijuana—they
may only need to sell their equity and compensate Josh for his contract damages.
See Erickson v. Pfiester
, No. 1:21-cv-00009,
The third part of the order says Mackie and Trellis “may not make any sale or pledge in respect of their Culta equity, and may not take any other action, that undermines the value of this equity.” App., Vol. II at 336. This directive against undermining value is open to interpretation. It does not necessarily require Mackie and Trellis—who own a 30 percent share of Culta, id. at 347—to affirmatively cultivate, process, or sell marijuana. But it may be read as instructing them to “use best efforts” to maintain Culta’s business value by abetting continued operations in violation of federal law. And their doing so may be necessary to comply with the order. [20]
In sum, the judgment enforcement order does not specifically order Mackie and Trellis to engage in marijuana activities that would violate the CSA, but compliance with the order may effectively require them to do so. [21] The record is not sufficiently developed to answer that question. The district court and the parties have not provided sufficiently developed analysis to answer others.
The questions, then, include whether
(1) The district court effectively ordered Mackie and Trellis to violate federal drug law. This question would benefit from further record development, which can occur only in district court.
assets”); id. at 517 (the district court stating, “The Court orders, although I think it’s obvious, that the defendants may not make any sale or pledge or anything else that undermines the value of their equity from this day forward until the sale is concluded.”). Testimony from the only witness at the evidentiary hearing on the C.R.C.P. 69(g) motion reinforces this reading. Josh called investment banker Brooke Hayes, who started to work with Mackie in September 2022 to raise funds for him based on Trellis’s equity in Culta. He ultimately withdrew due to weakness in the cannabis market. App., Vol. II at 432-34. When Mackie approached him again in April 2023, Mr. Hayes declined for the same reason, id. at 435-42, even though Maryland had legalized cannabis for recreational use effective July 2023, id. at 454-55, which in other states had increased sales. Mr. Hayes’s testimony suggested that efforts to sell Trellis’s equity would depend in part on Culta’s success in selling marijuana. A Colorado federal district court recently said it would decline payment or
redress from any income stream that would be illegal under the CSA,
Sensoria
, 581
F. Supp. 3d at 1260-61, or from any asset that would be subject to criminal forfeiture,
Sensoria, LLC v. Kaweske
,
(2) The order violates public policy. This question calls for further analysis of whether federal drug law is the only relevant public policy consideration. [22]
(3) The order is a proper equitable remedy. This question requires consideration of the limits on a federal court’s formulation of a judgment enforcement order to facilitate recovery of a money judgment. [23]
We think these questions are better addressed in the first instance in the district
court, which can then determine whether it would be “assist[ing] in any way towards
carrying out the terms of an illegal contract.”
Kaiser Steel
,
In sum, we recognize that the judgment enforcement order would be invalid if it requires Mackie and Trellis to violate public policy. [24] But we do not think the order is sufficiently clear nor the record sufficiently developed to answer that question. We remand to address those matters. Rather than being “remiss” or refusing to “acknowledge the elephant in the room,” as the dissent alleges, Dissent at 6, 8, our resolution allows for more informed consideration of public policy concerns than the dissent’s call for summary disposition. [25] We therefore vacate the order and remand for further proceedings
CONCLUSION We affirm in appeal No. 24-1049 . We vacate and remand for further proceedings in appeal No. 23-1211 .
Bartch v. Barch, Nos. 23–1211 & 24–1049
BALDOCK, Circuit Judge, dissenting.
The district court found Plaintiff Bartch and Defendant Barch entered into an oral contract to establish Culta, LLC (formerly Doctor’s Orders Maryland or DOMD), a vertically integrated Maryland business enterprise engaged in cultivating, processing, and dispensing marijuana. Bartch v. Barch , No. 18–CV–3016–RBJ–MDB, Findings of Fact, Conclusions of Law, and Order of Judgment, at 1–4 (D. Colo. filed Sept. 7, 2022); s ee generally https://www.culta.com . As of today, the Federal Criminal Code labels marijuana an illegal Schedule I controlled substance along with drugs like heroin, ecstasy, and LSD. 21 U.S.C. § 812. This Court cannot dispute that what Culta does, namely produce and traffic marijuana, remains illegal under both the Federal Controlled Substances Act (CSA) and the Racketeer Influenced and Corrupt Organizations Act (RICO), and perhaps other federal enactments. Recognition of these simple facts should have sounded the death knell of Plaintiff Bartch’s breach of contract claim by summary dismissal in the district court. Because the underlying contract between Plaintiff and Defendant Barch to establish Culta directly conflicts with a myriad of federal criminal laws, this Federal Court is bound to follow binding Supreme Court precedent and refuse to acknowledge its validity.
In short, Plaintiff’s breach of contract claim arises out of an illegal contract, and the
Supreme Court has recognized that “[t]he authorities from the earliest times to the present
unanimously hold that
no federal court will lend its assistance in any way towards carrying
out the terms of an illegal contract
.”
Kaiser Steel Corp. v. Mullins
,
I.
Consistent with Supreme Court authority, this Court should begin its analysis by acknowledging the subject contract’s indisputable illegality under federal law. For instance, the CSA makes it “unlawful for any person knowingly and intentionally . . . to manufacture, distribute, or dispense, or possess with intent . . . [to do so],” marijuana. 21 U.S.C. § 841(a)(1). This Court should acknowledge that manufacture, distribute, and dispense marijuana is precisely what Culta does. The CSA also makes it unlawful for any person to conspire or agree with another (no overt act is required) to commit any of the offenses set forth in section 841(a)(1). Id . § 846. This Court should acknowledge that such agreements undoubtedly are necessary to Culta’s business operation. In fact, the contract between Plaintiff and Defendant Barch may very well violate section 846. Continuing on, section 856 of the CSA makes it unlawful for anyone to “knowingly open, lease, rent, use, or maintain any place” for the purpose of manufacturing or distributing marijuana. Id . § 856(a). This Court should acknowledge that Culta, according to its website, has multiple business locations that dispense marijuana.
Consider too RICO. RICO defines unlawful racketeering activity to include the
“felonious manufacture, . . . selling, or otherwise dealing in” marijuana. 18 U.S.C.
Corp.
,
§ 1961(1)(D). The Tenth Circuit has recognized, and this Court should acknowledge, that
cultivating marijuana for sale “
necessarily
would involve
some
racketeering activity”
because “
cultivating marijuana for sale . . . is by definition racketeering activity
.”
Safe Sts.
All. v. Hickenlooper
, 859 F.3d 865, 882 (10th Cir. 2017) (first and last emphasis added).
Given our own precedent, Culta is engaged in racketeering activity as proscribed by RICO.
Meanwhile, the Ninth Circuit has observed that in enacting RICO “it is evident that
Congress would have considered a cannabis business to be a form of
organized crime
.”
Shulman v. Kaplan
,
The foregoing recitation of federal law (one could delve deeper still) is quite enough to convince me that this Court should recognize Culta for exactly what it is: a criminal racketeering enterprise as defined by federal law that, to say the least, flouts both RICO and the CSA. Given the present public policy of the United States regarding marijuana as reflected in both the Federal Criminal Code and Circuit Court case law, enforcement of the oral contract between Plaintiff and Defendant Barch in this Court is most certainly prohibited as violative of this federal policy. See Hanauer v. Doane , 79 U.S. 342, 349 (1870) (“The whole doctrine of avoiding contracts for illegality . . . is founded on public policy.”). Plaintiff’s cause of action is based entirely upon an illegal contract to establish Culta, notably an enterprise in which federal law recognizes no property interest. [2] 21 U.S.C. § 881(a). I simply do not understand why a federal court would lend legitimacy to any of this.
II.
Despite its denials, see Court’s Op. at 16 n.8, what this Court effectively tells us is that Defendants have waived or forfeited the defense of contract illegality. But, as I have already pointed out, see dissent, supra at 1–2, Supreme Court precedent by which this Court is bound plainly tells us otherwise: This precedent says in no uncertain terms that the defense of illegality cannot be waived or forfeited. Illegality is a defense that we are obliged to raise sua sponte . Let us turn to this precedent now.
The Supreme Court has observed that “a federal court[’s] . . . duty to determine
whether a contract violates federal law before enforcing it” is “well established.”
Kaiser
Steel
, 455 U.S. at 83. This duty arises because “[t]he power of the federal courts to enforce
the terms of private agreements is
at all times
subject to the restrictions and limitations of
the public policy of the United States as manifested in . . . federal statutes . . . .”
Id.
at 83–
84 (emphasis added) (ellipses in original) (quoting
Hurd v. Hodges
, 334 U.S. 24, 34–35
(1948)). Where enforcement of a private agreement would violate this public policy, a
federal court has a duty or “
obligation
. . . to refrain from such exertions of judicial power.”
Id.
at 84 (emphasis added) (quoting
Hurd
,
In contrast, one early example of the Supreme Court fulfilling this duty is its decision in Coppell , 74 U.S. at 542. The relevant background is this: Coppell was a breach of contract action in which the district court instructed the jury that if the contract was illegal, “the illegality had been waived.” Id . at 558. The Supreme Court explained the instruction “was founded upon a misconception of the law.” Id . “ In such cases there can be no waiver . The defense is allowed, not for the sake of the defendant, but for the law itself. . . . [The law] will not enforce what it has forbidden and denounced.” Id . (emphasis added). The Court continued: “The proposition to the contrary strikes us as hardly worthy of serious refutation. Whenever the illegality appears, . . . the disclosure is fatal to the case . No consent of the defendant can neutralize its effect. . . . Wherever the contamination reaches, it destroys.” Id . at 558–59 (emphasis added).
Another example of the Supreme Court rejecting the proposition that a defendant
may waive or forfeit an illegality defense is its decision in
Oscanyan
,
The law applicable to these appeals points only one direction while this Court inexplicably points the other. Given the foregoing Supreme Court authority—authority to which this Court does not meaningfully respond—this Court should acknowledge the elephant in the room and summarily dispose of this matter by remanding to the district court with instructions to dismiss. I agree that decisions from the Tenth Circuit appear in conflict with the Supreme Court. See Court’s Op. at 16 n.8. When the Supreme Court has spoken as it has in Coppell and Oscanyan , however, inferior federal court authority to the contrary is emphatically not the law. This Court should place Plaintiff Bartch and Defendant Barch back in their original positions. [6] Consistent with binding Supreme Court precedent, I would remand these appeals to the district court with instructions to vacate its judgment and dismiss the action as based on a contract that violates the public policy of the United States as it exists today. This course of action would necessarily dispose of the district court’s post-judgment enforcement order. [7] I respectfully dissent.
one unversed in corporate finance must understand that ordering Defendants to maintain the value of Trellis’s equity in Culta pending its sale is effectively the same thing as telling Defendants to continue cultivating, processing, and dispensing marijuana. Otherwise, the net worth of Culta and thus the value of Trellis’s equity in it would necessarily decrease. Like the underlying contract, the district court’s remedy of choice in this case is also very much illegal as violative of federal public policy. The post-judgment order’s terms coupled with the oral contract that preceded it collectively and directly bear upon the establishment, ownership, and operation of an enterprise the sole purpose of which is to cultivate, process, and dispense marijuana. This renders both unenforceable in federal court under the present state of federal law.
Notes
[1] Because the parties have similar last names, we refer to them as “Josh” and “Mackie,” consistent with their appellate and district court briefing.
[2] Although courts have come out in different ways, they have analyzed the
issues presented by marijuana-related contracts without summary disposition.
See,
e.g.
,
Shulman v. Kaplan
,
[3] The dissent mischaracterizes this oral contract between Josh and Mackie. It was not “to establish Culta.” Dissent at 1, 4. Rather, it was “a contract whereby [Mackie] would receive both [Josh]’s and [his] DOMD equity stakes from [third parties] and hold both interests until [Josh] wanted his back.” App., Vol. 1 at 60.
[4] Mackie and Trellis refer to this as the “Turnover Order.” Aplt. Br. at 1. Josh refers to its three components: the “Order to Divest,” “Order to Turn Over Proceeds,”
[6] Although the parties do not contest the issue, we briefly explain why we have
appellate jurisdiction under 28 U.S.C. § 1291.
We have jurisdiction in
No. 24-1049
because we may “reach the merits of an
appeal from a denial of a Rule 60(b) motion, [if] the ruling or judgment the Rule 60(b)
motion challenged was a [district court’s] final decision.”
Stubblefield v. Windsor Cap.
Grp.
,
[7]
See also Travelers Indem. Co. v. Bailey
,
[8] The dissent states, “What the [majority] effectively tells us is that Defendants
have waived or forfeited the defense of contract illegality.” Dissent at 5. We have not
said that. The dissent also states that “controlling Supreme Court precedent” holds “that
the defense of illegality cannot be waived or forfeited.”
Id.
That may be so, but the
dissent overlooks that our resolution of these appeals does not depend on whether Mackie
and Trellis waived a contract illegality defense.
As discussed above, we affirm in
No. 24-1049
based on the limited availability of
relief under F.R.C.P 60(b)(4). And in
No. 23-1211
, we vacate and remand for the district
court to consider the public policy concerns that both we and the dissent have raised.
We agree with the dissent that we must “apply Supreme Court cases that
directly control.”
United States v. Maloid
,
[10] The focus of No. 23-1211 , consistent with Mackie and Trellis’s arguments, is the judgment enforcement order, not, as the dissent contends, the contract and the original judgment. Once Josh “recover[ed] a valid and final personal judgment, his original claim[s] [were] extinguished and rights upon the judgment are substituted for it.” Restatement (Second) of Judgments § 18 cmt. a (Am. L. Inst. 1982). And as discussed below, we remand for the district court to consider whether it went too far in exercising its equitable authority to issue the judgment enforcement order.
[11] Neither party explains whether Josh needed to show standing for his F.R.C.P. 69 request separately from showing standing leading to the original judgment. We assume he does.
[12] Although discovery showed that Trellis’s equity interest in Culta was likely the only asset that could satisfy the judgment in full, see, e.g. , App., Vol. I at 75; App., Vol. II at 365 n.2; App., Vol. III at 587, Mackie also had a home encumbered by other debts, a vehicle, and a cell phone, App., Vol. I at 75. The district court could have ordered these assets applied to the judgment.
[13] An LLC member’s interest is intangible personal property.
See JPMorgan
Chase Bank, N.A. v. McClure
,
[14] In arguing that “charging orders are the [only] recognized mechanism for judgment collection” against LLC interests, Aplt. Reply Br. at 9, Mackie and Trellis reference “§ 7-80-128,” id. at 10, which does not exist. Colo. Rev. Stat. § 7-80-703 governs charging orders for interests in LLCs, and Colo. Rev. Stat. § 7-60-128 governs charging orders for non-transferable interests in partnerships.
[15] Mackie and Trellis argue that a charging order should be the exclusive
remedy for levying or executing on an LLC member’s interest. Aplt. Reply Br.
at 9-10. Other states and the model Uniform Limited Liability Company Act
(“ULLCA”) make charging orders an exclusive remedy to protect non-judgment-
debtor members in a multi-member LLC.
See, e.g.
, ULLCA § 503, cmt.;
id.
§ 503(f);
id.
§ 503(f), cmt.; J. William Callison & Maureen A. Sullivan, Limited Liability
Companies § 4:5 (2023 ed.). But Colorado has not adopted the ULLCA.
See Nelson v.
Encompass PAHS Rehab. Hosp., LLC
,
[16] We are not convinced Mackie and Trellis’s possession argument implicates the district court’s authority, but we address it using the parties’ characterization in their briefs.
[17] Mackie and Trellis did not make this argument in opposition to Josh’s
C.R.C.P. 69(g) motion and are not entitled to appellate review of the public policy
issue if it can be waived. But even so, we may exercise our discretion to address it.
See Margheim v. Buljko
,
[18] On appellate review of whether injunctive relief was appropriate, we have said
repeatedly that injunctions should “not be contrary,” “against,” or “adverse to the public
interest.”
See, e.g.
,
Wyandotte Nation v. Sebelius
,
[19] This view of the order arguably finds support from the district court’s temporary restraining order (“TRO”), compare App., Vol. II at 336-37, with Dist. Ct. Doc. 212, which was designed to prevent Mackie from continuing his attempts to use Trellis’s equity in Culta to fundraise for purposes other than paying the judgment, see Dist. Ct. Doc. 207 at 1; see also App., Vol. II at 493 (Josh’s counsel arguing that if the TRO was allowed to expire Mackie might “find[] a way to . . . try and use a gap to dissipate the
[22] In other words, would the C.R.C.P. 69(g) order be contrary to public policy
based only on the CSA or should other policy concerns such as Maryland marijuana
law and the interest in judgment enforcement also be considered in fashioning relief?
See Kaiser Steel
,
[23] For example, we highly doubt a district court order telling Mackie to rob a bank
and turn over the proceeds to satisfy the judgment would survive appellate review.
See
Sensoria
,
[24] The dissent suggests that Josh could seek his remedy in state court, Dissent at 8 n.6, but does not explain why the same federal public policy concerns would be absent there. See U.S. Const. art. VI.
[25] The dissent would summarily dismiss because the original contract involved
marijuana. We join many other courts that opt for more careful analysis consistent with
our “duty . . . to decide cases and controversies properly before [us].”
United States v.
Raines
,
[1] Defense attorneys love to couch their legal arguments in terms of a federal court’s power to hear a case and federal courts far too often take the bait. See, e.g. , Arbaugh v. Y & H
[2] The CSA subjects to forfeiture the following items involved in a CSA violation because “ no property right exist [ s ]” in them: (1) the marijuana and its containers, (2) “raw materials, products, and equipment of any kind” used to process and deliver the marijuana, (3) proceeds or any other thing of value furnished in exchange for the marijuana, and (4) any real property used to facilitate such exchange. 21 U.S.C. § 881(a) (emphasis added).
[3] This is not to say a federal court must strike all contracts that “touch upon” a marijuana enterprise. See, e.g. , Kenney v. Helix TCS, Inc. , 939 F.3d 1106, (10th Cir. 2019). In Kenney , an employee of defendant-employer sued, alleging defendant violated the Fair Labor Standards Act’s overtime obligations. The defendant provided security services for marijuana enterprises in Colorado. We held defendant was not excused from complying with the FSLA because “any violations of the CSA are not relevant to whether the FSLA’s protections apply to workers in the marijuana industry.” 939 F.3d at 1113. The FSLA’s overtime provisions focus on individual workers’ wellbeing notwithstanding the underlying nature of the business in which their employer is engaged. Id . at 1111–12. Pointing out that illegal enterprises are not exempt from federal tax laws, we relied on the well-established rule that employers are not excused from complying with federal laws just because their business practices are federally prohibited. Id . at 1110–13.
[4] Defendants raise an illegality defense based on public policy for the first time at page 25 of their opening brief in Appeal No. 24–1049.
[5] Unsurprisingly, section 79.6 of Corbin on Contracts , entitled “A Sua Sponte Issue for the Court,” expresses a view on the matter similar to the Supreme Court. The treatise tells us that “[b]ecause the public policy issue involves a consideration of the public interest, an interest much broader than the interests of the parties and one not usually considered by the parties, the court must take that protector’s role.” Corbin, supra § 79.6, at 21. Accordingly, “parties cannot remove the issue from the court’s purview by not raising the issue, . . . or otherwise waiving the issue. The corollary to this position is that the validity of a contract offensive to public policy cannot be waived. ” Id . (emphasis added); see also 5 Williston on Contracts § 12.5, at 1026–27 (4th ed. 2009) (defense of illegality based on public policy “cannot be evaded by the device of waiver”).
[6] Let us not forget we are here because Plaintiff had a prior Colorado criminal drug conviction and thought it imprudent to apply directly to Maryland for a state-issued license to cultivate, process, and dispense marijuana. To solve his problem, Plaintiff entered into an unlawful agreement with Defendant Barch to make Culta operational in such a way that Maryland authorities would remain unaware of his criminal record. Barch refused to fulfill his end of this illegal bargain by returning a portion of Culta’s ownership to Plaintiff once Maryland had granted Barch a license. Since then, things have spiraled out of control because federal courts, bound to uphold the public policy of the United States, have dropped the ball. If Plaintiff is correct that Defendant Barch breached an oral contract to aid in the establishment of a marijuana enterprise and the only asset available to redress his injury is the equity interest in this enterprise held by Barch and his holding company, then absent Congressional action, maybe Plaintiff’s breach of contract action and his preferred remedy reside in state court.
[7] The post-judgment order, i.e. , remedy, directs Defendants Barch and his shell company, Trellis Holdings, to (1) use their “best efforts” to sell Trellis’s equity, i.e. , partial ownership interest, in the marijuana enterprise, (2) turn over the proceeds from any such sale to Plaintiff until the judgment is satisfied, and (3) avoid devaluing Trellis’s equity in the meantime. The first two remedial measures are self-explanatory. As for the third measure,