Court Opinion

ID: 9906956
Source: CourtListenerOpinion
Date Created: 2023-12-05 17:03:25.475385+00
Date Added: 2024-06-11T09:55:12.733158
License: Public Domain

NOTICE: NOT FOR OFFICIAL PUBLICATION.
  UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
                  AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

                                     IN THE
              ARIZONA COURT OF APPEALS
                                 DIVISION ONE

        WHITESTAR SOLUTIONS, LLC, et al., Plaintiffs/Appellants,

                                         v.

            MEDMEN ENTERPRISES, INC., Defendant/Appellee.

                              No. 1 CA-CV 22-0738
                                FILED 12-05-2023

            Appeal from the Superior Court in Maricopa County
                           No. CV2020-003335
                   The Honorable Dewain D. Fox, Judge
                 The Honorable Daniel G. Martin, Judge

                                   AFFIRMED

                                    COUNSEL

Fennemore Craig, P.C., Phoenix
By Louis D. Lopez, Charles E. Markle
Counsel for Plaintiffs/Appellants Whitestar Solutions, LLC and Adakai Holdings,
LLC

Snell & Wilmer, L.L.P., Phoenix
By Jennifer L. Hadley Catero, Steven D. Jerome, Emily Gildar Yaron,
James G. Florentine
Counsel for Defendant/Appellee MedMen Enterprises, Inc.
                      WHITESTAR, et al. v. MEDMEN
                          Decision of the Court

                      MEMORANDUM DECISION

Judge Cynthia J. Bailey delivered the decision of the Court, in which
Presiding Judge James B. Morse Jr. and Judge Brian Y. Furuya joined.

B A I L E Y, Judge:

¶1           Whitestar Solutions, LLC (“Whitestar”) appeals the superior
court’s summary judgment in favor of MedMen Enterprises, Inc.
(“MedMen”). In its second amended complaint, Whitestar alleged that
MedMen had fraudulently induced Whitestar to contract to sell part of its
business to MedMen by misrepresenting the nature of restrictive legends
on MedMen’s securities. Because no admissible evidence shows MedMen
made material misrepresentations, and Whitestar shows no injury from any
alleged misrepresentation, we affirm.

                FACTS AND PROCEDURAL HISTORY

¶2           Whitestar owned Omaha Management Services, LLC
(“Omaha”), the management company for EBA Holdings, Inc. (“EBA”),
which operates a cannabis cultivation and dispensary business in Mesa and
Scottsdale. EBA does business as Monarch.

¶3             MedMen is a Canadian corporation with its securities
publicly traded on the Canadian Securities Exchange. Since at least May
2018, MedMen engaged Odyssey Trust Company (“Odyssey”) as its
securities transfer agent.

¶4         In September 2018, Whitestar and others1 entered a
“Membership Interest Purchase and Sale Agreement” (“the Agreement”)
with MedMen for Whitestar to sell or otherwise transfer its ownership in
Omaha and its interests (including the Monarch business) to MedMen.2

1     The others included (1) Adakai Holdings, LLC (“Adakai”), a wholly
owned subsidiary of Whitestar and Whitestar’s manager, (2) Dustin
Johnson, the founder/managing partner of Whitestar, member/manager of
Adakai, and board member of EBA, and (3) Michael Johnson.

2     The Agreement provided that Arizona has exclusive jurisdiction in
any legal suit arising out of the Agreement, and it provided for venue in

                                   2
                     WHITESTAR, et al. v. MEDMEN
                         Decision of the Court

Under the Agreement, the purchase price included a number of MedMen’s
Class B Public Shares (“the Closing Shares”).3 The Agreement required
MedMen to “issue and deliver” the Closing Shares to Whitestar “free and
clear of all Encumbrances[4] and restrictions on transfer.”5 However,
MedMen’s shares were unregistered securities, and Whitestar understood
that MedMen would issue those securities with a restrictive legend—a
statement on the certificate identifying restrictions on transferability—
affixed to the shares.

¶5            In October 2018, MedMen’s then-Head of Investor Relations,
Stephanie Van Hassel, confirmed with Whitestar’s representative that the
Closing Shares were foreign stock bearing a restrictive legend pursuant to
the United States Securities Act of 1933 (“the 1933 Act”), and that
Whitestar’s members could have the legend removed for purposes of
effectuating a sale pursuant to an exemption, Rule 9046 of Regulation S:

       The shares you will receive will be restricted in the sense that
       they have a legend. They will not be restricted in terms of a

Maricopa County. It also provided that the Agreement itself “shall be
governed by and construed in accordance with” Delaware law.

3     The purchase price was also subject to increase by a multi-tiered
Earn-Out Payment, an additional payment of Class B Public Shares
contingent on gross revenues over a specified period.

4      The Agreement broadly defined an “encumbrance” as “any charge,
claim, community property interest, pledge, condition, equitable interest,
lien (statutory or other), option, security interest, mortgage, easement,
encroachment, right of way, right of first refusal, or restriction of any kind,
including any restriction on use, voting, transfer, receipt of income or
exercise of any other attribute of ownership.”

5       In discussing Earn-Out Payments, the Agreement further provided
that the Class B Public Shares issued to Whitestar would be “free and clear
of all Encumbrances and restrictions on transfer other than resale
restrictions pursuant to United States security laws.”

6       See 17 C.F.R. § 230.904. According to Whitestar, “Rule 904 provides
a safe harbor for the removal of the restrictive legend before the expiration
of the one-year lockup for an offshore sale of unregistered securities.” Rule
904 is part of the section referred to as “Regulation S,” located at 17 C.F.R.
§§ 230.901 to -905. There is no specific timing component to Rule 904.

                                      3
                     WHITESTAR, et al. v. MEDMEN
                         Decision of the Court

      lock up period. They are restricted with the 1933 Act legend
      until you decide to sell your shares. At that point, you are
      able to sell through an exemption called Rule 904 of
      Regulation S and your broker will be able to assist you with
      this. They will provide you with the form that you will need
      to complete to certify that you are selling into Canada using
      this exemption. Unfortunately, US securities laws do not
      allow MedMen to issue shares to US residents without this
      restriction when the shares are not registered with the SEC.

Whitestar did not object to the Closing Shares coming with the restrictive
legend, and although Whitestar could have terminated the transaction
before closing if it believed MedMen made inaccurate representations or
warranties, it did not do so.

¶6           Closing occurred on December 3, 2018. Although the
Agreement provided for the Closing Shares to be issued to Whitestar,
Whitestar directed MedMen to instruct Odyssey to issue the Closing Shares
directly to Whitestar’s members (“the Share Recipients”).

¶7            MedMen previously authorized Odyssey to remove the 1933
Act legend in connection with the subsequent sale and transfer of its
Closing Shares. Odyssey’s representative advised Van Hassel that “if we
are going to remove the legend without a concurrent transfer, we should
have the broker and the shareholder undertake to return the shares to us if
the sale outside of the US does not imminently occur for any reason.”
Accordingly, the representation letters prepared by Odyssey and
authorized by MedMen provided that any Closing Shares not sold would
be “promptly” returned to Odyssey for re-application of the restrictive
legend.7

¶8            Soon after, Whitestar’s Dustin Johnson sought to have the
legend removed from all his recently acquired Closing Shares, and he
contacted FineMark National Bank and Trust (“FineMark”) to assist him.
In February 2019, FineMark’s Jennifer Garcia sent him an email advising
that she had learned from “our back office who is the transfer agent for our
incoming assets” that the Closing Shares “have to be sold on the Canadian

7      These “representation letters,” which were to be used when the
Share Recipients sold or transferred their Closing Shares, included forms
entitled “Form of Declaration of Reliance Upon Regulation S,” a Share
Recipient’s declaration, and “Affirmation by Seller’s Broker-Dealer of
Reliance on Regulation S,” the Share Recipient’s broker’s affirmation.

                                     4
                     WHITESTAR, et al. v. MEDMEN
                         Decision of the Court

Stock exchange within 30 days of the legend removal.” Garcia further
advised that if Johnson had the legends removed on all his shares, then “we
would need to have ALL of them sold within 30 days of removing the
restriction at Odyssey” and they would need to “have everything ready to
go before the restrictive legend is removed.” This was the first time Johnson
learned of the purported 30-day re-legending requirement, as no such
requirement was specified in MedMen’s instruction letters to Odyssey or
applied to the Closing Shares.

¶9           Over the next few months, the parties tried to resolve the
alleged 30-day re-legending issue. Ultimately, MedMen determined that,
although some securities brokers—and perhaps even Odyssey—believed
30 days was a reasonable period, that was not a restriction placed by
MedMen or originated by Odyssey, and there never was a 30-day resale/re-
legending requirement (or any requirement of a specific number of days) in
MedMen’s representation letters or in any legend removal paperwork
executed by the Share Recipients.

¶10           Meanwhile, the Share Recipients, including Dustin Johnson,
successfully removed the 1933 Act legend from their Closing Shares within
days after executing and submitting their representation letters. Further,
they have either sold their Closing Shares or held them without having the
legend reapplied.

¶11          Over time, the value of the Closing Shares declined and, in
March 2020, Whitestar sued MedMen in superior court for fraudulent
inducement, breach of contract, injunctive relief, declaratory relief, and
appointment of a receiver. Whitestar alleged that MedMen fraudulently
induced it to enter and close on the Agreement by promising to deliver
“freely transferable/tradeable shares” to Whitestar, but instead had
delivered “encumbered” stock (referring to the restrictive legend and the
purported 30-day re-legending requirement).

¶12           The case was assigned to Judge Danielle Viola. At the
beginning of discovery, Whitestar applied for the appointment of a receiver
to protect its interests and for a temporary restraining order and
preliminary injunction, largely to enjoin MedMen from selling Monarch.
Judge Viola held an August 2020 evidentiary hearing and took the matter
under advisement. She later denied the application to appoint a receiver
but granted Whitestar’s application for a preliminary injunction upon
Whitestar’s posting of a bond after concluding Whitestar demonstrated a
strong likelihood of success, there was a possibility of irreparable injury,
and the equities and public policy favored Whitestar. She also cautioned,

                                     5
                    WHITESTAR, et al. v. MEDMEN
                        Decision of the Court

however, that her preliminary conclusions were “[b]ased on the limited
evidence presented,” and she restricted the injunction to the sale or
disposition of “assets MedMen acquired under the Asset Purchase
Agreement.” Whitestar never posted the bond.

¶13        The case was reassigned to Judge Daniel Martin. In April
2022, MedMen moved for summary judgment.

¶14          In May 2022, Judge Martin granted summary judgment in
favor of MedMen and against Whitestar on all counts, finding and
concluding in part as follows:

              Preliminarily, the Court finds that Whitestar has
      standing to prosecute its claims. But, on the record presented,
      the Court further finds that no reasonable juror could
      conclude that Whitestar is entitled to relief on any of those
      claims. At the root of this litigation is Whitestar’s assertion
      that MedMen fraudulently induced Whitestar to enter into
      the Purchase and Sale Agreement that underpins the dispute
      between the parties. More specifically, Whitestar urges that
      the closing shares were subject to an undisclosed
      encumbrance to the effect that “the shares had to be returned
      if not imminently sold after the [1933 Act] legend is
      removed[.]” There is no dispute that Whitestar was aware
      that the shares would be issued subject to a 1933 Act legend;
      by its Complaint and subsequent submissions to the Court,
      Whitestar cuts from whole cloth an argument that it somehow
      was unaware of the nature of those restrictions or the manner
      in which the shares could subsequently be sold (i.e., pursuant
      to the Regulation S/Rule 904 safe harbor). Nor does
      Whitestar adduce any probative evidence of the encumbrance
      it alleges to have constituted the fraud (i.e., the re-legending
      period); the blanket authorization letter on which Whitestar
      relies does not say this. The mass of information submitted
      by the parties notwithstanding, there is simply no evidence
      that the closing shares had to be sold within a 30-day window
      once the restrictive legend was removed, and therefore no
      evidence of the encumbrance posited by Whitestar in support
      of its claims. Further to the foregoing, the Court agrees with
      MedMen that there is no evidence in the record of any
      damages proximately caused by the alleged re-legending
      requirement.

                                     6
                     WHITESTAR, et al. v. MEDMEN
                         Decision of the Court

             The Court’s findings and conclusions as to Whitestar
      compels the grant of summary judgment to MedMen on
      Counts One (fraudulent inducement), Two (breach of
      contract), Three (injunctive relief), and Six (receivership and
      injunction) of the Second Amended Complaint. As to Count
      Four (declaratory relief as to the earn-out shares), the record
      shows that MedMen issued the earn-out shares, and the Court
      agrees with MedMen that Whitestar “has failed to articulate
      any [remaining] dispute or additional obligation owed under
      the [Purchase and Sale Agreement] as to the Earn-Out
      Shares.”

             ....

              A grant of summary judgment is the exception, not the
      rule. Here, the parties have created a massive record which,
      from its sheer bulk alone, would suggest that a genuine issue
      of material fact must exist. However, at its core, this case
      revolves around a relatively uncomplicated question of an
      alleged misrepresentation for which no supporting evidence
      exists. Once the weakness of that foundation is exposed, the
      remaining structure collapses around it. Summary judgment
      will be granted in favor of MedMen.

(Record citations omitted.)

¶15            Judge Martin later denied Whitestar’s motion for
reconsideration. In October 2022, the superior court (Judge Dewain Fox)
entered final judgment in MedMen’s favor.

¶16         We have jurisdiction over Whitestar’s timely appeal under
Arizona Revised Statutes sections 12-120.21(A)(1) and 12-2101(A)(1).

                              DISCUSSION

      I.     Standing

¶17           As a threshold issue, we address Whitestar’s standing to bring
this lawsuit before the superior court. Whitestar argues that Judge Martin’s
conclusion that “there is no evidence in the record of any damages
proximately caused by the alleged re-legending” conflicts with his
preliminary finding that “Whitestar has standing to prosecute its claims,”
and its argument raises the question whether standing exists. MedMen
contends that standing is a jurisdictional requirement and argues we may

                                     7
                      WHITESTAR, et al. v. MEDMEN
                          Decision of the Court

sua sponte determine if Whitestar lacked standing to prosecute its claims.
See, e.g., Burkhart v. Genworth Fin., Inc., 250 A.3d 842, 851–52 (Del. Ch. 2020).

¶18           “The issue in Arizona is whether, given all the circumstances
in the case, [an organization] has a legitimate interest in an actual
controversy involving its members and whether judicial economy and
administration will be promoted by allowing representational
appearance.” Armory Park Neighborhood Ass’n v. Episcopal Cmty. Servs. in
Ariz., 148 Ariz. 1, 6 (1985). Those elements are met here.

¶19            “The issue of standing [in Delaware courts] is concerned only
with the question of who is entitled to mount a legal challenge and not with
the merits of the subject matter in controversy.” Dover Hist. Soc’y v. City of
Dover Plan. Comm’n, 838 A.2d 1103, 1110 (Del. 2003) (citation and internal
quotations omitted). Whitestar alleged the elements necessary to establish
standing under Delaware law: (1) it and/or the Share Recipients had
suffered an injury in fact from the loss of the Omaha
ownership/membership interests conveyed to MedMen in reliance on
MedMen’s representations, (2) a causal connection existed between the
alleged injury and MedMen’s alleged conduct representing that MedMen
would distribute unencumbered shares, and (3) the alleged injury could be
redressed by a favorable decision awarding either recission or recessionary
damages if Whitestar prevailed. See id.; Burkhart, 250 A.3d at 852. It appears
that, in preliminarily finding standing, Judge Martin implicitly recognized
this. We conclude the requirements for standing were met under both
Arizona and Delaware law, and Judge Martin did not err in concluding that
Whitestar had standing to pursue its claims.

       II.    The Merits

¶20        Whitestar argues the superior court erred in granting
summary judgment in favor of MedMen. We disagree.

              A. Standard of Review & Applicable Law

¶21           We review the grant of summary judgment de novo, while
viewing the facts and reasonable inferences therefrom in the light most
favorable to the non-moving party. See, e.g., Espinoza v. Schulenburg, 212
Ariz. 215, 216, ¶ 6 (2006). Summary judgment is appropriate only if no
genuine dispute exists as to any material fact and the moving party is
entitled to judgment as a matter of law. Ariz. R. Civ. P. 56(a); accord
Delmastro & Eells v. Taco Bell Corp., 228 Ariz. 134, 137–38, ¶ 7 (App. 2011).

                                       8
                      WHITESTAR, et al. v. MEDMEN
                          Decision of the Court

¶22            Nonetheless, a party opposing summary judgment may not
simply rest on the pleadings, but must show by competent evidence specific
facts that create a genuine issue for trial. MacConnell v. Mitten, 131 Ariz. 22,
25 (1981). We will not reverse summary judgment “simply on the
speculation that some slight doubt (and few cases have complete certainty),
some scintilla of evidence, or some dispute over irrelevant or immaterial
facts might blossom into a real controversy in the midst of trial.” Orme Sch.
v. Reeves, 166 Ariz. 301, 311 (1990). Also, we may affirm summary judgment
on any basis supported by the record. Mutschler v. City of Phoenix, 212 Ariz.
160, 162, ¶ 8 (App. 2006).

¶23           Under Delaware law, to prove fraudulent inducement,
Whitestar was required to show each of the following: (1) MedMen made a
false representation regarding the Closing Shares, (2) MedMen knew of, or
had a reckless indifference to, that alleged falsity, (3) MedMen intended to
induce action by Whitestar based on the representation, (4) Whitestar
reasonably relied on MedMen’s alleged representation, and (5) Whitestar
suffered an injury proximately caused by MedMen’s alleged
representation. Prairie Cap. III, L.P. v. Double E Holding Corp., 132 A.3d 35,
49 (Del. Ch. 2015) (citing Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074
(Del. 1983)).

              B. Judge Martin’s Summary Judgment Ruling

¶24           Although Whitestar identifies various factual disputes
between the parties, there were no disputed material facts precluding
summary judgment. Whitestar did not present admissible evidence the
Closing Shares issued to Whitestar’s members were “encumbered” by
MedMen with a 30-day re-legending requirement. Moreover, even
assuming a 30-day re-legending requirement existed, Whitestar did not
show it was enforced as to the MedMen shares or that Whitestar or its
members were proximately harmed. Judge Martin’s findings and
conclusions fully addressed, and correctly resolved, the issues set before
him in the motion for summary judgment, and they did so in a fashion that
will allow any court in the future to understand the resolution. Based on
the admissible evidence, Whitestar cannot show that a genuine dispute
exists whether Whitestar can prove each of the elements of fraudulent
inducement. We agree with Judge Martin’s analysis, and because no useful
purpose would be served by this court fully rehashing and analyzing his
correct ruling, we adopt his analysis. See State v. Pena, 140 Ariz. 544, 544
(1984) (approving and adopting the “well[-]reasoned and correct” decision
of the court below).

                                       9
                     WHITESTAR, et al. v. MEDMEN
                         Decision of the Court

¶25          We separately address other arguments Whitestar makes on
appeal.

             C. Alleged Preclusive Effect of Judge Viola’s Ruling

¶26           Whitestar maintains that Judge Viola’s ruling after the August
2020 preliminary injunction evidentiary hearing precluded Judge Martin
from entering summary judgment. We disagree. See Powell-Cerkoney v.
TCR-Montana Ranch Joint Venture, II, 176 Ariz. 275, 279–81 (App. 1993)
(“[L]egal conclusions reached at the preliminary injunction phase of
litigation do not constitute law of the case.”). Judge Viola’s ruling was a
preliminary ruling made before the close of discovery, and because the
context in which the parties presented their arguments changed
substantially after discovery, that ruling did not preclude Judge Martin
from granting summary judgment.8

             D. The Motion for Reconsideration

¶27            Whitestar moved for reconsideration on one ground—that
Judge Martin cited the wrong document, Exhibit 4 to Whitestar’s
controverting statement of facts, rather than Exhibit 3, when he concluded
Whitestar had not put forward any probative evidence of the 30-day “re-
legending period” and concluded that “the blanket authorization letter on
which Whitestar relies does not say this.” Whitestar raises that same
argument on appeal. Both Exhibit 3 and Exhibit 4 contain a blanket
authorization letter from MedMen to Odyssey—one dated June 28 and one
dated July 11, 2018—and neither letter provides for a 30-day (or otherwise
specified) re-legending period. Moreover, although Whitestar is correct
that Exhibit 3 also contains representation letters, including a “Form of
Declaration of Reliance Upon Regulation S” that states that “[a]ny shares
not so sold will be promptly returned to Odyssey for re-application of the
restrictive legend,” neither that document nor any other document in either
exhibit specifies a re-legending period. The parties presented, and the
superior court presumably considered, all these documents, and we find no
error in its conclusion.

8      We also disagree with any suggestion that the preliminary ruling of
the superior court should be considered “evidence.” See, e.g., Beam v. Foltz,
832 F.2d 1401, 1408 (6th Cir. 1987) (noting with approval a jury instruction
that “rulings by the court were not evidence and should not be considered
as evidence”).

                                     10
                   WHITESTAR, et al. v. MEDMEN
                       Decision of the Court

                           CONCLUSION

¶28       We affirm the superior court’s summary judgment in favor of
MedMen and against Whitestar.

                         AMY M. WOOD • Clerk of the Court
                         FILED: TM

                                    11