Oregon Hemp/CBD: Federal Court Allows Biomass Business Litigation to Proceed

The litigation fallout from the hemp rush continues to wind its way through state and federal courts. Just a few years ago everyone and their brother was hot on hemp. Investment capital flooded into Oregon and other states and the industry was awash in new Hemp/CBD farming, processing, manufacturing, and retail businesses.

The sheen has worn off and the Hemp/CBD market has not lived up to the hype. That has led to lots disappointment and a fair amount of hemp litigation. We’ve represented many companies and individuals all across the supply chain in a variety of Hemp/CBD business, insurance, and intellectual property litigation. This has been the case for a couple of years now.

This post discusses Oregon federal court hemp litigation involving a biomass processing facility and a recent preliminary decision on a motion to dismiss.

Defendants file counterclaims arising from hemp biomass venture

The case is Lake v. Esposito. The facts are unfortunately familiar and, because this is a motion to dismiss filed by the plaintiff, we only have the facts alleged in the counterclaims to go on. Apparently, defendants formed a hemp biomass processing startup in 2018. Plaintiff and defendants were all members of the hemp company. Plaintiff was a licensed attorney, and he drafted the member agreement in which each member agreed (among other things) to inform the company of any competing business opportunity.

Defendants, which include the company itself, claim plaintiff promised, but failed, to provide the necessary funding to get the operation going. Later, they allege, plaintiff ceased all funding and asked the other members to buy out his shares. Buy-out negotiations ensued but were unsuccessful. Plaintiff allegedly then formed a competing venture of which he is the managing member, and which competes directly with and provides the same services as the company. Defendants allege at least $1 million in damages.

Plaintiff moves to dismiss counterclaims; court disagrees

Plaintiff moved to dismiss, arguing defendants lack standing to sue plaintiff and even if they did have standing, their counterclaims fail to state a claim.

As for standing, Plaintiff argued that an LLC may not sue a member for breach of a member agreement under ORS 63.165. That statute provides, in part, that a member or manager is not personally liable for a debt, obligation or liability of the limited liability company solely by reason of being or acting as a member or manager.

The court explained that under Oregon law an LLC may sue one of its members for breach of a member agreement on the theory that the LLC is an intended third-party beneficiary of the member agreement. Here, defendants pleaded enough facts to establish the LLC was a third-party beneficiary of the member agreement.

Although ORS 63.165 insulates a member from liability in some respects, the statute provides that an LLC member is not personally liable for the obligations of the LLC “solely by reason of being or acting as a member.” Here, said the Court, defendants were not asserting counterclaims against plaintiff “solely” because he is a member but instead because he allegedly breached fiduciary duties. The court held that ORS 63.165 did not bar Defendants’ claims.

The court denied the remainder of the motion either because defendants pleaded enough facts or because plaintiffs’ motion depended on facts outside the four corners of the counterclaims. So for now the case continues subject to repleading of a derivative claim dismissed without prejudice and with leave to replead.

For more coverage of hemp litigation issues, see:

Cannabis Insurance Litigation: Oregon Federal Court Rules for Hemp CBD Home Processor in Coverage Dispute
Hemp Litigation: Colorado Federal Court Stays Hemp Partnership Dispute Under Colorado River Abstention Doctrine
Oregon Cannabis Securities Litigation: Another (!) Fraud Lawsuit
Hemp/CBD Litigation Forecast: Cloudy with a Chance of Damages
What’s Next for Hemp Businesses? A Litigation Perspective

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