Business

Denver Judge Vacates $100 Million Decision in Marijuana Ownership Battle

An internal legal battle among Native Roots ownership has been playing out for over four years.
An internal legal battle among Native Roots ownership has been playing out for over four years. Westword
Two partners in one of Colorado's largest dispensary chains just took a major hit in an internal ownership battle.

Native Roots co-founders Josh Ginsberg and Rhett Jordan first sued co-owner Peter Knobel in 2017 over an alleged breach of their operating agreement. After nearly four years of court hearings and legal dealings, an arbitrator awarded Ginsberg and Jordan just over $100 million with interest, but that award was recently tossed out by Denver District Court.

Knobel and his company, Brightstar LLC, were sued by Ginsberg and Jordan the year after Brightstar took majority ownership of Native Roots. Their lawsuit claimed that Knobel and Brightstar had violated a shotgun clause in their operating agreement by attempting to take control of the company and then sell Native Roots. According to Ginsberg and Jordan's filings, Knobel wanted to sell Native Roots to Privateer Holdings, a private equity firm that owns marijuana companies Leafly, Marley Natural and Tilray.

A special provision in business agreements, a shotgun clause typically allows one partner to try to force other partners to sell their stakes or to buy out partners who want to sell their ownership. According to Jordan, he and Ginsberg then invoked a stipulation in their operating agreement with Knobel and Brightstar in which partner disputes could be settled by an arbitrator.

In 2021, an arbitrator awarded $53.6 million to Ginsberg and $46.9 million to Jordan, as well as interest for the time the debt went unpaid. Earlier this month, however, a Denver District Court judge sided with Knobel and Brightstar, vacating a $140.4 million payment order while citing the arbitrator's bias against Brightstar and Knobel, as well as a lack of jurisdiction over Knobel as an individual.

Knobel's attorney, Hugh Gottschalk, argued that an individual cannot be added to an arbitration hearing if that person never agreed to participate — and only Brightstar, not Knobel, agreed to arbitration. Denver District Court Judge J. Eric Elliff bought that argument.

"The arbitrator committed legal error when he concluded that Brightstar’s corporate veil should be pierced and that Brightstar was Knobel’s alter ego. Knobel was never subject to the arbitrator’s jurisdiction, and  subjecting him to jurisdiction and including him in the award was legally erroneous and an abuse of discretion. For these reasons, the Court vacates the arbitration award against Peter Knobel individually," according to Elliff.

In his reasoning for vacating the payment entirely, Elliff pointed to the arbitrator's conduct "before, during, and after the hearing," which the judge said he believed demonstrated "direct, definite, and evident bias" against Knobel. To support his conclusion, Elliff cited "dubious lines of questioning" by the arbitrator and a lack of accommodations made for Knobel’s inability to read and understand complex documents.

Elliff also claimed that the arbitrator, who wasn't named in the court decision, ruled on crucial issues in the case without accepting all of the evidence.

"This is not a decision the Court comes to lightly. It is acutely aware of the time and treasure that this case has consumed. But having taken the time to completely review the hearing transcript and relevant parts of the record, the Court is firmly convinced that this is the just outcome," Eliff concluded.

Jordan and a Native Roots spokesperson didn't respond to requests for comment; Ginsberg could not be reached. According to Gottschalk, no appeal of the decision has been filed.

"We believe Judge Elliff's decision is the correct one and are very pleased to have the decision," Gottschalk says, describing the judge's seventeen-page ruling as "a very thorough analysis of the case."

Currently operating twenty stores in Colorado, Native Roots is still co-owned by Brightstar, Ginsberg and Jordan, with Brightstar the majority owner. Earlier this year, Jordan said that Native Roots continues to apply for new business licenses in Colorado and look at further expansion — despite the internal legal battle.

"As we're going through the proceedings, I don't know where it's going to go or what the options are," Jordan told Westword in January. "My greatest interest is continuing the success of my company, labor force and my team, and staying true to our roots."
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Thomas Mitchell has written about all things cannabis for Westword since 2014, covering sports, real estate and general news along the way for publications such as the Arizona Republic, Inman and Fox Sports. He's currently the cannabis editor for westword.com.
Contact: Thomas Mitchell