Social equity marijuana license holder turns to Arizona court to regain control of company

Corrections & Clarifications: A previous version of this article gave incorrect information about when the agreement with Michael Halow was made. Also, the article incorrectly described the lawyers handling subpoenas for Moe Asnani and Rene Mendoza.

Winners of one of the state's social equity marijuana licenses hope to wrest back control of their company in a new court action targeting Arizona's health agency.

The social equity applicant and her partner have already lost two key legal battles to a multi-state marijuana company they claim defrauded them of the lucrative license. The high-profile case inspired a legislative proposal this year that lawmakers ultimately chose not to approve.

The pair are now trying to force the state Department of Health Services to hold a hearing that could reverse their losses.

The complaint for special action filed July 18 in Maricopa County Superior Court with the help of local lawyer Isaac Gabriel accuses the state of breaking its own rules when it transferred control of the license without holding a hearing following a 2023 arbitrator's ruling.

The complaint also tries to capitalize on a June court ruling that Gov. Katie Hobbs violated the law when she removed 13 directors of state agencies from the state Senate's confirmation process and appointed them as "executive deputy directors," who are not subject to confirmation.

Among those was health agency chief Jennie Cunico, who the complaint argues had "no authority to act on behalf" of the agency. That's another reason the court should order the health agency to hold a hearing over the license transfer, the complaint says.

Since losing their license, Anavel Vasquez and Rene Mendoza have become prime examples of the failed social equity program. Vasquez is a former wildland firefighter with limited English skills who obtained the license in a state lottery. Mendoza, her longtime partner who's also a former firefighter, has acted as her business associate throughout their experience with the program.

They accuse Michael Halow of Story Cannabis of a scheme to take the license from them with a "fraudulent" business contract. Halow, who denies the allegation, ended up with control of the license after an arbitrator found in 2022 that Vasquez had breached their contract by selling Halow's 49% interest in it.

Moe Asnani, who paid Vasquez $2.7 million for that 49% stake, told The Arizona Republic the state's social equity experience reminded him of "American Greed," a long-running TV show about white-collar crimes and scams. But Halow's spokesman, longtime political crisis-management consultant Jason Rose, labeled Asnani a "pretty sophisticated actor."

"He knows exactly what he's doing," Rose said.

Program enriches marijuana corporations, leads to court fight

Arizonans approved the social equity license program as part of the 2020 recreational marijuana law. But like similar programs in other states, it hasn't solved equity issues.

The new law attempted to correct the disproportionate arrests of people of color for marijuana offenses over the years, offering a lottery for 26 licenses to low-income residents of high-enforcement areas. But as some predicted, large cannabis corporations swooped in to obtain the licenses, offering to pay the $4,000 lottery fee for the low-income applicants and to help set up and run dispensaries with them.

As The Arizona Republic reported in January, only one of the 26 licenses is now controlled and owned by a social equity applicant . The rest are controlled by pre-existing corporations.

Before their lottery win, Vasquez and Mendoza entered a business agreement with Halow's team, signing paperwork that would give up a 49% stake in the license and form a company called Juicy Joint.

The pair claims Halow's representatives met them in a hotel room and offered $35,000 in cash for the remaining 51%. When they declined, they became subject to arbitration required by the term sheet they signed.

They claimed Halow had felonies on his record that excluded him from any ownership in an Arizona dispensary. But arbitrator Shawn Aiken later ruled the accusation was false and that Vasquez had "secretly" sold Juicy Joint's ownership of the license to a company formed by Asnani and Mendoza.

The health department transferred the license from Menvas 22, the company formed by Asnani and Vasquez, back to Juicy Joint, which Halow and his team then fully controlled.

Vasquez retained her 51% interest in Juicy Joint. But without control of the operation, she cannot sell her interest or direct any distribution of profits.

'Litigation within litigation'

Following the transfer of the license in 2023, Menvas 22 sued the state, Halow, and Halow's two limited liability corporations.

Halow's interest, represented by Cohen Dowd Quigley PC, counter-sued in December, claiming Juicy Joint lost "hundreds of thousands of dollars" in legal fees to fight Vasquez's transfer of the license to Menvas 22. The counterclaim seeks compensatory and punitive damages from Menvas 22.

Superior Court Judge Christopher Coury consolidated the two cases into one, which remains unsettled. The latest filings from this month show Mendoza and Asnani are attempting to subpoena other social equity winners who had "dealings" with Halow's companies.

Menvas 22's side argued the term sheet Vasquez signed is "void and fraudulent," and the subpoenas of third parties would produce evidence showing Halow "did the exact same thing to the subpoenaed third parties that he did to Ms. Vasquez."

Halow's legal team argued that Menvas 22 wants to "re-litigate" the arbitrator's decision against Vasquez, against the judge's wishes.

"Worse," a July filing by Halow's team states, Menvas 22 "apparently seeks this discovery to engage in a host of 'litigation within litigation.' The court should not permit it."

Coury on July 22 turned down an objection by Halow's team to forbid the subpoenas.

Governor's office, health agency weigh in on social equity bills

As the litigation between the would-be social equity dispensaries blazed, two Republican state lawmakers sponsored mirror bills this year to encourage the state attorney general to investigate cases of "predatory" investors in social equity licenses and to streamline a path for social equity license winners to take back licenses obtained by unscrupulous investors.

The bills from Sen. Sonny Borrelli of Lake Havasu City and Rep. Kevin Payne of Peoria required a three-quarters majority vote to pass because they would have amended a voter-approved law. Payne's bill never got a vote in the House. Borelli's bill failed to reach that threshold in the Senate on March 6 with an 18-12 vote. Two Democrats, Sens. Flavio Bravo and Catherine Miranda of Phoenix, were among the 12 "no" votes.

Just before the vote, Carly Fleege, the health agency's legislative liaison, criticized Borrelli's bill in an email to the Legislature's Democratic policy advisor, Patsy Osmon. The email noted, among other things, "entities that acquire a license from a social equity owner must certify that they will support communities disproportionately impacted by previous marijuana laws... They might do this by giving money to support nonprofits that do this work or by employing people who are disproportionately impacted."

"Borrelli's bill," Fleege wrote in the email obtained by The Republic through state public records law, "is premised on partial information, may create unintended consequences, and is likely intended to circumvent unfavorable court decisions to benefit a single interested party in a contested social equity license sale."

Lourdes Peña, Hobbs' deputy chief of staff of Legislative, Policy and External Affairs, wrote to Hobbs' general counsel, Bo Duls, in a March 7 email that she had sent Fleege's email to "every Paulino," in an apparent reference to the Democratic caucuses' chief of staff, Paulino Valerio.

The Arizona Dispensaries Association, which contributes to numerous political campaigns, gave $25,000 to Hobbs' inaugural fund in 2023. Story Cannabis is among the association's members, but that doesn't necessarily suggest a motive for Hobbs’ position on Borrelli's bill. Asnani's Downtown Dispensary and D2 dispensary in Tucson are also members, and Asnani also gave the inaugural fund $25,000, records show .

Did state need to hold a hearing to transfer license?

The new complaint argues the health agency had no right to unilaterally remove or transfer Menvas' license to Juicy Joint last year "without notice, opportunity to be heard, or due process of the law."

Menvas 22 obtained a clarification of Aiken's arbitration decision in February that stated the decision didn't actually direct the health agency to take any action.

But a lawyer for the state, according to the complaint, claimed that was irrelevant. Though state rules indicate the agency should hold a hearing when it suspends or revokes a license, the agency claims it didn't suspend, revoke or transfer the license.

"As we've explained," the health agency counsel notified Menvas 22, "when a licensee transfers the license to another party, the Department merely reflects this in its records by reissuing the license in the name of the newlicensee.”

In other words, Gabriel wrote in the complaint, the agency seems to claim it "merely updates its records to reflecttransfers between unrelated entities." But that's not supported in the law or regulations, he continued.

Ultimately, the transfer denied the social equity applicant, Vasquez, from benefitting from her lottery win. Mendoza, who didn't return a text message for this article, previously said he doubts Halow would ever allow Vasquez to receive any profits from the Kingman dispensary now operating under her license.

A spokesperson for the health agency said it couldn't comment on pending litigation.

Menvas followed all of the agency's rules in creating the partnership between Asnani, Vasquez and Mendoza, Gabriel told The Republic in a written statement. It created a "true partnership with the license holder to operate a dispensary utilizing the license. This is exactly what AZ DHS contemplated given the social equity license holders would need a well-capitalized partner with significant retail experience to get a dispensary up and running.”

Reach the reporter at rstern@arizonarepublic.com or 480-276-3237. Follow him on X @raystern .

This article originally appeared on Arizona Republic: Social equity marijuana license holder turns to Arizona court to regain control of company