Submitted: April 15, 2019
H. Manwaring, IV, Albert J. Carroll, Alberto E.
Chávez, MORRIS JAMES LLP, Wilmington, Delaware;
Counsel for Plaintiffs.
Kenneth J. Nachbar, R. Judson Scaggs, Jr., Lauren Neal
Bennett, Thomas P. Will, Barnaby Grzaslewicz, Elizabeth A.
Mullin, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington,
Delaware; Counsel for Defendants and Nominal Defendants.
his death on November 5, 2017, Michael Llamas owned a 90%
member interest in Stone Ash, LLC (the "Company"),
and he served as one of its two managers. Defendant Stuart
Titus owned the other 10% member interest and served as its
other manager. When Michael died, his status as a member
terminated, and the economic rights associated with his
interest passed to his estate. Michael's status as a manager
likewise terminated. Titus was left as the sole member and
sole manager of the Company.
Company owned a large block of stock in Medical Marijuana,
Inc., an Oregon corporation that is a development-stage,
penny-stock issuer involved in cannabis-related businesses.
Its shares trade over the counter under the symbol
"MJNA," which this decision uses to refer to the
issuer. Through his positions with the Company, Michael
managed MJNA's operations, despite not having any formal
position with that entity.
death left Titus in control of the Company and, through it,
MJNA. Enter James Arabia, one of Michael's advisors.
After learning of Michael's death, Arabia moved quickly
to assert control over the Company. He did so by advising
Titus to appoint defendants John Huemoeller and Timothy Scott
as additional managers, explaining that they could support
Titus and that Michael would have wanted it that way.
Huemoeller and Scott are beholden to Arabia, and adding them
would give Arabia control over the Company at the manager
level. Moreover, under the terms of the Company's then-
operative LLC agreement (the "Original LLC
Agreement"), Huemoeller and Scott could remove Titus as
a manager, thereby consolidating Arabia's control.
followed Arabia's advice. On November 7, 2017, two days
after Michael's death, Titus executed a written consent
that appointed Huemoeller and Scott as additional managers
(the "November 7 Consent"). Only after signing the
November 7 Consent did Titus become concerned about its
implications. He reached out to Stephen Silverman, a lawyer
who had represented the Company. After meeting with
Silverman, Titus understood that he had handed over control
to Arabia. He was shocked and dismayed, and he asked
Silverman to fix the problem he had created.
members of the Llamas family learned about Arabia's coup.
A flurry of communications and meetings ensued. On November
13, 2017, Titus and Silverman met with the plaintiffs: Steven
Llamas, Michael's father, and Jeffrey Llamas,
Michael's brother. Titus executed a new LLC agreement for
the Company (the "Amended LLC Agreement"). Among
other things, it established a board of managers with a
maximum of three members. In three locations, it described
Titus as the sole member and manager of the Company. The
description was inaccurate, because no one ever took action
to remove Huemoeller or Scott.
the same meeting, Titus executed a written consent that
purported to appoint Titus, Steven, and Jeffrey as members of
the board of managers (the "November 13 Consent").
But it did not first remove any of the incumbent managers.
days later, Titus told Arabia about the Amended LLC Agreement
and the November 13 Consent. Arabia convinced Titus to return
to the fold. On November 20, 2017, Titus executed another LLC
agreement for the Company (the "Final LLC
Agreement"). On November 21, 2017, Titus executed a
written consent that purported to remove Steven and Jeffrey
and replace them with Huemoeller and Scott (the
"November 21 Consent").
lawsuit, Steven and Jeffrey contend that they were properly
appointed as managers but never properly removed. Although
they do not dispute the effectiveness of the Final LLC
Agreement, they contend that the November 21 Consent is
invalid along with all of the actions that the board of
managers subsequently took.
response to this lawsuit, the defendants have raised an array
of arguments and defenses, one of which is dispositive.
Assuming for the purposes of analysis that Titus validly
adopted the Amended LLC Agreement (which the defendants
otherwise contest), the defendants correctly point out that
Titus never removed the incumbent managers.
post-trial decision holds that the November 13 Consent did
not appoint Steven and Jeffrey to the board of managers. Once
adopted, the Amended LLC Agreement limited the size of the
board to three managers. With Titus, Huemoeller, and Scott
occupying those seats, there were no vacancies to fill. The
November 13 Consent therefore provides no basis to challenge
any actions that the managers of the Company subsequently
took. Since November 7, 2017, the Company's managers have
been Titus, Huemoeller, and Scott.
a one-day trial, the parties introduced 208 exhibits and
lodged ten deposition transcripts. Seven fact witnesses
testified live. The parties agreed to sixteen stipulations of
fact in the pre-trial order.
the witnesses had some type of credibility issue, and many
had several. The members of the Llamas family, the named
defendants, and Arabia had personal interests in the outcome
of the case and strong feelings about each other. Titus was a
particularly unreliable witness who repeatedly changed his
story and offered dubious interpretations of contemporaneous
documents. Arabia, Huemoeller, and Scott were confident
witnesses, but they had the air of confidence men. They
seemed only to be telling part of the story. Steven and
Jeffrey were generally credible, but they had the least
first-hand knowledge about significant events, and Jeffrey
had some unconvincing memory lapses. Silverman and Priscilla
Vilchis, Michael's girlfriend when he died, testified by
deposition. Their accounts were mixed: Some portions seemed
credible, others exaggerated, and still others undermined by
conspicuous failures of memory.
done my best to reconcile the conflicting accounts. Generally
speaking, contemporaneous documents have received the most
weight. The plaintiffs bore the burden of proving the facts
necessary to support their claims by a preponderance of the
Michael and MJNA
accounts, Michael was a charismatic and energetic
entrepreneur. By his mid-twenties, he had amassed a fortune
in real estate as the co-founder of North American Companies,
"a real estate development and acquisitions firm
specializing in all areas of distressed
debt." But all was not done according to Hoyle.
In September 2012, the United States Department of Justice
indicted Michael for his alleged involvement in multistate
mortgage fraud and Ponzi schemes. In August 2016, Michael pled
guilty to a subset of the charges, and he was awaiting
sentencing when he died in November 2017.
his entanglements with the law, Michael's business
interests expanded to cannabis-related products. In March
2011, at age twenty-six, he purchased a controlling interest
in MJNA. The parties share an interest in depicting MJNA as a
substantial enterprise deserving the positive associations
that customarily accompany publicly traded status. MJNA's
disclosures tell the more complicated story of a dubious
penny-stock issuer with a long history of questionable
to its disclosures, MJNA began life in 2003 as Berkshire
Collection, Inc., a Canadian corporation that traded under
the symbol "BKRCF." According to a complaint filed by
the SEC in 2009, Berkshire Collection was one of fifty-nine
subsidiaries spun off by Blackout Media Corporation and its
principal, Sandy Winick, as part of a scheme to create
publicly traded companies lacking any business purpose and
manipulate their shares. After pleading guilty in 2015, Winick
was sentenced in 2016 to seventy-eight months in prison and
ordered to pay $2, 431, 038.32 in restitution and $5 million
in civil forfeiture.
2005, Berkshire Collection reincorporated in
Oregon. In January 2007, it changed its name to
Mynewpedia Corp. and adopted the trading symbol
"MYNW." Id. Approximately one year later,
the corporation merged with Club Vivanet, Inc., adopted that
name, and changed its trading symbol to "CLVV."
See id. at 1-2. Club Vivanet described itself as
"a global marketing company delivering a range of
products and services through a network of IGC's
(Independent global consultants) around the world."
Id. at 4. Its balance sheet for the period ended
March 31, 2008, listed assets of $7, 441 (literally; not
expressed in thousands), and its statement of operations
disclosed an operating loss of $678, 669, a net loss of $10,
670, and a total of 8, 300, 000 shares issued and
outstanding. Id. at 13-14.
2009, the company changed its name to "Medical
Marijuana, Inc." as part of a transaction in which
control passed to Bruce Perlowin, a convicted marijuana
smuggler and self-described "King of
Pot." The company disclosed that it would now
"provide institutional level financial systems to local,
state and federal governments, testing and certification
services, education programs, consulting and turn-key
solutions to all levels of government and the Medical
Marijuana Industry." In 2016, the SEC charged
Perlowin with fraud in connection with his subsequent
marijuana-related venture, Hemp, Inc. According to the
SEC's complaint, Perlowin and his co-defendants sold
hundreds of millions of unregistered and purportedly
unrestricted shares to public investors.
March 2011, Michael acquired a controlling interest in MJNA.
According to MJNA's public filings:
On March 23, 2011, an equity/asset exchange was effected
between Hemp Deposit and Distribution Corp., a Delaware
corporation ("HDDC") and Medical Marijuana, Inc.
(the "Company" or "MMI"). The
equity/asset exchange called for the Company issuing 260,
000, 000 million [sic] shares of common stock to
HDDC which required an increase in the authorized
[sic] from 300, 000, 000 shares to 600, 000, 000
shares which increase was effective on March 28, 2011. The
issuance of the 260, 000, 000 shares was affected
[sic] on March 31, 2011. The resignation of all
officers and directors of Medical Marijuana, Inc. with the
appointment of interim officers and directors was also
affected [sic] on March 28, 2011. Permanent
appointments will be made in the near future.
result of this transaction, HDDC came to own 51.4% of
MJNA's common stock. Id. at 14. Michael
controlled HDDC, which also did business as CannaBANK,
first filing after the acquisition, MJNA disclosed that
"the continuing development of the issuer's
multi-faceted business plan developed a
loss." As of March 31, 2011, just after the
acquisition, MNJA reported total assets of $74, 376.39,
including current assets of $598.47. Id. at 18. It
reported goodwill of negative $46, 779, 037 and retained
earnings of negative $2, 497, 531.55. Id. The
company had issued 506, 049, 062 shares, of which 115, 855,
872 were held by the public. Id. at 3. MJNA was, for
all intents and purposes, a shell corporation with a catchy
the HDDC transaction, Michael took over as interim president
of MJNA. He later became MJNA's president and
a director. Michelle Sides, the Chief Operating
Officer of HDDC/CannaBANK, assumed the roles of Chairman and
Chief Operating Officer. The new management team reoriented
the company towards "cannabidiol (CBD)
Michael's control, MJNA continued its practice of issuing
massive amounts of stock. During the second quarter of 2011,
MJNA issued 17, 501, 947 shares. "Consultants"
received 12, 238, 800 shares "for establishing and
assisting the corporation," and private investors
received 5, 263, 147 shares. During the third quarter of
2011, MJNA issued 30, 014, 755 shares. Most went to
consultants or to pay for a trademark. As of
December 31, 2011, MJNA reported 558, 565, 764 shares
outstanding. As of December 31, 2012, it reported
808, 238, 318 shares outstanding. Id. During
subsequent years, MJNA kept pumping out shares. As of
December 31, 2018, MJNA had an authorized capitalization of
five billion total shares. Of this amount, 3, 562, 197, 168
were issued and outstanding, with 2, 148, 156, 858 in the
United States Department of Justice unsealed Michael's
indictment on September 14, 2012. The next business day, he
resigned from his positions with MJNA. Sides and other
executives continued in their roles.
week after Michael's indictment, Sides formed the
Company. In November 2012, Sides transferred the
entire member interest to Titus for nominal consideration.
Concurrently, Titus granted Michael an option to buy 90% of
the Company's member interests for nominal consideration.
JX 11; JX 12.
record does not clearly reveal what role Titus occupied at
the time in the MJNA family of companies, nor the nature of
his relationship with Michael. He first appeared in
MJNA's public filings in its 2014 annual report, where he
is listed as "Chief Executive Officer, President and
Director." The filing recites that Titus
"began his association with our family of companies in
2009, playing a pivotal role in raising capital among several
other duties." Id. The plaintiffs say that
"Titus was an early stockholder in [M]NA] and invested
prior to Michael's involvement." Dkt. 126 at 7. They
also say that "[b]y March of 2015, Titus was named as
CEO" of MJNA. Id. at 8.
April 2014, eighteen months after Sides formed the Company,
Michael exercised his option and acquired 90% of the member
interests from Titus. Also in April 2014, the Company
created Kannaway, LLC, which distributed CBD-based products
through relationship-based, multi-level marketing.
See JX 89 at '055. In December 2014, the Company
sold Kannaway to MJNA for 833, 333, 333 shares of common
stock. The Company had also loaned $1, 403, 331
to MJNA. Id. at 31.
Company has generated cash by regularly selling MJNA shares
in the open market. See Titus Dep. 41-43. Rule 144
of the Securities Act of 1933 permits an affiliate of an
issuer to sell in each quarter a number of unregistered
shares that does not exceed 1% of the issuer's
outstanding shares. See 17 C.F.R. §
230.144(b)(2) & (e)(1)(i); JX 89 at '058 ("Every
90 days, [the Company], as affiliates of MJNA [sic]
is allowed by SEC rules to sell up to 1% of the outstanding
shares in MJNA."). Relying on this rule, the Company can
sell a considerable number of shares. For example, between
November 13, 2017, and September 12, 2018, the Company sold
71, 257, 999 shares of MJNA for approximately $7, 012, 244.
JX 150 at 19.
Company uses the money it raises to pay its expenses and to
fund the operations of MJNA and its affiliates. MJNA has
struggled to generate operating income and depends on the
Company's injections of capital for its financial
having resigned from his positions with MJNA in September
2012, Michael continued to manage its operations. It appears
that he initially did so through HDDC. Later, he did so
through the Company. Although Titus assumed the role of CEO
at MJNA at some point in 2014, he focused on the promotional
and public-facing aspects of the business.
early 2014, while under indictment and around the same time
that he exercised his option to acquire 90% of the
Company's member interests, Michael met Arabia through a
mutual friend. Arabia considers himself a veteran of
corporate disputes and "parliamentary maneuvers" in
boardrooms. His career in finance began in the
1980s, when he worked on high-yield debt offerings. During
that decade, he was part of at least one hostile takeover
attempt-involving I.C.H. Corporation-that generated
litigation in this court. In the late 1990s, he served
as CEO of I.C.H. Corporation until the board terminated him.
See Arabia Dep. 28-29; Arabia Aff. Ex. A. He then
served as CEO of Naturewell, Inc., a company that traded over
the counter under the symbol "NAWL." Arabia left
Naturewell when its assets were liquidated. See
Arabia Tr. 229; Arabia Aff. Ex. A. Naturewell's public
filings indicate that in March 2013, it recast itself as
Brazil Interactive Media, Inc. and began trading under the
symbol BIMI; then, in September 2014, it became American
Cannabis Company, Inc., which continues to trade over the
counter under the symbol "AMMJ."
meeting Michael, Arabia became his trusted advisor on
financial and legal matters and an informal consultant to the
Company and its affiliates. See Arabia Aff.
¶¶ 3, 7; Arabia Tr. 230. Although fulfilling these
roles became his main occupation, Arabia did not receive any
formal compensation for his services. See Arabia
Dep. 39, 48-49. He benefitted instead by being able to
purchase shares from MJNA at a discount in private placements
or through other financing transactions. One of
Arabia's affiliates, TL-66, LLC, has amassed sizeable
holdings in MJNA.
his relationship with Michael, Arabia achieved a remarkable
financial turnaround. Arabia had just declared personal
bankruptcy in 2013, the year before he met Michael.
See Arabia Dep. 53-55; Arabia Tr. 264. Arabia's
bankruptcy came fresh off his defeat in a preemptive lawsuit
in which he had tried to prevent foreclosure on his
home.Yet by 2016, TL-66 had loaned nearly $10
million to the Company, secured by a first-priority lien on
all of the Company's assets. See JX 136. Two of
the witnesses in the case believe that Michael parked funds
with Arabia to protect against the forfeiture risk posed by
his indictment. That seems more plausible than the
notion that Arabia's wife, who owns 100% of TL-66,
advanced millions of dollars to the Company. She is a
personal trainer who, as of 2017, was still challenging a
$40, 000 judgment against her for unpaid credit card
debt. It likewise seems plausible that the
creation of the Company itself, coming so promptly after
Michael's indictment, along with the indirect and
temporally delayed manner by which Michael acquired a
less-than-100% interest, was part of an effort to restructure
Michael's assets to mitigate forfeiture risk.
the course of his career, Arabia established a close business
and personal relationship with Huemoeller. The two men
started out as bond traders with the same firm in 1982, and
they have remained close ever since. When Huemoeller founded a
company called HumWare Media Corporation, which trades over
the counter under the symbol "HMWM," he hired
Arabia as a consultant. Huemoeller Dep. 16-17. When Arabia
served as CEO of Naturewell, he brought Huemoeller onto the
board. See id. at 17. After becoming Michael's
trusted advisor, Arabia arranged for Huemoeller to join the
board of AXIM Biotechnologies, Inc., a firm controlled by
MJNA that is also involved in the cannabinoid industry and
whose shares trade in the over-the-counter market under the
trading symbol "AXIM." See id. at 7-8;
Titus Tr. 173; JX 89 at '056. Through the events giving
rise to this litigation, Arabia secured a position for
Huemoeller as a manager of the Company. Since then, he has
hired Huemoeller as a consultant to TL-66 and Cross &
Company, another entity that Arabia controls. See JX
168 at 2; Huemoeller Dep. 10-13. Except for a board fee from
a company called Pledge Petroleum, all of Huemoeller's
income comes from positions traceable to Arabia:
$5, 000/quarter $25, 000 stock payment annually
$45, 000 (11.39%)
$60, 000 (15.19%)
Air Water Earth
TL-66 and Cross & Co.
$240, 000 (60.76%)
$10, 000/quarter $10, 000 bonus to join as
$50, 000 (12.66%)
TOTAL: 395, 000 (100%)
also established close business and personal relationships
with Scott, a recently retired pastor. The two met over
twenty-five years ago when Scott presided over a funeral that
Arabia attended. Between 1993 and 2006, Arabia belonged to
Scott's congregation, and Scott has performed services
over the years for Arabia and members of his family,
including Arabia's marriage, his daughters'
marriages, and his in-laws' funerals. While CEO of I.C.H.
Corporation, Arabia secured a board seat for Scott, and when
other directors voted to terminate Arabia, Scott immediately
resigned. Scott Dep. 14-16. Scott's service on the I.C.H.
board led to a directorship at Naturewell, where Scott
recommended Arabia for the CEO spot. Id. at 16-17;
see also Arabia Dep. 114-15. After becoming involved
with Michael, MJNA, and their affiliates, Arabia secured
seats for Scott on the boards of MJNA and AXIM. See
Arabia Dep. 114; Scott Dep. 9-10. Through the events giving
rise to this litigation, Arabia obtained a position for Scott
as a manager of the Company. Since then, Scott has been
seated as a director to KannaLife Sciences, another MJNA
portfolio company. Scott Tr. 279-80. Other than some salary
for his service to a non-profit, all of Scott's income is
traceable to Arabia:
$30, 000 (23.08%)
$20, 000 (15.39%)
$30, 000/year (previously $0)
$30, 000 (23.08%)
$10, 000/quarter $10, 000 bonus to join as Manager
$50, 000 (38.46%)
TOTAL: $130, 000 (100%)
their longstanding personal and business relationships,
Huemoeller and Scott are loyal to Arabia. See
Huemoeller Dep. 51-52; Scott Dep. 62-63. During the events
giving rise to this suit, Scott promised Arabia that
"everything you say is confidential and I'm very
loyal to you and our friendship." JX 111. Arabia
testified that he would do "a million-dollar deal on a
handshake" with either of them. Arabia Dep. 186.
November 5: Michael's Death
early morning hours on Sunday, November 5, 2017, Michael died
in a car accident. He was thirty years old. After hearing the
news, Arabia put in motion a plan to gain control over the
day Michael died, Arabia visited Steven, Michael's
father. Steven spent most of his professional life as a
police officer, then after leaving the force, took jobs in
customer service and sales. When Michael got started in the
real estate industry, he hired his father to handle customer
service. In 2014, after moving into the cannabis business,
Michael again hired his father. Steven had only limited
contact with Arabia before Michael's death.
offering his condolences, Arabia asked Steven about settling
Michael's estate. During the conversation, Arabia told
Steven that they must not "under any circumstances,
allow a forensic audit of the companies." Steven Tr. 58.
Arabia also proposed adding Huemoeller and Scott as managers
of the Company, observing that Titus "wasn't capable
of handling the job of running the day-to-day operations by
himself." Id. at 58-59. Despite expressing this
opinion of Titus, Arabia said that they should increase
Titus's salary. My sense is that Arabia wanted to offer
Titus more money so that he would go along with the plan to
add additional managers.
believed that at least one manager should be a member of the
Llamas family. He wanted a family member who could look out
for the interests of Michael's minor child, who would
eventually inherit Michael's 90% economic interest in the
responded by telling Steven that Titus would likely go along
with his plan, not Steven's, because Titus needed money.
Arabia also offered to provide the Llamases with $500, 000,
which he suggested would help with any financial difficulties
they might encounter after Michael's death. Steven
interpreted this offer as a bribe. Id. at 59-60.
evening, Arabia contacted Huemoeller and Scott about serving
as managers of the Company. Both agreed immediately.
Huemoeller Tr. 270; Scott Tr. 279.
November 6: Meetings at Arabia's House
November 6, 2017, Arabia hosted an emergency meeting of the
MJNA board in his home. Arabia was not a member of the board,
but he hosted the meeting anyway. Arabia did not invite
Steven or Jeffrey, but they too attended anyway.
opened the board meeting by proposing to double Titus's
salary as CEO. He then asked Steven and Jeffrey whether
Michael had a will. Steven and Jeffrey were surprised by this
question, because they understood that Arabia had custody of
Michael's will. See Steven Tr. 61; Jeffrey Tr.
120. No will has ever been found.
the board adjourned, Arabia and Titus met privately. Arabia
told Titus that Michael would not have wanted Titus running
the Company alone and would have wanted Arabia to be
involved. Arabia Tr. 259-60; Arabia Dep. 121-22. Arabia
stressed that Titus should appoint additional managers whom
Michael and Arabia trusted. Arabia Aff. ¶ 9. Arabia
suggested Huemoeller and Scott, who Arabia said would act
primarily as Titus's advisors. Titus was concerned about
compensation that he felt the Company owed him. Arabia
assured Titus that Huemoeller and Scott would "never
play any games with [Titus] getting [his] fair share."
Arabia Dep. 122.
his private meeting with Titus, Arabia circled up with Steven
and Jeffrey. Arabia told them that he wanted to appoint two
individuals as managers whom he had known for a long time and
could rely on, mentioning Scott and Huemoeller. See
Steven Tr. 61; Jeffrey Tr. 120-21. Steven reiterated that he
wanted a member of the Llamas family to serve as a manager.
Steven Tr. 61-62. Arabia again offered to help out the Llamas
family, this time with 100 million shares of MJNA stock.
Id. at 62.
November 7: Titus Appoints Huemoeller and
drafted the November 7 Consent with the assistance of
counsel. See Arabia Tr. 261. It called for Titus to
act in his capacity as "Sole member of the Executive
Committee and Sole Manager" to appoint Huemoeller and
Scott "as members of the Executive Committee and
Managers of the Company." JX 27. On November 7, 2017,
Titus executed it. PTO ¶ 8.
signing the November 7 Consent, Titus gave Arabia control
over the Company at the manager level. The Original LLC
The responsibility for the management and oversight of the
operation and affairs of the Company shall be and are
[sic] hereby vested in an Executive Committee, which
shall consist of at least one (1) and not more than five (5)
members. Each of the members of the Executive Committee shall
be designated as a Manager for purposes of this agreement,
with one of the Managers designated by a vote of the
Executive Committee to act as Chairman. No Manager need be a
Member of the Company . . . .
§ 5.1. As a majority of the Executive Committee,
Huemoeller and Scott could outvote Titus and exercise control
over the Company.
addition, if they wished, Huemoeller and Scott could remove
Titus as a manager without cause. Section 5.5 of the ...