Since Bhang Chocolate Company, Inc. (Bhang) and Mentor Capital, Inc. (Mentor) originally agreed to Mentor’s purchase of 60 percent of Bhang for $39 million back in 2014, and after Mentor only paid $1.5 million of that amount, the two had an acrimonious split. The ongoing legal claims against each other may have taken a new turn based on a recent court ruling regarding a separate shareholder suit against Mentor.
On September 22, 2017, in U.S. District Court in Utah, Judge Jill N. Parrish ruled in favor of Gena and Susan Golden who had purchased Mentor stock directly from Mentor. The ruling basically agrees with their shareholder complaint that Mentor unlawfully issued warrants to the Goldens. The court said they are due a full refund of their original investment – about $140,000 plus interest – for the 75,000 warrants they were sold by Mentor in March of 2014.
The court order issued by Judge Parrish found that Mentor had never completed the bankruptcy court’s order confirming its plan of reorganization back in the year 2000. As a result, the shares sold to them were invalidly issued and were not exempt from Securities Act of 1933 registration requirements. The court noted that Mentor had to file amended articles of incorporation with the California Secretary of State by May 10, 2000. Mentor could not demonstrate that they had complied with that requirement.
The court, in a strong ruling against Mentor, stated, “Mentor does not dispute that the Goldens have made a prima facie case of a violation of Section 5 of the Securities Act.” Further, the court said, “There is no dispute that Mentor failed to file an amendment to its articles of incorporation as required by [its bankruptcy] Plan.” It went on, “…there is no evidence that Mentor complied with the requirements necessary to render the [bankruptcy] Plan effective.” The court concluded that with the failure of its bankruptcy plan to become effective, all securities sold under the authority of that plan since the year 2000 were not legally issued.
This new ruling, while not involving Bhang directly, calls into question whether Mentor had any legal authority to sell warrants and stock, and thus fund the Bhang or any other purchase in the first place. Where that leads in the near future remains to be determined. And it appears that Mentor has few options other than appealing.
The implications of this decision are three-fold:
1.) The Goldens, direct investors in Mentor, are entitled to reimbursement for their original investment plus interest.
2.) The ruling calls into question whether or not Mentor is technically still in bankruptcy, according to some legal authorities.
3.) Thirdly, it asks whether Mentor has had any legal authority since the year 2000 to issue any warrants or stock, since they had been relying on a bankruptcy order that the federal court just ruled was invalid.
The original dispute between Mentor and Bhang occurred in the spring of 2014, when Mentor contractually agreed to invest $39 million into Bhang. Instead, they only invested $1.5 million, and thereafter claimed an ownership interest in both Bhang and Bhang’s trademarks.
When the parties submitted their differences to the American Arbitration Association, that panel decided that the parties had to go back to where they were before Mentor sent Bhang only $1.5 million of the contracted $39 million. It also required Bhang to repay the $1.5 million.
Bhang has struggled to pay all of that back, although Bhang tells CBE that Mentor has received partial payments. Meanwhile, despite lacking any legal authority to do so, Mentor claimed they owned Bhang’s trademarks according to Bhang President Scott Van Rixel.
Bhang’s business is licensing its trademarks to licensees in the various medical marijuana states. According to Bhang, Mentor transferred Bhang’s trademarks to itself without any legal authority or court permission, in an attempt to collect money from Bhang. When Bhang approached investors to enable it to payoff Mentor, the prospective investors were scared off because there was no way to prove Bhang owned the trademarks. Then, Mentor, tried to get a court to appoint a receiver to run Bhang and liquidate its assets. The court denied Mentor’s motion.
However, Van Rixel, tells CBE that Bhang may now have investors interested with more than enough cash to pay the award to Mentor and aggressively expand. “I would advise anyone dealing with Mentor to make sure its promises of cash investment is based on cash in hand. As we just learned from reading the Utah Federal Court’s decision, assure yourself that Mentor’s sales of warrants to raise capital is legal,” said Mr. Van Rixel. As you can see, the dispute is far from over.
CBE placed a call to Chet Billingsley, CEO of Mentor, for comment. We received a follow-up call from Sara Billingsley, Director of Business Operations at Mentor Capital, Inc., who indicated that under advice from their attorneys, they would not comment and directed CBE to the below posting on the Mentor site.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
On September 25, 2017, a Federal District Court in Utah ruled against Mentor on a motion for partial summary judgment in a case that is pending there. The hearing on that motion had occurred in January, 2017. Mentor has been conducting discovery since that hearing, uncovering evidence and information contradictory to the plaintiffs’ claims in that case. Mentor believes that the ruling was erroneous and intends to use all efforts to ensure that all facts are considered by the District Court and on any necessary appeal. Mentor still intends to pursue cross-defendants Richard Golden and Scott Van Rixel for indemnity.