Filed 8/14/26 Second Site v. Scott CA2/3
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION THREE
SECOND SITE, LLC, B345427
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC723513)
v.
PAUL SCOTT et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of Los
Angeles County, Stephen P. Pfahler, Judge. Affirmed.
The Berglund Group, Keith W. Berglund, and Russell J.
Miller for Plaintiff and Appellant.
Afifi Law Group and Faryan Andrew Afifi for Defendants
and Respondents.
_________________________
Plaintiff Second Site, LLC sued defendants Paul Scott, Los
Angeles Wellness Center (LAWC), and others for breach of
contract and related tort claims stemming from a partnership
agreement for the management of LAWC and its license to
operate a medical marijuana dispensary in the City of Los
Angeles.1 After a bench trial, the court found the object of the
partnership agreement was to use LAWC’s dispensary license to
operate three different dispensaries within the City in violation
of a governing municipal ordinance; this illegal object rendered
the agreement unenforceable; and the parties to the agreement
were in pari delicto (at equal fault) for the illegality. Based on
these findings, the court dismissed Second Site’s claims and
entered judgment for defendants. Second Site appeals. The
company contends the court misconstrued the partnership
agreement’s object in deeming it illegal; even if the agreement
was illegal, the court erred in declining to enforce the agreement
under an equitable exception to the illegality doctrine; and,
notwithstanding the court’s findings regarding the partnership
agreement, some of the tort claims were nonetheless viable.
Finding no error on the record presented, we affirm.
BACKGROUND
1. Cannabis Law During the Relevant Period
To understand the pertinent facts and legal issues, some
background is necessary regarding the state and local cannabis
laws that were in place when the parties entered their
partnership agreement in September 2016.
1 The other defendants are Erba, Inc.; Sheri Shekarchian;
Shawn Shekarchian; Alireza Shekarchian; Devon Wheeler; Jay
Handal; and Gabriel Dezio.
2
a. California’s Initial Statutory Framework for
Medical Marijuana
California first legalized limited medical use of marijuana
in 1996 through the Compassionate Use Act (CUA). (See Health
& Saf. Code, § 11362.5.)2 While the CUA exempted qualified
patients and their primary caregivers from state criminal
liability for possession and cultivation of marijuana for personal
medical use (see id., subds. (d)–(e)), it did not create a commercial
regulatory system, authorize dispensaries, or address
distribution beyond individual patient use.
In 2003, the Legislature enacted the Medical Marijuana
Program Act (MMPA), adding sections 11362.7 through 11362.83
to the Health and Safety Code. (See Qualified Patients Assn. v.
City of Anaheim (2010) 187 Cal.App.4th 734, 744.) The MMPA
created a voluntary identification card program and extended
limited immunity to qualified patients and caregivers who
“associate[d] . . . in order collectively or cooperatively to cultivate
marijuana.” (Health & Saf. Code, former § 11362.775; see
Qualified Patients, at p. 744.) Our courts interpreted this
provision to permit collectives and cooperatives to distribute
medical marijuana to members, but only on a nonprofit basis.
(See People v. Jackson (2012) 210 Cal.App.4th 525, 538; see also
Health & Saf. Code, § 11362.765, subd. (a) [“This section does
not . . . authorize any individual or group to cultivate or
distribute cannabis for profit.”].)
2 Except as authorized by other laws, sections 11357 and
11358 of the Health and Safety Code make it a crime to possess
and cultivate marijuana. (See People v. Mower (2002) 28 Cal.4th
457, 463.)
3
b. Local Regulation in the City of Los Angeles:
Proposition D
In response to a proliferation of unpermitted medical
marijuana dispensaries and the attendant “crime and the
negative secondary effects” associated with that proliferation, the
City of Los Angeles enacted a series of local ordinances
culminating in Proposition D in 2013. (L.A. Mun. Code, § 45.19.6.
et seq.; see Safe Life Caregivers v. City of Los Angeles (2016) 243
Cal.App.4th 1029, 1034–1038 (Safe Life).) Proposition D
generally prohibited the operation of medical marijuana
businesses within the City (see L.A. Mun. Code, § 45.19.6.2,
subd. A), while creating a narrow form of limited immunity for a
defined subset of pre‑existing dispensaries. (Id., § 45.19.6.3; see
Safe Life, at p. 1038 [“Prop. D does not provide a right for these
excepted medical marijuana businesses to operate, but only
limited immunity.”].)
To qualify for this limited immunity, Proposition D
required a medical marijuana business to satisfy several
conditions, including: (1) continuous operation since at least
September 14, 2007; (2) timely registration with the City Clerk;
(3) possession of a valid Business Tax Registration Certificate
(BTRC) as of November 13, 2007; and (4) compliance with 15
operational restrictions set forth in Los Angeles Municipal Code
section 45.19.6.3, subdivisions A through O. These included
restrictions on location, signage, hours of operation, and
management structure. (Ibid.) Under Proposition D, “this
limited immunity [was] available and [could] be asserted . . . only
by a medical marijuana business at the one location identified in
its original or any amended [BTRC].” (Id., § 45.19.6.3, italics
added.) The ordinance also prohibited the medical marijuana
4
business from having “one or more Managers who are also
Managers at the same time of another medical marijuana
business in the City.” (Id., § 45.19.6.3, subd. N).
c. State Licensing Legislation
In 2015, the Legislature enacted the Medical Marijuana
Regulation and Safety Act (MMRSA), which established a dual
state‑local licensing system for commercial cannabis activity.
(See Safe Life, supra, 243 Cal.App.4th at p. 1045; Bus. & Prof.
Code, former § 19300 et seq.)3 Under the MMRSA, no medical
cannabis business could operate without both a state license and
local authorization. (See Bus. & Prof. Code, former § 19320,
subd. (a) [“Upon the date of implementation of regulations by the
licensing authority, no person shall engage in commercial
cannabis activity without possessing both a state license and a
local permit, license, or other authorization.”].) State licensing,
however, was not set to begin until January 1, 2018. (See id.,
former § 19321, subd. (c).)
During the interim period, cities retained full authority to
regulate or prohibit cannabis activity. (See Bus. & Prof. Code,
former § 19321, subds. (b)–(c).) Because Los Angeles did not
issue local licenses under Proposition D, pre‑existing dispensaries
could continue operating only by maintaining limited immunity
under the ordinance. (See id., former § 19321, subd. (c).)
In November 2016, California voters passed the Control,
Regulate and Tax Adult Use of Marijuana Act, more commonly
3 The MMRSA was later renamed the Medical Cannabis
Regulation and Safety Act. (See County of Kern v. Alta Sierra
Holistic Exchange Service (2020) 46 Cal.App.5th 82, 104 (County
of Kern).)
5
known as Proposition 64. The voter initiative “legalized adult
recreational use of marijuana and reduced the criminal penalties
for various offenses involving marijuana, including its cultivation
and possession for sale.” (County of Kern, supra, 46 Cal.App.5th
at p. 106.) After Proposition 64’s passage, the Governor signed
into law the Medicinal and Adult‑Use Cannabis Regulation and
Safety Act. (Ibid.; see Bus. & Prof. Code, § 26000 et seq.) The
statute repealed earlier state laws on medicinal marijuana,
including the MMRSA, and “created one regulatory system for
both medicinal and adult-use (i.e., recreational) cannabis.”
(County of Kern, at p. 106.)
2. The Partnership Agreement
Scott founded LAWC in the late 1990s as a nonprofit
collective with the mission to serve members of the Black LGBTQ
community living with HIV.4 The dispensary was originally
located in Inglewood but, due to zoning issues, Scott had been
forced to relocate it to the San Fernando Valley. He had long
hoped to return the dispensary to Los Angeles, where it would be
closer to his original clientele.
Glantz and Sapir formed Second Site to pursue
cannabis‑related business opportunities. In September 2016,
4 We draw the facts primarily from the trial court’s
statement of decision. Because Second Site does not challenge
the sufficiency of the evidence, we presume substantial evidence
supports the court’s factual findings. (See, e.g., Cletro v. Valley
Stores, Inc. (1953) 117 Cal.App.2d 709, 711; Rosenberg v. Raskin
(1947) 80 Cal.App.2d 335, 338 [“by failing to question the
sufficiency of the evidence to sustain the five findings of the trial
court hereinbefore stated defendant conceded that there was
substantial evidence in support of them”].)
6
they met with Scott to explore a potential acquisition or
partnership involving LAWC. At that time, Scott held a BTRC
that authorized him to operate LAWC’s dispensary in Los
Angeles. The parties toured Second Site’s existing facilities (at
Remmet Avenue and Eton Avenue in Canoga Park) and
discussed a possible business relationship, including Second
Site’s plan to establish a new location on Melrose Avenue—a
location Scott found desirable because it was closer to the
community LAWC historically served.
On September 28, 2016, Scott, on behalf of LAWC, and
Glantz and Sapir, on behalf of Second Site, executed the
partnership agreement at the heart of this case. The one-page
agreement provided the companies would “enter into a
partnership agreement” for a three-year term with two three-
year options to extend, and Second Site would have the “first
right of refusal” should LAWC “elect to sell” its “dispensary
license . . . for fair market value.” LAWC would “relocate” its
dispensary to a Melrose Avenue location “leased and operated by
Second Site,” and Glantz and Sapir would be “placed on as
managing members to” LAWC “with full operational control” for
the term of the agreement. In “consideration for the complete
and exclusive use of [LAWC’s] Dispensary license during this
term and complete licensing of operations listed” in the
agreement, Scott was to receive “10% of the net” from all Second
Site operations and “future operations and locations within the
city of Los Angeles.” The agreement listed three Second Site
locations, including the new Melrose facility: “1) 8010-8012
Remmet Ave. Canoga Park – 80 lights [¶] 2) 7027-7029 Eton
Ave. Canoga Park – 120 lights + extraction [¶] 3) 4665 Melrose
Ave. Los Angeles – 80 lights + Dispensary.”
7
In addition to the above terms, the agreement provided for
a monthly accounting to all partners; binding arbitration of all
disputes; and mutual indemnity, except with respect to the
agreement’s “enforceability under California Law.”
3. The Complaint
Second Site sued Scott, LAWC, and the other defendants
for breach of the partnership agreement; breach of the implied
covenant of good faith and fair dealing; fraud; unfair competition;
tortious interference with prospective economic advantage;
tortious interference with contract; conversion; conspiracy; money
had and received; declaratory relief; aiding and abetting; and an
accounting.
The operative second amended complaint alleges the
parties entered into a written agreement to have Second Site’s
principals—Sapir and Glantz—installed as “managing members”
of LAWC with “full operational control” of the dispensary. In
exchange for what the agreement described as the “complete and
exclusive use” of LAWC’s dispensary license, the complaint
alleges Scott was to receive 10 percent of the net proceeds from
Second Site’s operations at three locations: (1) the Remmet
location; (2) the Eton location; and (3) the anticipated LAWC
dispensary at the Melrose location.
Relying on Scott’s representations and the agreement,
Second Site allegedly commissioned a zoning and compliance
analysis in connection with relocating LAWC’s operations to the
new site on Melrose Avenue; invested more than $3 million in
improvements and equipment; and opened the dispensary at the
Melrose location with Scott’s knowledge and consent.
Shortly after the move, Second Site learned the Melrose
location could not be used as a dispensary due to its proximity to
8
a nearby church facility. The complaint alleges Scott failed to
disclose warnings he had received from the Los Angeles Police
Department regarding the site, resulting in additional expenses
and the need to relocate. In consultation with Scott, Second Site
secured a new location on Topanga Canyon Boulevard, executed a
lease on LAWC’s behalf, and, in June 2017, accompanied Scott to
the City’s Finance Office to amend LAWC’s BTRC to reflect the
new address, paying the 2017 BTRC fees.
In early 2018, after Los Angeles established a priority
licensing process for existing dispensaries, Second Site submitted
an application on LAWC’s behalf. According to the complaint,
the Department of Cannabis Regulation advised Second Site that
control of the address listed on the 2017 BTRC would determine
priority in the event of competing claims.
However, around this time, Scott and several other
defendants—including Alireza Shekarchian, his family members,
and individuals associated with Erba, Inc.—allegedly conspired
to seize control of LAWC and to divert its license to a different
dispensary location on Pico Boulevard. The complaint alleges
Scott and the other defendants gained unauthorized access to the
Topanga facility, removed the original 2017 BTRC, replaced it
with a photocopy, and submitted their own priority licensing
application using the stolen certificate. Scott and the other
defendants then allegedly caused LAWC to terminate the
Topanga lease, executed a sublease for the Pico location, and
submitted documentation to city officials to transfer LAWC’s
operations to that location.
According to the complaint, by early 2018, Scott had sold
his interest in LAWC to defendant Alireza Shekarchian “and
related parties,” LAWC’s corporate filings had been amended to
9
reflect new officers and directors aligned with Shekarchian, and
LAWC began operating at the Pico location under the name
“Erba.” Defendants allegedly continued to operate the
dispensary using LAWC’s license, obtained a temporary priority
license, and generated substantial revenues, all while excluding
Second Site from the business and denying it the benefit of its
contractual rights, including its right of first refusal under the
partnership agreement.
4. The Trial and Statement of Decision
After a seven-day bench trial, the court issued a statement
of decision ruling in favor of defendants on Second Site’s claims.
Critically, while the trial court found Second Site had proven its
claims for breach of contract and breach of the implied covenant,
the court concluded the partnership agreement was
unenforceable because its central object was illegal.5
5 With respect to Second Site’s breach of contract claim, the
court found the partnership agreement stated sufficient material
terms; Second Site substantially performed its obligations by
relocating LAWC’s operations and managing the dispensary; and
Scott and LAWC breached the agreement by, among other things,
removing the original 2017 BTRC, relocating LAWC to the Pico
location without authorization, destroying signage at the
Topanga location, and selling LAWC without providing Second
Site the contractually promised right of first refusal. For the
same reasons, the court found Scott and LAWC breached the
implied covenant of good faith and fair dealing by interfering
with Second Site’s ability to receive the benefits of the agreement.
Although the court also found defendants had established their
equitable‑estoppel and failure‑to‑mitigate defenses—which would
have reduced any contract damages awarded to Second Site—the
court’s conclusion that the agreement was illegal rendered those
defenses moot.
10
Citing “Glantz[’s] and Sapir’s testimony, as well as the
plain language of the Agreement,” the court determined “the
essential nature of the Agreement was to form a partnership in
order to operate a medical marijuana business at three different
locations”—Remmet, Eton, and Melrose—using LAWC’s single
BTRC, in violation of Proposition D’s requirement that a
dispensary operate only at the single location identified on its
certificate. In that regard, the court found the Remmet and Eton
locations “had no independent license or BTRC to cultivate
cannabis under Proposition D” and, “[b]y their own admission,
Glantz and Sapir intended to operate all of the cultivation
locations under LAWC’s BTRC, with none of them having its own
BTRC or license.” The court found two other violations that were
secondary to the agreement’s primary object. It found the
agreement violated Proposition D’s prohibition on managing
more than one medical marijuana business, because “Glantz
admitted that [he and Sapir] managed cultivation businesses at
the Remmet and Eton facilities simultaneously” while the
agreement also made them “managers of LAWC at the Melrose
location.” And, the court found the agreement contemplated an
unlawful profit‑sharing with Scott at a time when state medical
marijuana law permitted only nonprofit collectives operating in
accordance with local ordinances.
Having found the agreement unlawful, the court rejected
Second Site’s contention that equitable considerations justified
partial enforcement of the “core of the Agreement.” The court
found both sides in pari delicto (in equal fault) for entering into
the unlawful arrangement, and therefore equity would not assist
either party in enforcing the illegal contract. Further, because
the “central purpose of the Agreement was to have profit-sharing
11
based upon unlawfully sharing a single BTRC with multiple
locations (i.e. Remmet, Eton and Melrose) to create a vertically
integrated profit-sharing cultivation and distribution business
across multiple locations,” the court determined the contract had
“a singular unlawful purpose” that could not be severed from its
otherwise lawful provisions.
Finally, the trial court rejected Second Site’s tort claims.
With respect to fraud, the court found no evidence that Scott or
any other defendant made knowingly false statements or acted
with fraudulent intent, or that Second Site suffered a loss due its
reasonable reliance. The court dismissed the unfair competition
claim, finding Second Site failed to establish any underlying
unlawful, unfair, or fraudulent conduct. And, the court rejected
the conversion claim because Second Site had failed to prove
ownership of, or a right to possess, LAWC’s assets.
The court entered judgment for defendants. Second Site
filed a timely notice of appeal.
DISCUSSION
1. The Object of the Partnership Agreement Was
Unlawful
“The object of a contract must be lawful when the contract
is made, and possible and ascertainable by the time the contract
is to be performed.” (Civ. Code, § 1596; accord id., § 1550 [“It is
essential to the existence of a contract that there should be:
[¶] . . . [¶] [a] lawful object”].) The Civil Code defines the “object
of a contract” as “the thing which it is agreed, on the part of the
party receiving the consideration, to do or not to do.” (Id.,
§ 1595.) The object of a contract is unlawful if it is contrary to an
express provision of law; contrary to the policy of express law,
12
though not expressly prohibited; or otherwise contrary to good
morals. (Id., § 1667.) Contracts without a lawful object are void
(id., § 1598), and “the rights thereto cannot be judicially
enforced.” (Vierra v. Workers’ Comp. Appeals Bd. (2007) 154
Cal.App.4th 1142, 1148; see also Armendariz v. Foundation
Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 124.)
Whether a contract is illegal “is a question of law” to be
determined by the court “from the circumstances of each
particular case.” (Jackson v. Rogers & Wells (1989) 210
Cal.App.3d 336, 349–350.) However, unlike other interpretative
tasks, the court’s assessment of illegality is not necessarily
confined to a written agreement’s unambiguous terms. Rather,
“ ‘[p]arol evidence is always competent to show that a written
contract lawful on its face, is illegal or part of an illegal
transaction.’ ” (Lebal Co. of America v. Mastrup (1942) 51
Cal.App.2d 232, 233; accord Lewis & Queen v. N. M. Ball Sons
(1957) 48 Cal.2d 141, 148 (Lewis), citing Code Civ. Proc., § 1856
[The parol evidence rule “does not exclude other evidence of the
circumstances under which the agreement was made or to which
it relates, . . . or to establish illegality or fraud.”].) “To this end,
the trial court must be free to search out illegality lying behind
the forms in which the parties have cast the transaction to
conceal such illegality.” (Lewis, at p. 148.) “When the competent
extrinsic evidence is in conflict, and thus requires resolution of
credibility issues, any reasonable construction [by the trial court]
will be upheld if it is supported by substantial evidence.”
(Founding Members of the Newport Beach Country Club v.
Newport Beach Country Club, Inc. (2003) 109 Cal.App.4th 944,
955–956 (Founding Members).)
13
When the parties entered the partnership agreement in
September 2016, the Los Angeles Municipal Code generally
prohibited medical marijuana businesses from operating in the
City (see L.A. Mun. Code, § 45.19.6.2, subd. A), while affording
certain pre-existing dispensaries a narrow form of limited
immunity under Proposition D. (Id., § 45.19.6.3; see Safe Life,
supra, 243 Cal.App.4th at p. 1038.) As stated in the ordinance,
“this limited immunity [was] available and [could] be asserted . . .
only by a medical marijuana business at the one location
identified in its original or any amended [BTRC].” (Id.,
§ 45.19.6.3, italics added.)
The trial court determined the partnership agreement’s
central object was “to form a partnership in order to operate a
medical marijuana business at three different locations”—
Remmet, Eton, and Melrose—using “LAWC’s single BTRC,” in
contravention of Proposition D’s express pronouncement that
limited immunity would be available only to a dispensary
operating at the one location identified on its certificate.6
6 As discussed, the court also found the agreement violated
Proposition D because “Glantz [had] admitted that [he and Sapir]
managed cultivation businesses at the Remmet and Eton
facilities simultaneously” while the agreement made them
“managers of LAWC at the Melrose location.” (See L.A. Mun.
Code, § 45.19.6.3, subd. N [“Every medical marijuana business is
prohibited that has one or more Managers who are also
Managers at the same time of another medical marijuana
business in the City”].) And, the court found the agreement’s
consideration provided for unlawful profit‑sharing with Scott at a
time when state medical marijuana law permitted only nonprofit
operations under local licensing ordinances. (See Bus. & Prof.
Code, former § 19321, subds. (c)–(d).) Because we conclude the
partnership agreement’s primary object as determined by the
14
Because the Los Angeles Municipal Code and existing state law
prohibited medical marijuana businesses that did not qualify for
limited immunity (see fn. 7, post), and the partnership agreement
sought “to apply LAWC’s single BTRC across multiple sites” in
violation of Proposition D’s limited liability framework, the court
determined the agreement was illegal and unenforceable. (See,
e.g., Espinoza v. Calva (2008) 169 Cal.App.4th 1393, 1400 [when
municipal code prohibits use or occupation “ ‘until the building
official has issued a certificate of occupancy,’ ” occupancy without
the certificate is “unlawful and the lease constitutes an illegal
contract”].)
Second Site disputes the court’s illegality determination. It
argues the partnership agreement “is not illegal on its face”
because, “[p]roperly understood,” the agreement governs “Second
Site’s operation of LAWC’s Melrose dispensary using LAWC’s
BTRC” and it “does not say anything about how Second Site’s
separate cultivation sites at Remmet and Eton would be licensed
or operated.” (Underlining omitted.) Rather, in Second Site’s
telling, the agreement references the three locations “only
because Scott’s compensation is defined as ‘10% of the net’ profit
from ‘all Second Site operations,’ which at the time consisted of
Second Site’s existing locations at Remmet and Eton and the new
LAWC dispensary to commence at Melrose.” Thus, Second Site
says, “nothing in the Agreement required the conduct the trial
trial court—to operate dispensaries at three different locations
under a single BTRC—renders the agreement illegal, we do not
address these other illegality findings.
15
court deemed illegal.”7 There are at least two problems with this
argument.
First, Second Site’s proffered interpretation is not the only
reasonable construction of the operative contractual language.
The relevant provision states:
“In consideration for the complete and exclusive
use of Los Angeles Wellness Center’s
Dispensary license during this term and
7 Second Site also contends the trial court misinterpreted
Proposition D because, in the company’s telling, the ordinance
merely “created a condition of eligibility for immunity from City
enforcement—not a substantive prohibition on private
contracting,” and “nothing in the ordinance declared contracts
extending beyond one location void, nor did it authorize courts to
invalidate private agreement on that basis.” The contention does
not warrant serious consideration. Proposition D expressly
states: “It is unlawful to own, establish, operate, use or permit
the establishment or operation of a medical marijuana business,
or to participate as an employee, contractor, agent or volunteer,
or in any other manner or capacity in any medical marijuana
business.” (L.A. Mun. Code, § 45.19.6.2, subd. A.) When the
parties entered the partnership agreement, state law expressly
authorized “the City of Los Angeles to prosecute any person or
entity for a violation of, or otherwise [to] enforce, Proposition D.”
(Bus. & Prof. Code, former § 19321, subd. (c).) Thus, the only
avenue for lawful operation of a medical marijuana business in
the City of Los Angeles was under Proposition D’s limited
immunity, which was “available and [could] be asserted . . . only
by a medical marijuana business at the one location identified in
its original or any amended [BTRC].” (L.A. Mun. Code, §
45.19.6.3, italics added.) The trial court did not misinterpret the
governing law in declaring the partnership agreement void for
illegality.
16
complete licensing of operations listed below[,]
Los Angeles Wellness Center, Paul Scott will
receive 10% of the net from all Second Site,
LLC. Operations [sic] and or future operations
and locations within the city of Los Angeles.
“1) 8010-8012 Remmet Ave. Canoga
Park – 80 lights
“2) 7027-7029 Eton Ave. Canoga Park –
120 lights + extraction
“3) 4665 Melrose Ave. Los Angeles – 80
lights + Dispensary.” (Italics added.)
Because it links “the complete and exclusive use of
[LAWC’s] Dispensary license” to the “complete licensing of
operations listed below”—i.e., the Remmet, Eton, and Melrose
operations—and it makes Scott’s consideration contingent upon
this “complete licensing,” the partnership agreement is
reasonably susceptible of the very construction the trial court
gave it—namely, that its central object was “to form a
partnership in order to operate a medical marijuana business at
three different locations” by “attempting to apply LAWC’s single
BTRC across multiple sites.” As explained in its statement of
decision, the trial court based its construction on “Glantz[’s] and
Sapir’s testimony, as well as the plain language of the
Agreement,” and it assessed this extrinsic evidence in light of the
witnesses’ “credibility,” which the court identified as “a
significant factor” in coming to its decision. (Italics added.)
Because the partnership agreement is reasonably susceptible of
the trial court’s construction, we are compelled to accept it,
notwithstanding Second Site’s proffered interpretation to the
contrary. (See Founding Members, supra, 109 Cal.App.4th at pp.
17
955–956 [“When the competent extrinsic evidence is in conflict,
and thus requires resolution of credibility issues, any reasonable
construction [by the trial court] will be upheld if it is supported
by substantial evidence.”].)
Second, even if the agreement’s language was unambiguous
and not reasonably susceptible of the court’s interpretation, this
still would not have precluded the court from considering
extrinsic evidence to “search out illegality lying behind the forms
in which the parties have cast the transaction to conceal such
illegality.” (Lewis, supra, 48 Cal.2d at p. 148.) To that end, the
court found the Remmet and Eton locations “had no independent
license or BTRC to cultivate cannabis under Proposition D” and,
“[b]y their own admission, Glantz and Sapir intended to operate
all of the cultivation locations under LAWC’s BTRC, with none of
them having its own BTRC or license.” These factual findings—
which Second Site does not challenge—support the court’s
conclusion that the parties made the partnership agreement “to
apply LAWC’s single BTRC across multiple sites” in violation of
Proposition D’s limited liability framework and the ordinance’s
general prohibition and policy against the proliferation of
unlicensed medical marijuana businesses operating in the City.
(See fn. 7, ante.) The trial court did not err in determining the
partnership agreement’s central object was illegal.
2. Equity Does Not Compel the Enforcement of an
Illegal Agreement When the Parties Are In Pari
Delicto
Second Site argues the trial court erred by declaring the
partnership agreement void for illegality without undertaking a
full equitable analysis to determine whether the agreement
should nonetheless be enforced. The company maintains
18
California law requires courts to weigh a series of equitable
considerations—including the parties’ relative culpability, the
nature and seriousness of the illegality, whether the party at
greater fault would be unjustly enriched, and whether
enforcement would undermine the policy of the violated law—
before denying a claim based on an illegal contract. According to
Second Site, had the trial court performed this analysis, it would
have been compelled to conclude the alleged violations were
merely technical, that Second Site was less culpable than
defendants, that defendants would be unjustly enriched if not
held to account for their alleged breach, and that enforcing the
agreement would not frustrate the purposes of Proposition D or
state cannabis law. In Second Site’s telling, the court’s failure to
conduct this equitable inquiry—and its supposed categorical
reliance on the illegality finding—constituted reversible error.
We disagree.
Contrary to Second Site’s premise, the trial court did not
declare the agreement void based solely on illegality. The court
also found the parties were in pari delicto for the illegal
transaction, and equity should not lend its aid to Second Site
when the company was equally at fault. That finding, coupled
with our own assessment of the nature of the violation and
policies of the laws that were transgressed, plainly supports the
court’s decision not to reward Second Site for its part in the
illegal scheme. “The principle that participants to an illegal
contract who are in pari delicto can secure no relief based on such
contract” is part of the salutary rule that “he who comes into
equity must come with clean hands.” (Norwood v. Judd (1949) 93
Cal.App.2d 276, 283 (Norwood).)
19
As we have discussed, “the general rule” requires courts to
“withhold relief under the terms of an illegal contract or
agreement which is violative of public policy.” (Tri-Q, Inc. v. Sta-
Hi Corp. (1965) 63 Cal.2d 199, 218 (Tri-Q).) The rule’s purposes
are “to prevent [a] guilty party from reaping the benefit of his
wrongful conduct” and “to protect the public from the future
consequences of an illegal contract.” (Ibid.) However, this
general rule does “not necessarily apply to both parties to the
agreement unless both are truly in pari delicto”—that is, at equal
fault for the illegality. (Ibid.; see Bodily v. Parkmont Village
Green Home Owners Assn., Inc. (1980) 104 Cal.App.3d 348, 357
[“The doctrine of in pari delicto (in equal fault) refers to ‘the
general rule that the courts will deny relief to either party who
has entered into an illegal contract or bargain which is against
public policy.’ ”].)
Our high court has described the rule against enforcement
of illegal contracts and its equitable exception this way: “ ‘The
rule that the courts will not lend their aid to the enforcement of
an illegal agreement or one against public policy is
fundamentally sound. The rule was conceived for the purposes of
protecting the public and the courts from imposition. It is a rule
predicated upon sound public policy. But the courts should not
be so enamored with the Latin phrase “in pari delicto” that they
blindly extend the rule to every case where illegality appears
somewhere in the transaction. The fundamental purpose of the
rule must always be kept in mind, and the realities of the
situation must be considered. Where, by applying the rule, the
public cannot be protected because the transaction has been
completed, where no serious moral turpitude is involved, where
the defendant is the one guilty of the greatest moral fault, and
20
where to apply the rule will be to permit the defendant to be
unjustly enriched at the expense of the plaintiff, the rule should
not be applied.’ ” (Tri-Q, supra, 63 Cal.2d at pp. 218–219, quoting
Norwood, supra, 93 Cal.App.2d at pp. 288–289.)
Although our courts have applied the exception in a variety
of contexts, the factors to be considered are almost always the
same: the illegality must be collateral to the core purpose of the
contract and technical in the sense that the agreement could
have been performed lawfully; the plaintiff must be less culpable
than the defendant; and enforcement must not undermine the
public policy embodied in the violated statute. (See Tri-Q, supra,
63 Cal.2d at pp. 218–219 [listing cases]; Norwood, supra, 93
Cal.App.2d at p. 283; Denning v. Taber (1945) 70 Cal.App.2d 253,
257 (Denning).) As our Supreme Court explained in Tri-Q, the
exception and its recognized factors are grounded in the principle
that, “ ‘[i]n some cases, . . . effective deterrence [against illegality]
is best realized by enforcing the plaintiff’s claim rather than
leaving the defendant in possession of the benefit.’ ” (Tri-Q, at p.
220, quoting Lewis, supra, 48 Cal.2d at p. 151.) That principle—
though well established—cannot apply where the agreement’s
central object is unlawful and the parties are equally at fault for
the illegality. (See, e.g., Hooper v. Barranti (1947) 81 Cal.App.2d
570, 577 (Hooper) [where parties “were in pari delicto” and
plaintiff had to “rely upon the illegal transaction and agreement
and ask for its enforcement” to establish his claim, the court
would not “aid him, but must leave him as he was”].)
Here, the trial court found Second Site was in pari delicto
with Scott for the illegal scheme to use LAWC’s single BTRC as a
license to operate all three Second Site dispensaries. Second Site
does not challenge the sufficiency of the evidence to support this
21
factual finding. Instead, it argues the finding is irrelevant
because “in pari delicto is separate and distinct from the
equitable-factor exceptions.” Yet, in the very same sentence,
Second Site also admits the in pari delicto finding “overlaps” with
the “relative culpability” factor that courts must weigh in
determining whether to apply the equitable exception. Then, in
what appears to be a veiled effort to challenge the finding
without acknowledging the credibility determinations supporting
it, Second Site argues Scott was “categorically more morally
culpable” because “Glantz and Sapir . . . testified they did not
understand the one-BTRC-per-site or manager issues to be
unlawful,” while defendants “made tens of millions of dollars by
fraudulently breaching the Agreement and stealing LAWC from
Second Site.” (Boldface omitted.) Second Site’s reliance on
Glantz’s and Sapir’s testimony is plainly inconsistent with its
claim that it has “deliberately framed this appeal around legal
errors only—not factual reweighing or second-guessing witness
credibility” determinations. Moreover, the argument
fundamentally misunderstands how courts assess the parties’
relative culpability in determining whether the equitable
exception applies.
Contrary to Second Site’s argument, application of the
equitable exception depends on the parties’ relative culpability
for the illegal contract—not on the defendant’s culpability for
breaching the illicit agreement. Owens v. Haslett (1950) 98
Cal.App.2d 829 (Owens) is instructive. Haslett sought to recover
damages from Owens, who had performed remodeling work
without a valid contractor’s license, rendering the parties’
contract illegal. (Id. at p. 831.) She argued the equitable
exception should apply because she was unaware that Owens
22
lacked a license. (Id. at pp. 832–833.) The reviewing court
agreed, framing the relevant inquiry this way: “If . . . Haslett
was not in pari delicto, if she was justifiably ignorant of the fact
which made the contract illegal, that is, Owens’ lack of license,
then . . . her case [would] come within the [equitable] exception to
the general rule; for if she was not in pari delicto the illegality of
the contract would not have precluded her from recovering”
under it. (Id. at pp. 834–835, second italics added.) Critically,
however, the Owens court explained application of the equitable
exception only “amounts to a recognition of the contract by the
court,” and the party seeking relief must still satisfy “the usual
and ordinary requirements exacted of any party who seeks
recovery of damages for breach by the other party.” (Id. at p.
835.) Thus, as Owens teaches, these are two distinct inquiries:
first, whether the party seeking relief is less culpable for the
illegality (i.e., not in pari delicto); and second, if she is not in pari
delicto, whether the plaintiff can prove breach and damages
under ordinary contract principles. (Ibid.)8
8 Tri-Q is in accord. There, the cross-defendant company’s
officers had insisted that a severance agreement recite fictitious
consideration to give the company an improper income tax
advantage. (Tri-Q, supra, 63 Cal.2d at pp. 216–218.) The cross-
complainant knew about the subterfuge but executed the
agreement solely to obtain the agreed purchase price for his
stock, which the company conditioned on the arrangement. (Id.
at p. 218.) The trial court found the parties in pari delicto and
declared the agreement void. (Ibid.) Our Supreme Court
reversed, concluding the company was “clearly guilty of the
greater moral fault” for conceiving and insisting upon the
fraudulent arrangement, while the cross-complainant entered the
agreement for no “purpose other than to obtain the agreed
consideration for his stock.” (Id. at pp. 220–221 & fn. 4.) Having
23
Second Site’s argument conflates these distinct inquiries.
Its contention that Scott was more culpable because defendants
“made tens of millions of dollars by fraudulently breaching the
Agreement” goes entirely to conduct occurring after the illegal
contract was formed—the alleged breach and its financial
consequences—not to the parties’ relative culpability for the
illegal scheme itself. In contrast, the trial court’s in pari delicto
finding was properly directed at who bore responsibility for the
unlawful arrangement to operate three dispensaries under a
single BTRC. The trial court found Second Site and Scott equally
at fault for the illegality, and Second Site does not challenge the
evidence supporting this finding. Because the unchallenged in
pari delicto finding establishes the parties were equally
responsible for the agreement’s illegality, this threshold factual
predicate for the equitable exception is lacking, and the exception
cannot apply regardless of what occurred in the course of
performance. (See Owens, supra, 98 Cal.App.2d at p. 833 [the
“general rule” may yield to “recognized exceptions in favor of a
party who is not in pari delicto with the other party to the
contract and who, as the more innocent of the two, seeks
recovery”]; accord Tri-Q, supra, 63 Cal.2d at p. 218 [general rule
against enforcement of illegal contracts does “not necessarily
apply to both parties to the agreement unless both are truly in
pari delicto” (first italics added)].)
While the trial court’s in pari delicto finding is alone
sufficient to affirm the judgment on the contract claims, there is
determined the parties were not in pari delicto and that the
agreement should be enforced, the Tri-Q court remanded the
matter to the trial court to determine the company’s liability. (Id.
at p. 221.)
24
another problem with Second Site’s equity argument that
warrants discussion. According to Second Site, it should be
entitled to the benefit of its illegal bargain with LAWC because
the violation was merely “technical” and did not transgress the
public policy embodied in Proposition D and existing state
cannabis laws. Relying on cases involving licensing violations
(e.g., Norwood and Denning), Second Site argues the illegality
here was merely “administrative in nature” and “public policy
would not be served by denying Second Site relief” under the
illicit bargain. The licensing cases are instructive, but not in a
way that helps Second Site.
In Denning, two partners operated a saloon without
securing individual liquor licenses for each partner as required by
law. (Denning, supra, 70 Cal.App.2d at pp. 256–257.) The court
allowed the plaintiff to maintain an accounting action after the
partners terminated the business, reasoning the saloon was
“illegally conducted for lack of license, as distinguished from an
unlawful and forbidden enterprise.” (Id. at p. 257.) The Denning
court reasoned plaintiff was “not in pari delicto in failing to
secure the license,” as it was the defendant who failed to procure
it, and nothing in the law prohibited the parties from operating a
saloon together—the defendant had simply failed to fulfill the
procedural formality of securing proper licenses, which were fully
available to the partners. (Id. at pp. 257–258.) Further, because
the plaintiff’s accounting claim did “not necessarily involve the
legality of the partnership agreement to conduct [the saloon
business,] but depend[ed] upon the oral agreement to divide the
property equally,” which the partners made after voluntarily
terminating the business, the court concluded the technical
25
illegality of the business should not bar plaintiff from
maintaining his suit. (Id. at p. 260.)
Similarly, in Norwood, the court reversed a judgment
denying the plaintiff any share of a partnership’s assets after the
defendant—the plaintiff’s partner—had taken the contractor’s
license in his own name instead of the partnership’s. (Norwood,
supra, 93 Cal.App.2d at pp. 277–280.) The reviewing court
emphasized there was “no legal obstacle to including plaintiff’s
name in the application, and a partnership license could have
been secured, but this, defendant did not do.” (Id. at p. 286.) The
Norwood court reasoned the illegality “involved was the failure to
comply with a technical formality—it was not founded on the
agreement itself.” (Id. at p. 290.) Thus, in both Denning and
Norwood, the courts allowed suits implicating an illegal contract
notwithstanding the parties’ failure to secure proper licenses, but
only because the illegality was technical in the sense that the
businesses were themselves lawful, and the agreements could
have been performed lawfully had the parties simply obtained
the licenses that were available to them.
Hooper v. Barranti—a case the Norwood court
distinguished on grounds that manifestly apply here—is also
instructive. (See Norwood, supra, 93 Cal.App.2d at pp. 289–290
[distinguishing Hooper].) In Hooper, the parties’ agreement
expressly contemplated their partnership would operate a
business that was legally ineligible to hold a liquor license
because one partner was not a citizen and only citizens could
lawfully hold a liquor license. (Hooper, supra, 81 Cal.App.2d at
pp. 572–573, 575.) The reviewing court affirmed the judgment
voiding the agreement, explaining that, unlike the merely
technical licensing failures in Denning, the agreement was
26
“illegal from its inception” because the contemplated performance
was structurally prohibited, and the parties “were in pari
delicto,” as the plaintiff “knew that at all times the partnership
was conducting the business . . . that neither it, nor he
individually, was qualified to receive or had received a license.”
(Id., at pp. 577, 579.) Under those circumstances, a court “cannot
aid” the party seeking enforcement, “but must leave him as he
was.” (Id. at p. 578.)
This case is much more like Hooper, than it is like Denning
or Norwood. The violation here was not a technical omission—
e.g., a license that could have been obtained but was not. Under
Proposition D, there was no license available that would have
permitted Second Site to operate three dispensaries using
LAWC’s single BTRC. On the contrary, the ordinance expressly
confined limited immunity to a dispensary operating at “the one
location identified in its original or any amended [BTRC].” (L.A.
Mun. Code, § 45.19.6.3.) Like the prohibition against issuing a
liquor license to a noncitizen in Hooper, Proposition D’s one-
location condition was not a procedural requirement that could
have been satisfied by a different application or a properly filed
form—it was a categorical prohibition on the very object of the
partnership agreement. (See Hooper, supra, 81 Cal.App.2d at pp.
575–577.)
Moreover, the agreement’s object contravened one of the
central policy objectives that Proposition D sought to advance.
As stated in the ordinance’s recitals, the City enacted
Proposition D to curb the “proliferation of unauthorized medical
marijuana businesses” and the “increase in crime and the
negative secondary harms” associated with the proliferation by
granting a limited immunity to only those businesses that were
27
operating and had a BTRC on or before November 13, 2007. (See
L.A. Mun. Code, § 45.19.6.3, subd. A; see also id., § 45.19.6.) The
partnership agreement’s object to operate three dispensaries
using LAWC’s single BTRC plainly would have undermined this
anti-proliferation objective. Thus, because the agreement was
“illegal from its inception” and the performance it contemplated
was impossible to accomplish without violating public policy,
Second Site stands in precisely the position the Hooper court
described: it must “rely upon the illegal transaction and
agreement and ask for its enforcement” “to establish [its] claim,”
and the court therefore “cannot aid [it], but must leave [it] as [it]
was.”9 (Hooper, supra, 81 Cal.App.2d at pp. 577–578.)
Finally, there is no merit to Second Site’s contention that
the penalties specified in Proposition D implicitly preclude a
court from voiding an agreement that violates the ordinance.
(See, e.g., MW Erectors, Inc. v. Niederhauser Ornamental & Metal
Works Co., Inc. (2005) 36 Cal.4th 412, 436 [“ ‘In some cases . . .
the statute making the conduct illegal, in providing for a fine or
9 Asdourian v. Araj (1985) 38 Cal.3d 276 and Aghaian v.
Minassian (2021) 64 Cal.App.5th 603 are distinguishable for the
same reasons. In each of those cases, the illegality arose from a
technical or collateral failure to comply with a licensing or
regulatory requirement that, if performed, would have rendered
the agreement lawful. (See Asdourian, at pp. 290–294 [oral home
improvement contracts would have been legal had they been in
writing, and enforcing the agreements would not defeat the
statute’s purpose, as defendant was “a real estate investor, not an
unsophisticated homeowner or tenant”]; Aghaian, at pp. 621,
623–625 [contract to sell land in Iran could have been lawful had
defendant obtained licenses from United States Office of Foreign
Asset Control].)
28
administrative discipline, excludes by implication the additional
penalty involved in holding the illegal contract unenforceable.’ ”].)
Proposition D authorizes nuisance‑abatement proceedings
against medical marijuana businesses that violate its provisions
(see L.A. Mun. Code, § 45.19.6.7; see also id., § 12.27.1 [nuisance
abatement]), and Second Site acknowledges “hundreds of
[medical marijuana businesses] were shut down through City
Attorney actions, administrative nuisance proceedings, and
injunctions under Proposition D’s enumerated enforcement
mechanisms.” There is no meaningful difference between
shutting down unlicensed marijuana businesses for violating
Proposition D and voiding an agreement that had as its principal
object the illegal operation of similarly unlicensed businesses.
(Cf. MW Erectors, at pp. 435, 440–441 [where contractor was
licensed during performance and only unlicensed at contract
execution, equity would not be served by “extend[ing] the harsh
sanction of forfeiture beyond the bounds set by the Legislature
absent a showing that such a result is essential to effectuate the
statute’s protective purposes”].) The trial court correctly
concluded Second Site could not obtain the benefit of its illicit
bargain when it was in pari delicto for the illegality.
3. The Trial Court Correctly Dismissed the Tort Claims
Second Site contends the trial court erred in dismissing its
fraud, conversion, and unfair competition claims, asserting these
causes of action were “separate and distinct” from the illegal
partnership agreement. The argument does not warrant lengthy
discussion. Our review of the operative complaint confirms each
tort theory depended entirely on rights Second Site claimed
under the unenforceable agreement.
29
In support of its fraud claim, Second Site alleged Scott
“made promises about material matters in the Agreement without
any intention of performing,” and Second Site, in “justifiable
reliance upon Scott’s promises, . . . entered into the Agreement
and . . . perform[ed] all material obligations.” (Italics added.)
The trial court rejected the claim, finding no evidence of
fraudulent intent or justifiable reliance. On appeal, Second Site
argues Scott committed fraud, after “the Agreement was signed”
and “following [LAWC’s] relocation to Topanga,” by “deliberately
and methodically diverting LAWC’s assets and license.” (Italics
added.) But Second Site had no cognizable interest in “LAWC’s
assets and license” independent of the partnership agreement,
and it could not have justifiably relied on any representation
concerning those assets absent a legally permissible contract.
The trial court properly dismissed the claim.
The conversion claim fares no better. Second Site alleged
that, “[a]fter Plaintiff and LAWC entered into the Agreement,
Plaintiff had the right to immediate possession of all of LAWC’s
assets as well as its assets obtained from its operations.” (Italics
added.) The trial court dismissed the claim, concluding Second
Site failed to prove “it had a right to ownership or a right to
possess LAWC’s assets.” On appeal, Second Site argues “the
parties’ Agreement expressly designated Glantz and Sapir as
‘managing members’ of LAWC,” thus establishing their
“ownership interest in the company” as “equity owner[s].” (Italics
added.) Again, because Second Site’s asserted possessory interest
derives solely from an illegal and unenforceable agreement, the
trial court correctly dismissed the conversion claim.
The unfair competition claim is no different. Second Site
alleged defendants engaged in unfair competition by obtaining a
30
temporary license to operate LAWC at the Pico location while
“acting with asserted but no true authority in light of the terms
of the Agreement giving full operational control of LAWC to
Plaintiff.” (Italics added.) The trial court dismissed the claim,
finding Second Site had failed to prove a “wrong in the business
context” that violated the unfair competition law. On appeal,
Second Site says it “presented ample evidence of fraud,” including
“Scott’s post-formation misconduct, breach of fiduciary duties,
and concealment of material facts.” (Italics added.) But, again,
each alleged wrong arises from rights and obligations that exist
only under the illegal partnership agreement. Because the
agreement is void and unenforceable due to illegality, the
derivative unfair competition claim necessarily fails. The trial
court did not err in dismissing Second Site’s tort claims.
31
DISPOSITION
The judgment is affirmed. Defendants Paul Scott and Los
Angeles Wellness Center are entitled to costs.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
HANASONO, J.
We concur:
EGERTON, Acting P. J.
ADAMS, J.
32