Cip Paulsen, a former federal inmate-turned marijuana businessman, is fighting for control of his firm in court against angry investors and new drug charges.
Paulsen’s licensed marijuana business, Growstate, is in the hands of a court-appointed receiver after three early investors sought repayment of their initial $625,000 investment in 2014.
Financial documents filed with the court last week indicate debts totaling more than $5 million, a bulk of it five-figure monthly utility bills from Avista Corp. for powering the roughly 130,000-square-foot former Costco warehouse on Third Avenue in Spokane where the pot was grown. To save on those electric costs, Paulsen recently switched to processing existing plants for oils and extracts, rather than growing marijuana, according to court filings.
Even if Paulsen can pay off his creditors, it’s unclear whether he’ll be able to retain his business. A pair of arrests earlier this year on drug possession and driving under the influence charges could disqualify him under state rules that prohibit convicted criminals from participating in Washington’s legal marijuana industry.
Paulsen was in a Spokane County courtroom last week attempting to reverse the judge’s order appointing the receiver, who acts as a custodian of both his marijuana license from the state and the business until the creditors are satisfied. That includes the three investors, who filed a lawsuit in early November seeking dissolution of the company. They allege Paulsen was using profits of the business for personal benefit and had failed to provide an accounting of business gains and losses for three years.
“Plaintiffs in this case have a continuing fear of losing the remainder of their investments,” Brook Cunningham, the attorney representing the investors, said in court last week. The investors signed an operating agreement that indicates they could receive up to three times their initial investment, but also notes a number of risk factors that include “stringent government regulation,” an argument that some other growers and processors have cited as the cause of their own financial hardship.
Michael Paukert, the attorney representing Paulsen in the civil lawsuit, disputed claims he’d improperly spent the business’s money and requested at the hearing that he be able to question Paulsen’s personal accountant, Paul Fruci, about its finances.
“Mr. Paulsen, over the last year, has put over $140,000 of his own cash, through cash and the use of credit cards, into the company, over what the company has ever given him,” Paukert said. “It’s a matter of explaining the ledger.”
Paukert also argued that Paulsen was initially served with a lawsuit on a Friday evening and had to appear in court the following Tuesday, following a three-day weekend. Paulsen wasn’t afforded the opportunity to mount a defense before his company was taken away, Paukert said.
A financial report of the company shows Paulsen has deferred wages totaling more than half a million dollars.
Judge John Cooney, who is hearing the case, postponed the testimony until a court hearing scheduled for the middle of January. The marijuana license will remain in the hands of the court-appointed receiver and Growstate will continue to do business. The firm earned about $20,000 in net income for the second half of November, out of $105,000 in sales, according to court filings.
The investors filed their lawsuit after discovering a pair of new arrests for Paulsen, who spent nine years in federal prison as the central defendant in a cocaine bust dubbed “Operation Doughboy” in the mid-1990s. The Washington Liquor and Cannabis Board approved Paulsen’s marijuana license in 2014 because it determined he hadn’t had any criminal convictions in 10 years.
New criminal convictions are handled by a point system. If a marijuana licensee exceeds a certain point limit, they are barred from renewing their license. Paulsen faces two felony counts of possessing methamphetamine and cocaine and one misdemeanor count of controlling a vehicle under the influence of a drug after an arrest in Spokane County in February. In June, Paulsen was arrested on suspicion of driving under the influence in Kootenai County.
State laws prohibits anyone convicted of a felony in the past 10 years or two misdemeanors in the past three years from possessing a marijuana license. Paulsen is due in court in Idaho in January and the Spokane County charges are scheduled to go to trial in February.
The investors allege Paulsen didn’t notify them of the potentially disqualifying arrests.
Growstate’s license with the Liquor and Cannabis Board is up for renewal at the end of the month. The LCB reported Paulsen’s name is no longer on the license, and that the receiver is looking for a replacement.
Growstate has sold $7 million worth of marijuana since 2015, according to state records.
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