Item 1. Legal Proceedings
Item 1. Legal Proceedings
From time to time, we may become involved in litigation or other legal proceedings relating to claims arising from the ordinary course of business. Furthermore, third parties may try to seek to impose liability on us in connection with our loans.
We have been involved in a series of lawsuits against the Justice Cannabis Company and its related individuals and entities since April 2025 regarding various alleged defaults under the credit agreement entered into between the parties on April 5, 2021 and subsequently amended multiple times. The credit facility to Justice Cannabis Company matured on May 1, 2026 and was not repaid.
On April 20, 2026, we sent the borrowers a Maturity Statement and on May 7, 2026 we sent the borrowers a Notice of Default for failure to pay upon maturity. As of the date of this Quarterly Report, approximately $78.8 million of principal remains outstanding under the credit facility. We are pursuing repayment of this loan through multiple avenues. On May 14, 2026, AFC Agent noticed public dispositions of certain collateral under Article 9 of the Uniform Commercial Code, originally scheduled for July 28, 2026, and currently rescheduled for September 24, 2026 and October 6, 2026.
In April 2025, we and AFC Agent (collectively, the “AFC Parties”) commenced legal actions against two shareholders (the “Guarantors”) of the parent of Justice Cannabis Company in the United States District Court for the Southern District of New York, which was amended in June 2025, and then again in June 2026 following the court’s partial grant of the Guarantors’ motion to dismiss in March 2026. The second amended complaint against the Guarantors asserts claims for breach of contract and fraud. This action is in discovery.
Also in April 2025, AFC Agent commenced an action against the parent of Justice Cannabis Company (the “Parent”) in New York state court asserting a claim for breach of contract arising from Parent’s failure to satisfy its obligations under a payment guaranty agreement related to the Company’s credit facility with Justice Cannabis Company. On August 3, 2026, AFC Agent commenced an action against the Parent in New York state court seeking summary judgment in lieu of complaint for failure of the Parent to satisfy its obligations under the guaranty agreement upon the borrower’s failure to pay at maturity.
In April 2025, two Justice Cannabis Company-affiliated cannabis companies that are borrowers under the Company’s credit facility with Justice Cannabis Company filed a complaint in the United States District Court for the District of New Jersey alleging, among other things, breach of contract, breach of the implied covenant of good faith and fair dealing, and
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violations of the New York Uniform Commercial Code in connection with the Company’s termination of a forbearance agreement between the parties. In May 2025, the court granted NJ plaintiffs’ request for a preliminary injunction. In June 2025, the AFC Parties appealed the injunction to the Third Circuit Court of Appeals, which heard oral argument on March 3, 2026. On May 6, 2026, the AFC Parties filed a motion to dismiss the appeal as moot. The appeal and that motion both remain pending before the Third Circuit. On February 23, 2026, the District Court granted the AFC Parties’ motion for summary judgment on the Amended Complaint’s fourth count.
In June 2026, the AFC Parties commenced an action against Bloc Dispensary LLC, Hayden Gateway LLC, Pier Cove LLC and certain affiliated borrowers in the Superior Court of New Jersey, Chancery Division, Mercer County, seeking to enforce the AFC Parties’ contractual rights to inspect the collateral securing the credit facility to Justice Cannabis Company. The defendants removed the action to the United States District Court for the District of New Jersey, and the action was subsequently returned to the Chancery Division. On July 15, 2026, the defendants, together with JG HoldCo LLC and two individual principals, filed a counterclaim against the AFC Parties and applied for an order to show cause with temporary restraints seeking to enjoin the AFC Parties from exercising control over the counterclaim-NJ plaintiffs’ deposit accounts and from conducting the noticed dispositions of collateral described above. The defendants also allege, among other things, that the credit agreement is unenforceable because it involves activities that violate federal law, that the AFC Parties do not hold valid or enforceable security interests in the collateral, and that the noticed dispositions would not be commercially reasonable under Article 9 of the Uniform Commercial Code. Pursuant to a case management order entered on July 17, 2026, AFC’s opposition to the pending application for preliminary injunctive relief was filed on August 7, 2026, replies are due on August 14, 2026, and a hearing is scheduled for September 15, 2026. The AFC Parties believe the counterclaim is without merit and intend to defend against it vigorously.
On March 26, 2026, Bloc Dispensary LLC, Hayden Gateway LLC, and JG HoldCo LLC—which are two borrowers under the credit facility to Justice Cannabis Company entities—filed suit against Leonard Tannenbaum, Robyn Tannenbaum, Daniel Neville, the Company, AFC Agent, and the Adviser in the Circuit Court for the 15th Judicial Circuit for Palm Beach County, Florida. The complaint reiterates many of the allegations in a complaint that was filed in California (and subsequently dismissed for lack of jurisdiction), including that the defendants harmed plaintiffs’ business and breached the 2024 Justice Cannabis Company Forbearance Agreement, among other alleged misconduct. The Florida plaintiffs assert causes of action against all defendants for breach of fiduciary duty, tortious interference with a contractual relationship, unjust enrichment, breaches of contract, negligent hiring, and negligent retention and supervision, and seek damages, interest, costs, attorney fees, and an injunction against foreclosure. Defendants filed a motion to dismiss and a motion to stay this action on July 6, 2026, which remains pending.
On February 26, 2026, Jon Loevy and Michael Kanovitz—the principals of the Justice Cannabis Company borrowers—filed a complaint in the Circuit Court of Cook County, Illinois against nine individuals who are directors, officers, or other personnel affiliated with the Company. The defendants removed the action to the United States District Court for the Northern District of Illinois. The complaint, as amended on May 22, 2026, asserts a claim for defamation, based on statements attributed to a Company spokesperson in a legal trade publication and on remarks made on a Company earnings call. In June 2026, the defendants moved to dismiss the amended complaint for lack of personal jurisdiction and for failure to state a claim, and separately moved for sanctions. Both motions remain pending. The defendants believe the claims are without merit and intend to defend against them vigorously.
Because the outcomes of these actions remain uncertain, no reasonable estimate of possible outcomes resulting from these legal actions can be made at this time.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in Item 1A - “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2025 and as disclosed in Item 1A. “Risk Factors” in subsequently filed Quarterly Reports on Form 10-Q.
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