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A lawsuit against Canopy Growth Corp. and two related cannabis companies has been stayed by Ontario’s Superior Court, after the joint venture at the heart of the dispute was granted creditor protection in order to restructure the business.

The joint venture, called PharmHouse Inc., runs a 1.3-million-square-foot cannabis greenhouse in Leamington, Ont. The project has been embroiled in a major dispute over supply agreements that has left it unable to pay creditors, employees or contractors.

Canopy Rivers Inc., the venture capital arm of Canopy Growth which owns 49 per cent of the joint venture, said on Wednesday that PharmHouse has entered a court-monitored restructuring process under the Companies' Creditors Arrangement Act (CCAA). Canopy Rivers has provided $7.2-million in debtor-in-possession financing to PharmHouse to allow it to keep operating through the bankruptcy process.

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While PharmHouse looks to restructure its business, the Ontario Superior Court has stayed a $500-million lawsuit launched by one of the joint venture partners against Canopy Rivers, Canopy Growth and a third cannabis company, TerrAscend Corp.

Canopy Growth, related companies face $500-million lawsuit from joint-venture partner

PharmHouse is a joint venture between Canopy Rivers and a group of Leamington businessmen with long-standing ties to Southwestern Ontario’s greenhouse industry. The Leamington group includes Paul Mastronardi, chief executive officer of Mastronardi Produce Ltd., one of Canada’s largest indoor vegetable growers.

Canopy Growth and TerrAscend are involved in the project through supply agreements signed with PharmHouse.

In late August, the Leamington group, which owns 51 per cent of the project through a numbered company, launched a lawsuit against its partners after they failed to uphold their side of a supply agreement and buy a set amount of cannabis from PharmHouse at a pre-negotiated price.

The group claimed that it spent huge amounts of money building the greenhouse complex based on guaranteed purchase agreements. In its statement of claim, the group said that it now believes its partners were never serious about honouring the purchase agreements.

“The defendants' true purpose in entering into the joint venture and all related agreements was primarily to announce a partnership with a premier greenhouse operator to the public with the intention that such information would ‘froth’ the market for their publicly traded shares,” the group alleged in the statement of claim.

Before the suit was stayed, Canopy Rivers released a statement calling the allegations “completely without merit.”

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Canopy Rivers said in a news release on Wednesday that it expects to take a $32.6-million impairment charge after writing off the value of its equity investment in PharmHouse. It added that it may record additional losses on a $50.2-million loan that it made to PharmHouse and a $90-million line of credit made to the venture, for which it is the guarantor.

Canopy Rivers, which was founded by Canopy Growth to pursue minority investments in cannabis companies, had touted PharmHouse as the centrepiece of its Canadian marijuana production strategy. The high-tech greenhouse was supposed to produce 50,000 kilograms of cannabis a year. Around half of this product was supposed to go to Canopy Growth, Canopy Rivers and TerrAscend as part of guaranteed purchase agreements.

Over the past two years, the price of wholesale cannabis in Canada’s legal market has fallen dramatically because of a combination of oversupply and weaker-than-expected demand. This has made older supply arrangements uneconomical, forcing companies to either renegotiate or break contracts.

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