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Legal woes mounting for hemp startup Isotex

| February 6, 2020 3:17 PM

Lincoln County District Judge Matthew Cuffe intervened in the ongoing fallout between Isotex and the company that owns the property housing the hemp processing facility, issuing a temporary restraining order against the startup.

Kootenai Tec, a Louisiana-based limited liability company, bought the former Stinger building from Fisher Industries and leased it to Isotex in late September. Now the company alleges Isotex reneged on multiple parts of its contract and should pay $66,067 per month until vacating the property.

Accusing Isotex officials of moving assets out of its Lincoln County facilities despite pending litigation, Kootenai Tec successfully secured a restraining order in court Jan. 23.

When Isotex arrived in Libby in the early autumn, residents greeted their aspirations with fanfare. The company’s co-founders, speaking at a Libby Chamber of Commerce event in October, said they hoped to eventually hire 120 workers. A local job fair was held; more than 200 people, many from Lincoln County, applied for positions with the company.

Isotex, based in Texas, planned to produce an isolate necessary for making cannabidoil (CBD). The end product has received increased attention in recent years for its potential medicinal properties.

Co-founders Jason Cross and Eugene Elfrank said the waste created by the process remained marketable for other uses. Leftover materials prove useful in manufacturing automotive parts and headboards, among other products, Elfrank said at the time.

That the startup sought out the former Stinger building for its operation seemed poetic. Lincoln County, through the Port Authority, invested $3.2 million in the building in an effort to shore up and expand the region’s economy. County officials courted the Arizona-based Stinger Welding before it moved operations to Libby.

But the relationship grew contentious and then litigious. After CEO Carl Douglas died in a plane crash in 2012, the company filed for bankruptcy. Jobs were lost. Stinger departed town shortly thereafter.

In the long shadow cast by the Stinger debacle, residents began to question Isotex’s fortunes around town and on social media. Just months into the venture, Kootenai Tec alleged that Isotex had defaulted on the terms of their agreement. On Dec. 13, the Louisiana company notified Isotex of the problem and gave the startup until Dec. 30 to fix the problems, according to court documents.

The company accused Isotex of failing to make timely interest payments on a $7 million loan facilitated by Kootenai Tec, court documents said. It failed to cooperate in letting Kootenai Tec take payment in kind as outlined in its loan agreement, neglected to provide requested financial documents and did not maintain insurance, according to the lawsuit.

Among the litany of allegations, Isotex also failed to properly document improvements to the site and mishandled the loaned money, court documents said.

On Jan. 6, representatives of Kootenai Tec served Isotex with a notice of termination and a notice to quit. Isotex continued to operate in the facility despite the notification, court documents said.

Attorneys for Kootenai Tec asked the court that when Isotex vacates the building, the company assume an interest rate of 15 percent per annum until the delinquent rent is paid off. They also want the court to award Kootenai Tec money for its costs and disbursements, attorney’s fees and other potential relief, according to court documents.

Kootenai Tec later alleged that the startup has removed property and assets since an unlawful detainer complaint was filed Jan. 14.

In his Jan. 23 ruling, Cuffe wrote, “It appears to this court that the defendant is engaging in acts that, if they continue, will produce great or irreparable harm to plaintiff.”

“It further appears to this court that, during this litigation … the defendant is engaging in conduct that violates plaintiff’s rights, respecting the subject of the action, including but not limited to removal or disposal of the adverse party’s property, and tending to render a judgment ineffectual,” he wrote.

The court order prevents Isotex from moving any of its property, fixtures or equipment from the Stinger building as well as at properties owned by Bob McLaury, McLaury’s Apiaries, Melfred and Ann Siefke, Mac’s Market and Wildlife Recapture.

The order also bars Isotex employees or representatives from accessing the Stinger building.

According to a press release dated Jan. 23, Isotex is filing counter lawsuits. In it, company officials announced plans to fight what it described as an attempt to seize the startup, including filing a federal Racketeer Influenced and Corrupt Organizations Act lawsuit.

“Today, Isotex will no longer remain silent,” the document reads. “Isotex has gathered evidence exposing a conspiracy aimed at taking-over the company. As such, Isotex began filing lawsuits today … against these conspiring investors, contractors and their in-state associates.”

In it, company officials said they had remained silent despite “rampant speculation, false reports and baseless allegations” while trying to launch the hemp production facility.

“Isotex will stand and fight for itself, its employees, the communities in and around Libby, and Montana,” the press release said.

A hearing on a preliminary injunction in Lincoln County District Court related to the Kootenai Tec lawsuit is scheduled for Feb. 5, according to Cuffe’s ruling. Each party will receive equal time to present their case, he wrote.