Litigation bankrupts hemp firm before trial

A 186-acre hemp farm in Montrose, Colo. (Tiney Ricciardi, The Denver Post)

One business day before jurors were to weigh whether it owes royalties to an inventor, the Broomfield hemp company ECS Brands filed for Chapter 11 bankruptcy.

Its April 11 filing put a pause on the trial but ECS must still contend with court judgments, settlements and a lawsuit from its founder’s ex-fiancée, all of which suggest the maker of CBD gummies and hemp seltzers has been borrowing millions of dollars it cannot repay.

ECS Brands was founded in 2018 by CEO Arthur Jaffee, a University of Colorado graduate who previously took the local CBD company Elixinol public. It now has six employees.

“ECS has experienced cash flow difficulties as a result of the turbulence of a fast growing, unregulated industry,” Jaffee explained in an April 16 affidavit. “A collapse of vendors in 2019-2020 made it impossible for (ECS) to fulfill its contractual obligations.”

That led to what Jaffee characterizes as “significant litigation,” much of which was settled. 

“The settlements caused a financial strain on the business, as payments to satisfy these…were almost $50,000 per month,” he explains. “…Ultimately, the threat of litigation, judgments and arrearages on rent caused (ECS) to seek protection under the bankruptcy code.”

Two years ago, the Kentucky company Bluegrass State Holdings accused ECS of using Bluegrass’s method for removing THC from hemp but not paying royalties. ECS countersued, saying Bluegrass tricked it into licensing a method that was not proprietary. Bluegrass would have sought $437,000 at an April 14 trial, had that trial not been canceled.

Later in 2023, ECS was sued by two men who claimed they loaned the company $1.9 million and $100,000, respectively, but were not repaid; both cases were settled. The next year saw two lawsuits by ECS vendors, ending in court judgments of $30,000 and $11,000.

Arthur Jaffee. (LinkedIn)

Then, on the last day of March, ECS and Jaffee were sued by Katie Southworth, who until recently was the company’s general manager and Jaffee’s fiancée. Southworth claims Jaffee stole from her by forcing her to move $160,000 of her ECS salary to his bank account from 2021 to 2023; by opening and not paying off credit cards in her name, wrecking her credit; and by kicking her out of the couple’s $1.5 million home in Sloan’s Lake.

Jaffee has not responded to the lawsuit and did not answer requests for an interview.

As for ECS, Jaffee values its assets at $4.7 million, $2.6 million of which is equipment and materials and $2 million of which is in accounts receivable. He has not fully listed the company’s debts but says they include $2 million to the U.S. Small Business Administration, $96,000 to its office and warehouse landlord at 295 Interlocken Blvd., and $83,000 to Southworth.

The company’s bankruptcy lawyer is Jenny Fujii at Kutner Brinen Dickey Riley in Denver.