Victor J.  Roehm III
 

Fear, Loathing, and Legal Marijuana in the Pacific Northwest

November 2017

Victor J. Roehm III
503.243.1641

Published in the National Association of Credit Management Business Credit Journal
November 2017 

With the passage of Washington Initiative 502 in 2012 and the subsequent passage of Measure 91 in Oregon in 2014, commercial production, processing and the retail sale of cannabis have become a major industry in the Pacific Northwest.  However, there is still a great deal of uncertainty for those who may knowingly or unknowingly deal with this industry.  Below are some issues to be aware of with respect to this unique industry.

The Controlled Substances Act

As a general matter, cannabis is listed on Schedule I of the Federal Controlled Substances Act.  It is unlikely that this will change in the short-term.  This means that production, sale and processing of cannabis are federally illegal even though Washington and Oregon permit these activities pursuant to a state licensing regime.  It also means that leasing or maintaining real property used for manufacturing or distributing controlled substances is itself an illegal act. (See 21 U.S.C. § 856.)  The sale of "drug paraphernalia" is also illegal pursuant to 21 U.S.C. § 863.  Drug paraphernalia has a broad meaning that includes "any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance…."

The penalties for violating the Controlled Substances Act include jail time and stiff monetary penalties.  However, another aspect of the Controlled Substances Act and related laws that was of particular concern to landlords who rented to tenants involved in the cannabis industry was civil forfeiture.  If the government has probable cause it can seize property, including real property, money, and equipment, used in connection with a violation of the Controlled Substances Act through civil forfeiture based on a preponderance of the evidence standard, which is a lower legal standard than the typical burden of proof in a criminal case, which requires evidence beyond a reasonable doubt.  This put landlords who leased to cannabis businesses in a great deal of risk.

The Cole Memorandum

Fortunately, in August of 2013, in wake of the legalization of recreational marijuana sales in Colorado and Washington, the United States Department of Justice provided guidance as to their enforcement priorities with respect to marijuana, which provided some comfort to those leasing property to or doing business with a state-licensed cannabis business.  The enforcement priorities include:

  • Preventing distribution to minors;
  • Preventing revenue from going to criminal organizations;
  • Preventing diversion of marijuana to other states;
  • Preventing state-authorized activity from acting as a front;
  • Preventing violence and use of firearms;
  • Preventing drugged driving and adverse health consequences;
  • Preventing growing of marijuana on public lands; and
  • Preventing marijuana possession and use on federal property.

As long as a person or entity is complying with a comprehensive state regulatory scheme which addresses the Department of Justice's enforcement priorities and not otherwise violating any of the enforcement priorities set forth in the Cole Memorandum, Federal authorities will not currently pursue legal action against that person or entity.  However, it is important to remember that the Cole Memorandum is not a law or a regulation and is subject to change at any time that the Department of Justice determines to no longer be bound by its guidance. 

Rohrabacher-Blumenauer

The Department of Justice has an additional limitation when it comes to prosecuting medical marijuana businesses and the entities that do business with them—the Rohrabacher-Blumenauer amendment.  This amendment to the Department of Justice's budget has been in place since 2014 and states that none of the funds that the Department of Justice receives may be used "to prevent [States where medical cannabis is legal] from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana."  Courts have upheld the principal that Rohrabacher-Blumenauer prevents prosecutions related to the medical cannabis industry, but it does not extend to recreational cannabis.  Attorney General Sessions has argued for discontinuing Rohrabacher-Blumenauer when it expires in December and the amendment's future is unclear.

Continuing Challenges

In addition to the concerns about possible changes to the Cole Memorandum and the Rohrabacher-Blumenauer Amendment, there are other challenges when doing business with a member of the cannabis industry.  Despite additional guidance from the Department of Justice and the Department of Treasury, Federally-insured banks typically refuse to open accounts for cannabis business entities and escrow and title companies refuse to hold funds related to deals involving cannabis businesses or properties on which a cannabis businesses are located.  Additionally, most title companies in Oregon will not issue a title insurance policy for cannabis-related real property.  Some state-chartered credit unions are taking accounts for cannabis businesses, but the fees they charge are far above those charged for other accounts.   Of particular concern to those who may be selling equipment on financing terms to these entities, bankruptcy is not available for most cannabis business entities.  This means a creditor may have to pursue a state court receivership to attempt to collect from an insolvent cannabis business. 

Another recent wrinkle has been attempts by neighboring property owners to bring civil cases under the Racketeer Influenced and Corrupt Organizations Act ("RICO") against marijuana businesses, their landlords and numerous other entities and businesses that do business with these cannabis businesses, including the property owner's lender, under the theory that all of these businesses were engaged in a conspiracy to violate the Controlled Substances Act, which diminished the value of the plaintiff's property.  The 10th Circuit Court of Appeals held in June that such a case was sufficient to survive a motion to dismiss and a similar case is now pending in Oregon.  The possibility of liability under RICO could have a chilling effect on the growth of the cannabis industry and could impact businesses that had little or no knowledge that they were dealing with a cannabis business.  These cases together with potential actions by the Department of Justice and Congress could have a profound impact on the industry and those who do business with the industry.


Victor J. Roehm is a partner in Sussman Shank's business group with a focus on finance, real estate and corporate transactional work. He can be reached at 503-227-1111 or vroehm@sussmanshank.com.

 


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