Federal Law and Policy

Jesse Harris writes:

Is a landlord who accepts rent from a cannabis dispensary tenant entitled to bankruptcy relief in a federal forum? In In re Olson, 2018 WL 989263 (B.A.P. 9th Cir. Feb. 5, 2018), the Bankruptcy Appellate Panel for the Ninth Circuit answered: maybe, maybe not, but either way, the bankruptcy court must make specific factual findings based on evidence in the record and explain its reasoning.

U.S. Court of Appeals for the Ninth Circuit building in San Francisco, CAIn Olson, a 92-year-old, legally blind landlord owned a shopping center in which a marijuana dispensary—operating legally under California law—was a tenant. Facing a foreclosure sale of her property, as well as ongoing litigation with the dispensary tenant, the debtor filed for Chapter 13 relief. The debtor continued to collect rent from the dispensary tenant, and ultimately proposed a Chapter 13 plan that included the sale of the shopping center within six months of plan confirmation. Before confirmation, however, the bankruptcy court sua sponte dismissed the bankruptcy case because the debtor was receiving “illegal proceeds” by “leasing property for an unlawful purpose under federal law, although lawful under state law.”

The debtor appealed, arguing that the bankruptcy court abused its discretion by dismissing the case. The Ninth Circuit agreed. In vacating the bankruptcy court’s order, the Bankruptcy Appellate Panel found that the bankruptcy court failed to articulate its legal basis for dismissing the case with “clarity and precision.” Specifically, the panel noted that the bankruptcy court did not make findings on its conclusion that the debtor violated the Controlled Substances Act by accepting the dispensary’s rent; that the debtor acted in bad faith; that the trustee would be administering the proceeds of an illegal business; or that the rents were to be used to fund the plan.

A concurring opinion written by Judge Maureen A. Tighe also pointed out that “[w]ith over twenty-five states allowing the medical or recreational use of marijuana, courts increasingly need to address the needs of litigants who are in compliance with state law while not excusing activity that violates federal law.” According to Judge Tighe, “the presence of marijuana near the [bankruptcy] case should not cause mandatory dismissal.”

The holding in Olson not only highlights the ongoing tension between the Controlled Substances Act and state marijuana programs, but it also emphasizes the need for landlords to carefully consider leasing property to cannabis businesses. Should those landlords eventually seek bankruptcy relief, such relief may be limited. That said, the panel in Olson appears to have equipped landlords who choose to lease property to cannabis businesses with certain bankruptcy options to avoid the “harsh penalty of dismissal,” such as rejecting the lease under Section 365 of the Bankruptcy Code.


Jesse M. Harris is an associate in the firm’s Financial Restructuring & Bankruptcy Department, based in its Philadelphia office.

Jack Praetzellis writes:

Sunset at Manhattan Beach and Pier in Southern California, Los Angeles.California Governor Jerry Brown signed an amendment to California Evidence Code Section 956 ominously known as the “crime-fraud exception”.  The newly-revised Code Section attempts to address the tension between state and federal law governing cannabis.

Under normal circumstances, California’s attorney-client privilege makes confidential communications among an attorney and a client exempt from disclosure.  Essentially, neither a lawyer nor a client can be compelled to testify about the substance of their communications.

The crime-fraud exception punctures the attorney-client privilege.  It provides that if a client used the services of a lawyer to commit a crime or a fraud, then the attorney-client privilege doesn’t apply.  The conflict between state and federal laws governing cannabis raises the specter of whether or not legal advice about cannabis falls into the crime-fraud exception.

Under California’s newly enacted Evidence Code Section 956(b), so long as an attorney “advises the client on conflicts with respect to federal law,” the crime-fraud exception won’t impact the attorney-client privilege where the advice is “rendered in compliance on state and local laws on medical cannabis or adult-use cannabis.”

Before celebrating, however, be mindful of Federal Rule of Evidence 501.  Where federal law governs a claim, federal courts do not apply state law privileges and therefore will not apply Evidence Code Section 956(b).  And obviously no similar special exception has been written in to federal law.

What’s the takeaway?  If you are providing or receiving advice about cannabis in California, be sure that some of the advice concerns conflicts with respect to federal law.  While it’s not guaranteed to preserve the attorney-client privilege under all circumstances (see Federal Rule of Evidence 501), it’s undoubtedly better than nothing.


Jack Praetzellis is an associate in the Litigation Department, resident in the San Francisco office.

As a follow-up to yesterday’s post regarding the status of FinCEN’s 2014 marijuana banking guidance in light of the Attorney General’s policy reversal on marijuana enforcement at the federal level, we have received written confirmation from FinCEN that its 2014 guidance remains in place.  In response to our inquiries, FinCEN provided us with the following statement:

“The SAR reporting structure laid out in the February 14, 2014 guidance remains in place.  FinCEN will continue to work closely with law enforcement and the financial sector to combat illicit finance, and we will notify the financial sector of any changes to FinCEN’s SAR reporting expectations.”

In addition, the two U.S. Senators from Colorado, Michael Bennet (D) and Cory Gardner (R), announced that they have sent a letter to FinCEN urging the agency to retain its 2014 marijuana banking guidance.  In their press release, the senators warned that “repealing the guidance could increase the amount of cash used by marijuana businesses, raising public safety issues and reducing the oversight and transparency of marijuana transactions.”  A copy of their letter is available here.

We are closely monitoring this area and will provide timely updates as to any developments.

Reuters is reporting today that the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) was caught off guard by Attorney General Jeff Sessions’ announcement last week that the Justice Department was reversing its policy regarding enforcement of federal marijuana laws.  A FinCEN spokesman said in a statement that his agency’s prior pronouncement regarding marijuana banking nevertheless “remains in place,”  referring to guidance issued in February 2014 to clarify Bank Secrecy Act expectations for financial institutions seeking to provide services to marijuana-related businesses.  That guidance described how financial institutions could provide banking services to marijuana businesses consistent with their BSA obligations despite the fact that the manufacture, distribution, and dispensing of marijuana is illegal under federal law.  And as we recently reported, 400 banks and credit unions were actively serving the marijuana industry prior to the Attorney General’s announcement.

Reuters reports that FinCEN received no advance warning of the Attorney General’s announcement, according to sources, and a Justice Department spokesman declined to comment about whether his agency had coordinated with FinCEN prior to the announcement.  The Justice Department’s policy reversal has understandably sowed confusion among financial institutions as to whether they can continue to do business with marijuana businesses, and FinCEN’s confirmation that its 2014 guidance remains in place should provide some measure of comfort to affected banks and credit unions.

It is worth noting that FinCEN’s current director – Kenneth A. Blanco, who assumed the role just last month — spent the last 28 years of his career as a Justice Department prosecutor, most recently serving as Acting Assistant Attorney General of the Criminal Division.  During his tenure at the Justice Department, he was the chief of numerous sections, including the Money Laundering and Asset Recovery Section, the Narcotic and Dangerous Drug Section, and the Organized Crime and Gang Section, among others.  We have yet to see whether Mr. Blanco will implement major policy changes at FinCEN, and whether his agency maintains its marijuana banking stance, or aligns with his former agency’s policy shift, may well be one of the first major policy decisions he has to confront.

Last Thursday, Attorney General Jeff Sessions issued a policy Memo regarding Marijuana Enforcement that effectively rescinded the 2013 “Cole Memo” guidance, which endorsed a more “hands off” approach in states where marijuana had been legalized. The January 4, 2018 Memo instructed that with regard to marijuana-related enforcement actions, federal prosecutors should “follow well-established principles that govern all federal prosecutions.”

Cannabis and the law
Copyright: jirkaejc / 123RF Stock Photo

This announcement has important implications for licensed cannabis businesses across the country, and attorneys from Fox Rothschild’s Cannabis Practice Group were among the first to provide legal and practical advice for those in the industry. Links to selected publications and interviews can be found below:

AG Sessions Issues Cannabis Policy Reversal. What Does It Mean for the Industry?

First Lawyer Comments Come Through on Sessions Decision To Rescind Cole Memo (via Cannabis Law Report)

Cannabis Law Practices Brace for Impact of Sessions Memo (via Law.com)

Sessions takes aim on marijuana enforcement (via NJBIZ.com)

Bethlehem company gets green light to dispense medical marijuana (via Allentown Morning Call)

 

The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has released updated statistics showing a steady increase in the number of depository institutions that actively bank U.S. marijuana businesses. As of September 30, 2017, a total of 400 banks and credit unions provided services to marijuana-related businesses, up from 334 as of December 31, 2016. FinCEN’s data is based upon Suspicious Activity Reports (SARs) required to be filed by financial institutions on activity involving a marijuana-related business.

In guidance issued in February 2014, FinCEN required financial institutions providing services to marijuana businesses to file the following types of SARs depending upon the type of services being provided:

  • A “Marijuana Limited” filing, which means that the financial institution’s due diligence indicates that the marijuana-related business does not raise any of the red flags as defined in the Cole Memo and is compliant with the appropriate state’s regulations regarding marijuana businesses. In this category, the financial institution is providing banking services to the marijuana-related business.
  • A “Marijuana Priority” filing, which means the financial institution’s due diligence indicates that the marijuana-related business may raise one or more of the red flags as defined in the Cole Memo or may not be fully compliant with the appropriate state’s regulations regarding marijuana-related businesses. In this category, the financial institution is providing banking services to the marijuana-related business while further investigation is being conducted.
  • A “Marijuana Termination” filing, which means the financial institution decided to terminate its relationship with the marijuana related business for one or more of the following reasons:

– The financial institution’s due diligence indicates that the marijuana-related business raises one or more of the red flags as defined in the Cole Memo.

– The marijuana-related business is not fully compliant with the appropriate state’s regulations.

– The financial institution has decided not to have marijuana-related customers for business reasons.

As of September 30, 2017, FinCEN has received more than 39,000 SARs involving marijuana-related businesses since issuance of the February 2014 guidance. The vast majority of those SARs – nearly 29,000 – were “Marijuana Limited” filings, indicating that the financial institution was providing ongoing banking services to the marijuana business in question. FinCEN has received approximately 2,800 “Marijuana Priority” SARs, and just over 9,400 “Marijuana Termination” SARs, during the same time period.

An analysis of FinCEN’s SAR filing data shows a positive and encouraging trend for marijuana businesses, which have typically struggled to find financial institutions willing to provide banking services. For the first three quarters of 2017, the number of “Marijuana Limited” SAR filings increased every month by an average of 1,258 filings. In comparison, the number of “Marijuana Priority” and “Marijuana Termination” SAR filings increased by an average of only 332 and 118, respectively.

Venture capital is playing a growing role in the country’s emerging legal cannabis industry. Attorneys Emily J. Yukich and Matthew R. Kittay of Fox Rothschild’s Emerging Companies & Venture Capital Practice will conduct a panel discussion with industry insiders during the American Bar Association Business Law Section’s annual meeting in Chicago.

Cannabis leafThe Angel Venture Capital Subcommittee, which Yukich and Kittay co-chair, will present an in-depth 360-degree examination of venture capital investing in cannabis companies, featuring:

Panelists:

  • Jeremy Unruh, general counsel and director of external communications at PharmaCann, a medical cannabis provider based in Oak Park, Illinois.
  • Charlie Bachtell, founder and CEO of Cresco Labs, LLC, a Chicago-based medical cannabis cultivating and manufacturing company.
  • William Bogot, co-chair of the Cannabis Practice Group at Fox Rothschild LLP.

Date: Thursday, Sept. 14

Time: 10 a.m. to 11 a.m.

Venue: Chicago Ballroom VIII, Ballroom Level, Sheraton Grand, Chicago, Illinois.

Yesterday, U.S. Senator Cory Booker (D-NJ) introduced the Marijuana Justice Act of 2017.  The bill, which Senator Booker first announced on Twitter and then described more fully on Facebook Live, aims to end the federal prohibition on cannabis with a multi-faceted approach.  First, the bill seeks to amend the Controlled Substances Act to declassify marijuana as a controlled substance under Schedule I of that Act.  Presently, marijuana is in the same category as heroin.

U.S. Capitol Building
Copyright: mesutdogan / 123RF Stock Photo

Although Senator Booker describes the legalization of marijuana at the federal level as “first and foremost,” he describes the declassification as “just the beginning.”  As written, the legislation is retroactive, requiring each federal court to issue an order expunging each conviction for a marijuana use or possession offense entered by the court before the date of enactment.  The bill would provide individuals presently incarcerated for marijuana-related offenses with an opportunity have their sentences reviewed as though the Act was in effect at the time the offense was committed.

In addition to the shift in federal law, the legislation incentivizes states to become more flexible in their criminalization of marijuana.  Under the proposed legislation, states would be ineligible for certain funding if they disproportionately arrest or incarcerate “low-income individuals” or “minority individuals,” as those terms are defined in the bill, for marijuana-related offenses.

Finally, the bill creates a “Community Investment Fund” of $500 million for communities that Senator Booker describes as having been “disproportionately impacted” by the enforcement of current laws.  Senator Booker would have the community investment fund available to finance job training, reentry services, expenses related to expungement of marijuana-related convictions, community centers, and libraries.

Although the bill has been described as a “long shot” in the Republican-controlled Congress, given the ever-increasing presence of the legal cannabis industry, it is one worth following.  You can learn more about the bill in the press release on Senator Booker’s website, and watch the Facebook Live video of Senator Booker discussing the bill:

In a recent ruling, the Tenth Circuit addresses multiple controversies where private citizens, sheriffs and county attorneys, and neighboring states brought several suits attempting to limit or interfere with Colorado’s Amendment 64 which legalized recreational marijuana in Colorado.

The Cases

  • In the first suit, the Reillys, individual landowners who own property adjacent to a marijuana grow facility, brought suit under 18 USC § 1964(c) which provides that private citizens can bring a civil suit against members of a RICO enterprise if they are damaged by a RICO activity.  The Reillys allege that the facility emits noxious odors which impede on their enjoyment of their property and which have (potentially) diminished the value of their land.  The district court dismissed this action, finding that the Reillys had not pled facts to show that there was plausible injury to their property.
  • In the second suit, Safe Streets Alliance and the Reillys alleged that Amendment 64 is preempted by the Controlled Substances Act and that the CSA confers upon them a federal substantive right to equitable remedy which they asserted should be to prevent Colorado and the local governments issuing licenses to the marijuana growers.
  • In the third suit, Colorado, Kansas and Nebraska sheriffs and county attorneys sued Colorado under similar preemption theories asserted by the Reillys.
  • In the fourth suit, Nebraska and Oklahoma moved to intervene in the first three cases, claiming that Amendment 64 injures their sovereign rights and those of their citizens, also relying on the theory that the CSA allows preemption of Amendment 64.

Who Won and Who Lost?

  • The only potential winner is the Reillys.  The Tenth Circuit determined that the district court inappropriately dismissed their action noting that Colorado state law acknowledges that invasion of one’s property by noxious odors gives rise to a nuisance claim and results in direct injury to property.  Because the Reillys assert that their property had lost value due to invasion by noxious odors, the Tenth Circuit granted the Reillys the right to prove their damages in the District Court.  However, the Tenth Circuit did not recognize any right to recover for injury attributable to emotional, personal, or speculative future injuries (e.g., any disappointment they experience because a marijuana grow impedes their mountain views or because there is federally illegal behavior openly occurring next to their property).  So, the Reillys have the opportunity to prove their monetary injuries in the District Court.
  • The preemption arguments all failed.  The Court held that the CSA’s preemption clause did not confer Safe Streets and the Reillys with any federal substantive rights which would permit them to force the local regimes to stop issuing licenses or permitting federally illegal conduct.  Without such rights, there is no remedy available.  Based on the same reasoning, the Court held that the Colorado, Kansas and Nebraska sheriffs and county attorneys also do not have any federal substantive rights which allow them to bring a claim.
  • Nebraska and Oklahoma’s moved to intervene in the case after the Supreme Court declined jurisdiction over their claims against Colorado.  The Tenth Circuit affirmed that only the Supreme Court has jurisdiction over controversies between the states and rejected their intervention.  Further, the Court distinguished the preemption arguments available to private citizens vs. sovereign states.

Interesting and Not Insignificant Side Note

  • In addressing the Reillys RICO claims, the court addressed the following question:  who are the defendants, or in RICO parlance, who are the members of the RICO enterprise, against whom the injury claims can be alleged.  Initially, the Reillys included a contractor who provided water to the marijuana grow facility as a defendant.  The Tenth Circuit held that “delivering water to the Marijuana Growers’ operation” was insufficient to establish that the contractor was part of the enterprise.  The Tenth Circuit relied on another Tenth Circuit case, George v. Urban Settlement Servs., 833 F.3d 1242 (10th Cir. 2016) holding that “a defendant must do more than simply provide, through its regular course of business, goods and services that ultimately benefit the enterprise.”  This holding should provide some protection for anyone who provides services as a contractor to a state licensed marijuana business.

The opinion is available here:  Safe Streets v. Hickenlooper et al

The Financial Crimes Enforcement Network of the U.S. Department of the Treasury (FinCEN) recently issued a Marijuana Banking Update, with data through March 31, 2017.   The number of banking institutions offering services to Marijuana Related Businesses continues to increase, but the overall number of banks providing such services remains low.  As of March 31, 2017, only 368 banks and other depository institutions in the U.S. offered services to Marijuana Related Businesses.

Copyright: jeremynathan / 123RF Stock Photo

During the period covered by the Update, banking institutions filed approximately 30,000 Suspicious Activity Reports (SARS) across the 3 required filing categories:  Marijuana Limited, Marijuana Priority, and Marijuana Termination.  The majority of the SARs filings – over 20,000 – fell into the Marijuana Limited category, while 2,007 SARS were filed in the Marijuana Priority category and 7,326 SARs were filed in the Marijuana Termination category.

FinCEN defines the three filing categories as follows:

Marijuana Limited: the financial institution’s due diligence indicates that the MRB does not raise any of the red flags as defined in the Cole Memo and is compliant with the appropriate state’s regulations regarding marijuana businesses. The financial institution is providing banking services to the MRB.

Marijuana Priority: the financial institution’s due diligence indicates that the MRB may raise one or more of the red flags as defined in the Cole Memo or may not be fully compliant with the appropriate state’s regulations regarding MRBs. The financial institution is providing banking services to the MRB while further investigation is being conducted.

Marijuana Termination: the financial institution decided to terminate its relationship with the MRB for one or more of the following reasons:

    • The financial institution’s due diligence indicates that the MRB raises one or more of the red flags as defined in the Cole Memo.
    • The MRB is not fully compliant with the appropriate state’s regulations.
    • The financial institution has decided not to have marijuana related customers for business reasons.