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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.

As a follow up to my post on the City of Boynton Beach having its regulations overturned by Florida state law, other Florida municipalities are debating medical marijuana dispensaries.

Those adopting or extending moratoriums on dispensaries:

  • Marathon City, located in the Keys, has extended its moratorium for another 180 days.
  • Winter Garden, located near Orlando, recently voted in favor of a moratorium.
  • Collier County has also imposed a county-wide moratorium through the end of 2017.
  • Coral Gables, located near Miami, has also voted to impose a ban on dispensaries.
  • City of Sarasota, located south of Tampa, imposed a 60 day moratorium.

Miami Beach is investigating a creative workaround to impose some local control on dispensaries.  Miami Beach is looking into changing the zoning rules for pharmacies within their borders since municipalities are required to regulate dispensaries as they do pharmacies.

Meanwhile, the first dispensary in the City of Jacksonville, Florida recently opened its doors.  Tallahassee, the capital of Florida, also recently had its first dispensary open.

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Dori K. Stibolt is a West Palm Beach, Florida based partner with the law firm of Fox Rothschild LLP.  She focuses her practice on litigation and labor and employment issues.  You can contact Dori at 561-804-4417 or dstibolt@foxrothschild.com.

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

Effective today, retail shops and medical marijuana dispensaries in the City of Denver will have the right to remain open until 10:00 PM. Under Colorado law local jurisdictions have the authority to regulate the time, place, manner and number of marijuana stores, or prohibit their operation altogether.

16403223 - open late neon window sign
Copyright: phaseout / 123RF Stock Photo

Previously, Denver’s ordinances permitted stores to remain open until 7:00 PM.

Earlier versions of the bill contemplated 12:00 AM midnight as the new closing time.  The Council’s passage of Denver’s bill was in part motivated by the City’s desire to compete with adjacent municipalities such as Commerce City and Aurora, which requires stores to close at 10.

Illuminated neon drive thru sign.
Copyright: 72soul / 123RF Stock Photo

The first known legal drive-thru marijuana retail store in Colorado chose the date of 4/20 to open in Parachute, a town of approximately 1,100 located 40 miles west of Glenwood Springs along Interstate 70.

While customers will enjoy the novelty and simplicity of buying marijuana without exiting their vehicle, the Colorado Department of Marijuana Enforcement regulations impose a logistical challenge on this business model. The regulations require that all points of ingress and egress for a store be secured by commercial grade locks, and that video surveillance systems record all transactions with sufficient detail to identify all customers and employees participating in such transactions. Regulations further provide that all marijuana products cannot be visible from outside the premises.

To comply with these regulatory obstacles, the owner of the drive-thru store has converted a prior car wash facility so that the drive-thru window is within the car wash structure and not visible or directly accessible from the outside.

As regulations also prohibit the sale of any (non-infused) food or beverages at any marijuana store, as tempting as it may be, it will be pointless for any drive-thru customer to ask, “can I get fries with that?”