Medical Marijuana Dispensaries and Commercial Real Property Lenders—What is the Dope?

by Ervin Cohen & Jessup LLP
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Numerous articles have been published about medical marijuana dispensaries. In fact, I read in an article last week that a bipartisan coalition of members of the House of Representatives recently voted to restrict the Drug Enforcement Administration from using funds to shut down medical marijuana dispensaries that operate in accordance with applicable state law. Since California was one of the first states to legalize medical marijuana dispensaries in 1996, commercial real property lenders whose real property collateral may be leased to a medical marijuana dispensary, either in whole or in part, should now breathe a sigh of relief since they have nothing to worry about, right?

Wrong. Medical marijuana dispensaries remain illegal under federal law, even if they are operating legally under state law. Worse yet, unless the federal government decides not to enforce federal law with respect to medical marijuana dispensaries whether in accordance with a vote of Congress as set forth above or otherwise, secured real property lenders can face drastic results if their real property collateral is leased to a medical marijuana dispensary, regardless of whether the lender consented to the leasing of the property to a medical marijuana dispensary. In fact, unless it takes immediate action against its borrower, a secured lender could potentially lose its lien rights under its deed of trust, especially if the federal government proceeds with a civil forfeiture action against the lender’s real property collateral.

I have represented secured creditors in several civil forfeiture actions brought by the federal government. Civil forfeiture actions are quite tricky. Federal asset forfeiture law allows the federal government to bring a civil action to confiscate or forfeit any property, and in the case of a secured real property lender, strip the lender’s lien on its real property collateral, so long as the property is derived from or is used to commit a crime. Because the leasing of any commercial real property to an entity that manufactures or distributes marijuana is a violation of federal law, the federal government can bring a civil forfeiture action against a lender’s real property collateral based solely on the fact that a tenant of the property sells medical marijuana. Moreover, despite the fact that the operation of a medical marijuana dispensary may be permitted under state law, the United States Supreme Court has held that the operation of a medical marijuana dispensary does not give rise to any exception to the prohibition of manufacturing or distributing marijuana imposed under federal law.

Commercial real property lenders have a complete defense to a civil forfeiture action called the innocent owner defense if the lender did not know of the criminal conduct giving rise to the forfeiture action, or upon learning of the conduct giving rise to the forfeiture action, the lender did all that could be “reasonably expected under the circumstances to terminate such use of the property.” Federal law has established that “doing all that could be reasonably expected under the circumstances to terminate such use of the property,” may include demonstrating that the lender did both of the following:

  1. The lender, in a timely fashion, revoked or made a good faith attempt to revoke permission for those engaging in the criminal conduct to use the property or took reasonable actions in consultation with a law enforcement agency to discourage or prevent the illegal use of the property; and

  2. The lender gave timely notice to an appropriate law enforcement agency of the information that lead the lender to know that the conduct that gave rise to a forfeiture would occur or has occurred.

Of the two above elements necessary to establish the innocent owner defense, the first element is far more difficult to determine, especially in the case of a commercial real property lender. For example, it is not clear how a commercial real property lender can make a “good faith attempt to revoke permission” for a tenant’s use of the real property collateral to operate a medical marijuana dispensary especially where the lender never provided permission to the borrower, and certainly not to the tenant, for the operation of the medical marijuana dispensary at the real property collateral. I have not found any statutory or case law explaining how this standard is applied in the case of a commercial real property lender, but in civil forfeiture actions that I have represented secured lenders, attorneys from the United States Attorney’s Office have told me on numerous occasions that it expects a commercial lender to either not lend to any borrowers who lease any space of the commercial real property collateral to medical marijuana dispensaries or, immediately upon learning that the borrower may be leasing its property to a medical marijuana dispensary, declare the loan in default, even if the borrower is current in its payments due under its loan, and immediately proceed with foreclosure. At the very least, this course of action will antagonize the borrower and could potentially give rise to a lender liability action brought against the commercial real property lender.

The first element of the innocent owner defense also requires that the lender act in a “timely fashion.” What does this mean? I have not found any definitive law on this issue as it relates to a commercial real property lender but based on my experience and on related case law involving federal civil forfeiture, it is highly unlikely that a lender will be able to successfully raise the innocent owner defense if any of its employees or officers were aware that the real property collateral was leased to a medical marijuana dispensary, regardless of management’s actual knowledge, or that the lender will be able to raise the innocent owner defense based on its ignorance of the fact that federal law, unlike California state law, prohibits the operation of a medical marijuana dispensary.

It is always best to be proactive if a commercial lender discovers that its real property collateral has been leased to a medical marijuana dispensary regardless of whether it had or should have had previous knowledge of this fact.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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