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Jeff Sessions’ decision to rescind Obama-era guidance on the Department of Justice’s approach to marijuana enforcement was troubling for the cannabis industry. The “Sessions Memo” withdrew earlier marijuana-specific guidance memoranda and directed US attorneys to decide which marijuana activities to prosecute “with the Department’s finite resources,” based on well-established principles that govern all federal prosecutions including, “the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.”
The Sessions Memo does not provide much additional insight as to what prosecutors should look for in determining what marijuana crimes to target. In lieu of such guidelines, it is important that stakeholders in the cannabis industry familiarize themselves with the US Attorney in their district. This post is focused on Annette Hayes, the US Attorney for the Western District of Washington.
On January 4, Hayes issued the following statement regarding the Sessions Memo:
Today the Attorney General reiterated his confidence in the basic principles that guide the discretion of all U.S. Attorneys around the country, and directed that those principles shepherd enforcement of federal law regarding marijuana. He also emphasized his belief that U.S. Attorneys are in the best position to address public safety in their districts, and address the crime control problems that are pressing in their communities. Those principles have always been at the core of what the United States Attorney’s Office for Western Washington has done – across all threats to public safety, including those relating to marijuana. As a result, we have investigated and prosecuted over many years cases involving organized crime, violent and gun threats, and financial crimes related to marijuana. We will continue to do so to ensure – consistent with the most recent guidance from the Department – that our enforcement efforts with our federal, state, local and tribal partners focus on those who pose the greatest safety risk to the people and communities we serve.
This short paragraph indicates that Hayes’ office will focus on threats to public safety, as it has for the past few years, and will act in a manner “consistent with the most recent guidance from the Department.” This statement is fairly vague and does not give a strong indication as to how Hayes will act in light of the Sessions Memo. To better understand Hayes’ opinions on cannabis, we can turn to her career as a prosecutor.
Hayes joined the U.S. Attorney’s Office in 1997 as an Assistant United States Attorney in the Criminal Division. Early in her career she was assigned drug cases including large-scale, international trafficking and cartel-related cases. In 2002, she became the Deputy Supervisor of the Complex Crimes Unit where she prosecuted cyber hacking and intellectual property cases. In 2005, she became one of the supervisors of the General Crimes Unit, focusing on a range of federal crimes including child exploitation, drug, fraud, identity theft, immigration and violent crimes cases. Hayes took over for Jenny Durkan (Seattle’s current mayor) as the Acting US Attorney for the Western District of Washington in October 2014.
As she moved up the ranks, Hayes has not focused solely on drug crimes. Since taking over as US Attorney for the Western District of Washington, Hayes’ office has focused on marijuana cases involving acts of violence or the distribution of other drugs, like methamphetamine. I uncovered no examples of Hayes’ office prosecuting a licensed marijuana business. The following are some of the key marijuana-focused cases prosecuted in western Washington under Hayes:
Illegal BHO Operation in Bellevue. In June 2015, Hayes announced that David Shultz had been sentenced to nine years in prison after causing a fire in a Bellevue apartment complex while manufacturing Butane Hash Oil (BHO). A man was killed as a result of the fire and several others were injured. The incident occurred in November 2013 and Hayes took over this case after replacing Durkan. Mr. Shultz was operating squarely outside of Washington’s regulatory framework.
IRS Fraud. In May 2016, Hayes announced that former IRS agent Paul Hurley would serve 30 months in prison for soliciting and then accepting a bribe while auditing Have a Heart. Have a Heart worked with the FBI and local law enforcement to document the events leading to Mr. Hurley’s arrest and conviction. Have a Heart is a licensed retailer but did not face charges relating to this incident.
Unlicensed Medical Marijuana. In June 2016, Hayes announced that Lance Gloor would serve a ten-year sentence for drug trafficking. Gloor owned several medical marijuana dispensaries. In 2010, police officers obtained a warrant to search Gloor’s home and found over 70 marijuana plants and a firearm. While awaiting charges in state court, Gloor allegedly opened four marijuana dispensaries in the Puget Sound area. During his trial, Gloor the court ruled that Gloor violated court orders by contacting witnesses. In announcing the conviction and sentence, Hayes stated, “[d]espite repeated notice that his marijuana business was illegal under state and federal law, he continued to use lies, threats and intimidation to try to cover his tracks and make as much money as he could.” The court found that Gloor was not operating in compliance with state law and he did not have a license to produce, process, or sell marijuana from the Washington State Liquor and Cannabis Board.
SPD Marijuana Diversion. In May 2017, Hayes announced the arrest of four Seattle Police Officers on conspiracy charges related to the delivery of hundreds of pounds of marijuana from Seattle to Baltimore. Alex Chapackdee, a 16-year veteran of SPD, was the alleged ringleader who also drove across the country to deliver marijuana on several occasions. This case is ongoing and the individuals involved have not yet been convicted.
Overall, Hayes does not appear to have the same zealous opposition to cannabis as Jeff Sessions. However, she has pursued marijuana cases that involved individuals who operated outside of Washington’s regulatory framework. Hayes, like all of us, has relied on the Cole Memo for the last four years and is likely re-evaluating how her office will deal with marijuana in Washington. Under the Sessions Memo, we could see Hayes take a tougher approach to cannabis but her history of prosecuting marijuana crimes appears to indicate that she is not inclined to target licensed businesses.
Lester Black has a good article up at FiveThirtyEight about the Washington marijuana market. Washington’s mandatory data transparency presents a fantastic opportunity for the kind of market analysis that is challenging in other industries that don’t have access to that type of data. In this context, the data reflects what a lot of Washington marijuana producers already know: The market out there is incredibly tough. Even though Washington’s window for marijuana licensing was only open for a month in late 2013, there is still enough product cultivated and sold in Washington that wholesale prices continue to drop, over four years later. This makes it hard for small businesses to compete.
Washington’s legislative and regulatory systems try to prop up small, local businesses a few different ways. The mandate that all business owners reside in Washington is a big one, of course. But we also have consolidation limits. An individual cannot have in ownership interest in more than three licensed producers and/or three licensed processors. On the retail side, no one is allowed to own more than five retail stores.
Those anti-trust pot market provisions have worked to some extent in providing initial market entry to a lot of different people. Entering a market and surviving a market, however, are very different. When the Washington market was first coming online, wholesale prices of more than $5.00 per gram were common. The average wholesale price in September was half that, at $2.53. Some amount of price decline was always expected, but small businesses that based their cost structure on that higher price point are struggling to make things work.
In any market with unexpected decreases in profits based decreased demand, increased competition, cost spikes, etc., well-financed business actors will be better able to survive than businesses that don’t have access to capital. Of course, if a business has so little money that it can’t pay its bills, it won’t survive. But access to capital provides additional advantages. You can get better financial planning advice from the outset so you know how best to plan for 280e. You are less likely to be swindled by consultants or other vendors with backloaded payment contracts. You have better access to credit. The list goes on.
The most eye-opening aspect of Black’s article may be the section on nationwide cannabis demand. According to Jonathan Caulkins of the Drug Policy Research Center at RAND, you can grow all of the THC consumed in the United States on 10,000 acres of farmland. That isn’t really that much, and it helps clarify why Washington producers continue to struggle. Even with its fixed number of production licensees, Washington likely has too much licensed production capacity for its in-state demand.
Where does that leave small Washington producers? They have a few different routes to success. One is to become large Washington producers, winning a race that so many others are losing. Another is to hope that marijuana demand trends upward — something that state regulators wary of DEA intervention hope does not happen. There is also the chance that marijuana goes legal nationally, opening up a much larger market without established players. Otherwise, no matter how much the state fights it, the industry will continue to trend toward consolidation with larger, better financed businesses surviving longer than small companies can hang in there.
Our Seattle office often receives calls from entrepreneurs who want to operate in Washington’s thriving recreational cannabis market. Washington is not currently accepting applications for new cannabis licenses which means there are a finite number of licenses available. This leaves one option for entrepreneurs who want to operate their own Washington’s cannabis business: buy an existing licensed business. These transactions are common but can be risky if the buyer is not careful. This post outlines some of the key issues buyers need to watch out for when purchasing a cannabis business in Washington state.
1. Prepare to buy the business, not the license.
Generally, a prospective buyer has two options in buying a business: (1) purchase the entity itself by buying all outstanding shares or membership interests, or (2) purchase the business’ assets, such as the equipment, fixtures, property, and goodwill. When buying a Washington cannabis business, purchasing only the assets is not much of an option.
The Washington State Liquor and Cannabis Board (LCB) does not treat a license to produce, process, or sell cannabis as a transferable asset. This means that a buyer must purchase the business that holds a license, rather than purchase the license itself (it is possible to buy a partial share in a business but this post focuses on scenarios where the buyer takes full control over a licensed entity). There are some exceptions to this rule. For example, when a buyer targets a sole proprietor it is possible to assume the license. However, in most cases, the buyer must purchase the entity rather than the assets.
By buying an entity, the buyer takes on all contracts, debts, and anything else registered under the business’ name. This requirement means that a buyer faces increased liability and therefore must carefully evaluate the target business.
2. Do your homework and know what you’re buying.
As with the purchase of any business entity, a potential buyer should perform thorough due diligence before closing. (See our articles on that here and here.) Washington’s Uniform Commercial Code database is available online and can be used search what creditors have filed against a debtor in the state providing useful information about the target entity’s debts. Buyers can also perform federal, state, and county lien searches to determine whether there are encumbrances taken out against the target company. A buyer may also search a licensee’s violation history on the LCB’s website, though this information may be limited. If time permits, a buyer can make a public record’s request for the license to uncover a full history of investigations, violations, and other pertinent information. Such requests take a few weeks or months to process so they may not be available if time is a factor.
The buyer should request all relevant seller company documents and require the seller to list all other debts that could impact the business, including wages owed to employees or debts owed on unfulfilled contracts. Once these debts are outlined, a buyer’s attorney can draft a warranty or indemnity stating that the seller will pay for any outstanding debts that arose before the sale.
3. Know what you’re paying and when you’re paying it.
After due diligence, the parties must agree to terms of the sale, including the purchase price. For background on how to value a cannabis business take a look at the following posts:
Once the parties are settled on the purchase price, it’s time for an attorney to draft the purchase and sale agreement.
In drafting a purchase and sale agreement, timing is everything. This is because the LCB must approve of anyone who is a true party of interest in a cannabis business. The definition of a true party of interest is broad and includes the following individuals in a given entity:
Sole Proprietorship: The sole proprietor and his or her spouse;
Partnership: All partners and their spouses. This includes general and limited partners in LPs, LLPs, and LLLPs;
LLC: All members and managers and their spouses;
Corporations: All stockholders and corporate officers and their spouses. This includes both publicly and privately held corporations; and
Multilevel ownership structures: All persons and entities that make up the ownership structure and their spouses.
The definition also includes any person or entity that expects a percentage of gross or net profits (excluding financial institutions) or who exercise control of the licensed business in exchange for money or expertise. Additionally, the LCB requires disclosure of financiers, which includes anyone lending or gifting money to a licensed entity.
Ownership of a cannabis business must not transfer until the LCB approves of the new owner. An undisclosed true party of interest or financier is a major penalty that results in a cancellation of license. This means that the buyer will not “get the keys to the company” until the LCB signs off. To deal with this, we often recommend using a conditioned contract where payment is made in increments over time based on certain events. Buyers may elect to put money in escrow with instructions to distribute funds upon LCB approval. However, buyers should prepare to pay the seller a fee in exchange for the option to purchase the business after LCB approval.
4. Prepare for Licensing.
After the purchase and sale agreement is executed, the LCB will investigate the buyer to determine whether he or she is qualified to own a cannabis business. The LCB investigates the buyer’s finances, requires the buyer show proof that he or she is a Washington resident, and requires the buyer submit fingerprints for a criminal background check. In addition, the buyer must provide detailed information on the source of funds used to purchase the business. This process starts with a phone call where the buyer outlines the details of the transaction. Then the LCB sends out a document request so that the buyer can provide documents to show the details of the transaction. These document requests often require that the buyer submit the purchase and sale agreement, proof of the source of funds which can include bank statements, a list of the buyer’s previous jobs and places of residence, and other personal information.
Conclusion. The process of purchasing a cannabis business can seem difficult, but a buyer with adequate preparation and counsel can get through the process without too much of a headache. Washington’s cannabis market is booming and the limited number of licenses makes a marijuana business a potentially valuable asset. If you have questions about how the process works, contact one of the cannabis business lawyers in our Seattle office.
When Colorado and Washington kicked off recreational marijuana legalization and business licensing, both states limited ownership of licensed marijuana businesses to their own state residents. Oregon’s ballot measure, passed two years later, followed suit. But Oregon’s legislature almost immediately removed that restriction. Colorado’s legislature similarly lifted the restriction in 2016, allowing U.S. citizens to qualify for ownership of licensed cannabis businesses. California, Nevada, and the clear majority of legal cannabis states allow at least some level of out of state ownership of licensed businesses. Washington, however, continues to maintain its strict residency requirement for ownership of marijuana businesses.
Washington’s residency requirement does not have any de minimis baseline — a 0.01% business owner is subject to the same restrictions as a 100% business owner. And the residency requirement doesn’t only apply to owners: any person that can exert control over a business (such as a director, officer, or contract manager), anyone that has the right to receive business profits, and the spouses of all those people are all required to live in Washington. The restrictions even rope in things that may not be apparent on first read. For example, the state Liquor and Cannabis Board still considers royalties on branded products (e.g. a trademark license for 2% gross sales on products carrying the mark) to invoke the residency restriction.
As with all regulated industries, businesses push as much as they can at the bounds of these rules to accomplish their objectives. Out of state residents enter into business deals that include providing capital loans for a fixed interest return, which was itself restricted for the first few years of legalization. They lease or sublease real property, purchase and lease capital equipment, enter into consulting contracts, and enter into branding deals with fixed payments. The closest that they can come to a profit share or revenue share is an agreement to sell inputs at a markup to licensed cannabis businesses – be they branded packages or ingredients for edibles. The various restrictions and promises in these agreements test the boundaries of whether or not the out of state businesses exert “control” over cannabis businesses.
Some state lawmakers and many licensed businesses cite these out of state business deals as reason to partially lift the residency restrictions. If these types of deals are being entered into anyway, why not allow them to encourage transparency, the logic goes. It’s a similar argument to the one made about legalization in the first place.
But there are voices in Washington that support maintaining the residency restriction. Retailers, craft and cottage industry advocates, and established businesses think that the negative ramifications of more out of state money flowing into the state would outweigh any potential benefits. And for now, Washington agrees. While the August 2013 Cole Memorandum put out by the Department of Justice did not have any language touching on state residency of cannabis business owners, the follow-up financial guidance from FinCEN did include payments to non-state residents as a red flag event for marijuana businesses.
A quirk about marijuana businesses is that the states really don’t want them to fail. If this were any other new industry getting a lot of press buzz, you would expect to see lots of business failure in the early days. Businesses that are not adequately capitalized would have a tough time going up against competitors with large bankrolls that can afford to sell at a loss in the early days of the market. In a regular market, that trend would course correct in a reasonable amount of time, and the market would stabilize. But with cannabis, business failure can be a scary thing for the state. A dying marijuana business is a risky candidate for black market and out of state diversion of product. And that type of diversion is precisely the type of activity that could trigger direct involvement from the DEA and DOJ, agencies that would love nothing more than to have a good reason to bust up state-legal cannabis businesses. Many business owners and legislators in Washington think that maintaining the state residency requirement contributes to current industry stability, and they prefer the status quo to the unknown possibilities of a large influx of out of state capital.
The Washington legislature goes back into session in January, now under unified Democratic Party rule. After taking on cannabis issues every year since 2014, the legislature seems ready to move on to other things, but don’t be surprised to see the state residency restriction rear its head in proposed legislation.
The Washington State Liquor and Cannabis Board recently issued a report on recreational cannabis home grows to the Washington State Legislature without making a specific recommendation as to whether the state should legalize recreational home cultivation. Instead, the LCB analyzed the following three proposed option (which options we discussed here):
Tightly Regulated Recreational Marijuana Home Grows. This option would impose a strict regulatory framework. Home cultivators would need a permit to grow legally. Permit holders could then purchase plants from licensed producers. Each household would be allowed four plants and all plants would be tracked in the same traceability system used to monitor commercially grown cannabis. The LCB would impose requirements to ensure security and to prevent youth access and diversion. Both the LCB and local authorities would monitor home grows. Cannabis processing would be subject to the same restrictions as apply to medical cannabis (e.g., no combustible processing).
Local Control of Recreational Marijuana Home Grows. Like Option One, this option would require a permit, require safeguards to prevent diversion, limit each household to four plants, and allow permit holders to purchase plants from producers. Option Two would not require home cultivators to use the State’s traceability system. It also would give greater authority to local jurisdictions to create more restrictions and to authorize, control, and enforce the homegrown program.
Recreational Home Grows are Prohibited. The third option is to maintain the status quo and prohibit home cultivation.
The Board weighed the benefits and drawbacks of each measure. A tightly regulated system provided in the first option would address concerns over traceability and public safety but would require allocating significant resources to monitor home grows. The second option would allow local governments to control home cultivation but could result in inconsistent and confusing rules and regulations across the state. The third option would mean the state would not need to implement a new system but would continue allocating resources to prohibit home cultivation.
The LCB contacted cannabis regulators from Colorado, Oregon, and Rhode Island. Colorado and Oregon allow for recreational home cultivation (along with all other states that have legalized recreational marijuana) and Rhode Island permits medical home cultivation with tight regulations. Colorado’s constitution provides a right to home cultivation. The Colorado State Legislature expressed concerns about large home grows as the law originally allowed for up to 99 plants in a home and in 2017, Colorado limited that number to 12 plants per home. Oregon citizens can grow up to four plants generally but can grow more after obtaining a permit or a doctor authorization. Oregon recommended a low number of plants if recreational grows are allowed. Rhode Island expressed concerns over diversion and created a strictly regulated home grow system where all grows must be permitted and plants traced in the traceability system.
The Washington Board also spoke to the Association of Washington Cities, Washington State Association of Counties, the Washington Association of Sheriffs and Police Chiefs, the Department of Social and Health Services, Department of Health, Washington Healthy Youth Coalition, and received public comment through a public hearing and written comments. The LCB reports that law enforcement generally opposed implementing a home cultivation program as it could create public health and safety concerns, including diversion of legally grown product to the illicit market. Law enforcement officials also expressed concern over whether the state could regulate home grows as individuals are afforded privacy protections in their homes that can prevent law enforcement officers from inspections. Other state agencies expressed concerns about children accessing cannabis grown in their homes.
The report emphasizes Washington’s compliance with the Cole Memo through a tightly regulated system, stating that recent changes made by the legislature continue “to add public safety measures to the system rather than making it more lax.” It summarized the viability of home grows as follows:
If the maximum plant number is kept very low, the less of an overall impact there may be to a regulated system and diversion to feed the illicit market and marijuana being exported to other states. While the majority of people may likely follow the rules, there may be those who will intentionally not stay within legal requirements with the goal of engaging in the illicit market.
The Board also emphasized the need for clear regulation if the State allows recreational home cultivation:
The more clearly and simply the parameters are drawn – how many plants a person may have, definitions of a plant and the level of maturity of plants a person may have, restrictions on when a person is illegally growing vs. legally growing – the less overall impact to the regulated system and the greater the enforceability of home grows, thus supporting the tenets of the Cole Memo. This greater enforceability does not completely abate enforcement concerns.
The LCB’s analysis will now be used by the Washington State legislature to implement a program to legalize home cultivation or to uphold the status quo. Washington’s legislative session starts in January and we’ll continue to write about the status of homegrown cannabis in the Evergreen State.
Last week, the Federal Department of Justice (DOJ) filed a motion with the Ninth Circuit Court of Appeals to stay or remand appellate proceedings in its case against Rhonda Firestack-Harvey, Rolland Gregg and Michelle Gregg, the remaining members of the Kettle Falls Five, because it does not have funds to continue the prosecution. The Kettle Falls Five is the name given to a group of medical marijuana growers in Kettle Falls, a town in North East Washington. The group consisted of Rhonda Firestack-Harvey and Larry Harvey, their son Rolland Gregg and his wife Michelle, and Jason Zucker.
The Kettle Falls Five were charged by the federal government after a 2012 raid on their farm in Northeast Washington. The group was collectively growing medical cannabis plants in an amount permitted by state law. The federal government vigorously prosecuted the Kettle Falls Five over the last five years. The feds originally sought 10-year mandatory prison terms. The feds dropped charges against Larry Harvey who was battling stage four pancreatic cancer. Mr. Harvey passed away in August 2015.
Jason Zucker pleaded guilty and testified against the other defendants prior to trial. He was sentenced to 16 months of prison time based on his cooperation. The remaining defendants faced charges of growing, possessing, and distributing cannabis, in addition to charges relating to firearms found on the same property as the cannabis grow. Rhonda, Rolland, and Michelle were acquitted of all charges except growing cannabis. Michelle and Rhonda received a sentence of one year and a day and Rolland received a sentence of 33 months.
The Kettle Falls Five appealed to the Ninth Circuit. The DOJ was expected to continue its vigorous prosecution, which makes its recent motion to stay or remand the case quite a surprise. In its motion, the DOJ provided the following explanation:
This motion is based upon Congress denying funding to the Department of Justice for the prosecution of medical marijuana patients in states where medical marijuana is lawful. The purpose of this motion is to acknowledge that the United States was not authorized to spend money on the prosecution of the defendants after December of 2014 because the defendants strictly complied with the Washington State medical marijuana laws.
This refers to the Rohrabacher-Blumenauer Amendment which limits prosecution of state-compliant medical marijuana actors. As part of a federal budget deal in December 2014, Congress cut off funds for the federal prosecution of medical marijuana growers and users in states where medical cannabis is legal, so long as those actors are following state law. Since 2014 the Amendment has repeatedly been renewed.
The DOJ’s motion also cites United States v. McIntosh, in which the Ninth Circuited decided the Rohrabacher-Blumenauer Amendment prohibited the DOJ from “spending funds for the prosecution of individuals who engaged in conduct permitted by the state medical marijuana laws and fully complied with the laws.” The DOJ’s motion states that the “prohibition regarding DOJ expenditure of funds applies even though the prosecution was properly initiated prior to [Rohrabacher-Blumenauer’s] enactment.”
The DOJ asks the court either to either back off on the appeal or to send the case back to the trial court. This is promising as it appears the DOJ may have finally seen the writing on the wall and is going to drop its case against the Five. However, it may also mean the DOJ is attempting to hold off on prosecuting the defendants to see if Congress reaffirms the Rohrbacher-Blumenauer Amendment, which is not guaranteed, especially given the current political status of our federal government. It should go without saying that Jeff Sessions has openly lobbied Congress against the Amendment.
In any event, this is an opportunity for defense counsel to ask the judge to toss out the case, which we fervently hope will be its eventual outcome. On a broader scale, this motion shows that the Rohrabacher-Blumenauer Amendment is a powerful tool to limit federal prosecution of medical cannabis growers.
Washingtonians have long been known for their love of coffee, but a new commodity is gaining popularity across the state: cannabis. The Evergreen state is living up to its name, as consumers cannot get enough legal cannabis. It only took nine months for Washington cannabis sales to hit the $1 Billion mark in 2017 and rake in over $300 Million in taxes!
These sales numbers come on the heels of a report from the Washington State Institute for Public Policy that shows a decrease in teen use of cannabis since the passage and implementation of Initiative 502. Teens also report that it is more difficult to access cannabis since legalization. Not only is the legal cannabis industry profitable, it also seems to keep youth from using.
Washington’s experiment with legalization appears to be working. Here’s hoping other states and the federal government take note.
You can find more information on sales data at the Washington State Liquor and Cannabis Board’s website.
Back in 2014, we wrote that bankruptcy is not an option for marijuana businesses. That issue has been litigated here and there since then, but as of today, cannabis businesses are no better off than before. The hard reality is this: all bankruptcy cases are handled in federal courts under rules outlined in the U.S. Bankruptcy Code. Those courts have held that it would be impossible for a U.S. Trustee to control and administer a debtor’s assets (cannabis) without violating the federal Controlled Substances Act.
Bankruptcy laws are designed to afford a fresh start to honest but unfortunate debtors, while providing equal treatment to creditors. Without recourse to bankruptcy, parties can only: (1) liquidate without court supervision, or (2) explore state court receivership. Liquidating without court supervision offers no protection to pot business creditors. State court receivership does afford protections, but adds complexity because states closely regulate who is allowed to possess and sell marijuana (through licenses). For a while, it was an open question as to whether a state court receivership would actually work in the cannabis context. Recently, one actually did.
In the case at issue, a landlord (creditor) had leased space to a licensed marijuana business tenant (debtor). The tenant failed to pay rent, and the landlord evicted the tenant and acquired a judgment for unpaid rent. Because RCW 7.60.010 et seq. provides that a Washington state court may appoint a receiver over a marijuana business, the landlord convinced the court to issue an order appointing a receiver to sell the tenant’s cannabis and satisfy the judgment. The landlord then successfully navigated the licensure issue with the Washington State Liquor and Cannabis Board, sold the pot, and collected on its judgment.
Washington is not the only pro-cannabis state with statutes and administrative rules that seek to bridge the bankruptcy gap by allowing creditors to seize and sell cannabis. In Oregon, OAR 845-025-1260 provides “Standards for Authority to Operate a Licensed Business as a Trustee, a Receiver, a Personal Representative or a Secured Party.” Our Oregon and Washington cannabis lawyers have assisted numerous clients in acquiring and perfecting security interests under the relevant rules. We expect California to adopt a similar regime.
One of the reasons creditors get such high rates of interest for loans to cannabis businesses—in addition to the fact that banks won’t lend to them—is because many pot businesses lack lienable collateral. For many of them, the net worth of the business is mostly tied up in the cannabis itself. It is now clear that, at least in Washington, the cannabis can be liquidated by a third party, whether or not the pot was initially proferred by the debtor as collateral for a loan. In that way, cannabis businesses are being treated by progressive states much like non-pot concerns.
That we finally have had one successful state court receivership probably won’t nudge circumspect lenders to reach out to the cannabis industry. However, cannabis businesses can feel encouraged that their number one asset (their cannabis) may have marketable value when looking for loans; and lenders can feel hopeful that if everything falls apart, there may be liquidation value in the cannabis crop. None of this “solves” the bankruptcy issue, but it’s a step in the right direction.
Unlike other states with recreational cannabis, Washington does not allow for home cultivation of recreational cannabis. However, that could change soon as SB 5131 requires the Washington State Liquor and Cannabis Board (LCB) to study the viability of home cultivation. The LCB will hold a public hearing on Wednesday, October 4, 2017, at 10:00 AM on whether the State should allow home grows of recreational marijuana. Written public comments may be submitted through October 11 at firstname.lastname@example.org or hard copy at PO Box 43080, Olympia, WA 98504.
The LCB will hold a public hearing on Wednesday, October 4, 2017, at 10:00 AM on whether the State should allow home grows of recreational marijuana. Written public comments may be submitted through October 11 at email@example.com or hard copy at PO Box 43080, Olympia, WA 98504.
The LCB must consider home cultivation in light of the Cole Memorandum, the Obama-era policy statement from the Department of Justice that tacitly permits states to legalize marijuana so long as those states enact strong and effective regulations. The Cole Memo outlines eight enforcement priorities:
Preventing the distribution of marijuana to minors;
Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
Preventing marijuana possession or use on federal property.
The LCB has opposed home cultivation in the past. In 2015, Washington lawmakers considered a bill that would have allowed cultivation of up to six cannabis plants. In response, the LCB sent a letter outlining the Board’s concern that unregulated home grows would increase the occurrence of all eight enforcement priorities outlined in the Cole Memo.
The LCB worries that home cultivation will lead to diversion. Washington producer, processors, transporters, researchers, and retailers must all use “seed-to-sale” traceability software. As the name suggests, a cannabis plant is monitored throughout its life to prevent cannabis from being diverted to other states, to minors, or to the black market.
The LCB is seeking public input on three proposed options:
Tightly Regulated Recreational Marijuana Home Grows. This option would impose a strict regulatory framework. Home cultivators would need a permit to grow legally. Permit holders could then purchase plants from licensed producers. Each household would be allowed four plants and all plants would be tracked in the same traceability system used to monitor commercially grown cannabis. The LCB would impose requirements to ensure security, preventing youth access, and preventing diversion. Both the LCB and local authorities would monitor home grows. Cannabis processing would be subject to the same restrictions as apply to medical cannabis (e.g., no combustible processing).
Local Control of Recreational Marijuana Home Grows. Like Option One, this option would require a permit, require safeguards to prevent diversion, limit each household to four plants, and allow permit holders to purchase plants from producers. Option Two would not require home cultivators to use the State’s traceability system. It also would give greater authority to local jurisdictions to create more restrictions and to authorize, control, and enforce the home grown program.
Recreational Home Grows are Prohibited. The third option is to maintain the status quo and prohibit home cultivation.
The LCB must report its findings to Washington’s legislature by December 1, 2017. Lawmakers provided the LCB with no additional funds, meaning the Board must conduct its study without expanding its budget. There is no guarantee that anything changes but this is could be the beginning of recreational home cultivation in Washington.