The California Receivers Forum LA/OC Chapter’s July
luncheon program focused on the challenges posed by medical marijuana. In
both equity receiverships and rents-and-profits receiverships, the first
order of business is determining whether the operating entity and/or
tenant(s) are in compliance with state and local laws. A compliance
checklist was provided in the program materials and is available on
request. (See the box at the end of this article.)
Cultivation, storage, distribution and use of
marijuana are all illegal under federal law. Jeremy Matz, former
Assistant U.S. Attorney, speaking for himself alone, suggested that it is
unlikely that “the feds” would prosecute a court-appointed receiver, even
though federal law takes precedence over state law, because federal
enforcement actions are focused on high volume, for-profit enterprises.
A receiver proposed for appointment in an equity
receivership with a medical marijuana enterprise should ensure that the
proposed order explicitly spells out the receiver’s duties as an agent of
the Court in taking possession of and operating a medical marijuana
business. David Pasternak’s order in Dehdashty vs. Gourmet Green
Room, included in the program materials, is an example.
To be in compliance with state law, the operating
entity must be either a cooperative or a collective; it cannot be a
corporation, partnership, LLC, etc. It is imperative to maintain detailed
records of all income and expenses, because prosecutors look for evidence
of profit-taking by principals, members, employees, and vendors. The
cooperative/collective itself should cultivate all marijuana sold to
members, because it is unlikely that the receiver will be able to obtain
detailed records of the cost of cultivation from a vendor.
Rents-and-profits receivers have diverse tightropes
to walk. In addition to braving the buffeting winds of conflicting laws,
the rents-and-profits receiver often must balance the competing demands of
landlord vs. tenant, and tenant vs. tenant.
In a commercial property, whether or not a dispensary
or grower is in compliance with state and local laws, terminating the
tenancy by negotiation or eviction may be advisable, depending on the
circumstances. Although cooperatives/ collectives typically pay rents that
are multiples of current market rents, the presence of marijuana
operations may be damaging to the market value of the property as a whole.
The nature of the plaintiff, a federally chartered financial institution,
for example, may ordain that federal law considerations are paramount,
even if the tenant is in compliance with state and local laws.
The language in leases can cut both ways in
commercial properties. Medical marijuana tenants, who expend substantial
sums on tenant improvements and who pay very, very high rents, usually
demand leases that specify that medical marijuana uses are permitted uses.
Landlords who agree to those terms are pleased to accept above-market
rents until they receive a get-rid-of-your-marijuana-tenant-or-else letter
from the U.S. Attorney or local prosecutor. (Two examples of Department of
Justice letters are in the program materials.) If the tenant refuses to
vacate, and the landlord tries to evict on the basis of unlawful uses,
recent case law suggests that the landlord will be unsuccessful — “You
knew medical marijuana uses were unlawful when you signed the lease….” —
leaving the landlord facing possible prosecution and forfeiture.
In a residential property, the receiver’s decision
tree is even more complex. If a tenant has a medical marijuana
recommendation or approval (there is no such animal as a prescription for
medical marijuana) and is otherwise in compliance with state and local
laws, the receiver has limited options. In federally subsidized housing,
HUD has a policy of zero tolerance of drugs, but enforcement of the
policy, especially for “legitimate” patients, is problematic.
Residential tenants who smoke or grow marijuana,
strictly for their personal use and with a recommendation, can pose
particular problems in non-subsidized properties. Neighbors with children
or elderly relatives at home, or neighbors with competing disabilities,
may protest vociferously, yet despite official complaints, it is difficult
to engage the cooperation of police or sheriffs without evidence of sales
or distribution (partying) or use by minors. In these situations,
negotiation is always the first choice, in preference to rolling the dice
with an unlawful detainer action.
When renting to new residential tenants, receivers
should ensure that rental agreements have the strongest possible “no
smoking” and “no disruptive or unlawful activities” clauses. Even with
such language, and especially in the absence of such language in old
agreements, an unlawful detainer action may not be successful without
considerable evidence of harm to others.
Special thanks to the outstanding panelists, Aaron
C. Lachant, Fenton Nelson, LLP; Jeremy D. Matz, Bird, Marella,
Boxer, Wolpert, Nessim, Drooks & Lincenberg, P.C.; Steven K. Lubell,
Law Offices of Steven K. Lubell; Liz McDuffie, Medical Cannabis
Caregivers Institute; Anthony J. Napolitano, Buchalter Nemer, P.C.
*Nancy L. Martin is President of Resolution Equity Partners,
Inc. Her practice includes real estate, investment consulting, and
fiduciary services, specializing in receiverships and asset
administration. The firm provides services to financial institutions,
servicers, investment funds, attorneys, accountants, private parties and
|For copies of the July CRF
LA/OC program materials, or for referrals to other sources of
education and training, or referrals to professionals with legal,
brokerage or management experience in medical marijuana matters,
please e-mail your informational request to Nancy Martin at