The Risks of Collecting Debt in the Medical Marijuana Industry

Lorna-WalkerToday’s blog was written based on the interview NL Editor Marti Lythgoe had with Lorna Walker, Managing Attorney with Sweet & Walker, P.C., San Francisco, CA. Her emphasis is commercial collection litigation and creditors rights. She is also one of the few in California who specialize in the collection of debt related to the production and sale of medical marijuana. She is a frequent speaker on creditor’s rights topics. She and Hillary Bricken recently participated in a presentation titled Where There’s Smoke…. Ramifications of Collections for the Medicinal Marijuana Industry at the CLLA/IACC 2017 Mid-Year Collection Conference.  Marti interviewed Lorna by phone on 9/6/17, and also had access to her PowerPoint presentation.

The sale of medical marijuana was legalized in CA, one of the first states to do so, in 1996. (It was only recently made legal there for recreational use, and it isn’t being sold yet for that purpose.) It’s Lorna Walker’s opinion that CA is behind other states such as WA or NV in the regulation of the industry. “There are a lot of loopholes. Proposed regulations still are not as tight as they need to be. Even if you get a judgment, enforcement is difficult. It’s up to local city and county governments as to how they enforce the law.”

A big challenge in CA and other states is that, under federal law, marijuana is illegal and classified as a Schedule 1 drug. Federal law does not recognize medical marijuana as a valid property right worthy of protection, so there is no due process claim or property takings claim in federal court. Federal courts will not enforce contracts if made for what they consider to be an illegal purpose. This makes collection difficult on the state level, even where marijuana’s medicinal use is legal.

Where’s the Money?

In California, you have to have a sheriff involved in seizing assets, and they won’t take crops, edibles and other marijuana-based inventory. The whole point is to sell assets, not destroy them. They are not going to sell a drug that is classified as Schedule 1 in order to pay a debt. When trying to collect from suppliers, there are not a lot of viable assets, unless you can find cash receivables and farm/production equipment, like tractors or grow lights. If there’s a store front, you can’t seize the inventory, but you can place a keeper and seize the cash assets.  Another option is to find the landlord and garnish rent payments. Most marijuana is sold on a cash-only basis and banks won’t even open accounts or loan money for most in the industry. So one can’t levy on a bank account because there isn’t one! You can levy on real property or accounts receivable. Special limitations apply where personal property sought to be levied upon is located in a ‘private place of the judgment debtor,’ which requires a seizure order.

State Courts

In her presentation, Lorna gave examples of decisions in states other than CA where medicinal marijuana is legal:

  • Arizona’s attorney general issued an opinion in 10/12 saying much of that state’s medical marijuana law was invalidated by federal law.
  • A Colorado state court judge dismissed a case on the grounds that contracts dealing with medical marijuana violate federal law and further opined that the entire state law as illegal.
  • A Montana case went all the way to the US Supreme Court. They refused to hear an appeal on a law that roles back the provisions of the medical marijuana initiative.

The medical marijuana business in Arkansas will not be cash only, but banking services for the business will be “expensive, secretive and legally dubious,” according to representatives of the financial industry.

“Any banks that do decide to serve the medical marijuana industry in Arkansas should expect to open a new department to deal with the mountain of paperwork the federal government requires,” said Bill Holmes of the Arkansas Bankers Association. “If you commingle [money from the sale of marijuana] with public monies and it went to a school fund, for example, you’d have to write the school up for having received illegal drug money.”

According to Lorna, the outcome of litigation on something such as enforcing a contract can be a court by court decision. If a judge considers marijuana a moral issue, he/she could rule against you on that basis by citing federal law.. Sometimes it is possible to choose a “more friendly” jurisdiction, court or judge that will try a case such as WA, where a judge is more likely to rule in favor of enforcement of state law.

If arbitration or alternative dispute provisions are included in a contract, it may be possible to avoid going to court. As long as marijuana is illegal under federal law, the possibility for preemption and illegality defense can always be raised. However, now that 29 states have approved marijuana for medicinal use, more judges are starting to recognize that state laws should be enforceable.

Profits vs. Risk

The profits from growing and dispensing marijuana are outrageous. It’s risky but highly profitable; even a license is worth a lot of money. Therefore, although it’s almost impossible to get insurance against risk, people are willing to risk federal prosecution. People from all walks of life are investing in or participating in the production and sale of marijuana. Investors risk losing thousands of dollars, especially if they are investing in another state, because federal drug laws preempt state law and doing business across state lines is illegal. Don’t even think about filing in that state court! Bankruptcy protection is not available to those in the industry, because that falls under federal law.

Who Is at Risk

Everyone needs to understand their risks before jumping into the industry. Attorneys face risks in representing investors and other clients because there are so many difficulties with the enforcement end of the industry. This can include litigating/enforcing contracts, loans, leases, the dispensary of supplies, and collecting debt from businesses growing &/or dispensing medical marijuana. It is not legal for pharmacies to dispense marijuana because they are federally regulated, so people with prescriptions have to take them to private sellers. There are a lot of fly-by night companies and questionable people in the industry. It’s a risky industry, especially in CA.

Although medicinal marijuana may be legal in a state where a contract was signed, attorneys have a professional responsibility to not represent an illegal activity. It’s complicated! The future is unknown given the current administration’s rumblings about making all types of marijuana use illegal. If a bill is passed to ban medical marijuana that would ban the sale of marijuana for recreational use, too, and shut down the whole industry.

The legalities involved in every aspect of the medical marijuana industry are a fascinating national issue with more lives being impacted on a daily basis. Stay tuned for future developments!

Lorna Walker, Managing Attorney

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Categories: collection industry resources, Debt Collection, Debt trends 2017, Guest Blogs, Medical Marijuana debt collection, NL Insider

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