As commercial cannabis operations take hold in legal states, Courts are increasingly called upon to adjudicate rights that impact the industry or that touch on the individual interests of cannabis operators.  This trend is particularly interesting in the federal court context of bankruptcy.  As a Court operating in federal jurisdiction, practitioners don’t know what to expect when their cannabis clients are facing bankruptcy judges.

An owner of commercial property in South Lake Tahoe filed for Chapter 13 bankruptcy relief as she was facing foreclosure.  A dispute existed with the tenant over a purported  option agreement to purchase the commercial property which had lease space to a   cannabis dispensary for several years. The city joined in motions with the Court to ask that the lease be rejected because the tenant’s dispensary permit expired and the owner had not consented in writing to the cannabis operation (a similar requirement exists in Los Angeles).   The tenant argued that the landlord had violated the Controlled Substances Act in accepting rent payments for the cannabis operation. The lower bankruptcy dismissed the owner’s bankruptcy petition finding that the owner was complicit in committing a crime by accepting rent while the bankruptcy case was still ongoing.

But the Bankruptcy Appellate Panel (BAP) disagreed the the lower Court.  The decision was vacated and the matter was remanded for further proceedings. The appellate panel’s decision rested on the lower Court’s failure to articulate a legal basis to conclude that the Controlled Substances Act (CSA) had been violated by the owner.

The holding in this case emphasizes the conflict between federal and state courts caused by state-legal Cannabis which remains federally illegal. There is a need for landlords to be fully aware of the commitment and consequences of leasing properties to Cannabis Businesses. As the Honorable Judge Tighe wrote in the concurring opinion: “[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.”

Read the unpublished decision at:  http://cdn.ca9.uscourts.gov/datastore/bap/2018/02/20/Olson-17-1168Memorandum.pdf

By Hiba Adda on April 2, 2018