Photo of Robert McVay

Robert is a partner at Harris Bricken focusing on corporate, finance, and transactional matters for clients both inside and outside the cannabis industry.

Cannabis business growthMany of the posts on this blog focus in one way or another on how tightly regulated marijuana industries force cannabis entrepreneurs to adapt their practices to stay within the rules. When you are getting started as a marijuana grower, processor, or retailer, you can afford to stay compliant with less organization. So long as your cannabis company’s key players know the rules, it is possible to keep 5-10 employees in check and make sure they (and you) are doing everything by the book. But as soon as a business starts to grow, whether internally through new employees or externally through new locations either in-state or out-of-state, it loses its ability to maintain regulatory compliance through sheer force of will. At that point It has to update its internal structure and systems so that the cogs of the machine can operate without direct oversight of the founders.

This advice isn’t really limited to regulatory compliance. Businesses looking to build a brand need consistent, reliable operations. At a certain point, the business’s founders are no longer able to micromanage every detail of compliance or operations, but they want the business to continue growing according to their vision. That period of a business — the transition from start-up to going concern — is always hard for founders. A business’s ability to rocket upward without constraints is going to falter sooner or later, and there is a plateau period, where every marginal gain in productivity starts to produce equal or greater levels of operational cost or risk of regulatory compliance.

Going back to compliance, this stage is when it is key to start implementing structures that may at first seem antithetical to rapid growth. I am referring to things like writing and maintaining standard operating procedures, company policies, and clear hierarchies and chains of responsibility. It makes sense to run a startup as a “flat” company, where everyone is expected to pitch in and do everything. But in a highly regulated industry, a clear organizational hierarchy is key. With written policies and procedures and clear levels of responsibility, it is easier for businesses to prevent problems and to develop and institute solutions when problems do occur. In every settlement conference that the Washington State Liquor and Cannabis Board has after it issues an Administrative Violation Notice, the hearing officer asks what steps the cannabis business has taken to prevent similar violations in the future. And if the cannabis business on the hot seat is able to explain clearly why the problem occurred and the corrective actions it has and will continue taking to make sure “it” never happens again, the penalty will be reduced.

But this isn’t just about penalty reduction; it is about a business’s founders being able to move from day to day management and micromanagement to bigger picture thinking. Startups succeed because their founders have a vision and they implement plans to achieve that vision. When a business reaches a certain size, the daily triviality threatens to overwhelm everything. By delegating authority, allocating responsibility, and creating standard operating practices, a founder is able to step back, review the broader picture, and chart the overall course for the business going forward.

In more practical terms, here are some steps to take when your cannabis business starts to hit that plateau period:

  • Adopt written standard operating procedures, written company policies, and a written employee manual;
  • Appoint one or more compliance officers at each business location who are absolutely responsible for knowing state and local regulations and how those regulations fit within the company’s standard operating procedures;
  • Revisit and update the standard operating procedures regularly, and have your company compliance officer(s) recommend amendments to procedures to ensure continued compliance with state and local regulatory changes.

For marijuana businesses with multiple locations, especially locations in different states, it will be important to separate the company-wide policies and procedures from the site-specific policies and procedures. The more that can be company-wide, the better, but vast variations in state marijuana laws call for variations in day to day practices in different states.

If you do take these steps, you have to take them seriously and stick to them. Written policies and procedures are worthless if a company doesn’t follow them. There are some growing pains — it isn’t fun to lose some of the flexibility that you had as a startup — but these steps really can help put your business on a path to healthy expansion and the failure to take them could be your downfall.

Marijuana cannabis potPresident Trump’s actions have sparked massive activist energy from progressives. His Executive Order on immigration created waves of protests at cities and airports across the country. Those protests have been significant in getting lawmakers that oppose Trump’s actions to take stands where possible. Without massive protests, Washington’s Attorney General Bob Ferguson may never have brought the case that put a temporary stand to the immigration executive order. The protests may also have had a chilling effect on new executive orders that would generate more protests, including one order that would have curbed LGBT rights that appears to have been scrapped. Basically, the activism appears to have had some impact.

What will it look like if the Trump Administration goes after cannabis?

With the confirmation of Jeff Sessions as Attorney General, we now have an ardent pot critic in charge of our country’s law enforcement apparatus. Because of the Rohrabacher Amendment, the Department of Justice cannot use resources to interfere with state implementation of medical marijuana laws, which includes medical marijuana businesses at least in the Ninth Circuit. However, recreational states such as Washington, Oregon, and Colorado could be targeted if Sessions and Trump decide to make this an issue.

If they do decide to go hard after recreational marijuana, with either a general notice or targeted civil actions or even criminal law enforcement actions against cannabis entrepreneurs, what will the public reaction be? It isn’t automatic that legal changes a majority of Americans oppose will lead to massive reaction and protesting. The administration has appointed someone to the Federal Communications Commission who threatens the open internet we have today and would like to replace it with a system where internet service providers can curate content. Yet, there have been no protests or even much public opposition by political leaders against this appointment. Net neutrality as a concept is very popular, but it does not provide the same energy spark as civil rights, LGBT rights, or immigration.

One of the best ways to prevent an attack on the rights of states to treat marijuana how they see fit is to convince federal officials that marijuana issues will spark the same kind of energy as the refugee ban. This means that people who don’t care at all about cannabis as a product have to get involved. There were tons of people involved in the immigration protests that have probably never known a Syrian refugee or Iraqi immigrant, but they protested because Trump’s immigration order struck them as un-American.

In the same way, using federal law enforcement authority to attack businesses and individuals that are fully compliant with a marijuana state regulatory system is deeply un-American. It has never been the job of the federal government to involve itself in intrastate issues unless it is trying to protect civil rights or voting rights. Every success the federal government has had at the intrastate level has been to curb discrimination and protect the rights of workers, voters, and others against state actions that violate federal law or the constitution. Federal action against intrastate activity outside of those types of issues has been seen as brazen overreach.

If we grant that public reaction and public protest is a real check on federal authority, then people who care about cannabis rights must place the issue within the framework of fundamental American values. Only through that structure, and through adoption of that structure by people who are not cannabis users or business owners, will there be enough potential or actual public backlash to avoid the administration upending the current cannabis status quo.

Cannabis exportsIsrael is moving toward authorizing the export of medical marijuana. Israel is an example of how advanced a market can get with a relatively small number of potential customers. With only around 23,000 patients, Israeli’s medical marijuana businesses have thrived, benefiting from the country’s open approach to research, unlike in the United States. So, how will potential Israeli exports affect markets in the United States?

Countries can regulate trade on two fronts — outgoing goods (exports) and incoming goods (imports). On the export side, countries will generally have limits or bans on the export of munitions or military items, items that have military applications, and items intended to go toward countries or individuals that the U.S. has designated under its sanctions regime. For imports, countries will generally track what is coming in for customs purposes to levy import duties and will require proof of licensure for the import of regulated goods that require licenses to possess. Israel may allow the exports, but it doesn’t mean that the United States will allow the imports. Because marijuana is still a controlled substance that is illegal to possess without permission from the DEA, medical marijuana patients in the United States likely won’t be able to import marijuana for their own use.

But for researchers, access to Israeli medical marijuana strains would be a huge boon. For years, the only marijuana researchers can use has been controlled by the National Institute on Drug Abuse at a licensed facility at the University of Mississippi. This has been a problem because NIDA’s Mississippi marijuana has often been found by researchers to be of inferior quality, and many research projects have ground to a halt after receiving all required licensing and permits because the NIDA facility simply didn’t have the type of marijuana that needed to be researched. In August, the DEA announced a new policy that would potentially expand the list of permitted facilities for the cultivation of cannabis for research. In that policy statement, the DEA used the Single Convention on Narcotics to provide it some cover for its continued limitations on cannabis growing for research. The primary limitation for those permitted by the DEA to cultivate marijuana is that they receive written permission from the DEA each time that they distribute marijuana.

The DEA continues with these limitations for a number of reasons as we have discussed here and here. But the DEA’s best arguments for its ongoing limitations are based on the U.S.’s obligations under the Single Convention. Articles 23 and 28 of the Single Convention make clear that countries that allow cultivation of cannabis for research purposes must ensure that research marijuana not be diverted to the illegal market. This is only a problem for the DEA domestically when the cultivation is in the United States, though. If the DEA licenses importers, only a limited quantity of marijuana comes into the United States, and protection against diversion from the grow operation is the problem of the exporting country.

The DEA has authorized importation before. In December 2015 it granted Catalent CTS, LLC of Missouri a registration to import “finished pharmaceutical products containing cannabis extracts in dosage form for clinical trial studies.” These imports would presumably be from GW Pharmaceuticals, which has a massive facility in the United Kingdom.

But Israel’s medical marijuana cultivators have a strong reputation around the world, and researchers will be eager to run trials with strains of cannabis they cannot get anywhere else. It will take some time for Israel to move the marijuana export allowance through its legislature (it has only been voted out of committee), but don’t be surprised if a number of U.S. based researchers start applying to the DEA for import permits and start getting their cannabis from Israel.

Cannabis regulatory lawyersOur cannabis regulatory lawyers are in the midst of a few different administrative cases right now dealing with violations of marijuana regulations. In Washington State, the Liquor and Cannabis Board treats its regulatory mandates as “strict liability” rules. This means the onus is on the cannabis business to comply, and a business that violates a regulatory mandate is liable even if it did absolutely everything it could have done to prevent the violation. This sort of strict liability for violating cannabis-focused regulations is fairly common across the country and is just another example of how cannabis businesses even in cannabis-legal states are treated differently from other businesses.

The theory behind strict liability for regulatory violations is that businesses are best positioned to make sure violations do not occur. Businesses need to pony up as many resources as it takes to prevent violations. This strict liability is opposed to a negligence standard, where if the business is found to have acted with reasonable care to comply with the rules, it would not be found liable.

The problem with strict liability, however, is that it can be unfair to businesses that try to have reasonable compliance programs but still slip up. There is no way to prevent employees from flouting the rules from time to time. It happens at every regulated business throughout the country. Employees often see compliance measures as a hindrance to getting their jobs done, and they look for workarounds. But in a strict liability system, a business whose employee violates a compliance program is treated the same as a business that didn’t have any compliance program at all. There is a certain unfairness to that.

The goal of any regulatory agency should be for businesses to have maximum compliance, and the best way to do that is to encourage self-policing. This is why most federal agencies have dedicated programs for regulatory compliance, self-policing, and self-reporting, where penalties against businesses are greatly reduced or even waived if the business follows certain compliance steps.

Washington State voters mandated the State implement this sort of favoritism for liquor merchants “that try” when it passed Initiative 1183, privatizing liquor sales. Under that program, Washington liquor sellers that implement specific best practices to avoid selling liquor to minors will face reduced and deferred penalties if they accidentally make such a sale. Regulatory partnerships like this benefit businesses by giving them guidelines on how to operate and they also benefit the public as a whole as they will lead to fewer overall sales to minors because businesses are so incentivized to implement effective programs.

For marijuana in Washington, the best that cannabis businesses can rely on are that the regulations allow the Liquor and Cannabis Board to reduce penalties if a cannabis business with violations can demonstrate that its business policies and/or practices will reduce the risk of future violations. And though mitigation like this is helpful, it is not the same as a standardized compliance program responsible companies can join to get across the board penalty mitigation.

Marijuana businesses should band together to demand such a “voluntary” compliance program. As everyone knows, regulatory costs for cannabis businesses are high, and even the most compliant cannabis company will have employee slip-ups or regulatory misunderstandings from time to time. The competitive aspect is also key; so long as cannabis compliance program guidelines are not set across the board, businesses will try to comply with the rules at the lowest cost, to the detriment of the compliance programs. Setting up minimum compliance guidelines will allow participating cannabis businesses to know their competitors are either on the same playing field as they are, or that they are risking harsher penalties for not being part of the voluntary compliance program. It’s a win-win for compliant cannabis businesses and for the state. Yet no matter what sort of state-law program to which your cannabis business is subject, it pays to constantly self-audit your company to work towards full compliance. See Understanding and Managing Cannabis Legal Compliance and Cannabis Compliance Audits.

What are you seeing out there? What are your thoughts on all of this?

Cannabis growsThe Seattle Times ran a story last week about the DEA continuing its marijuana eradication program even in states with legal marijuana like Washington. The DEA authorizes funding for state law enforcement to search for and eradicate marijuana, generally on public land.

Several of our clients asked us about this story, wanting to know if it meant the DEA was also taking action against state-legal marijuana businesses. Fortunately that is not the case. The DEA eradication program is specifically targeted at illegal operations on public lands. Federal law enforcement is going after cannabis grows it claims are operated by Mexican cartels. Regardless of who runs these cannabis grows, they are not compliant with state law. Under current federal enforcement policy, the federal government still has free reign to support law enforcement action against marijuana operations that are outside the bounds of a state-regulated system.

On one hand, this eradication program is in the best interests of compliant, tax-paying marijuana businesses as it eradicates competition from illegal cannabis. If we are going to have a Drug Enforcement Agency to which Congress appropriates funds, we would prefer it spend its time and money seeking to eradicate illegal marijuana grows than going after state-legal cannabis businesses. Even if the DEA is only scratching the surface with the total amount of marijuana it seizes, the mere threat of these eradication efforts forces illegal cannabis growers to try harder to hide their products, increasing their costs and forcing them to sell at a higher price. Anything that increases the legal market’s competitive edge against the illegal market has some benefit to our clients who pay taxes and registration fees and operate fully above board. Finally,  illegal, unregulated cultivation on public land, often in national parks or national forests, can have significant negative impacts on the environment.

Still, we have to ask if local marijuana eradication is the best way for the federal government to spend its money. In 2016, the DEA spent $760,000 in Washington, $200,000 in Oregon, and $4.3 million in California on eradication efforts. In Washington, because of the mountainous areas where illegal grows are found, the per plant eradication cost is $26.49. That’s a huge cost per plant when evidence has shown that these eradication efforts have not significantly reduced the total amount of illegal marijuana making its way to market.

Like a lot of other government programs, it seems that much of the reason for continuing with the cannabis eradication program is that the money is easy for Congress to spend and law enforcement jobs remain secure so long as they continue to receive this kind of money. If the federal government were serious about the ecological concerns of illegal marijuana growing, the eradication program would be run by the United States Forest Service or the Department of Interior or the EPA. Not by the state highway patrol with funding from the DEA.

One of the most pernicious challenges for marijuana decriminalization nationwide is the continued financial interest of those politically popular groups that generate revenue from illegality. Law enforcement and corrections officers represent a huge and organized political constituency, and though they don’t all speak with one voice (see Law Enforcement Against Prohibition), they tend to favor anti-cannabis programs that keep federal funds flowing their way because of the security it brings to the agencies as a whole and to the individual law enforcement officers. So long as marijuana remains illegal, we will throw money at quixotic eradication efforts.

In discussing this money tug, Lt. Chris Sweet of the Washington State Patrol told the Seattle Times that public perception that the money can be used for other programs like education and treatment is “definitely a big concern.” The pie is only so big, and those of us who think the money would be better spent on education or treatment need to make our voices heard too.

Cannabis ContractsOur cannabis clients often face the chicken and egg problem of trying to balance three or four decisions contingent on one another. A classic example is a new marijuana business licensee that wants the state agency to approve a certain location, wants a landlord to execute a lease for that location, and wants an investor to contribute capital to pay for equipment and build-out at that location. The state agency will only approve the location when it has a signed lease in front of it. The landlord will only execute the lease if a state license has already been approved and if the business is properly capitalized. The cannabis business does not want to be on the hook for executing the lease until it knows it has a good source of capital and that the land will be approved by the state for its cannabis business. And the investor will only put money into the cannabis business if there is confirmation the property works and the business has a lease.

Basically, everything is contingent on everything else. It can be a challenging situation for cannabis business owners, but there is a simple solution more companies should use — standard conditional agreements with agreed-upon closing periods. Anyone who has bought a home understands how closing works. You sign a purchase agreement, but you have 30 days to get inspections done to make sure the home has clear title and is adequately constructed. If there are any problems, you can walk away, less your earnest money.

The same structure can be used in startup cannabis business deals. So long as landlords get some earnest money up front, they are generally willing to execute commercial leases that allow tenant cancellation if the state does not approve the cannabis license or if the tenant discovers its cannabis business is not feasible at any point during the first few months of the lease. Similarly, cannabis investment contracts can and should be similarly conditioned. A loan agreement or an equity purchase agreement involving a cannabis business can have any time frame for closing, which can be defined as actually funding the investment or as the moment when the investor is fully obligated to pay the investment over time. Generally, the conditions will be that the company passes some standard due diligence, but it makes sense for the licensing and real estate portions to be added as additional closing conditions.

Using multiple conditional agreements, a cannabis business can ensure everything is aligned before obligations to pay money mature. And if things fall apart, the various conditions will not be met and everyone can walk away with minimum pain. When doing cannabis deals, it is important to think through the various facts that need to be in place before obligations start maturing. If you do this, you will be better able to walk the tight rope that heavily-regulated cannabis businesses on a timeline face during the cannabis licensing process.

Mike_Pence_&_Jeff_Sessions_(29299670541)My cannabis clients are all over the map with how they are reacting to Donald Trump’s election victory and his subsequent naming of Jeff Sessions as the presumptive nominee for Attorney General. Some of them are absolutely confident that marijuana legalization momentum cannot be slowed, much less halted. Others are much more cautious and are concerned that the political climate may have terrible effects on their cannabis businesses. The majority, however, are not really engaging directly with the issue. They are doing business as usual as they wait to see if major changes are in order on the federal policy side.

But even for those that aren’t sure yet what is going to happen, business is full of small gambles. We have clients right now that don’t know if they should move forward and buy another piece of equipment or expand into a larger facility because they don’t know if they will be able to get their money back. If Jeff Sessions is as scary to the cannabis industry as his prior public statements would support, then every dollar invested into a marijuana business right now is a dollar that may not be recouped. There is a real risk here.

But with that risk comes opportunity. One of the great fears for small marijuana entrepreneurs has been that large businesses will squeeze them out as soon as they get the chance. But big business will never make that move so long as the legal climate for marijuana remains as risky as it is. If Hillary Clinton had been elected, the long, slow march toward overall legalization may not have accelerated, but it also wasn’t going to slow down or stop. With Trump, I would be surprised to see any major moves into the marijuana industry by large businesses any time soon. Small businesses can be flexible in an uncertain landscape, but large businesses abhor uncertainty. They are simply too slow-moving and have too much internal inertia to be able to react well in a legal climate where it feels like policy changes by the week.

So, small businesses retain their advantage. This isn’t to say that marijuana businesses won’t or can’t grow. It is saying that, at least for the foreseeable future, most of the growth in marijuana businesses is likely to be organic — from businesses that started in the industry. The idea that Philip Morris or Pfizer or Monsanto are going to come in and throw money at the marijuana industry and run everyone else out of business is dead in the short term because those massive businesses have so much to lose. The Trump effect will keep them out, whereas they would probably have been more likely to get involved in different circumstances.

American-style capitalism has a way of quickly generating enterprises that fill whatever void is created by government policy, or lack thereof, and this holds true for cannabis as well. No matter what the administration does, cannabis businesses, both legal and illegal, will adapt. Any move that keeps big business away from marijuana will simply allow smaller state-legal actors and black market actors to play a stronger role. Federal cannabis policies moving forward will not determine whether there is a marijuana market — that is set in stone — but they will determine which players are most advantaged.

Cannabis real estate lawyersThe Denver Post ran a story Sunday on the high rents marijuana businesses have to deal with nationwide. In Portland, for example, rental property that typically goes for five dollars per square foot goes for three times that amount for cannabis businesses. Though rents for cannabis businesses in Washington and Colorado are stable, they are still well above the market rate. Real estate investors looking to lease to cannabis businesses are gambling that this trend will continue.

There are several things pushing up cannabis rents, many of which are discussed in the Denver Post article, all of which decrease the available supply of cannabis real estate. Any property with an existing deed of trust or mortgage held by a financial institution runs some extra risks. The vast majority of mortgages contain a clause mandating that the property only be used lawfully. If a property has a cannabis business use on it, the bank can call the loan in default and accelerate the principal so it’s all due immediately and giving the bank right to foreclose if the borrower cannot find alternative financing. Many cannabis businesses are at locations with mortgages now, and banks are tacitly accepting the businesses so long as the legal climate doesn’t change. If the legal climate does change and federal law enforcement becomes a real threat, the banks holding notes on cannabis properties could well use the legal changes as their opportunity to call their note in default, either getting their money back or allowing them to foreclose. Because of this threat from banks, most cannabis businesses prefer to lease property owned outright (without any bank note), and most landlords with financed property prefer to lend to businesses that are federally legal.

The hodge-podge of state and local cannabis regulations also tends to drive up the price of cannabis business real estate. State laws that limit how close cannabis businesses can be to a school, a park, a church, or another cannabis business also limits the number of properties available to cannabis businesses. When you add in local zoning codes that often push cannabis businesses to heavy industrial areas and building codes that often require cannabis production facilities to have full fire suppression and air quality systems in place, the list of available properties for the marijuana industry plummets even further. With so many marijuana businesses fighting for so few spaces, it is no wonder real estate prices skyrocket.

Finally, there is still a ton of money being invested into cannabis real estate from out of state and foreign investors. Many marijuana licensees lack sufficient capital to build out growing facilities, and they look to turn-key real estate opportunities, often with deferred rent, where they are expected to pay out the nose when they start making revenue. These higher-priced turn key facilities tend to increase the price ceiling even for landlords that only offer bare warehouse space. Hardly a day goes by where one of my firm’s cannabis business attorneys does not get a call from someone on the East Coast asking us about cannabis real estate opportunities in Washington, Oregon, or California. Even public companies are involved in the turnkey cannabis real estate market, including Innovative Industrial Properties, Inc., a cannabis related REIT that did an IPO on the NYSE just a few days ago.

So, is the upward trend in cannabis real estate likely to continue? Real estate investors are showing signs of skepticism. Innovative Industrial Properties didn’t have the strongest IPO, raising $67 million when it hoped for $175 million. The media has tended to blame President-elect Trump’s choice of Jeff Sessions to run the Justice Department, which is a real concern for everyone, but there may be other factors at work.

In Washington State, cannabis businesses that are renting warehouse space in heavily populated King and Pierce counties are facing fierce competition from outdoor growers from eastern Washington. Outdoor grown marijuana has long been perceived to be inferior to indoor-cultivated product, but outdoor growers are rapidly developing techniques to increase the quality and consistency of their products. The continued trend toward oils and other concentrates also puts downward pressure on the relative value of crafted indoor product.

Outdoor spaces, especially in rural counties, tend to be significantly cheaper than urban or suburban warehouse space. If more growers see those areas as real alternatives, warehouse prices may fall. And even if the Trump-Sessions administration makes policy choices that decreases the availability and increases the price of cannabis real estate, the long-term trend is still toward legality, with cannabis looking more like other businesses. As the cannabis industry “normalizes,” we should expect  lease rates for cannabis businesses to fall more in line with lease rates for other businesses. Real estate investors should be careful not to overpay based on their assuming the current cannabis leasing market will last forever.

What are you seeing out there? What are your thoughts on where cannabis real estate is heading?

Cannabis business lawyersWe’re in that time of year when at least some of the licensed cannabis producers in Washington tend struggle. A short-term glut of marijuana on the market makes it harder to stand out and make sales, and businesses that aren’t competitive on price or quality get left behind. I bring this up because it is also the time of year when financiers come to my firm’s cannabis business lawyers looking for a way out of deals they fear will never pay off.

“Financiers” in the Washington marijuana system generally refers to debt investors that get a set interest rate of return rather than a profit-interest in a business. Mark Cuban once said that only a moron would start a business on a loan, but the limitations on out-of-state equity ownership leave many newish cannabis businesses cash-strapped, so they turn to debt. We have also seen that many of the creditors involved in the local marijuana industry are not seasoned small-business investors. They are people looking to take advantage of an industry that seems to be printing money. Debt feels less risky than equity, so they throw some money into a cannabis business or two, believing they will be able to get 10%-20% interest annually.

Because so many of these investors are new to small business investing, many don’t protect themselves. Lenders have a lot of tools to make sure they get paid. Security interests in real, personal, and intangible property provide avenues for seizing assets. Marijuana inventory is complicated to secure, but most marijuana businesses have at least some high dollar capital equipment. Personal guarantees from major players put personal assets on the hook as well, and signed confessions of judgment make the process of obtaining a judgment on the debt significantly easier. Most loans do not involve all of these protections, but most smart lenders are not willing to provide completely unsecured capital to brand new businesses without any way to get a return if the business folds.

If you are one of those unsecured investors and the cannabis company to whom you loaned money defaults on your loan, what can you do? If you want any chance of recouping your investment, you really only have two options. First, you can renegotiate the debt. In most well-drafted promissory notes, an uncured event of default causes the debt to accelerate and mature. This means that if your cannabis borrower misses a payment and doesn’t make a late payment by the cure date, its entire debt becomes due. Once this happens, it is just a matter of negotiating an extension on the note. During that extension, you as the creditor have significant leverage to extract concessions from your cannabis borrower, such as personal guarantees, security interests, or even pledges of ownership interest in the cannabis company. The reason you as the creditor have leverage is because your only other viable option would be to obtain a judgment against the borrowing company and that judgment will likely be a nightmare for your borrower. If you are wiling to brave the legal fees and get a judgment against your borrower, you can then use that judgment to begin levying on the cannabis business’s assets as though you had a security interest in the property to begin with. In most states, once you get the judgment, at least some of what you spend collecting on it, including your attorneys’ fees, will be collectable as well.

Companies that owe debts to third parties and realize that they are about to go under sometimes look for ways to avoid paying the debt. This is a good time to bring up fraudulent transfers. As defined in most states, a fraudulent transfer occurs in a few different ways, the most common of which is when an insolvent debtor transfers property without receiving a reasonably equivalent value in the exchange. If an “insider” — someone connected to the company like a director or a director’s spouse — is involved in the transaction, showing fraudulent transfers becomes far easier. For example, if a debtor  company has a bunch of equipment and transfers it to the company owner’s brother, that is potentially a fraudulent transfer, and the property can be clawed back for creditors.

The stickiest situations come when there are multiple debts. A company is not necessarily breaking any laws if it chooses to pay one creditor before it pays other creditors. Unless the creditor is an “insider,” the company can generally choose which of its debts to pay unless it is in a formal bankruptcy (probably not available to marijuana businesses) or a state receivership proceeding. In certain circumstances, multiple debt investors have signed promissory notes in which the company promises not to pay the notes proportionally and not to provide any payment preference. If the debtor company does pay one holder disproportionately to the others in that circumstance, the creditor left-behind may be entitled to a clawback of the payment.

These collections matters don’t usually end with either side truly happy. Attorneys make some money, and investors can often recoup a portion of their investments, but debt litigation against a business is an unpleasant affair. If you are looking to lend to a cannabis company, make sure you know what your plan is if things turn south. It’s better to have a security interest up front than it is to fight the company and other creditors in court to get the right to levy.

It looks like President-elect Trump intends to name Senator Jeff Sessions as his new Attorney General. As I mentioned in the last post about Trump’s pot policy, Sessions has been hostile to marijuana for a long time. Here is a general flavor of Sessions talking about marijuana:

Not very encouraging. So where does that leave us? Just because Sessions doesn’t like marijuana does not automatically mean increased law enforcement action against it. Any federal attempt to roll back cannabis’s big gains would be incredibly unpopular politically, and it seems Sessions wants to focus on national security, terrorism, and immigration as his primary areas of focus. He may rant and rave against marijuana, but actions speak loudest, and taking action may be too costly.

Sessions is also limited in what he can do, so long as the federal spending bill says that the federal government cannot spend money to interfere with state medical marijuana laws.

Still, that means recreational laws and people that participate in recreational marijuana businesses must remain cautious. There is nothing stopping federal agents from raiding marijuana businesses, as possession, distribution, and manufacture of marijuana remain illegal under federal law. The Cole Memo isn’t going to stop them, and Sessions can withdraw that memo with the stroke of a pen. Logistically, there simply are not enough federal agents to enforce federal marijuana laws everywhere, but that won’t necessarily stop them from targeting big players.

If this issue is important to you, please call your state’s Senators, particularly if they serve on the Judiciary Committee, to let them know the cannabis issue is important to you. Sessions has to go through a confirmation process. Last time he tried this, in 1986, he was rejected for having made racist comments in his past. I doubt he will be rejected this time (there will be far less qualified nominees for other positions, and the Republican-controlled Senate won’t reject everybody). But political pressure on him to maintain his focus on real law enforcement and leave marijuana policy to the states can have a real impact.

As cannabis lawyers, we will obviously be watching what happens pretty closely but mostly continuing to move forward with business (in Washington, Oregon and California) as usual. Or as Hilary Bricken from my firm put it in an interview regarding what to expect with California cannabis:

Bricken says she and other lawyers with clients in the marijuana business are paying close attention to the trend in federal law, but they aren’t slowing down in anticipation of a new administration. “If the federal government goes around arresting attorneys, then we have a constitutional crisis on our hands. But for us, it’s business as usual until we get some dramatic turnaround.” And even in that event, she says, “I wouldn’t be afraid to take up the fight.”

Fingers crossed.