U.S. targets landlords in medical marijuana fight

A Feb. 10, 2012 photo shows Matthew Huron,

A Feb. 10, 2012 photo shows Matthew Huron, owner of two medical marijuana dispensaries and an edible marijuana company in Denver, examining a marijuana plant in his grow house. Medical marijuana is legal in 17 states, but the industry has a decidedly black-market aspect _ it's mostly cash-only. That's because banks won't touch pot money. The drug is illegal under federal law, and processing transactions or investments with pot money puts federally insured banks at risk of drug-racketeering charges. In Colorado, state lawmakers are attempting an end-run around the federal ban by creating a cooperative financial institution for state dispensaries and growers to allow them to store and borrow money. (AP Photo/Ed Andrieski) (Credit: AP Photo/Ed Andrieski)

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Federal prosecutors are targeting medical marijuana shops in California, seeking forfeiture of the properties in which they do business.

The authorities are pressuring landlords to shut down the shops or face possible loss of the real estate through the unconventional and low-key use of a civil statute designed primarily to seize the assets of drug-trafficking organizations.

While some states, including California, have legalized medical marijuana businesses, the federal government does not recognize their authority to do so and has targeted the shops for violations of the 40-year-old Controlled Substances Act.


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The goal of the Justice Department's effort, part of a crackdown announced last October, is to fight the medical marijuana industry, estimated at $1.7 billion annually, without confronting it head-on with costly and potentially embarrassing criminal prosecutions, industry sources and legal experts said.

This indirect strategy is reminiscent of the department's attempts, which have met with only limited success, to sever the medical pot industry's access to banking services. Many businesses have found ways around those restrictions, experts said.

"Filing asset-forfeiture lawsuits against these commercial properties is a very clever way to handle an otherwise horribly difficult and controversial situation," said Greg Baldwin, a partner at the Miami law firm Holland & Knight and a former federal prosecutor.

"If you bring criminal charges against these medical marijuana businesses, the federal government gets pilloried in the press for attacking California law and sick people."

Baldwin, who specializes in complex commercial litigation and white-collar criminal defense, added that with all four U.S. attorneys in California employing the same strategy, it is clearly official Justice Department policy rather than an anomaly involving rogue prosecutors.

The new approach stems from Justice's difficult position under President Barack Obama, said Allen St. Pierre, the executive director of the National Organization for the Reform of Marijuana Laws (NORML).

The department cannot rely on heavy-handed criminal prosecutions to combat medical marijuana, St. Pierre said. But it also cannot ignore the issue and risk being labeled soft on drug crime.

"It's being done softly, because if they tried to go the harsh criminal route there is a very good chance they would not only fail but become even more unpopular, something you tend to not want to do going into your last election," he said.

LAWSUITS AND LETTERS

Federal prosecutors in Los Angeles last week filed two asset-forfeiture lawsuits against buildings housing three marijuana stores in Santa Fe Springs. They also sent so-called warning letters to dozens of area property owners threatening similar legal action.

The letters - only the latest of hundreds mailed to property owners in recent months - gave the owners two weeks to comply with federal law, which prohibits involvement in marijuana distribution.

The civil-forfeiture statute allows the government to seize any real estate used to commit or facilitate drug trafficking.

The provision has traditionally been applied to residential properties used by drug traffickers to grow, store or distribute marijuana. Legal experts say there is no reason it cannot be used against properties that house medical marijuana shops.

The U.S. Supreme Court has recognized the federal government's authority to enforce the national ban on medical marijuana. Still, such enforcement remains unpopular. A Gallup survey last October found that 50 percent of Americans favored full legalization of marijuana and 70 percent favored allowing its medical use to alleviate pain and suffering.

Colorado, a key state in Obama's reelection effort this year, has a medical marijuana law. In November voters will decide on a ballot measure aimed at all-out legalization.

As the first state to legalize medical marijuana in 1996, California has been a bellwether for the industry and federal law enforcement efforts to combat it.

If the move against commercial property owners succeeds in California, it could spread to other states with medical marijuana laws, legal experts said.

For-profit storefront marijuana shops, especially those opposed by the cities where they operate or located near schools or playgrounds, are the Justice Department's favored targets.

Federal prosecutors across California launched a coordinated enforcement campaign in October 2011, stating that California is the top marijuana-producing state in the country and that it exports the drug to other states.

Under the leadership of U.S. Attorney Andre Birotte Jr, the Central District of California, based in Los Angeles, has been particularly aggressive. Federal prosecutors there said last week they have brought a dozen civil lawsuits seeking to forfeit properties housing marijuana businesses.

"Three of those actions have been resolved with the closure of the marijuana stores and court-approved consent decrees in which property owners agreed that they would no longer rent to people associated with illegal marijuana operations, or the property would be subject to an immediate forfeiture to the government," the U.S. Attorney's office said.

LESS MANPOWER REQUIRED

The Justice Department's Thom Mrozek, a spokesman for the U.S. Attorney's Office for the Central District of California, told Reuters that it requires less manpower to combat marijuana businesses by mail and civil actions than it does to bring criminal prosecutions.

"We can get on the Internet, identify a store and have someone drive by and find out if it is operating. That is a whole lot different from conducting a criminal investigation, going out and making buys and conducting surveillance. These are two very different balls of wax," he said.

The letters and lawsuits have "so far been extremely effective in securing the closure of about 200 illegal marijuana storefronts in our district," Mrozek said.

Baldwin, the Miami lawyer, was not surprised. Few property owners are going to pay hundreds of thousands of dollars to defend against a government lawsuit to keep a tenant, let alone risk losing their investments, he predicted.

"Most of these things are going to end up with the landlord kicking out the offending enterprise," he said. "It's like a flank attack against these stores that leaves them in the most disadvantageous position possible."

NORML's St. Pierre said the federal government "has not sufficiently broadcast this threat (of eviction) as a deterrent," so a lack of widespread awareness among landlords in California and other states may soften its impact on the industry. He said that when marijuana businesses are kicked out of one property, "they will simply move next door and the whole process, as we've seen time and time again, simply starts over."

Although authorities have made public the strategy of targeting landlords, they have not made a national campaign of it, and so far only landlords who rent to marijuana shops have received warning letters.

CHALLENGING EVICTIONS

The letters' prospects might also be affected by the weak real estate market, actions by the municipalities where the properties are located, and California's strict eviction laws.

Ken Carter, a property owner who rented commercial space in Murrieta to the Greenhouse Cannabis Club, which opened for business in January, said he soon received a warning letter from the U.S. Attorney's office in Los Angeles.

Carter said that although he was intimidated by it he was not about to panic, because the value of the property had fallen to roughly half the $1 million he owed on it. Although authorities summoned Carter to the property during a Drug Enforcement Administration (DEA) raid this year, federal prosecutors never took legal action against him. He said he could not explain the lack of action.

However, he said the city of Murrieta, which banned medical marijuana shops in 2005, began issuing a $2,500 fine for every day Greenhouse remained on the property. He said that persuaded him to begin an eviction process, but it took several months to complete. The city has sued Carter and wants him to pay $150,000 in fines, he said.

Eric Safire, a San Francisco lawyer, is representing the owner of commercial property in the Mission District of San Francisco where an existing tenant opened the Shambhala Healing Center, a medical marijuana business that began operating in January 2011.

In late February of this year, the property owner received a warning letter from the U.S. Attorney's Office for the Northern District of California, Safire said. He eventually had to file suit to evict his tenant. The matter was complicated by the fact that the tenant had made substantial improvements to the property before opening Shambhala, Safire added.

Safire said the tenant agreed to end the marijuana business by this July 1. Reuters left a telephone message seeking comment from Shambhala's owner but did not receive a response.

SCARING BANKS

St. Pierre likened the campaign to the Justice Department's effort to scare banks away from doing business with medical marijuana outfits.

"There will still be landlords leasing to these businesses, so I don't think it's ultimately going to be successful, just like the effort to thwart the banking," he said.

The DEA began warning banks and credit-card companies away from medical marijuana businesses in late 2007 or early 2008.

Some marijuana outfits have been forced to operate as cash-only businesses, but by and large the industry has survived and, by some expert accounts, thrived by operating through front companies or personal accounts.

HIGH RISK, HIGH REWARD

St. Pierre said the federal ban has made medical marijuana a "high risk, high reward" business. Entrepreneurs willing to flout the federal ban can earn hundreds of thousands or even millions of dollars each year, and may be willing to face the challenge of eviction, he said.

Those who fail to heed these measures may face greater sanctions, however. The Justice Department's Mrozek said property owners or marijuana sellers who are not persuaded by warnings and civil action could find themselves in the dock on criminal charges, a fact he said was spelled out in the 220 warning letters dispatched by prosecutors in Los Angeles thus far.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete (here) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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