The Cole Memorandum Revoked and What Does it Mean By: D. Keith B. Dunnagan, Esq.
As 2018 progresses a big topic in both the legal world and business world will be the legalization of cannabis in California.
January 1, 2018, marked the first day in which recreational cannabis would legally be sold in the State of California. Although the ballot measure legalizing cannabis in California passed in November 2016, much of 2017 was devoted to developing and organizing the Bureau of Cannabis Control (BCC), the state agency charged with overseeing and regulating the California cannabis industry. Once the BCC was created, the State spent significant time developing regulatory schemes and licensing protocol. While that is still a work in progress, the first licensed cannabis retailers opened their doors on January 1, 2018.
However, the legalization at the State level is only one step towards full legalization of cannabis, as it remains a schedule 1 narcotic under the Federal Controlled Substances Act. Meaning that cannabis distribution, cultivation, etc, remains a potential felony under federal law.
In August 2013, the Cole Memorandum was issued from the Department of Justice, which more or less stated that the federal government would take more of a hands-off approach in cannabis prosecution in states where cannabis was legal. The Cole Memorandum listed 8 factors to consider prior to instituting any cannabis prosecution in states where such cannabis was legal. The basics of the memorandum essentially boiled down to dealing with cannabis in criminal activity, regulating use by minors and sufficient regulations to reasonably keep legal cannabis from interstate commerce where the cannabis may end up in a state where such use was illegal. (The memorandum was much more complex and thorough, but this will give you the basics for the sake of this article).
With the Cole Memorandum in place and the statewide legalization of cannabis in full swing investors and businesses began to plan for life with legalized cannabis. In California, real estate prices for warehouse space and certain Ag land soared as a result of premium prices that legal cannabis would bring. For instance, in the Sacramento area, warehouse lease rates in some areas went from a low of $0.50 a square foot to more than $2.50 a square foot. Sale prices in some instances doubled after the November 2016 election and lease terms that were heavily in favor of tenants in certain areas, became such a hot commodity that a landlord could functionally require whatever they wanted because the list of tenants for legal cannabis space was so long and the supply was so low.
All of this was happening before the State even had its regulatory scheme in place. Further, in October 2017, Governor Brown signed into law AB 1159 which made cannabis a legal subject of a contract in California. Prior to this move, individuals involved in commercial contracting related to cannabis had an out. Every contract has to have a legal subject matter. If the subject matter of the contract is illegal then the contract itself is void and cannot be enforced by the courts. Which means a non-performing party always had a way out of the contract. AB 1159 put that issue, at least from the state level to bed.
While legal business could be transacted, the new business was not without its hurdles. Conventional lending from federally insured lenders and financial institutions was almost impossible to find, leaving all funding for legal cannabis enterprises to expensive hard money lenders. Additionally, real estate deals involving cannabis properties found it difficult to find willing escrow and title companies to assist in closing cannabis related transactions with the issuance of title insurance. In speaking with multiple escrow and title officers, one thing was consistent, the title companies were not interested in issuing title insurance for properties where it was known that the property would engage in cannabis-related business. That leaves, potential investors to do some creative contracting work to protect their business interests and due diligence periods while also creating a contract sufficient to complete a deal using escrow services.
Even with the hurdles, the cannabis business was looking promising until January 4, 2018, when Jefferson Sessions, III, the current US Attorney General, summarily rescinded the Cole Memorandum. What this means at this point nobody knows. Will there be federal raids of legal businesses in California as a result of this change in policy? Will the prospect of civil forfeiture of property become a more realistic problem? What will happen if a party tries to break a contract because of the federal illegality when the State says the subject matter is legal? Or will the federal government start to move in the direction that many states are already moving in and legalize cannabis at the federal level?
According to a Gallup poll in 2016, the majority of republican’s support the legalization of the cannabis. Almost immediately upon revoking the Cole Memorandum, democrats and republicans alike finally agreed on something and both rebuked Mr. Sessions for revoking the Cole Memorandum’s protections related to states where cannabis was legal. Could this be the beginning of a process to legalize cannabis at the federal level? Considering the harsh criticism from some Republicans, like Senator Cory Gardner of Colorado who accused Mr. Sessions of “trampling on the will of the voters in Colorado and other states”, it seems as though the stage has been set for fight over legalizing cannabis and what better time to do it, than in the midterm election cycle of a first-term president.
One thing is for sure, 2018 will be an uneasy year as the statewide legalization of cannabis politically fights with its federal illegality.
A word from Keith Dunnagan:
On January 4, 2018, Mr. Jefferson Sessions, III, United States Attorney General revoked the Cole Memorandum. Today we look at what the impact may be as cannabis is now being legally sold in California.
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