Cannabis Law Prof Blog

Sixth Circuit Defers to State Cannabis Law in Insurance Dispute

Federalism might bolster insurance coverage for commercial landlords who choose to rent to legal marijuana grow operations if the landlord ensures their insurance policy does not contain a broad exclusion for “criminal acts.” An insurance claim for damage to a rental unit may not bring a commercial landlord any relief, especially when the tenant was growing cannabis illegally under both state and federal law. K.V.G. Properties, Inc. v. Westfield Ins. Co. (hereinafter KVG), a recent case out of the Sixth Circuit, begs the question: Would an exclusion in a first-party insurance contract for criminal acts apply if the tenant had complied with state law when growing marijuana?

Michael S. Levine and Geoffrey B. Fehling of Hunton Andrews Kurth recently weighed in on the K.V.G. decision, which was handed down in late August and, according to Levine and Fehling, “previews ‘federalism’ arguments that are likely to reappear in future cannabis coverage disputes where state law permitting all or limited use of cannabis conflicts with federal law.”

This dispute began when the DEA raided KVG’s commercial tenants for growing marijuana in rental units, but not before the tenants had already done substantial damage, like wall removal, holes in the roof, altered ductwork, and severe damage to HVAC systems. KVG evicted the tenants and sought coverage for nearly $500,000 in related losses from its insurers. KVG sued after the insurer denied its claim because the damages resulted from acts contained in the “Dishonest or Criminal Acts Exclusion” in the policy. The exclusion states that the insurer “will not pay for loss or damage caused by or resulting from any dishonest or criminal act by you, any of your partners . . . employees (including leased employees) . . . authorized representatives or anyone to whom you entrust the property for any purpose.”

Cultivating marijuana is a crime under federal law, but it is protected by Michigan law under the Michigan Medical Marihuana Act (the “MMMA”). The Court noted that “under different circumstances, KVG might have a strong federalism argument in favor of coverage.” However, KVG’s tenants did not comply with Michigan law, which KVG admitted in eviction pleadings. KVG claimed that the “tenant illegally grew marijuana” and it was a “continuous health hazard.”

Moreover, when raiding the premises, the DEA operated under guidance from the Deputy Attorney General James Cole stating that they should not prioritize “individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.” The Court reasoned that “the fact of the raid itself has some tendency to show that the tenants were not in ‘clear and unambiguous compliance’ with Michigan law.” Since pleadings are binding legal documents, KVG admitted its tenants engaged in a criminal act and never argued legality under the MMMA. Instead, KVG argued that the Dishonest or Criminal Acts Exclusion only applied if the tenants had been convicted. The Court rejected this argument because the policy says “criminal act,” not “crime” or “criminal conviction.”

Levine and Fehling concluded that two of the biggest takeaways from KVG are that:

"Policyholders should look for narrow criminal acts exclusions—that are, for example, triggered only by a 'crime' or 'conviction'—that do not apply broadly to alleged 'criminal acts.'" If KVG had not admitted the acts were 'illegal,' a court would be required to interpret exclusions narrowly and in favor of coverage, which may have led to a different outcome in KVG. Also, as the Sixth Circuit recognized, federal courts "act as faithful agents of the state courts and the state legislature," meaning that federal courts sitting in diversity emulate state courts that will enforce applicable state law.”

This deference to state law, including legalized cannabis use through ballot initiatives, may result in different outcomes on “criminal acts” arising from different facts.

--Kindal Wetuski

Philippines: Marijuana Performance Bond for British Pop Stars

This seems innovative, I suppose, but how effective might it be?

    British pop phenomenon One Direction paid a cash bond to the Philippines on Thursday that was imposed because of drug concerns, allowing them to play two concerts this weekend, the immigration bureau said.

    The bond, 200,000 pesos ($4,500) each for singers Zayn Malik and Louis Tomlinson, will be forfeited should the two get caught using or promoting illegal drugs, Bureau of Immigration spokeswoman Elaine Tan told AFP.

    The bond requirement was in response to an anti-drug watchdog group's request for "strict scrutiny" of Malik and Tomlinson before they were issued work permits, she said.

    "The condition is intended to protect the public interest should the band members commit any violation during their stay in the Philippines," she said.

    A video of Malik, 22 and Tomlinson, 23 apparently smoking marijuana in a car while on tour in Peru went viral last year and shocked the tattooed but baby-faced quintet's hordes of female fans.

    The group is scheduled to hold concerts at the seafront grounds of the Philippines' largest mall, which can accommodate tens of thousands of people, on March 21 and 22.

What's frankly puzzling is the idea that having to forfeit $9,000 -- about the same as the face price of a dozen Platinum tickets to a single One Direction concert -- is going to be a bigger deterrent to smoking weed than Philippine law.   I'm not an expert, but it looks to me like simple possession can get you 12 to 20 years in prison.

Related articles

One Direction pays 'marijuana bond' to Philippines

P400k cash bond required before One Direction is allowed to perform in PH

One Direction must pay 'weed bond' before Philippines concert

Upcoming Session on "Financial Planning for Your Marijuana Business"

Starting any new business is risky.  Starting a new business that the federal government still considers a felony, and in which most of the legal rules that govern other businesses don't apply or are seriously unsettled, only raises the risk.

Bold entrepreneurs are finding it worth doing, but they obviously need to do what they can to limit their risk.  Potential Washington business owners have got a special program coming up this Saturday that sounds like it will be worthwhile:

    Members of the professional cannabis world in Washington have an opportunity this weekend to attend a special event organized by the Marijuana Business Association (MJBA) and hosted at the Bellevue, Washington Red Lion.  Entitled “Dollars & Sense of Risk & Financial Planning for Your Cannabis Business,” the event is slated to run from 9am to 5 pm this Saturday, November 22nd and features educational presentations from established financial professionals.

    The event will be limited to 100 participants, but there are still some spaces available. The smaller size of the event allows for audience members to ask direct questions of the presenters. There will be professionals from Cornerstone Financial Group, Salal Credit Union, CIPS, Cannabis Commodities Exchange, and Cannabis Merchants present, among others. The experts will be speaking on a wide range of topics, from insurance and taxes to business planning and development.

    Unlike some educational or networking events in the cannabis industry, this “Dollars & Sense” event stands out because despite limiting attendance to 100 participants, there is no ticket fee to I-502 licensees or applicants or those who have memberships to the Marijuana Business Association. For those interested in the cannabis industry who haven’t actually taken the plunge yet, tickets are only $10 (plus processing fees).

    You can purchase or reserve tickets via the Eventbrite page for financial planning event.

The event is free to MJBA members and I-502 applicants; price for the general public is $10.

Contract Law and the Scott-Crist Debate

I'VE HAD A RECENT E-MAIL DISCUSSION with Mark Kleiman, the UCLA professor and drug policy expert about something that has nothing to do with marijuana, but does relate to my other hat as a teacher of contract law.  He posted his own take on the matter on his Reality Based Community blog.  Since it gives me a nice opportunity to illustrate some basic principles of contract law, I thought I'd respond.

In the Florida debate between Governor Rick Scott (R) and Governor Charlie Crist (D), you may recall, the event organizers sent each of the two parties a copy of the agreed-upon debate terms for their signatures.  The agreement specifically prohibited either candidate from bringing "any electronic device (including fans)" to the event. 

Scott's representative signed his form and sent it back.  Crist's representative signed the form and sent it back, but interpolated a handwritten note next to the "fans" provision that said, "with understanding that the debate hosts will address any temperature issues with a fan if necessary."  This additional language was not sent to Scott's campaign, nor is there any evidence that Crist specifically drew the attention of the debate organizers to his addition.

Crist, as you recall, brought his own fan, and although the organizers apparently protested, had it installed and used it throughout the debate.  Prof. Kleiman makes several points about this, most of them relating to his political opinion of Governor Scott, but he makes one claim that's directly in my wheelhouse.  Everyone's entitled to his or her own opinion of politicians, but not everyone's opinion about contract law is reliable.  Here's Prof. Kleiman's take on the contract issue:

My understanding of the law is that when one party modifies a contract before signing it, the other party has the choice of accepting the contract as amended or refusing it. So it can’t, I think, properly be said that Crist broke the rules he had agreed to. Clearly, the organizers were remiss in not bringing the amendment to the attention of Rick Scott, which left Scott’s handlers believing that Crist was breaking a rule.

As it turns out, Prof. Kleiman's understanding of contract law is incorrect.  And even if it were correct, Crist's use of his own fan was was breach of the agreement anyway.

First, unilaterally interpolating something into a document while not telling the other side does not [missing "not" added later!] make the inserted language part of the deal.  The terms had apparently already been agreed to by both sides, and the letter was a memorandum sent for formal signature.  Crist's penchant for putting fans inside his podium was well-known and was explicitly prohibited.  Crist could have insisted on his own fan during negotiations, but either he did not or he tried and failed.  In either case, he tried to add a new term by interpolating something into the document.  He thus attempted to revise the deal unilaterally after agreeing to it.  This is not only not permitted under contract law, it is evidence of bad faith in the contracting process.   Trying to sneak something into a writing that you failed to win during the actual negotiation is the epitome of contractual bad faith.

It's true that Crist could have got the change in the contract if both of the other parties were notified and both expressly agreed, but that didn't happen.  Instead, the Crist campaign slipped into a document mailed back and probably received by a file clerk, not the officials who had negotiated the transaction.  Crist, moreover, did not send a copy to Scott.  As both Scott and the debate organizers objected immediately when Crist produced his fan, there is no basis for a claim that the contract was modified by Crist's unilateral addition.  Using his own fan plainly breached the agreement.  The breach was plainly deliberate and planned in advance.

Second, even if we were to assume arguendo that the language became part of the contract, it doesn't say what Prof. Kleiman says it does.  The contract specifically prohibited Crist from bringing his own fan.  (The argument in Prof. Kleiman's pst that the language is simply nonsensical is itself nonsense -- parties to a contract are always free to define terms any way they choose, and if they want to define a fan as an electronic device for purposes of their own contract, they are free to do so and nothing in contract law requires them to use the dictionary meaning of terms.)

The best that can be said for the interpolated language -- if we assume it somehow came into the contract -- is that it obliged the organizers to provide a fan if the temperature became a problem.  The temperature apparently did not become a problem, since the room was 67 degrees at the time of the debate.  Under the language -- assuming again we pretend that it was part of the agreement -- Crist had a right to demand that the organizers provide fans, if the room was, in fact, too hot.  But there is no construction of the language that would permit Crist to bring his own fan and use it over the objections of Scott and the debate organizers.  The organizers have steadfastly insisted that Crist violated the agreement, and under contract law they're plainly correct.

Whether Scott reacted appropriately when his opponent knowingly and deliberately violated the terms of the debate agreement is a matter of opinion.  Whether Crist breached the agreement is a matter of undisputed fact and basic contract law.  He did.

UPDATE:  A READER by email raises a couple of good points that I should address.  First, he asks, what's my basis for saying that the terms had been agreed in advance, rather than sprung unexpectedly on Crist in the organizer's letter.  Isn't it possible that Crist learned for the first time about the "no fans" rule when he got the agreement?  Yes, it's possible, though it strikes me as unlikely.  High-profile debates between heavy-hitting politicians usually involve the parties in working out the details.  If Crist had no prior information about the debate terms before the letter arrived, I'd expect he'd formally object to the "no fans" term rather than have a staffer try to add a weaselly caveat into the document.  It's not like he's shy, or anything.  But of course I could be wrong about this.  If so, Crist should have had better legal counsel if he wanted to make sure he was in compliance with the contract.

The second point the reader raises is that since I actually don't know for certain that Crist had advance knowledge, it's not reasonable for me to say that the fact are "undisputed."  I disagree, because while Crist's knowledge or lack thereof may be relevant to his bad faith, it's not relevant to the contractual issues.  The undisputed facts are (1) the agreement expressly prohibited Crist from bringing and using his own fan; (2) Crist's interpolated language did not become part of the agreement; (3) even if we assume, arguendo, that the language became part of the agreement, it did not permit Crist to bring and use his own fan, and (4) Crist brought and used his own fan.