Marijuana Law, Policy & Reform

Editor: Douglas A. Berman
Moritz College of Law

Thursday, May 24, 2018

Noting the gray that surrounds the "enforceability of marijuana-related agreements"

This new article by Joshua Horn and Jesse M. Harris in the Legal Intelligencer provides a useful reminder of how much law (and well as policy) is unpredictable in the modern marijuana universe. The piece is headlined " Cannabis and Banks: What Qualifies as Illegal Activity? Many legal issues arise out of financing cannabis activities, not the least of which is whether a target property for a cannabis venture is mortgaged by a bank."  Here is how the piece starts and ends:

Many legal issues arise out of financing cannabis activities, not the least of which is whether a target property for a cannabis venture is mortgaged by a bank.  The standard institutional mortgage contains language that allows the mortgagee to “call” the loan if the property is being used to conduct “illegal activity.”  This language relates to federal lending guidelines and is usually nonnegotiable.  The question thus becomes: what qualifies as “illegal activity”?

As a general matter, a contract for an illegal purpose is unenforceable.  And while 29 states have passed some form of marijuana legislation, marijuana remains a controlled substance under federal law.  The interplay between state and federal law has left the status of the marijuana industry — and the rights of involved lenders and borrowers — unclear.  Several recent cases highlight this ambiguity....

At bottom, there are no black and white answers when it comes to the enforceability of marijuana-related agreements — only gray.  For this reason, most lenders outright refuse to enter into such agreements.  This is particularly true for mortgage loan originators who underwrite a new loan with the intention of immediately selling it to investors like FHA, Fannie Mae or Freddie Mac.  As government entities, such investors will not accept marijuana-related contracts.

Other lenders, often called “portfolio lenders,” keep a certain number of loans in their portfolio instead of selling to investors.  Portfolio lenders thus assume the risks associated with lending to marijuana-related business. And, because portfolio lenders assume the risk, they have greater discretion in deciding whether to extend credit to a cannabis-related entity.  Depending on the jurisdiction, sophisticated borrowers may have better luck in persuading these lenders to do just that.

https://lawprofessors.typepad.com/marijuana_law/2018/05/noting-the-gray-that-surrounds-the-enforceability-of-marijuana-related-agreements.html

Business laws and regulatory issues, Court Rulings, Federal Marijuana Laws, Policies and Practices, Who decides | Permalink

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