Litigation Trends Analysis
How Banking and Real Estate Financing Impact the Cannabis Industry
The cannabis industry is growing and so is the number of cannabis-related lawsuits. Cannabis litigation is emerging with common disputes including issues of landlord-tenant, breach of contract, and fraud. Commercial disputes of this kind are expected to continue as the industry matures.
Marijuana disputes also intertwine with other industries such as finance and real estate. This piece will highlight two distinct areas that are impacted by cannabis business litigation: (1) banking institutions, and (2) real estate financing.
Cannabis company operations may present difficulties with the tracing of money. Traditional banking services are not always available to marijuana business owners. In Michigan, there are limited financial institutions that openly work with cannabis businesses because while Michigan voters legalized medical and recreational marijuana, marijuana remains a Schedule I controlled substance at the federal level. The risks to financial institutions are high considering there is a chance for money-laundered funds to funnel through the banks. As a result, most banks are reluctant to provide services to the cannabis industry. For the marijuana businesses that do have banking relationships, many still operate by cash-based transactions because companies like Visa and MasterCard will not allow cannabis transactions. The natural consequence of this is the potential for a lack in financial tracing and increase in tax evasion. These challenges may lead to litigation involving banks and the federal government.
The legalization of marijuana has created more jobs and more real estate needs—whether it is the need for space to operate a cannabis business or a home for new community members coming in for employment opportunities. One area of real estate that presents challenges in Michigan is the loan process. Because many credit unions or federal banking institutions do not serve marijuana businesses, these business typically turn to private financing. Generally with loans, a borrower will provide collateral to a lender to secure the loan. Cannabis businesses must be creative with collateral because they cannot provide plants or inventory as collateral, and are generally prohibited from using an interest in their cannabis licenses as collateral. Many marijuana business owners seek private funding from friends and family or from private equity firms or other entities that tend to charge higher interest rates, increasing the potential for loan default and litigation related to the lack of collateral to back the loan.
In its early stages of growth, poor documentation riddled the cannabis industry, opening the door for more disputes. As the industry becomes more sophisticated, litigation trends will shift. One forward-looking trend that may arise is in products liability as the market advances and the Food and Drug Administration enforces its regulations.
Honigman’s Cannabis team is equipped to handle a variety of issues, including the types of cases identified here. Please reach out to us if we can be of assistance.
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