By Brett Wolf

NEW YORK, June 12 (Thomson Reuters Accelus) – A civil statute designed primarily to seize the assets of drug trafficking organizations is now being wielded by federal prosecutors in California in an unconventional and little-noticed attack on medical-marijuana shops in the state.

Prosecutors have brought more than a dozen lawsuits seeking the forfeiture of commercial properties that house marijuana shops. The actions pressure owners to either evict these controversial tenants or face costly legal battles or the loss of their buildings.The goal is to scare owners into cutting their ties to such tenants and to help the Justice Department combat 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 strategy is reminiscent of the department’s nearly half-decade-old endeavor to combat the industry by attempting to sever its access to banking services, an indirect approach that appears to have met with limited success, forcing the industry to rely on personal accounts and others belonging to front companies.

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

“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 former federal prosecutor and partner at the Miami law firm Holland & Knight. “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 clear that it is official Justice Department policy rather than an anomaly involving rogue prosecutors.

The new strategy stems from the difficult position the in which the Justice Department has found itself 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 afford to rely on unpopular and 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. Thus, pressuring landlords offers an attractive alternative.

“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 against their properties if they continued to lease space to such businesses.

The warning letters – only the latest of hundreds of such letters mailed to property owners in recent months — gave the owners two weeks to come into compliance with federal law, which prohibits involvement in marijuana distribution.

The civil-forfeiture statute wielded by prosecutors — Title 21, US Code, Section 881(a)(7) — allows the government to seize and forfeit any real estate “used, in any manner or part, to commit, or to facilitate the commission of” drug trafficking.

While this civil provision has traditionally been used on residential properties used by drug traffickers to grow, store or distribute marijuana, legal experts say there is no reason it cannot be used against commercial properties that house medical marijuana shops.

The U.S. States Supreme Court and others have recognized the federal government’s authority to enforce the ban. Still, such enforcement remains unpopular with a significant portion of the electorate in states where medical marijuana has been legalized.

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

The strategy of targeting commercial property owners thus far has been limited to California. Still, if it succeeds there, federal prosecutors in other states with medical marijuana laws will likely consider using it, legal experts said.

For-profit, commercial marijuana operations operating out of storefronts, especially those opposed by the cities where they operate or those near schools or playgrounds, are the Justice Department’s favored targets.

Federal prosecutors across California launched their coordinated, lawsuit-focused enforcement campaign in October 2011, stating that California is “the number-one marijuana producing state in the country” and that it exports the drug to other states.

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

“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.

Question of resources

It requires a lot less manpower to combat marijuana businesses with warning letters and civil actions than it does to bring criminal prosecutions, Justice Department spokesman Thom Mrozek told Thomson Reuters.

“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. He added that prosecutors plan to continue using the strategy.

Baldwin 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 that in addition to being unpopular, criminal prosecutions of medical marijuana businesses are risky. He said changing attitudes mean some jurors may hesitate to convict because they do not consider the distribution of medical marijuana a crime anymore.

“Rather than try and get these criminal convictions, which they know the public does not support and which will only make an unpopular enforcement effort even more unpopular, they’re taking the softest route possible and that is definitely the administrative civil justice route of trying to get these landlords scared enough to stop that commerce from happening,” he said.

St. Pierre added, however, that the federal government “has not sufficiently broadcast this threat 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.”

Challenging evictions

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

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

Carter said that while he was intimidated by the letter, he was not about to panic, because he was underwater on the property; he owed more than $1 million and the value of the property had fallen to roughly half that amount. Although authorities summoned Carter to the property during a Drug Enforcement Administration raid, federal prosecutors never took legal action against him.

However, he said the City of Murrieta, which had banned medical marijuana shops, began issuing a $2,500 fine for every day Greenhouse remained on the property. He said that persuaded him to begin the eviction process, but it took several months to complete because Greenhouse’s owner fought it. The eviction was finalized by a Riverside County Superior Court judge in April. Still, the city has sued Carter and wants him to pay $150,000 in fines, he said.

“They still haven’t let up, they’re still after me,” he said.

Eric Safire, a San Francisco-based lawyer, is representing a Los Angeles businessman who owns commercial property in the Mission District of San Francisco. Safire said one of his client’s existing tenants opened the Shambhala Healing Center, a medical marijuana business that began operating in January 2011.

In late February, the property owner received a warning letter from the U.S. Attorney’s Office for the Northern District of California, Safire said. He added that his client was worried about the prospect of losing his property and moved to evict.

“He eventually had to file suit in order to evict his tenant,” Safire said, adding that the matter was complicated by the fact that the tenant had made “substantial improvements” to the property before opening Shambhala.

Safire said that in late May the parties agreed that the tenant would “cease-and-desist” operation of the marijuana business by July 1. Thomson Reuters left a telephone message seeking comment from Shambhala’s owner but did not receive a response.

Producing pariahs

Despite the evictions that have occurred to date, 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 U.S. Drug Enforcement Administration began warning banks and credit card companies away from medical marijuana businesses in late 2007 or early 2008, and many have responded by closing such businesses’ accounts. Even small regional banks that once publicly embraced the industry have abandoned it in recent months; no one contacted by Thomson Reuters was aware of any banks still openly serving the industry.

While some marijuana outfits have been forced to operate as cash-only businesses because they were unable to establish or maintain banking relationships, by and large the industry has nonetheless survived, and by some accounts, thrived.

Jim Dowling, a former Internal Revenue Service special agent who also acted as an anti-money laundering advisor to the Office of National Drug Control Policy, said it appears marijuana businesses are gaining access to bank accounts clandestinely.

Dowling, who now runs a consultancy in Pasadena, California, said some banks do not make a thorough effort to know the true identities of their customers, and as a result, a medical marijuana business can operate through a personal account or pose as a legitimate business and pump large sums of marijuana-tainted cash into the U.S. financial system.

“The question I’d have for financial institutions, especially those in states with medical marijuana laws, is ‘Do they compare the list of the authorized marijuana dealers in their state with their list of accountholders?'” he said.

Prosecutors have not taken the “difficult and controversial” step of criminally prosecuting a bank for providing services to medical marijuana businesses, Baldwin noted.

“The Justice Department’s threat to banks was an unsuccessful attempt to shut down these marijuana businesses,” he said. “This having failed, it is going at it in a different way.”

High risk, high-reward industry

St. Pierre said the federal ban has made medical marijuana a “high risk, high reward” business that can earn bold entrepreneurs hundreds of thousands or even millions of dollar each year. Some of those individuals are not going to be pushed out of the business by banking and property leasing challenges, he said.

Those that 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 that he said was spelled out in the 220 warning letters dispatched thus far.

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