NORTH BAY -- As the federal government moves to disrupt or disband medicinal marijuana dispensaries across Northern California -- many of which operate legally according to state laws -- an unlikely target has been thrust into the cross hairs of the sticky legal battle:  banks and lenders.

It's a battle that legal experts in the North Bay said touches on both the fundamental question of states' rights and the role of financial institutions in enforcement actions carried out by the government.

[caption id="attachment_42968" align="alignleft" width="158"] John Friedemann[/caption]

John Friedemann, a partner with Santa Rosa-based, finance-focused law firm Friedemann Goldberg, said a banking client of the firm recently received a warning letter from the Office of Melinda Haag, the U.S. Attorney representing Northern California. Additionally, Ms. Haag's office sent a similar letter to the mortgage holder of the Marin Alliance for Medical Marijuana in Fairfax, according to a report by the Bay Citizen newspaper. The U.S. Attorney has also sent letters to landlords of such dispensaries.

In 2009, U.S. Attorney General Eric Holder said the federal government would no longer raid medical marijuana dispensaries that operated legally under state law, carrying out a verbal campaign promise made by President Obama. But on Oct. 7 of this year, California's four U.S. Attorneys announced that they would crack down on dispensaries, saying that they are still illegal under federal law.

The shift by California's U.S. Attorneys presents practical issues for banks and lenders, while touching on larger legal concerns. 

Lenders could potentially face criminal charges for their conduct in lending to a dispensary, although that is improbable, Mr. Friedemann said. More likely, he said, the bank could take a financial hit for making a perfectly sound lending or mortgage decision that is in line with state law. 

"At a minimum the bank faces a loss of its collateral that secures the bank's loan to the dispensary, because of asset forfeiture laws," Mr. Friedemann said. "Generally if the government is putting your borrower out of business, your loan will not get paid."

Jack Gillund, a spokesman for Ms. Haag's office in San Francisco, said, "If there is a lien holder, we provide notice to them, and an opportunity to cure, before seeking to forfeit their interest in the property."

Mr. Gillund also said financial institutions weren't being targeted specifically for lending. "Rather the letters were sent because the lien holders have an interest in the real property."

"Any person or entity that has an ownership or lien holder interest in real property with knowledge or reason to know of illegal drug sales on the property may have the interest in the property forfeited to the government without compensation," Mr. Gillund added.

Clients are worried, even if they haven't received a letter, Mr. Friedemann said.

"One of the causes of concern for a lender is that they'll find out they have been lending to someone who is involved in dispensary activities that the lender did not know about," Mr. Friedemann said, adding that some dispensary owners make their intentions well known, while others often mask such a business with other products and are more discreet about it."Some lenders may have made loans and did not know that it was a dispensary."

And that speaks to a larger issue, Mr. Friedemann said -- should banks be concerned with enforcing the law on behalf of the government, whether overtly or tacitly?

"It's never been [a bank's] job, at least not historically, to substitute for the police," he said. "If you borrow money from a bank to buy a home, you would be somewhat troubled to find your banker peaking over your fence. You don't expect them to intrude in your personal life."

Mr. Gullund of Ms. Haag's office downplayed this concern.

"A landlord or lien holder that knowingly rents or makes property available for the purpose of distributing a controlled substance is operating in violation of federal law," he said. "We are not asking lien holders to enforce federal law, nor could we." 

The letter sent to Friedemann Goldberg's client gave the bank 45 days to "discontinue the sale and/or distribution of marijuana" at the dispensary.

[caption id="attachment_42969" align="alignleft" width="158"] Sean Beehler[/caption]

Sean Beehler, a Santa Rosa attorney who advises dispensaries throughout the state in conjunction with a firm in Southern California, agreed that banks are being put in a difficult situation.

"It does put them in a precarious position," Mr. Beehler said, adding that dispensary owners often meet all the requirements for a loan or mortgage. "It puts lenders in a very difficult situation," particularly if they are FDIC or National Credit Union Administration insured.

"The focus on the lenders that I see is that the federal government is going to come seize the properties. Really what they're going to be doing is seizing the land from the bankers," Mr. Beehler said.

Mr. Beehler also said that, while he advises all dispensary clients that their business is illegal under federal law, many of the them are upstanding business owners who wish to abide by California laws that permitted the use of medicinal marijuana in 1996. He also said the federal governments' sudden attention to medical marijuana dispensaries has caught most people off guard.

"It was only about a month and a half ago that the big crack down came," he said. "Up until then, everyone was operating under the assumption that they could follow the compliance of state law. The good ones were strictly complying. Then, all of a sudden, they get these notices. I think a lot of them want to be good tenants."

Mr. Beehler pointed to the recent raid of Northstone Organics near Ukiah in Mendocino County, which was operating with a county sheriff's permit to grow medicinal marijuana. Advocates of medicinal marijuana complained that the law abiding owners were being targeted while cartels and illegal operations have proliferated without much recourse.

In Sonoma County, the Board of Supervisors is considering capping the number of  dispensaries  at seven that operate outside of city limits.