Dazed and Confused
Title Insurance and Marijuana-Related Property Transactions
By G. Leigh Curry, Esq.
For over 50 years, cannabis has been illegal under federal law. However, starting in 1996, states began to legalize cannabis for medical and recreational purposes. With diametrically opposed laws existing between state governments and the federal government, it is easy to become confused as to the consequences of conducting business with the marijuana/cannabis industry. As a result, the title insurance industry is facing a conundrum:
How do we insure property that involves a state’s legalized cultivation or sale of a substance that is illegal under applicable federal law?
What about hemp?
For purposes of this article, we will not be discussing hemp, also known as industrial hemp, which was federally legalized through the 2018 Farm Bill. Hemp, while the same plant species as cannabis, contains very low levels – less than 0.3 percent – of tetrahydrocannabinol (THC). Hemp can be used for a variety of products including clothing, textiles and rope, and the seeds can be eaten as a source of protein and Omega-3. Since hemp is legal under federal law, the title industry has no issues with insuring transactions involving property used to cultivate, process or sell hemp.
Is cannabis legal?
Any discussion of title insurance and marijuana/cannabis-related property transactions must start with the Controlled Substances Act, Title 21 of the U.S. Code (CSA).
Enacted in 1970, the CSA created five schedules of drugs/substances based on the potential for abuse. Cannabis/marijuana is classified as a Schedule 1 drug, a substance with a high potential for abuse and not safe to use. The CSA provided that possessing, selling or intending to sell cannabis was a felony. Cannabis still is listed as a Schedule 1 drug, meaning there is no legal marijuana of any kind permissible under federal law.
However, either through ballot initiatives or by legislation, many states have enacted laws legalizing cannabis, all of which contradict the CSA.
California was the first state to legalize medical marijuana in 1996. Colorado and Washington were the first states to legalize recreational use in 2012. Currently, 37 states have legalized at least some use of marijuana for medical purposes, and 21 states and Washington, D.C. have legalized adult recreational use.
This increasing dichotomy between state and federal law has led to uncertainty and confusion as to whether there would be federal enforcement of the CSA in those states that have legalized medical and/or recreational cannabis. The confusion has been exacerbated by the different stated approaches of the last three administrations and the respective attorneys general.
In 2013, Deputy Attorney General James M. Cole issued the Cole Memorandum that stated due to limited resources, the Department of Justice (DOJ) would not enforce the marijuana prohibition in those states where it had been legalized. This appeared to be reversed in 2018 when Attorney General Jeff Sessions stated prosecutors should follow well established procedures that govern all federal prosecutions. In 2021, Attorney General Merrick Garland appeared to reverse the DOJ stance again, going back to the position of the Cole Memorandum and indicating that due to the limited resources the DOJ would not be pursuing prosecutions in states that have legalized marijuana.
Where are we today?
While cannabis still is listed on Schedule 1 of the CSA, and still federally illegal, there are several proposed bills that would affect the federal landscape of cannabis.
- Federal Legalization
Three bills have been proposed that would remove cannabis from Schedule 1 of the CSA, and make cannabis legal at the federal level. These bills are: the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act; a federal legalization bill proposed by South Carolina Representative Nancy Mace; and the Cannabis Administration and Opportunity Act.
All three of these bills contain similar provisions. Each bill would remove cannabis from Schedule 1 of the CSA, making cannabis federally legal; establish a federal framework for regulating the cannabis industry, including licensing and some form of federal tax; include social equity provisions providing for the expungement of nonviolent criminal possession convictions; and provide for a portion of the tax funds to be spent in the communities hardest hit by those convictions. Of the three bills, the Cannabis Administration and Opportunity Act is the most likely to proceed, but none have made it into law yet.
Two other bills look to provide protections to financial institutions and other parties that provide business assistance to the state legalized cannabis industry. The Secure and Fair Enforcement (SAFE) Banking Act and the Capital Lending and Investment for Marijuana Businesses (CLIMB) Act would provide regulatory and criminal prosecution protection for financial institutions and other parties that provide services to the cannabis industry.
The CLIMB Act seeks to provide those protections to any party providing any service to the cannabis industry, including creating a safe harbor to allow for the trading of cannabis companies on the New York Stock Exchange and the NASDAQ.
The SAFE Banking Act only provides protection to financial institutions, but is the most likely bill to pass. In fact, the SAFE Act has passed the House of Representatives several times, but not yet made it through the Senate. This is partly due to the concern of some senators that passing the SAFE Act would prevent the bigger goal of federal legalization. Recently, there has been discussions that adding the social equity provisions of the federal legalization bills along with providing access to the Small Business Administration would be enough to get the SAFE Act through the Senate. Unfortunately, that has not happened yet, as the SAFE Act was not included in the omnibus spending bill at the end of 2022.
Doma leads the way
With states’ laws contradicting federal law, the DOJ continually amending its stated approach to cannabis prosecutions, and the threat of forfeiture as penalty under the CSA, many title insurance underwriters have refused to insure transactions involving property intended to be used for the cultivation or sale of cannabis. While other title insurance underwriters shy away, Doma has led the way insuring cannabis property transactions in legalized states since 2019. If you need assistance in clearing the confusion regarding cannabis property transactions now, please contact your Doma underwriting counsel or Doma state agency manager.
Leigh Curry is Vice President, Midwest Regional Underwriting Counsel at Doma Title Insurance, Inc.