As we predicted in our CANNABIS BUDS STINK! NOW WHAT? article of December 28, 2018, the costs for California cultivators are beginning to accelerate. After nearly one year of recreational sales in California, much of the cannabis industry remains underground. Stung by taxes and voluminous paperwork, only around 5 percent of marijuana farmers in the state have licenses. Sales of legal cannabis are expected to exceed $3 billion this year, only slightly higher than medical marijuana sales from last year. Tax revenues have been lower than expected, and just about one-fifth of California cities allow sales of recreational cannabis. The dream of a fully regulated market seems years off.
A federal judge has ruled that a group of Petaluma neighbors cannot sue a cannabis company and its lead grower under a federal racketeering and corruption law because bad odors and noise are nuisances that don’t cause the kind of measurable financial losses required to pursue the case.
U.S. District Judge Jon Tigar’s Dec. 27 ruling halted what may have been the first attempt in California to use the civil portion of the Racketeer Influenced and Corrupt Organizations Act, passed in 1970 to combat the mafia and organized crime, to stop marijuana cultivation since it was legalized for recreational use.
The plaintiffs argued that the operation’s “sickening cannabis odor” and loud noise diminished the value and enjoyment of their properties. But Tigar, in his 11-page decision dismissing the case, wrote that the neighbors’ complaints amounted to nuisances and personal injuries, which are “not compensable under RICO.”
The decision came about six weeks after cultivator Carlos Zambrano and his business partners with Green Earth Coffee ceased all operations at the Adobe Road property as part of an agreement with Sonoma County’s permitting department, which contended they had not complied with all local rules.
Attorney Joe Rogoway, who represents Zambrano and his partners, said the judge’s ruling was a win for his clients and other marijuana operators facing opposition from neighbors who don’t like the smell of marijuana.
“RICO is not the appropriate venue to remedy cannabis odor,” Rogoway said. “This was the marrow of their claim; this was the central component of their case that’s been thrown out by the federal court. It certainly is a big victory for the defense.”
The plaintiffs, four families who live on Herrerias Way, were given 30 days to amend their complaint and try again to seek a civil remedy using the RICO Act, which is designed to punish ongoing criminal activity by allowing plaintiffs to be awarded triple the amount of monetary damages they prove plus legal fees.
They could instead try to sue Zambrano and Green Earth Coffee in Sonoma County Superior Court, which has different standards for a legal case alleging financial losses. Kevin Block said his clients are interested in trying to recuperate the money they’ve spent on attorney fees and are still deciding whether to continue pursuing a civil case.
The San Francisco judge’s decision diverges from the findings of a panel of federal judges in Colorado.
The 10th Circuit Court of Appeals decided that the RICO Act can be used to prosecute a state-licensed marijuana business.
However, the Colorado plaintiffs still failed to prevail in that case after a jury ruled in favor of the marijuana cultivation firm, finding the facility did not hurt neighboring property values.
Block said his clients — Stefan and Carol Bokaie; Surinder and Marie Uppal and their son, Gurjiwan Uppal; Brenda and Patrick Ward; and Neera and Sandeep Bhandari — believe they had already prevailed because the cannabis farm ultimately was shut down.
“We won — that’s my view,” Block said.
And they contend the county would not have shut down the operation when it did if they had not filed their federal lawsuit in August, three months after Zambrano and Green Earth Coffee began growing marijuana at the property, a 15-acre parcel running behind the backyards of four rural estates on Herrerias Way.
\They felt the county was not enforcing its cannabis regulations and was allowing cultivators to operate illegally. They chose to file the complaint under the RICO Act because marijuana is still an illegal controlled substance under federal law, Block said.
Their complaint alleged the marijuana farm created noxious odors and noise that prevented them from enjoying their homes and exacerbated health problems. They also claimed the farm didn’t have proper permits or state licenses.
The neighbors settled with the property owner. A limited liability company called Flying Rooster that had leased the property to Green Earth. Block declined to state the terms and financial payout of the settlement and said it was confidential.
They initially named Exchange Bank as a defendant because the bank recorded a deed of trust for the property in 2015, but the plaintiffs voluntarily dismissed their lawsuit against the bank in September. An Exchange Bank official said it had severed its ties to the property after learning cannabis cultivation was occurring on site.
The vineyard property is zoned for what’s called “diverse agriculture.” It was an eligible site for cannabis cultivation when Green Earth and Zambrano moved their operations there.
In another win for the neighbors, Flying Rooster agreed to change the deed to the property to bar cannabis cultivation on the site, regardless of who owns it, as part of an October agreement reached in September with the county’s permitting department.
Also in the agreement, Zambrano and his partners said they would pay $415,000 in taxes and other fees to the Sonoma County permitting department after the department determined they were not complying with local regulations.
Zambrano and his partners believed they were taking the right steps to legalize their operation in Sonoma County and had been told by a county official they could cultivate marijuana at the Adobe Road site under the county’s temporary relief program created to allow existing growers time to comply with the new rules, according to Rogoway, their lawyer, who noted the settlement included no admission of guilt.
He declined to say whether Zambrano and Green Earth Coffee would continue trying to do business locally.
Rogoway said the county is “an extremely challenging place to operate” because of how it has shaped and then changed its requirements for people trying to come into compliance with new rules created after voters legalized marijuana in November 2016.
“The county of Sonoma is inhospitable to cannabis operators,” Rogoway said.
The bottom line: California cultivators in residential areas must move or lose their permits to grow cannabis. The ramifications will result in billions of dollars in lost investment and a rethink of their consensus business models.