When Disfavored Businesses Go To Pot
Marijuana dispensaries are legal businesses under California law, but the distribution of marijuana is a Federal offense. As a result a Marijuana distribution business is not eligible for Federal Bankruptcy Relief.
This issue came up in Colorado recently where Frank Arenas operates a marijuana wholesale business. Mr. Arenas and his wife sought personal bankruptcy relief under Chapter 7 but the case was dismissed because individuals involved in criminal occupations are not allowed to seek relief under the Bankruptcy Code. A Bankruptcy Appellate Panel authored an opinion in which the trio of Bankruptcy Judges sustained the dismissal with these words: ”possessing , growing and dispensing of marijuana and assisting others to do that are federal offenses … Can a debtor in the marijuana business obtain relief in the federal bankruptcy court? No.”
The Tenth Circuit Court of Appeals has granted a stay pending appeal. This marks the first time this issue has been considered at such a high judicial level.
Unless Congress takes the unlikely step of changing Federal marijuana laws, this bodes to be an interesting discussion with potential ripple effects on Counties like Ventura which restrict Marijuana distribution because it still constitutes a Federal Crime.
This issue has caught the attention of scholars and pundits who have scheduled programs on this topic and related issues at upcoming seminars throughout the country. (E.g. an American Bankruptcy Institute Meeting in December 2015 features this topic – “Selling Unusual Assets in Bankruptcy and Their Tax Aspects (Pot, Porn and Puppies)”.)
In the meantime, operators of legal Pot businesses have fewer options for insolvency relief.
William E. Winfield is an attorney at Schneiders & Associates, L.L.P. He has been practicing in creditors’ rights and debtors remedies for 30 years and is board certified in Business Bankruptcy by the American Board of Certification. He is also available for appointment as a Receiver.