No Bankruptcy for Medical Marijuana Businesses

In the United States, the right to file for bankruptcy was established in the Constitution. Specifically, Article I, Section 8, clause 4, known as the Bankruptcy Clause, authorizes Congress to create uniform laws on Bankruptcy that are applicable throughout the United States. This law, and the ability to file bankruptcy was very important to the framers of the Constitution because it was an alternative to the archaic practice of putting people in debtor’s prison.

While debtor’s prison still existed in the United States for some time after the ratification of the Constitution, by the 1830s, the states that had debtor’s prisons were drafting legislation to minimize their presence. One of the reasons this was important was because, when people are willing to take economic risk and start a business, both the economy and the strength of the nation grows, and these were very important goals during the industrial revolution. If you didn’t have to go jail if your new business failed, you were more likely to take risks, and that is what many people did.

However, as our Los Angeles area medical marijuana cooperative attorneys can explain, the owners of medical marijuana grow operations generally cannot file for bankruptcy. The reason for this is because in a bankruptcy proceeding, which takes place in federal court, the judge will assign a bankruptcy trustee who will valuate all of debtor’s assets, and sell any property not subject to exceptions in the bankruptcy estate to satisfy creditors to the greatest extent possible. If debtor owned a business, that business can be liquidated to pay off part of the debt. Since it is illegal to possess any amount of marijuana under federal law, the bankruptcy trustee cannot legally do anything with a medical marijuana business, according to recent article from The Street.

So, as the article asks, if a marijuana medical dispensary is going broke and can’t file bankruptcy, what is the next course of action? The article focuses on a couple who are also business partners in a marijuana wholesaler in state of Colorado, where the business is completely legal under state law. The couple said they followed all state laws an did what they were told was legal, but, when the business went under, and they filed for Chapter 7 Bankruptcy under the wife’s name, the government moved to dismiss their bankruptcy petition on grounds that they were running an illegal business and are not able to apply for bankruptcy protection, since they effectively waived that right.

When the bankruptcy judge dismissed their petition, they appealed to the bankruptcy appellate court, and three judges on the panel said anyone in violation of federal law with respect to their business could not file for bankruptcy and affirmed the dismissal. The couple appealed the case to the United States Court of Appeals for the Tenth Circuit, and we will have to wait and see what happens.

Hopefully, as more and more states legalize medical marijuana, the courts will be more willing to help business owners who are following state law.

The Los Angeles CANNABIS LAW Group represents growers, dispensaries, collectives, patients and those facing marijuana charges. Call us at 949-375-4734.

Additional Resources:
Bankruptcy Filing Isn’t Allowed for Marijuana Businesses — So Now What?, October 5, 2015, The Street, by Kelsey Butler

More Blog Entries:
Study: Teen Marijuana Use Not Linked to Health Trouble, Aug. 4, 2015, Los Angeles Marijuana Lawyer Blog