Is marijuana legal in your state? Don't count on bankruptcy protection if your weed business fails.

By Alfred Villoch, III, Esquire, with Savage, Combs and Villoch, PLLC
A federal judge recently dismissed a bankruptcy case filed by a marijuana business owner in Colorado, according Tom McGhee of the Denver Post.  Why?  Because marijuana remains illegal under federal law and that causes major impediments in obtaining relief under federal bankruptcy law.  See Dkt #74, In re Arenas, Case No. 14-11406 (Bankr. D. Colo. Aug. 28, 2014); see also “Judge denies bankruptcy protection to Denver marijuana business.”
In that case, Mr. Arenas, the debtor in bankruptcy, produced and distributed marijuana in Colorado at the wholesale level. He possessed all of the required licenses and permits to legally produce and distribute marijuana.  The bankruptcy court even acknowledged that Mr. Arenas’ marijuana business was perfectly legal under Colorado law.  But the court also found that leasing space to a marijuana dispensary and cultivation of marijuana made Mr. Arenas liable for criminal penalties under the the federal Controlled Substances Act, 21 U.S.C. § 801 et seq. (the “CSA”). Because of that, the bankruptcy court dismissed Mr. Arenas’ case upon a motion filed by the United States Trustee.
Unfortunately, Mr. Arenas’ case highlights the conflict between the marijuana policies reflected in state law and the federal marijuana prohibition.   State legalization does not nullify federal law. Nor does it prevent federal enforcement of the CSA within state borders. Rather, marijuana production and distribution remain federal crimes even in those states that have legalized those activities. But once the states decriminalize marijuana and stop enforcing a prohibition on its distribution and use, the federal government lacks the resources to fill that void. See Robert A. Mikos, On the Limits of Supremacy: Medical Marijuana and the States’ Overlooked Power to Legalize Federal Crime, 62 Vand. L. Rev. 1421 (2009).
Although the feds lack resources to enforce, when a bankruptcy petition is filed, the business seeks relief under federal law to discharge its debts. Accordingly, the hands of bankruptcy court are tied because they are in fact the feds themselves. The bankruptcy court cannot look the other way while the CSA is in place. While it might not be fair and these instances are wholly different, the bankruptcy court would be obligated to do the same if a meth lab business or cocaine dealer filed for bankruptcy protection.
The bankruptcy court in the Arenas’ case did express some conflict and concern, concluding that “the legal analysis necessary for the resolution of this case to be relatively straight-forward while recognizing that the result is devastating for [Mr. Arenas]. [He] need[s] the relief that would otherwise be available to [him] under the Bankruptcy Code. It is relief that, under the circumstances, the Court cannot provide. As a federal court, the Court cannot force [Mr. Arenas’] Trustee to administer assets under circumstances where the mere act of estate administration would require him to commit federal crimes under the CSA. Nor can the Court confirm a reorganization plan that is funded from the fruits of federal crimes.”
In short, there remains a stark conflict between state and federal law on the legalization of marijuana.  Although marijuana is legal in some states, marijuana businesses cannot obtain bankruptcy relief because they are looking to the same laws, i.e., federal law, to relieve them of debt when those same federal laws state that their activities are illegal.  In many ways, it makes no sense. But until the federal government repeals the marijuana portion of the CSA, expect these results.  For any questions about bankruptcy law, please call Alfred Villoch, III, with Savage, Combs and Villoch, PLLC.