Cannabis Businesses Refused Basic Legal Protections That Are Available To Nearly Every Other Industry

Once again, medical and recreational cannabis business owners across the nation are refused basic legal protections that are available to nearly every other industry; this time, bankruptcies. Bankruptcy is one of the most fundamental financial tools in American law. Nobody wants to go bankrupt, but when you need it…you need it.

A bankruptcy can give a person a fresh start when their finances become untenable. The most common types of bankruptcies are Chapter 7 (in which all the debtor’s assets are used to pay off their debts and the balance is (generally) whipped clean) and Chapter 13 (in which the debts and assets are reorganized so that the debtor can keep (most of) their assets and make affordable payments on the debt). Both types allow a person relief from the weight of debts they simply cannot pay by allowing a Department of Justice’s trusted to seize or control the debtor’s assets. Bankruptcy is very complicated and cannot be adequately summarized in this short blog post; if you are thinking of filing for bankruptcy you should contact a qualified attorney to discuss your situation and determine what course of action is best for you.

However, if you own a business in the cannabis industry, your options are limited. The 10th Circuit US Bankruptcy Appellate Court recently in In Re Frank Anthony Arenas held that a cannabis business was not eligible for Chapter 7, nor Chapter 13 bankruptcy relief because of the federal ban on marijuana.

Among their arguments, the most damning to cannabis businesses is that a cannabis bankruptcy cannot occur because the trustee, a government employee, cannot take possession of the cannabis plants and equipment of the business in either a Chapter 7 or Chapter 13 bankruptcy because they would then be committing a federal crime. Nor, they argue, can the court transfer ownership of the plants and equipment to the creditors, because then the creditors are forced by a federal court to committing the same federal crime. Because the trustee cannot control the cannabis products or production equipment, which are often the most valuable assets of a cannabis business, they cannot provide the same services that they provide to all other types of businesses, and therefore cannot offer bankruptcy relief.

The Court couldn’t allow the bankruptcy because the court cannot see any reasonable way to both give relief and uphold the federal prohibition on the use, sale, possession, and production of cannabis. They are bound by the law and sworn to uphold it. So, the trustee and the creditors cannot be forced to commit federal crimes, and the debtors cannot have their cake and eat it too by keeping their most valuable assets and having their debt wiped clean.

This was a very fact based opinion and not a per se rule. That means that some other cannabis business with very different finances might sneak through in some future bankruptcy, but until it makes it into court again we simply do not know.

In the mean time, insolvency isn’t really an option in cannabis.