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DON’T LET YOUR MONEY GO UP IN SMOKE: A Legal Marijuana Business Owes Me Money; Now What?

Times and mores are changing. More and more people and more and more states have de-stigmatized and legalized (in at least some respects) marijuana use, sales and cultivation. As the marijuana “industry” expands, and however unlikely it may seem, a marijuana business could run into creditor problems just like any other. In fact, this has happened already.

Locally (meaning within a state), enforcing claims against a marijuana enterprise ought be no different than enforcing claims against more conventional business enterprises. That is, after calls, letters and cajoling, there would appear to be no reason why local (state and municipal) courts would not entertain collection litigation or other business-oriented litigation, enter money judgments, authorize enforcement of judgments and so on.  Anecdotally, local courts have done so.

What if things get worse and the marijuana business falls behind to multiple creditors?  Ordinarily, that scenario raises the possibility of bankruptcy. Will the debtor run for bankruptcy protection?  Will someone force the debtor into bankruptcy involuntarily?

To date, case law is limited but essentially unanimous that a marijuana business cannot commence a federal bankruptcy case voluntarily, nor can it be forced into bankruptcy involuntarily.  There are perhaps a dozen cases on point, mostly from bankruptcy courts in places like Colorado, Oregon, Arizona and Michigan.  None allow a marijuana business, or an individual whose primary income is from legal marijuana activity, to enjoy (or suffer) bankruptcy protection.[2]  The rationales differ somewhat but ultimately rest on the point that the product on which the enterprise runs is illegal under federal law, and the federal courts and federal judicial processes cannot be invoked to protect or administer illegal goods.

For now, that is the law.  But whether that should be the law, and whether case law will evolve otherwise, are different questions.  Those questions are explored in some detail here. As that paper observes, those questions are largely untested and likely require deeper reasoning than has been applied so far.  For example, in the Rent-Rite case, the court granted a creditor’s motion to dismiss a bankruptcy case, expressing concern about the prospect of a debtor making payments from contraband.  Yet the court seemed untroubled by the prospect of the creditor being paid with those same “illegal” dollars outside the bankruptcy case, as it had been before.

So what can be done in a situation of collective financial distress?  One option is to try to change the case law with new arguments as to why bankruptcy protection – which sometimes benefits creditors as much as the debtor – ought to be permitted for those who transact in marijuana.  Since only one appellate court thus far has issued an opinion on the issue,[3] courts are largely free to express their own views.  For more on these issues see here.

Alternatively, just as state law collection proceedings ought to be available, state law proceedings that address collective financial distress ought to be available too.  These include, for example, receiverships and assignments for the benefit of creditors.  For more on receiverships, click here and here.  For more on assignments for the benefit of creditors, click here, here and here.

[1] See, for example: In re Arenas, 535 B.R. 845 (BAP 10th Cir. 2015) (plan could not be funded with profits of “criminal activity”); In re Rent-Rite Super Kegs West, Ltd., 484 B.R. 799 (Bankr. D. Colo. 2012) (warehouse landlord obtained dismissal of marijuana tenant’s case); In re Medpoint Management, LLC, 528 B.R. 178 (Bankr. D. Ariz. 2015) (marijuana business resisted involuntary petition which was thrown out).

[2] Arenas, cited in footnote 1.

About David Weinstein

David R. Weinstein has practiced law in the areas of bankruptcy, insolvency and creditor-debtor relationships. He has been a partner and an associate in small, medium and large law firms, helping individuals and companies, large and small. Today, Mr. Weinstein blends all those experiences with the personalized service he can give directly to clients in…

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