Kenneth C. Pickering and Angela J. Benoit
As the marijuana industry continues to grow, individuals and organizations that provide goods or services to cannabis-based businesses may face legal consequences they have not considered, specifically potential bankruptcy ramifications.
Federal bankruptcy courts – bankruptcy courts are federal, not state – cannot offer bankruptcy protection to debtors whose business activities constitute a federal crime. Federal criminal law creates challenges when marijuana businesses contemplate filing for bankruptcy protection, putting not only the marijuana businesses themselves at risk, but also anyone who does business with them.
In recent years, bankruptcy cases have focused on individuals or entities that lease space or sell equipment or supplies to those involved in the production, distribution or sale of marijuana. However, it now seems possible that employees that work for organizations related to the marijuana industry could be denied bankruptcy protection as well.
The Controlled Substances Act
The Controlled Substances Act (the “CSA”), makes it illegal to “manufacture, distribute, or dispense, or possess with intent to manufacture, distribute or dispense, a controlled substance.” 21 U.S.C. § 841(a)(1). In addition, the CSA prohibits possession or distribution of, “any equipment, chemical, product or material which may be used to manufacture a controlled substance…having reasonable cause to believe, that it will be used to manufacture a controlled substance.” 21 U.S.C. § 843(a)(6). As a result, it is illegal under federal law to sell any equipment that will be used to grow marijuana.
The CSA’s Intersection with Bankruptcy Law
Congress enacted the Bankruptcy code to aid “honest but unfortunate debtor[s].” Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 366 (2007). In order for a debtor’s bankruptcy plan to be confirmed it must be proposed in good faith, and not be “forbidden by law.” 11 U.S.C. § 1325(a)(3). This provision excludes businesses filing for bankruptcy when their income involves the sale marijuana. This is so because courts will not participate in a bankruptcy, or allow a bankruptcy trustee to manage assets, that are derived from a criminal enterprise.
Businesses that do not directly grow or distribute products containing cannabis can also be denied bankruptcy protection if their revenue is the result of sales to marijuana businesses. In a recent case a bankruptcy court dismissed a landlord’s bankruptcy petition because the landlord, a warehouse owner, rented space to a marijuana growing operation. Although the marijuana growing operation was legal under Colorado law, the court held the landlord had knowingly violated federal law by leasing to a cannabis grower. The court denied the landlord bankruptcy relief because the bankruptcy trustee would have been required to possess and administer assets in violation of federal law.
Another recent case in Colorado involved debtors that sold hydroponic and gardening-related supplies to marijuana and non-marijuana businesses. Although the equipment could be used for many crops, the expansion of indoor gardening supplies is largely dependent on the growing cannabis industry in Colorado.
Although the court seemed reluctant to do so, it found that the debtor’s business violated federal law because a portion of the equipment sold would be used to manufacture a controlled substance. The debtor participated in cannabis industry trade shows, gave away promotional materials associated with marijuana use, engaged in promotions with cannabis dispensaries, and contributed prize money to “grow-offs.”
The bankruptcy court found that selling hydroponic equipment to both marijuana and non-marijuana based businesses did not demonstrate a specific intent to violate federal law. But, the court found the debtor sold equipment “having reasonable cause to believe, that it will be used to manufacture a controlled substance.” As a result, the court denied the debtor bankruptcy protection.
Employees of Cannabis Businesses
Recently the United States Trustee objected to the bankruptcy of an employee of a staffing agency who helps places temporary employees with businesses in the marijuana industry. The debtor, who resides in Oregon where state law allows the use of recreational and medicinal marijuana, is employed by a staffing agency that places temporary workers who harvest, cultivate and trim marijuana. While the debtor herself does not produce or sell marijuana, she earns approximately 62% of her monthly income from the staffing agency.
Because the staffing agency relies on payments from individuals who directly violate the CSA, the United States Trustee moved to dismiss the debtor’s bankruptcy plan on the grounds that her income is derived from activities that are forbidden under federal law. The debtor’s plan is currently scheduled for review by a federal judge on May 23, 2019.
Potential Ramifications
Current law makes it clear that sellers that have a “reasonable cause to believe” that their products may be used to manufacture a controlled substance will not be afforded bankruptcy protection. Cases have also made it clear that landlords to such business will also be denied protection.
Should the bankruptcy court dismiss the staffing agency employee’s bankruptcy petition, individuals and businesses that are not directly involved in the marijuana industry may soon be unable to seek bankruptcy protection as well. There is even potential danger for those who advise or otherwise assist cannabis-related businesses because they too receive payments derived from the violation of federal law. The pending bankruptcy case in Oregon may help clarify the boundaries for those involved in the marijuana industry.
Angela Benoit is an associate in Mirick O’Connell’s Litigation Group. She focuses her practice on business and securities litigation and in representing clients in response to state and federal government investigations. She can be reached at 