The Bankruptcy Appeals Panel (“BAP”) for the Tenth Circuit recently ruled in In re Arenas, 535 B.R. 845 (2015), that a marijuana business “while not engaged in intrinsically evil conduct…cannot obtain bankruptcy relief because…marijuana activities are federal crimes.” The BAP concluded that “the debtors are unfortunately caught between pursuing a business that the people of Colorado have declared to be legal and beneficial, but which the laws of the United States – laws that every United States judge swears to uphold – proscribe and subject to criminal sanction. Because of that, neither a Chapter 7 nor Chapter 13 trustee can administer the most valuable assets in the estate. Without those assets or the marijuana based income stream, the debtors cannot fund a plan without breaking the law….” Noting that a bankruptcy discharge is a privilege, not a right, the BAP affirmed the dismissal of the debtors’ bankruptcy case.
One commentator on this opinion concluded by hoping that “…as more states legalize medical marijuana, the courts will be more willing to help business owners who are following state law.” Because, as correctly noted by the Tenth Circuit BAP, federal judges are sworn to uphold the federal laws and can neither substitute their judgment for the plain language of federal statutes nor can they require Trustees to violate federal law by administering the assets of a marijuana business, it is wishful thinking to hope that Bankruptcy Courts will rule otherwise until marijuana is decriminalized on a national level. And that is unlikely to happen any time soon. Fortunately, this does not mean that marijuana businesses facing financial distress are bereft of remedies.
Most states have several state law alternatives to bankruptcy proceedings that are often a preferred alternative for distressed businesses, even those engaging in operations that do not run afoul of federal law, that provide the same result with far less time and expense. While none of these can provide a bankruptcy discharge, they can provide essentially the same thing in many cases. While these will vary from state to state, some options include receiverships, assignments for the benefit of creditors, trust mortgages, bulk sales, and sales under Article 9 of the Uniform Commercial Code, as well as composition arrangements and restructurings.
Bankruptcy, even the threat of bankruptcy, is no doubt a significant arrow in the insolvent business’ quiver, but it is not the only one. Even though it cannot obtain a bankruptcy discharge given the current federal criminalization of marijuana, a financially distressed marijuana business can explore several state law courses of action that will enable it to accomplish the same result.