In a previous post, we explained how the Cole Memo enabled the sale of marijuana in 24 states and the District of Columbia despite being illegal under Federal Law. However, the Cole Memo provided guidance only to federal prosecutors and was not binding on branches of the federal government. For example, bankruptcy courts have found that the legality of marijuana production under state law does not enable an individual engaged in the sale of marijuana to seek protection under federal bankruptcy law. See, e.g., In re Arenas, 514 B.R. 887 (Bankr. D. Colo. 2014); In re Rent-Rite Super Kegs W. Ltd., 484 B.R. 799 (Bankr. D. Colo. 2012); In re Medpoint Management LLC, 2015 Bankr. LEXIS 1125 (Bankr. D. Ariz. 2015).
In particular, the United States Bankruptcy Appellate Panel for the Tenth Circuit Court of Appeals recently found that a “debtor in the marijuana business” cannot obtain relief in federal bankruptcy court. Arenas v. United States Trustee (In re: Arenas), BAP No. CO-14-046 (10th Cir. BAP 2015). The Court’s conclusion involved a detailed analysis of certain provisions of the Bankruptcy Code that is beyond the scope of this update. However, the Court’s decision essentially rested on the conclusion that the bankrupt debtor’s trustee could not administer the debtor’s bankruptcy estate because selling and distributing the marijuana assets would constitute federal offenses. In the Court’s words, “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 Sates Judge swears to uphold – proscribe and subject to criminal sanction. Because of that, neither a Chapter 7 nor 13 trustee can administer the most valuable assets in this estate” without violating federal law. Accordingly, the Court succinctly concluded: “Can a debtor in the marijuana business obtain relief in the federal bankruptcy court? No.” For more informaiton on how this may affect your business, please contact a member of the Frantz Ward Marijuana Law & Policy Group.