The legal cannabis industry is estimated to be around $10 billion. As more states legalize some form of marijuana use, whether medicinal or recreational, that number is sure to grow. Ever since the legalization of marijuana began there has been a conflict between its legal use and the bankruptcy laws.
The reason is that cannabis is still considered a controlled substance and its use is still illegal under federal law. Bankruptcy trustees, those charged with administering the estates of debtors under the Bankruptcy Code, are fearful, and justly so, that dealing with property, especially money, that is used to generate or generated by the sale of an illegal substance could be considered a violation of federal criminal laws, subjecting them to criminal prosecution as well as loss of their jobs. Suppose a debtor files Chapter 13 bankruptcy. The debtor submits a portion of her future earnings to the Chapter 13 trustee, who uses the money to make a partial repayment to the debtor’s creditors. Now suppose that the debtor is employed in a legal marijuana retail business. Her earnings come from the sale of what is under federal law a controlled substance, meaning the money is tainted. The Chapter 13 trustee wants nothing to do with a potentially illegal business.
A case now pending in the Ninth Circuit Court of Appeals may provide some clarification to the issue. In this case, a landlord filed Chapter 11. One of the landlord’s tenants is a cannabis retailer, a business that is legal under the laws of the state where the landlord operates. The landlord proposed a plan to repay its creditors. The plan relied, in part, upon the revenue the landlord receives from the marijuana retailer. The United States Trustee, which is a part of the United States Department of Justice, the agency charged with enforcing the criminal laws that prohibit dealing in marijuana and other controlled substances, objected to the proposed Plan. Both the Bankruptcy Court and the United States District Court approved the Plan. The United States Trustee has now appealed to the Ninth Circuit Court of Appeals.
A decision by the Ninth Circuit will be binding on all federal courts, including bankruptcy courts, in the Ninth Circuit, but not elsewhere. However, as one of only twelve circuit courts of appeal in the United States, and one of the largest, a Ninth Circuit precedent can be persuasive when cited in other courts. How the Ninth Circuit decides this case will have an effect on whether businesses or individuals involved in the legal cannabis industry can seek protection in bankruptcy.