Recent Colorado Bankruptcy Court decisions have made it clear that owners of Colorado’s Marijuana Businesses are not entitled to bankruptcy protection in many cases. The rationale is that, because Colorado’s marijuana businesses are illegal under federal law, these business cannot receive the benefits of federal bankruptcy laws. Colorado Bankruptcy Courts have said:
“Unless and until Congress changes [federal drug] law, the Debtor’s operations constitute a continuing criminal violation of the [Controlled Substances Act] and a federal court cannot be asked to enforce the protections of the Bankruptcy Code in aid of a Debtor whose activities constitute a continuing federal crime.”
In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 at 805 (Bankr. D. Colo. 2012); See also, In re Arenas, Colo. Bankr. Case No. 14-11406 HRT. In Arenas, the Bankruptcy Court analyzed whether a marijuana business owner would be eligible for relief under either Chapter 7 or Chapter 13 of the Bankruptcy Code. The Court found that the marijuana business owner was not eligible for Chapter 7 relief because it would force a bankruptcy Trustee to liquidate assets – such as marijuana plants – in violation of federal law. The Court found “that the administration of this case under chapter 7 is impossible without inextricably involving the Court and the Trustee in the Debtor’s ongoing criminal violation of CSA.” Id.
The Arenas Court further held that the business owner was not eligible for a Chapter 13 reorganization because the bankruptcy code prohibits a bankruptcy debtor from proposing a repayment plan that is “forbidden by law.” Id. The Court found that the marijuana business owners’ proposal to repay creditors with funds from his federally illegal marijuana business violated the Bankruptcy Code and therefore denied the marijuana business owners’ motion to convert to a Chapter 13.
The recent decisions by the Colorado Bankruptcy Court severely limit a marijuana business owners’ ability to seek bankruptcy protection but do not expressly prohibit it in all situations. For instance, it is unclear whether a marijuana business owner would be eligible to discharge debts incurred in furtherance of a federal crime, if he or she had no federally illegal assets subject to liquidation by the Trustee. Until federal law and Colorado law align, marijuana business owners seeking bankruptcy relief face an uncertain path and should proceed with the help of an experienced bankruptcy attorney.