The modern “gold rush” of our era, also known as the legalization of marijuana, is all over the internet with an open investment invitation in bright, shiny lights. However, most states have legalized the cultivation and sales of marijuana for medical purposes only, rendering investment opportunities sparse at best.
When it comes to the recreational use of marijuana, some states have attempted to “legalize” use while others have simply “decriminalized” the recreational use as long as the individual in question only possesses the designated amount deemed acceptable.
The allowance of marijuana use varies state by state, and the statutes vary from one state to the next, which fosters confusion. Regardless of the laws passed by each state, the federal government has not taken any steps to “legalize” or “decriminalize” marijuana use. Consequently, marijuana remains a Schedule I controlled substance under federal law and any possession or use could mean federal prosecution of a crime.
When U.S. attorneys need to determine whether or not to prosecute an individual who is following his or her state marijuana laws, the Department of Justice currently takes the position that U.S. attorneys need to consider other factors, including: state laws and whether or not other crimes are being commited. The Department of Justice has taken thos position in the past, however, it is subject to change, and continually changes. Regardless, there is no guaranty that following a state’s marijuana law can help an individual avoid federal criminal prosecution.
On the one hand, it may make sense for the federal government to look the other way when a state legislature has decided to allow the citizens of that state to possess a small amount of marijuana. However, state legalization of marijuana will bring with it large-scale operations intended to supply commercial amounts of the Schedule I drug to the citizens of those states, for medical or recreational purposes, which makes the issue problematic.
The problems that stem from the state “legalization” or “decriminalization” of marijuana are not limited to only criminal issues. These issues include banks unwilling to accept money from marijuana growers due to federal money laundering statutes and the fact that the U.S. Bankruptcy courts can refuse to deal with what may be deemed “dirty money.”
Marijuana businesses that have fallen on hard times quickly learn that the U.S. Bankruptcy Courts will not bail them out. Several bankruptcy courts have addressed the issue and have primarily rejected the debtors by relying on the requirement that a debtor’s plan of reorganization must be “proposed in good faith and not by any means forbidden by law .”
In addition, the courts have opined that allowing a debtor to use funds from “illegal” activities to make plan payments to the trustee, who would then be required to pay creditors using the illegal funds, could potentially be considered money laundering. Courts have also taken the position that where the funds originate from from—the rental of a commercial property in which rents are paid by a marijuana buisiness—is considered an illegal source and a plan cannot be confirmed .
Interestingly, in In re: Wright , the Bankruptcy Court noted that the Wright’s marijuana cultivation business was legal under California law and the debtors “pay taxes just like any other business.” (Apparently the IRS had no problems taking the debtors’ dirty money). Nevertheless, the Bankruptcy Court found that the debtors could not propose a Chapter 13 plan that would satisfy the bankruptcy code because their business, which sold its wares to medical clinics, remained illegal under federal law. While the debtors in Wright were ultimately permitted to convert their case to a Chapter 7 bankruptchy for liquidation purposes because none of the interested parties objected to the notice, the majority of bankruptcy courts do not allow individuals directly involved in a marijuana business to maintain a bankruptcy case.
The reality of this era’s proverbial “gold rush” based on a state-sanctioned marijuana business is significantly limited by the fact that the state’s permission to allow the activity directly conflicts with existing federal law. Although a distressed marijuana-based business may have legitimate needs to reorganize and get rid of some debt, the U.S. bankruptcy courts are unable to offer refuge at this time. Those interested in operating marijuana-based businesses would be wise to study all related laws, not just state laws, before opening up shop.
By: Mitch Robiner
Mitch Robiner is an attorney in the Firm’s Franchise Law and Construction Law Practice Groups. If you have any questions or concerns about this issue or any other matter, please contact Mitch directly at 813-223-1099.
See: Case No. 07-10375, Docket No. 32, Bankr. N.D. Cal. Aug. 3, 2007