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Lack of Access to Bankruptcy Continues to Hamper The Industry

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By: Gary Michael Smith, Esq.

Criminal enterprises cannot wash away the sin of debt in the fresh-start waters of bankruptcy. If a criminal enterprise finds itself unable
to meet its obligations, there is no easy escape.

Because bankruptcy is governed by Federal law (bankruptcy is even mentioned in the United States Constitution), Federal law also controls who is allowed to file for bankruptcy protection. Although cannabis is a $10 billion industry and growing, State law and State tolerance have zero effect on bankruptcy’s Federal gatekeepers. Those gatekeepers, United States Trustees, still regard the cannabis industry as a criminal enterprise in open violation of the Federal Controlled Substances Act. They are not wrong. All the cannabis-prohibiting Federal felony statutes remain in full force and effect, State laws notwithstanding.

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In each of the thus-far rare instances of a dispensary or dispensary-related entity filing for bankruptcy, bankruptcy was opposed by the United States Trustee, and the case was dismissed for lack of jurisdiction. This result has repeated in Florida, Michigan, California, Colorado, and Arizona bankruptcy courts. For example, the Arizona Bankruptcy Court dismissed a bankruptcy filed by a dispensary management company. In re Medpoint Management, LLC, 528 B.R. 178 (Bankr. D. Az. 2015). Medpoint was the management company that owned its sponsoring dispensary’s name and trademark under which the dispensary sold its marijuana products. The bankruptcy court ruled that the management company’s revenue was derived at least in part from the manufacture or sale of marijuana, and hence the United States Trustee could not administer the bankruptcy estate without violating Federal law. On that premise, the bankruptcy was dismissed.

Until Federal law changes, dispensaries, cultivators, infusers, and other primary-tier industry actors are not able to avail themselves of bankruptcy. But what about non-primary tier actors? What about non-cannabis vendors, suppliers, landlords, and the like who provide support goods and services to the industry? Can they seek bankruptcy protection?

Maybe.

Pending in theU.S. Court of Appeals for the Ninth Circuit is Garvin v. Cook Investments Northwest. In the case, the United States Trustee is fighting to keep a landlord from confirming a plan of reorganization under chapter 11 of the Bankruptcy Code because the landlord leases property to a tenant engaged in a marijuana business. If the U.S. trustee is successful, it could mean that people who
do business with cannabis companies may also be prevented from seeking bankruptcy relief, same as cannabis companies are prevented. Given the nature of this issue, there is a real chance that Garvin might ultimately have to resolve via petition to the United States Supreme Court, so a firm answer to this question may yet be years away.

The unavailability of bankruptcy makes it critical that dispensaries run with strong controls and with an eye towards staving off all areas
of liability, not just debts from loans. Employment lawsuits and tort liabilities, to name a few, can also be sources of tremendous and inescapable liability. If bankruptcy is never an option, don’t put yourself in the position of having to make an impossible choice.

Gary Smith head shot 

Gary Michael Smith is an attorney and arbitrator and partner in the Phoenix Arizona-based Smith Saks PLC.   He is also a founding director and current president of the Arizona Cannabis Bar Association.  He can be reached at smith@smithsaks.com

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