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Courts just saying no to bankruptcy protection for pot businesses - II

In a previous post, we started discussing how federal courts are now being called upon to decide the issue of whether marijuana-related businesses should be allowed to seek federal bankruptcy protection.

Specifically, we started discussing a case recently decided by the Tenth Circuit Bankruptcy Appellate Panel dismissing the Chapter 7 filing of the proprietors of a Colorado-based marijuana business.

To recap, the proprietors in question consisted of a married couple who owned a Denver-area commercial building, half of which they used to grow marijuana and half of which they leased to a third party marijuana dispensary. When they began experiencing money problems, the couple tried to file for Chapter 7 bankruptcy.

The trustee overseeing the case, however, asked the bankruptcy court to dismiss the bankruptcy petition owing to fact that while their operations were legal under state law, they were nevertheless in direct violation of the federal Controlled Substances Act. Indeed, the CSA classifies marijuana as a Schedule I drug, meaning it has both a "high potential for abuse" and no accepted medical use.

The district court ultimately sided with trustee and dismissed the couple's bankruptcy petition. It also took things one step further by indicating that the case could not be converted to a Chapter 13 bankruptcy filing, as the income used to make the regular payments under any resulting repayment plan would likely come from marijuana-related activity otherwise prohibited under federal law and, by extension, that the couple's assets would always remain vulnerable to forfeiture.

It's worth noting that in affirming the decision of the district court, the appellate panel was careful to characterize bankruptcy protection as a privilege, perhaps sending a clear message to proprietors of marijuana businesses.

It will be interesting to see this issue continue to play out across the country.

What are your thoughts? Should these business owners be able to file for bankruptcy or did the court make the right decision in this case? 

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