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With Federal Bankruptcy Courts Unavailable, Marijuana Businesses Turn to State Options
At present, 25 states, including the District of Columbia, have legalized marijuana. While the number of states and territories with laws and policies allowing for the cultivation, sale, distribution and possession of marijuana for recreational or medicinal purposes has grown over the last decade, marijuana continues to be classified as a Schedule I controlled substance, in the same category as heroin and ecstasy, under the federal Controlled Substance Act (CSA). The growing disconnect between federal and state marijuana laws and policies creates legal risks for not only those engaged in the cultivation and sale of marijuana, but also for suppliers, landlords, investors and financial institutions directly or indirectly related to marijuana businesses.
The Schedule I status of marijuana makes it problematic for marijuana businesses to access traditional banking and financial services to obtain funds necessary to fund, operate and grow their businesses. Banks, often federally insured, are reluctant to lend to marijuana businesses fearing scrutiny by federal regulators. Banks must report suspicious activity, including business funds stemming from illegal activities, which under federal law includes the sale of marijuana, leaving banks who lend to marijuana business subject to federal enforcement actions and monetary fines.
Similarly, federal bankruptcy courts have been unavailable to marijuana businesses due to the Schedule I status of marijuana. The current position of the United States Trustee is that: 1) the bankruptcy system cannot be an instrument for an ongoing commission of a crime; and 2) trustees and other estate fiduciaries should not be required to administer assets in violation of federal law. In a letter issued by the Executive Office for United States Trustees (the Direction Letter), Chapter 7 and Chapter 13 trustees are directed to promptly notify the United States Trustee when a marijuana asset is discovered in a bankruptcy case. The Direction Letter advises that the United States Trustee's policy is to move to dismiss or object in each case involving marijuana assets, because they cannot be administered under the Bankruptcy Code.
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