Colorado court denies bankruptcy protection to marijuana growers

September 5, 2014

Marijuana gavelColorado residents who earn a living by growing or selling marijuana are high and dry if they ever need to file for bankruptcy.  The federal bankruptcy court in Denver has ruled that residents who grow or sell marijuana cannot maintain a bankruptcy because their activities are in violation of the federal Controlled Substances Act.

“As a federal court, the Court cannot force the debtors’ trustee to administer assets under circumstances where the mere act of estate administration would require him to commit federal crimes under the CSA. Nor can the Court confirm a reorganization plan that is funded from the fruits of federal crimes,” Judge Howard R. Tallman stated.  (In re Arenas, 2014 WL 4288991 (Bankr. D. Colo. Aug. 28, 2014).

The Chapter 7 debtors owned a building in Denver that consisted of two units.  Marijuana was grown and distributed out of one; the other was leased to Denver Patients Group LLC, which operated a marijuana dispensary.

It was unquestioned that the debtors possessed all of the necessary licenses and permits to grow and sell marijuana under Colorado law.  Nevertheless, the U.S. Trustee moved to dismiss the case for cause pursuant to Section 707(a) and In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (Bankr. D. Colo. 2012).

In Rent-Rite, the bankruptcy court granted a creditor’s motion to dismiss a Chapter 11 case filed by the owner of a warehouse that was partially rented to a tenant engaged in the cultivation of medical marijuana.

In that case, the court observed that “unless and until Congress changes [federal drug] law, the debtor’s operations constitute a continuing criminal violation of the CSA 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.”

Judge Tallman agreed in In re Arenas, finding that Colorado was free to ignore violations of federal law by its citizens, but could not force the bankruptcy court to ignore violations of federal law by debtors.

Allowing the debtors in this case to receive a discharge under either Chapter 7 or Chapter 13 would require the bankruptcy court to do just that, the judge said.