No Bankruptcy Relief for Marijuana Business

Marijuana sales for medical and recreational use is legal in several states.  But, it's a crime under federal law.  What happens when a marijuana business fails?

Frank and Sara Arenas owned a building in Denver with two units.  In one, Frank grew and sold marijuana wholesale.  He leased the other unit to tenants to dispense marijuana for medical use. The tenant sued Arenas over an issue with the lease and obtained a judgment against him.  Arenas filed for bankruptcy and the United States Trustee asked the bankruptcy court to dismiss Arenas's case.  (A US Trustee is an agent of the US Department of Justice responsible for monitoring bankruptcy cases for fraud and protect the integrity of the system). Although Arenas's medical marijuana business was legal under Colorado law, it violated the federal Controlled Substances Act (CSA).

The 10th Circuit BAP considered Arenas's case late last month.  Arenas v. United States Trustee (In re Arenas), 2015 Bankr. LEXIS 2821 (B.A.P. 10th Cir. Aug. 21, 2015):

The pivotal issue here is whether engaging in the marijuana trade, which is legal under Colorado law but a crime under federal law, amounts to "cause" including a "lack of good faith" that effectively disqualifies these otherwise eligible debtors from bankruptcy relief. We agree with the bankruptcy court that while the debtors have not engaged in intrinsically evil conduct, the debtors cannot obtain bankruptcy relief because their marijuana business activities are federal crimes.

 Arenas had argued unsuccessfully in his brief  before the BAP the hypocrisy of the federal government in tolerating Colorado's legalization of marijuana businesses. Twenty three states and the District of  Columbia have legalized medical marijuana use, while such use remains a federal crime.