Is Bankruptcy Possible if You Work in the Cannabis Industry?

With the legalization of recreational and medicinal marijuana in Washington State, there will be an increase in the number of legally (from a State standpoint) operating dispensaries, growers, and other related business that derive their income from the marijuana industry.  As a result there will also be many workers and businesses in this industry who may seek protection from the Federal Bankruptcy Court by filing a chapter 13, chapter 7 or chapter 11 bankruptcy in order to reorganize or discharge debts owed to creditors.  While the right to file bankruptcy is available to most people living in Washington State, those continuing to work in the marijuana industry may have a tough time convincing a U.S. Trustee or bankruptcy judge appointed by the Federal government that their income is obtained through legal means or the assets involved in a cannabis business are not involved in illegal activity.

There have been some new developing case law in which debtors have had a tough time filing for bankruptcy if they were involved in the marijuana industry.  In an Oregon bankruptcy case, a debtor who owned a medical marijuana business filed for a chapter 13 reorganization only to get their chapter 13 case denied when the U.S. trustee objected to his case due to the fact that income received from the debtor was partially derived from Federally illegal activity.

In Colorado there was a case in which a debtor derived 25% of his income from renting out space to a business growing marijuana. The court in this case came to a similar conclusion as in the Oregon case, even though the debtor was not directly involved in the marijuana business.  The debtors bankruptcy case was dismissed as the debtor was found to have “unclean hands,” (an equitable doctrine where a debtors own bad acts preclude a right to a remedy).

In California Mother Earth’s Alternative Healing Cooperative sought bankruptcy protection by filing a chapter 11 reorganization plan and was eventually denied that right due to the fact that the Cooperative’s assets were all tied up in the marijuana industry and thus a bankruptcy trustee could not administer the assets due to the fact that the business and the assets were considered to be part of illegal activity under Federal law.

So what is a debtor who is involved in the cannabis industry to do if they want to file for bankruptcy?

My suggestion would be to stop all involvement in the marijuana industry and don’t derive any income from what could be considered to be Federally illegal activity prior to filing for bankruptcy.  Businesses can be wound up and dissolved prior to filing for bankruptcy and debtor can stop earning an income from the industry so that there will be no involvement in potentially illegal activities prior to filing for bankruptcy.

Another option debtors can seek out it is to try and settle debts for less than the full balance and side step any potential bankruptcy issues altogether.  Depending on the type of debt you are dealing with, creditors may accept 25-50% or less of your current balance.  Definitely something to explore if you have funds available in which to settle your debts.

If you have been working in the Cannabis industry and you live in Washington State, give Symmes Law Group a call at 206-682-7975 to learn about your options.