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Marijuana Businesses Can't File for Bankruptcy

Let's face it -- not every small business is going to make it. And those that don't can normally claim some protection in bankruptcy, if necessary. Well, those that also don't sell marijuana, that is.

The Tenth Circuit recently held that debtors in the marijuana business can't obtain relief in federal bankruptcy court. Here's why:

The Feds v. the States

While some state marijuana laws may allow recreational pot, marijuana cultivation, distribution, and possession are all criminalized under the federal Controlled Substances Act. Meaning that, as far as the federal courts are concerned, marijuana is illegal and marijuana businesses are illegal enterprises.

This may not matter when it comes to criminal charges, but it is important when one considers that bankruptcy protections are federal laws, and therefore federal courts have sole jurisdiction over bankruptcy proceedings. And when ruling on bankruptcy applications, those courts are bound by federal law.

Arenas v. U.S. Trustee

When Colorado marijuana business owners Frank and Sarah Arenas filed bankruptcy last year, they were quickly rebuffed by US Bankruptcy Judge Howard R. Tallman, who said, "violations of federal law create significant impediments to the Debtors' ability to seek relief from their debts under the federal bankruptcy laws in a federal bankruptcy court." This loosely translates to mean, "Don't come crying to federal bankruptcy laws after you've broken federal drug laws."

The Arenas appealed the decision to the Tenth Circuit, who affirmed the lower court ruling, noting that any administration of the bankruptcy, including selling or disposing of the chief assets, mainly marijuana, would violate federal law. Although they filed for Chapter 7 bankruptcy, the ruling also denied the Chapter 13 bankruptcy claim because "the debtors cannot fund a plan without breaking the law."

Starting any new business is a gamble; starting a marijuana business is really rolling the dice.

If your small business (marijuana-related or otherwise) is considering declaring bankruptcy, you may want to talk to an experienced bankruptcy attorney first.

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