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Colorado Marijuana Businesses Barred From Bankruptcy Court

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By Casey C. Sullivan, Esq. on September 03, 2015 3:36 PM

Marijuana-related businesses who go belly up shouldn't expect any relief from federal bankruptcy courts, a bankruptcy appellate panel in the Tenth Circuit announced late August. Marijuana businesses, even if they're allowed by state laws in Colorado, are still viewed as illegal in the federal government's eyes and can't get relief from the federal bankruptcy system, the panel ruled.

The marijuana industry has boomed in Colorado since the state legalized recreational weed in 2013. Recreational marijuana sales reached $700 million during the first full year of legalization. But should those budding businesses stumble, they'll be barred from bankruptcy court as a result of federal laws criminalizing marijuana.

No Chapter 13 for Marijuana Businesses

The Tenth's bankruptcy panel didn't hesitate in keeping weed businesses out of court. "Can a debtor in the marijuana business obtain relief in the federal bankruptcy court?" they asked. "No." Though Colorado has legalized weed, it still remains a felonies under federal law to grow, sell, and distribute marijuana.

The case involved licensed marijuana growers and dispensers who went bankrupt after losing a lawsuit against their tenants. Frank and Sarah Arenas owned a commercial building in Denver where they grew marijuana in unit and leased a space retail dispensary in the other. A failed eviction action left them buried in legal bills and the pair declared bankruptcy.

They originally filed a Chapter 7 petition, which would liquidate their property and distribute the proceeds to their creditors. They then petitioned the court to convert their bankruptcy to Chapter 13, which would establish a payment plan. The United States Trustee, however, objected to the conversion, asking the court to dismiss the case given the nature of the Arenas' business. The bankruptcy court and appellate panel both agreed, noting that the Arenas' reorganization would be "funded by profits of an ongoing criminal activity."

Besides the criminal nature of their business, the panel also noted the infeasibility of the Arenas' Chapter 13 plan. In their repayment plan, the Arenas would be paying off their debts with, at best, a surplus income of $8 a month.

A Common Problem for Marijuana Businesses

The Arenas' troubles aren't unique, nor does the appellate panel break new ground. Bankruptcy courts, though not at the appellate level, have repeatedly refused to offer relief to marijuana businesses. A California bankruptcy court dismissed a medical marijuana dispensary's Chapter 11 petition, the Street reports, for similar reasons. The Colorado bankruptcy court has even refused Chapter 11 to a keg store, after its creditors noted that it had rented space to marijuana businesses.

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