Judge Denies Bankruptcy Protection for Colorado Marijuana Business Owner

The Florida Right to Medical Marijuana Initiative, Amendment 2 is on the November 4, 2014 ballot in Florida as an initiated constitutional amendment. The measure, if approved, would legalize medical marijuana in the State of Florida in certain circumstances. More specifically it would provide that the medical use of marijuana by a qualifying patient would not be subject to criminal or civil penalties under state law. The measure needs 60% of the votes to pass.

Since 1996, twenty states along with Washington D.C. have passed laws allowing smoked marijuana to be used for a variety of medical conditions. Two States, Colorado and Washington, have passed laws legalizing the recreational use of marijuana. It is important to recognize that state marijuana laws do not change the fact that marijuana use continues to be an offense under Federal law. The filing of a Bankruptcy petition is governed by Federal Law.

Recently, a Bankruptcy Judge in Colorado dismissed the case of a marijuana business owner, saying that although his activities are legal under Colorado law, he is violating the Federal Controlled Substance Act. In reaching his decision, the Judge noted that although the result is devastating to the debtor, “violations of federal law create significant impediments to the debtors’ ability to seek relief from their debts under federal bankruptcy laws in a federal bankruptcy court.”

In the instant case, the Debtor was a wholesale producer and distributor of legalized marijuana. The Debtor filed an individual Chapter 7 Bankruptcy petition. In Chapter 7 Bankruptcy a trustee is assigned to liquidate any non-exempt assets with the proceeds going to the Debtor’s creditors. The Judge noted in his decision that the Debtor would be ineligible for Chapter 7 because the trustee could not take control of assets or liquidate any inventory without running afoul of Federal law. Furthermore, the Debtor would not be able to convert his case to Chapter 13 because any repayment plan would be “from the profits of an ongoing criminal activity under federal law”. The Judge noted that in either a Chapter 7 and Chapter 13 case, the Trustee would be distributing funds that were derived from the violation of Federal Law.

There have also been at least two bankruptcy cases in California that were also dismissed because the debtor’s income was derived from medical marijuana which is also legal in that state. In short, if Florida was to legalize medical marijuana, any debtor or business that is involved in that industry, would most likely not be able to file for bankruptcy protection. The Colorado case number is: 1:14-bk-11406-HRT.

Jonathan Bierfeld is an attorney with Martin Law Firm, P.L., whose practice focuses in Bankruptcy Law and Civil Litigation. He is admitted to practice law in the State of Florida and the Federal Court for the Middle District of Florida. He primarily practices in Lee County Florida in Cape Coral and Fort Myers, Florida.