Despite widespread trends of state-level legalization and decriminalization of high-THC cannabis and growing acceptance of cannabis by Americans, cannabis and cannabis-based products remain illegal under federal law. .
At least 37 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands have adopted a program to regulate medical cannabis – and 18 states, two territories and the District of Columbia have adopted measures to license and regulate the use of cannabis by the adults. Companies and individuals operating in these legal state markets often face unique difficulties and challenges and lack access to basic financial services and legal protections widely available to non-cannabis operators. As we have already writtenin situations of financial hardship or distress, cannabis operators and their owners, sellers, suppliers and business partners do not have guaranteed access to bankruptcy courts.
Some bankruptcy courts have found that the mere presence of cannabis (commonly called “marijuana”) near a bankruptcy filing does not automatically bar bankruptcy relief, but many others have bent over backwards to find grounds for dismissal of such cases. In the latter case, bankruptcy courts have consistently dismissed cases where a debtor directly engages in violations of the federal Controlled Substances Act (“CSA”) or where the debtor’s reorganization efforts depend on proceeds from CSA violations.
A recent ruling from the US Bankruptcy Court for the District of Arizona is yet another reminder that the federal bankruptcy courts are hostile territory for cannabis companies and their operators. Ryan Mayer has filed for Chapter 13 bankruptcy, seeking to reorganize his personal debts and liabilities. In a Chapter 13 bankruptcy, an individual comes up with a plan to repay some or all of their debts. The amount to be repaid depends on his income, the amount and types of debts owed, and the amount of property he owns. Generally, debtors must use all of their available monthly income to pay off their debts.
Mayer was the chairman and one of the main shareholders of Rosinbomb. While not touching plants, Rosinbomb has derived most of its revenue from the manufacturing and nationwide sale of extraction and processing equipment within the state-legal cannabis industry. . And all of Mayer’s income came from Rosinbomb.
Shortly after the filing, Mayer’s creditors and the Chapter 13 trustee decided to dismiss the case. They argued that Mayer’s stake and Rosinbomb’s sole source of income, a “marijuana-related business” under federal law, violated the CSA and disqualified him from bankruptcy. In response, Mayer argued that Rosinbomb’s machinery and equipment were used by non-cannabis companies and consumers and that Mayer could fund his plan and pay his creditors in full from assets legally obtained under the state and federal law – including an expected inheritance from his deceased father’s estate.
Unfortunately for Mayer, the Court found there was no credible evidence to support his claims that sufficient revenue could be generated from the sale of equipment to hemp and other non-legal cannabis customers. Federal and that the inheritance claimed by Mayer was speculative. The Court dismissed the case, holding that the only reliable the source of income was from a company whose operations violate the CSA, since Rosinbomb’s business activities themselves amount to the sale of federally illegal cannabis accessories under the CSA.
Mayer was not involved in a cannabis operation involving plants. He did not grow or sell cannabis plants or products, and neither did Rosinbomb. NEVER MIND. Rosinbomb customers have “touched the plant” using Rosinbomb machinery to extract cannabis oils and rosin. Those customers who touched the plants paid Rosinbomb, which paid Mayer. Therefore, Mayer’s personal income was the proceeds of illegal federal activity. Therefore, he could find no shelter in bankruptcy.
Is there a point when a debtor’s connection to marijuana becomes too attenuated to exclude them from bankruptcy courts? We do not know yet. For now, state-legal cannabis companies and their operators — even those not directly involved with the plant or its products — will continue to struggle to avail themselves of bankruptcy protection. This is a problem for the cannabis industry, which faces the same economic pressures as all businesses large and small. Bankruptcy – from large business reorganizations under Chapter 11 to small business Subchapter V to individual Chapters 7 and 13 cases – is a haven for honest but unfortunate businesses and individuals looking to reorganize their affairs. and make a fresh start. Unfortunately, for most industry players, bankruptcy is not an option – at least not one they may assume is available to them.
While federal legislative efforts to provide these protections have to the point of death, case law continues to evolve. For now, this case is a further reminder that debtors and their attorneys should carefully assess all ties to the cannabis industry, direct and indirect, before filing for bankruptcy. As shown on the mayereven an indirect connection to a non-plant business can be grounds for disqualification and dismissal.