No Bankruptcy Protection for Denver Marijuana Businesses?

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The Denver Post reported a story today about a Judge ruling that marijuana businesses in Denver will not have access to bankruptcy protection – It seems unfair that a brand new (and theoretically unstable) business surrounding a recreationally legal substance would not be able to protect themselves from any unforseen mishaps that may lead to bankruptcy.
The Denver Post reports:
Marijuana plants grow in a Colorado grow house. (John Leyba, Denver Post file photo)

Buzz kill?

A U.S. bankruptcy judge has dismissed the case of a Denver marijuana business owner, saying that although his activities are legal under Colorado law, he is violating the federal Controlled Substances Act.

In dismissing the case, filed in U.S. Bankruptcy Court in Denver by Frank Anthony Arenas, Judge Howard Tallman said he realizes the “result is devastating for the debtor.”

The Arenas case is at least the second such one involving a marijuana business tossed out of bankruptcy court in Colorado. At least two others have been dismissed in California.

Tallman made a similar decision in a 2012 case involving Rent-Rite Super Kegs West Ltd, a company that operated a warehouse partially rented to a tenant cultivating marijuana.

“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,” Tallman wrote in the Arenas decision last month.

Arenas, who couldn’t be reached for comment, has appealed the decision to the U.S. 10th Circuit Court of Appeals in Denver. According to his bankruptcy petition, Arenas owes more than $556,000 to unsecured creditors.

He has assets of $595,925, personal property worth $47,191 and monthly income of $4,315.16.

He has testified that he owns about 25 marijuana plants valued at $250 each, according to Tallman’s decision.

Arenas, a wholesale producer and distributer of weed, filed for Chapter 7 protection, in which a debtor turns over assets to a trustee to liquidate and give the proceeds to creditors.

In the decision, Tallman alludes to the contradictions that dueling marijuana laws pose to liquidating assets and distributing the proceeds among creditors.

The trustee can’t take control of assets or liquidate the inventory without running afoul of federal law, he said. Nor can the debtors convert the case to Chapter 13, which would allow them to pay off debts over time because the plan would be funded “from profits of an ongoing criminal activity under federal law” and involve the trustee in distribution of funds derived from violation of the law.

Those who own and operate marijuana businesses are caught in a legal limbo with federal law restricting access to banking services and creating obstacles that other legitimate — at least by state law — businesses don’t, said Sam Kamin, a professor at University of Denver’s Sturm College of Law.

“As long as it is illegal under federal law, we are going to have weird anomalies like that,” Kamin said.

Mike Elliott, executive director of the Marijuana Industry Group, said the bankruptcy case is one more “unjust” penalty that pot businesses face.

“It is amazing how far down the rabbit hole we are when we get to an issue like this,” he said. “Marijuana businesses are unjustly penalized because the federal law is no longer based in reality.”

Tom McGhee: 303-954-1671, [email protected] or twitter.com/dpmcghee

 

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