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Court: Marijuana Businesses Can File for Bankruptcy, Too

Homegrown indoor pot plants and leaves
By William Vogeler, Esq. | Last updated on

Marijuana businesses have been on a legal tightrope for some time, especially in states like Washington. It was the first state in the country to legalize cannabis, leading half of America to follow.But federal law has always banned the drug, and so a marijuana dispensary was having trouble in federal court there.

In Garvin v. Cook Investments NW, SPNWY, the U.S. Ninth Circuit Court of Appeals had to decide whether the struggling business could invoke federal bankruptcy protection. It turned out to be a good day for marijuana -- even in bankruptcy court.

'Acknowledged Criminal Enterprise'

At arguments on appeal, the U.S. attorney said the debtors wanted the appeals court to be the first to say that an "acknowledged criminal enterprise" could obtain bankruptcy protection to keep committing crimes. That argument turned out to be an accurate prediction. The Ninth Circuit said the law directs bankruptcy courts to police the means of a reorganization plan's proposal, not its substantive provisions. The judges affirmed the district court plan because it was not proposed "by any means forbidden by law."

The case involved several companies, but the issue was primarily over a lease. Green Haven had a lease to use a property exclusively for marijuana business. The lease, while lawful under Washington law, violated the federal Controlled Substances Act. The renter sought bankruptcy protection, but the trustee alleged the lease constituted gross mismanagement and filed a motion to dismiss. The trial court denied the motion, and the proposed reorganization plan followed.

Proposed Plan Affirmed

The district court confirmed the pot plan, as amended, over the trustee's objection. It was the only objector; the creditors all approved. On appeal, the Ninth Circuit shrugged off the government's argument and affirmed the plan.

In their unanimous ruling, the judges said they "did not believe" their decision would "result in bankruptcy proceedings being used to facilitate legal violations." As the debtor's attorney had argued, many people and companies go into bankruptcy without perfect records. For example, a debtor who doesn't pay taxes can still use the bankruptcy process.

That could include marijuana enterprises, which are typically cash businesses. But that's another story.

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