The discrepancy between federal and state laws regarding legal cannabis oftentimes make it tricky for marijuana businesses to operate like a traditional company.
For example, they are unable to utilize traditional banking due to its status as a Schedule I narcotic, and they don’t have the access to a plethora of protections typical businesses consider standard.
One such protection is the right bankruptcy aid, and the U.S. Department of Justice has been quick to remind the cannabis industry that they cannot file for bankruptcy under any circumstances.
No Bankruptcy Aid For Marijuana Businesses, Says the Department Of Justice
In an article published by the American Bankruptcy Institute last Friday, director of the Justice Department’s Executive Office for U.S. Trustees, Clifford J. White III, and the trial attorney for the agency, John Sheahan, explained that cannabis businesses cannot claim bankruptcy because of their lingering Schedule I status.
“Marijuana continues to be regulated by Congress as a dangerous drug, and as the Supreme Court has recognized, the federal prohibition of marijuana takes precedence over state laws to the contrary,” the article stated.
The Justice Department noted that the United States Trustee Program’s stance remains firm and that no assets associated with the cannabis industry can be liquidated or restructured following bankruptcy.
“The USTP’s response to marijuana-related bankruptcy filings is guided by two straightforward and uncontroversial principles,” the two Justice Department officials pointed out. “First, the bankruptcy system may not be used as an instrument in the ongoing commission of a crime and reorganization plans that permit or require continued illegal activity may not be confirmed. Second, bankruptcy trustees and other estate fiduciaries should not be required to administer assets if doing so would cause them to violate federal criminal law.”
This ruling not only affects those with direct ties with the business but basically anyone involved from the top down. The duo cited the Controlled Substances Act, which states “there is no distinction between the seller or the grower of marijuana and the supposedly more ‘downstream’ participants… [A]ll are in violation of federal criminal law,” as their main source of contention.
“Not only would a trustee who offers marijuana for sale violate the law but so, too, would a trustee who liquidated the fertilizer or equipment used to grow marijuana, who collected rent from a marijuana business tenant, or who sought to collect the profits of a marijuana investment,” White and Sheahan said.
Final Hit: DOJ: No Bankruptcy Aid For Marijuana Businesses
The crackdown on cannabis-related businesses comes on the heels of an earlier memo issue by White, which urged private trustees specializing in bankruptcy cases to report any marijuana companies looking to declare bankruptcy to the Justice Department.
“Our goal is to ensure that trustees are not placed in the untenable position of violating federal law by liquidating, receiving proceeds from, or in any way administering marijuana assets,” White wrote back in April.
In Friday’s piece, White and Sheahan admitted there will be difficulties for the Justice Department’s Trustee Program, which serves as an overseer of bankruptcy cases, to properly monitor every case. Because unlike other ‘illegal’ bankruptcy cases, the business continues to possess assets deemed illegal by the federal government.
“Those cases present a challenge to the bankruptcy system because they generally involve assets that are illegal even to possess,” they explained .” [A] marijuana bankruptcy case may involve a company that not only is continuing in its business, but is even seeking the affirmative assistance of the bankruptcy court in order to reorganize its balance sheet and thereby facilitate its violations of the law going forward.”
Most businesses, they contend, dispose of their illegal assets before the bankruptcy process even begins. However, since their businesses are technically legal on a state-sanctioned scale, they have no reason to remove the items from their possession.
With the DOJ cracking down, the lines are blurred on whether these businesses are considered legal, or illegal. At this point, it appears the only way the cannabis industry can acquire some of the privileges of a traditional retail business, is if the federal government legalizes pot as a whole. Unfortunately, that doesn’t appear to be happening anytime soon.