Bankruptcy and the marijuana business: a legal limbo

 Posted on August 01, 2023 in Business Bankruptcy

As of July 2023, Maryland joined the growing number of states permitting the licensed sale of recreational marijuana. With the cannabis industry essentially starting at zero in the state, this has created a promising new business opportunity for entrepreneurs, including people of color, in Greenbelt and the rest of Prince George's County.

A $26 billion industry

In fact, as more and more states decriminalize cannabis, thousands of dispensaries and other marijuana businesses have popped up across the country. In 2021 alone, legal marijuana sales generated $26 billion in revenue. Just like any other business, cannabis businesses are at risk of failure due to economic downturns, bad luck or other reasons. When most business owners are struggling to pay their debts, they can file for bankruptcy protection as an individual to stop creditor harassment and give them the chance at a reasonable solution. But bankruptcy is not an option for most people in the marijuana industry.

Do cannabis and bankruptcy mix?

Though cannabis is now legal for recreation in 21 states, plus the District of Columbia, it is still a controlled substance under federal law. Businesses that are perfectly legitimate under Maryland state law are considered criminal enterprises in the federal criminal code. Similarly, bankruptcy courts will not accept filings from businesses seeking protection related to "ongoing criminal" activity like cultivating or selling marijuana. When a cannabis business tries to file for bankruptcy, the United States Trustee Program, which oversees the bankruptcy system, will likely move to dismiss it. And it appears USTP will continue to refuse bankruptcy protection for marijuana-related businesses until Congress legalizes it.

So, where does this leave the owners of a marijuana business? Is bankruptcy ever an option for them?

Are you a person or a business?

For individuals, maybe. If they leave their job or sell their interest in a cannabis industry business, it may be possible to separate themselves from the activity viewed as illegal in federal court. But any company that derives most of its income from cannabis or paraphernalia and expects to continue doing so cannot get access to bankruptcy protection — for now.

There is a glimmer of hope, though. A bankruptcy judge in California ruled against the trustee's motion to dismiss over the applying business' minority stake in a Canadian marijuana business. Since the Canadian business was operating within the laws of its country, the judge ruled, the asset did not disqualify the American company from bankruptcy.

For now, though, cannabis businesses dealing with debt problems will need an alternative strategy. A discussion with a bankruptcy attorney can help clarify what you can do to stop creditor harassment fight to keep yourself in business.