Entrepreneurs in the emerging legal market for cannabis products in Massachusetts are facing a triple whammy crisis: First, the market for recreational (sometimes called “adult-use”) marijuana products has been closed by government order due to corona virus distancing measures, plus these firms will find themselves unable to participate in federal stimulus plans, and after that the firms are also ineligible to apply for relief through the bankruptcy courts. Depending on the length of the virus crisis, the situation could spell the death knell for numerous firms trying to break in to the quirky market for legal weed in the Bay State.
On March 23, 2020 Massachusetts governor Charlie Baker ordered all non-essential businesses in Massachusetts to close through April 7th, an order that shuttered recreational use pot shops, while allowing medical marijuana sales and liquor sales to continue.
While some of the emerging pot shops in Massachusetts are owned by national or regional firms and backed by serious venture capital, many others are truly local-run entrepreneurial ventures that may not have enough cash to support a long term shutdown. Complicating matters, the Cannibis Control Commission in Massachusetts is charged with actively supporting small minority owned enterprises when approving licenses, in partial amelioration of the disproportionate impact of the war on drugs in minority communities.
Just when some of the new pot firms are gearing up and opening in Massachusetts, they have been forcibly closed. For many, this comes after a brutal, lengthy and slow licensing process, along with being saddled with exorbitant local aid payments, and a lack of traditional financing.
On top of those problems, cannabis remains a banned substance under federal law. This means that the new licensees are not able to participate in any of the stimulus programs passed by Congress such as the $2 trillion CARES Act that was signed in to law on March 27, 2020.
The federal government’s prohibition on marijuana also prevents growers and sellers from seeking bankruptcy reorganization when the virus crisis is behind us. Bankruptcy in the United States is a federal law, with all cases being heard in the federal courts. Bankruptcy judges in states that have legalized either recreational or medical marijuana use have almost unanimously ruled that weed businesses that may be legal at the state level are not able to file for bankruptcy due to the federal ban.
Put together, the federal ban could add up to hundred of millions of dollars and thousands of layoffs in the marijuana business nationwide. Some advocates are angling for state relief payments that equal what would have been paid out by Uncle Sam, but with states like Massachusetts facing budget shortfalls in the foreseeable future, there is slim chance of that actually happening.
The bankruptcy portion of the problem, of course, could be fixed quickly by a couple of tweaks to the federal bankruptcy code. Pot entrepreneurs, however, shouldn’t hold their breath waiting for this, given the perpetual gridlock we have seen in Washington in recent years.
By Doug Beaton
Attorney Douglas J. Beaton has practiced bankruptcy law in the Northeast for twenty six years, and is an active commentator on developments in bankruptcy practice and procedure. He can be contacted through this form: