Since the rise of marijuana legalization in various parts of the United States, it has been universally held that newly minted “pot shops,” should they fall on hard times or go out of business, cannot seek corporate bankruptcy relief. Bankruptcy court is federal court, and federal courts reading federal laws still consider cannabis to be a banned substance, the sale of which often involves criminal penalties. Likewise, dispensaries usually won’t accept credit cards, since those are issued by banks, which must have a federal charter, making nearly all banks fearful of getting involved.
But what about individual bankruptcy cases, sought by flesh and blood human beings with a boatloads of bills to pay? In a recent Massachusetts ruling, an employee of a Massachusetts cannabis operation was kicked out of bankruptcy court as well, just because the company he worked for was peddling the evil weed.
The case concerned a Chapter 13 plan filed by a couple in the bankruptcy court in Worcester. At the time the case was filed, the husband was a budtender at a local dispensary; several months into the case, he had switched jobs and was working as a manager with a separate firm.
While acknowledging the tension between Massachusetts laws (recently changed to allow retail sales of pot to recreational users), and federal law (where marijuana remains a schedule I controlled substance), Massachusetts bankruptcy judge Elizabeth Katz came down hard on the debtor. Judge Katz found that the debtor was essentially in constant violation of federal law, committing federal crimes perpetually (his managerial duties included procuring weed for sale, overseeing retail operations, and filling in for absent salespeople).
According to Katz, this amounted to a “lack of good faith” that precluded the proposed Chapter 13 plan from confirmation. Furthermore, since the debtors’ payments into the plan were to come mostly from the husband’s wages, the court found that a plan could never be confirmed with what the feds consider tainted money.
Moreover, even a last ditch attempt to save the plan by switching to payments from the wife’s retirement funds was not enough to carry the day, as the husband continued to engage in, and derive benefits from, activities that the court thought violated federal criminal law.
If bankruptcy courts nationwide are inclined to follow Judge katz’ lead, marijuana industry employees may often find themselves in teh same boat as their employers when hard times come knocking; shut out of bankruptcy court due to a federal / state legal conflict over which they have no control.
The case is In re Blumsack, no. 21-40248.