Why Pot Companies Can't File For Bankruptcy
The Denver Post recently reported on a bankruptcy judge's decision to dismiss a bankruptcy petition filed by a Denver marijuana business owner on the grounds that pot is illegal under federal law.
The problem is that federal courts have exclusive jurisdiction over bankruptcy cases, which enable debtors to purge many of their debts and pay back their creditors what they can. Federal bankruptcy courts don't preside over cases involving illegal businesses, and that's what recreational pot shops are - at least under federal law.
In his decision to dismiss the case, US Bankruptcy Judge Howard R. Tallman pointed out that marijuana business owners Frank and Sarah Arenas were technically violating the Controlled Substances Act.
"It may be extremely unlikely that they will ever be arrested and prosecuted for their violations of the CSA," Tallman wrote. "Nonetheless, those violations of federal law create significant impediments to the Debtors' ability to seek relief from their debts under the federal bankruptcy laws in a federal bankruptcy court."
The Arenas had sought to file for Chapter 7 bankruptcy, which requires debtors to turn over their assets to a trustee. In turn, the trustee liquidates those assets and gives the money to creditors. In a case like this, Tallman noted, that trustee would have to violate the law by selling weed in order to liquidate those assets.
Tallman also ruled the case couldn't be converted to a Chapter 13 bankruptcy, which would have allowed them to pay off their creditors gradually while still operating their business. Tallman noted "their reorganization would be funded from profits of an ongoing criminal activity."
Of course, the inability to file for bankruptcy is bad for pot businesses, and it's just one of the financial problems facing an industry in an uncertain legal territory. As Forbes noted last week, many banks refuse to deal with pot businesses because they're worried about getting charged with money laundering. This forces pot businesses to deal in cash, which creates an array of headaches not least of which is the fear of getting robbed.
Ironically, these businesses deemed illegal under federal law also end up paying bigger tax bills to the US government because they're not allowed the same write-offs as other small businesses.
In light of this tough financial environment for pot businesses, Paul Armentano, the deputy director of marijuana reform group NORML, told Business Insider he wasn't surprised by the bankruptcy ruling.
"It is consistent with the trend of denying state-compliant marijuana businesses the sort of basic and necessary financial options that all institutions require to be competitive in the marketplace," he said in an email.