Cannabis-related debtors have been continuously prevented from accessing relief in bankruptcy. The Controlled Substances Act functions as the key culprit preventing these debtors from achieving plan confirmation. With the widespread legalization of cannabis among the states, the disparate treatment of cannabis-related debtors breaches the uniformity requirement of the Constitution’s Bankruptcy Clause. Until bankruptcy courts recognize that cannabis-related debtors are similarly situated to other debtors, however, cannabis-related debtors should seek ways to diversify their income so that, if filing a petition for bankruptcy becomes necessary, there exist sufficient non-cannabis related income to fund a reorganization plan and receive a discharge.
Table of Contents
- Introduction 3
- Drug Control Meets Bankruptcy 4
- The Controlled Substances Act 4
- The CSA’s Effects on Bankruptcy Law 6
- Uniformity 8
- Seigel v. Fitzgerald 11
- A Homogenous Income Stream Dooms A CRD’s Bankruptcy Case 13
- Garvin v. Cook Investments 14
- Master Equity Group 16
- CWNevada, LLC 18
- Conclusion 22
Cannabis-related debtors (hereinafter, CRDs) have been prevented from accessing the full benefits that bankruptcy has to offer with little exception. This preclusion is rooted in the Controlled Substances Act (CSA) and cannabis’s status as a Schedule I substance. Put simply, due to the plant’s status in federal law, it is a crime to “knowingly open, lease, rent, use, or maintain any place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using” cannabis. The U.S. Trustee, and sometimes creditors, refer to the CRDs’ apparent violations of the CSA as a factual basis for their arguments to bankruptcy courts to reject plan confirmation for CRDs.
The common theme for CRDs that have been prevented from achieving plan confirmation is a complete lack of non-cannabis related income to fund a reorganization plan. Income based solely on proceeds derived from cannabis-related operations has been the common thread in Chapter 7, Chapter 11, and Chapter 13 cases for CRDs that have had their cases thrown out of bankruptcy.
This article will also explore two recent bankruptcy cases involving CRDs. The first case, currently within the jurisdiction of the Western District of Michigan’s Bankruptcy Court analyzes the U.S. Trustee’s and the debtor’s competing arguments with respect to confirmation of a plan funded entirely by proceeds derived from cannabis operations. The second case explores what CRDs may face outside of bankruptcy.
One of the purposes of this article is to introduce a new argument in favor of allowing CRDs access to plan confirmation. The Constitution’s Bankruptcy Clause requires that “laws on the subject of bankruptcies” be uniform. Although the CSA is not a bankruptcy law, the Act’s disparate and objective effects on similarly situated debtors has now become alarmingly significant due to the widespread legalization and regulation of cannabis on the state level. As of 2022, approximately 428,000 jobs are supported by the cannabis industry in the United States. If Congress legalizes cannabis federally, this jobs figure could be as high as 1.75 million. Even without federal legalization, the number of Americans relying on the cannabis industry for economic well-being is too large to continue CRD’s pariah-like treatment within Bankruptcy. The continued denial of CRDs’ access to bankruptcy relief becomes increasingly absurd as cannabis entities become accepted as legitimate businesses subject to state regulation. This article argues that under the Bankruptcy Clause’s uniformity requirement, CRD’s continued preclusion from plan confirmation pursuant to the CSA cannot stand.
To be sure, bankruptcy courts have not shied have from considering cases of past and possibly ongoing violations of non-bankruptcy laws. In one example, a bankruptcy court oversaw a voluntary Chapter 11, which was later converted to Chapter 7, that involved a debtor in possession of leaking containers that held toxic substances. Another bankruptcy case that received Chapter 11 plan confirmation involved extensive environmental harm and criminal liability for the debtor’s officers.
This article will first discuss the Controlled Substances Act and its objective effects on CRDs and similarly situated debtors. Next, the argument that the disparate treatment of CRDs cannot continue in light of the Constitution’s uniformity requirement will be presented followed by supporting Supreme Court caselaw. The article will conclude with an analysis of two recent bankruptcy cases involving CRDs.
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