There is seemingly, in the opinion of a great number of bankruptcy courts, a conflict between the United States Bankruptcy Code requirements that a debtor reorganize or liquidate “in good faith,”  the federal Controlled Substances Act [21 USC § 841] (“CSA”) prohibiting, among other things, the distribution or sale of marijuana, and the laws of over half of the states in the country that authorize the sale of marijuana for medical and other purposes. It is not clear on whom the burden of reconciling this conflict should fall, but it seems unlikely, in any scheme, that it should fall upon a $75,000 a year employee in a marijuana dispensary seeking to pay back his creditors by paying over some portion of his wages in a consumer Chapter 13 proceeding. Yet, that is where we find ourselves in the first months of 2023 with the decision of a bankruptcy court judge in the District of Massachusetts dismissing a Chapter 13 case, In Re Blumsack, Chapter 13 Case No. 21-40248-EDK, 2023 WL 214293 (Bankr. D. Mass Jan. 17, 2023) because the debtor’s role as a licensed employee at a fully licensed marijuana dispensary in the Commonwealth of Massachusetts in the opinion of the Court makes his efforts to pay back his creditors “not in good faith.”

This conflict at the corporate debtor level is not new and has played itself out over a period of years in a number of opinions dismissing bankruptcy cases involving businesses engaged directly in the sale or distribution of marijuana or even the sale of machinery used in the cultivation of the crop. See, In Re Way to Grow, Inc., 597 B.R. 111 (Bankr. D. Colo. 2018); In re Rent-Rite Super Kegs West Ltd.  484 B.R. 799 (Bankr. D. Colo. 2012); (debtor derived roughly 25% of its revenues from leasing warehouse space to tenants engaged in the business of growing marijuana). 

There do not appear to be, and the Court in Blumsack did not cite to any, cases involving individual debtors not directly engaged in production or sale other than in their role as employees being denied access to the bankruptcy courts. But see, Burton v. Maney (In re Burton), 610 B.R. 633 (9th Cir. BAP 2020) (upholding dismissal of individual Chapter 13 case because debtor owned equity interest in an entity selling marijuana). What is clear from the precedent is that the decision to dismiss a case lies within the discretion of the court.

The Bankruptcy Appellate Panel in the Ninth Circuit took pains to acknowledge that “the mere presence of marijuana near a bankruptcy case does not automatically prohibit a debtor from bankruptcy relief.” Id. at 637. (citations omitted), but at the same time acknowledged that “few bright line rules have emerged from decisions published to date.” Id. The Supreme Court has upheld the viability of the CSA as it relates to the criminalization of marijuana sales within states that have legalized those sales, finding that Congress had acted within its powers under the Commerce Clause of the U.S. Constitution (Article I, § 8). Gonzales v. Raich, 545 U.S. 1 (2005).

Congress has reacted in part by appending to every omnibus appropriation bill since 2014, the Rohrabacher–Farr amendment prohibiting the Department of Justice from using any portion of the funds appropriated to it to enforce the CSA in a way that interferes with state law in states authorizing the use of medical marijuana. This amendment has a practical effect, although not one apparently that prevents the Justice Department, through the Office of the U.S. Trustee, from advocating for the dismissal of bankruptcy cases. The import of this amendment and other actions by the federal government have created a federal government approach that is with respect to marijuana regulation a “half in, half out regime that simultaneously tolerates and forbids local use of marijuana.”  Blumsack, at * 4, quoting Standing Akimbo, LLC. v. United States, ––– U.S. ––––, 141 S. Ct. 2236, 2237 (2021), reh'g denied, ––– U.S. ––––, 142 S. Ct. 919 (2021).     

Why this “half-in, half-out” approach finds the bankruptcy court a convenient forum to take an occasional strong enforcement stance with “no bright line” rules is not self-evident.  Three days following the decision in Blumsack, the bankruptcy court for the Central District of California, in denying a motion to dismiss the bankruptcy case of a corporate debtor attempting to reorganize through the sale of securities in a Canadian company cultivating marijuana found that “[I]n general, this Bankruptcy Court should defer to prosecutors” and others “to use their discretion about whether and how to address violations of nonbankruptcy law.” In Re The Hacienda Company, LLC, Chapter 11 Case No. 2:22-bk-15163-NB, 2023 WL 345793 at * 8 (Bankr. C.D. Cal. January 20, 2023) citing Garvin v. Cook Investments NW, SPNWY, LLC, 922 F.3d 1031, 1036 (9th Cir. 2019).

An enforcement scheme that is not predictable, nor understandable, benefits no one and unduly punishes debtors such as Blumsack for the failure of federal and state authorities to reconcile the inconsistency of a regime in which state laws expressly permit and regulate activity that federal law explicitly makes a crime. The burden of that failure should not lie with a salaried employee making an effort to pay back his creditors with a portion of his wages.