Even Indirect Income from Cannabis Can Get You Banned From Bankruptcy

Regardless of widespread traits in state-level legalization and decriminalization of high-THC hashish and rising acceptance of hashish amongst People, hashish and hashish merchandise stay unlawful below federal legislation. 

At the very least 37 states, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands have adopted a medical hashish regulatory program – and 18 states, two territories, and the District of Columbia have enacted measures to permit and regulate adult-use hashish.  Firms and people working inside these state-legal markets typically face distinctive difficulties and challenges and lack entry to fundamental monetary providers and authorized protections broadly accessible to non-cannabis operators.  As we’ve written before, in conditions of economic problem or misery, hashish operators and their house owners, distributors, suppliers, and enterprise companions lack assured entry to the chapter courts.

Some chapter courts have discovered that the mere presence of hashish (often referred to as “marijuana”) close to a chapter case doesn’t routinely prohibit chapter reduction, however many others have bent over backwards to search out trigger to dismiss these circumstances.  Within the latter, chapter courts have persistently dismissed circumstances when a debtor straight engages in violations of the Federal Managed Substances Act (“CSA”) or the place the debtor’s reorganization efforts rely upon proceeds derived from CSA violations. 

A latest ruling from the U.S. Bankruptcy Court docket for the District of Arizona serves as one other reminder that federal chapter courts are hostile territory for hashish firms and their operators.  Ryan Mayer filed a chapter case below Chapter 13 of the U.S. Bankruptcy Code, looking for to reorganize his private money owed and liabilities.  In a Chapter 13 chapter, a person proposes a plan to re-pay all or a portion of his money owed.  The quantity to be repaid relies on how a lot he earns, the quantity and sorts of debt owed, and the way a lot property he owns.  As a basic rule, debtors should use all month-to-month disposable revenue to re-pay their money owed. 

Mayer was the president and a significant shareholder of Rosinbomb.  Though not plant-touching, Rosinbomb derived most income from the manufacture and nationwide sale of extraction and processing tools throughout the state-legal hashish business.  And all Mayer’s revenue got here from Rosinbomb.

Shortly after submitting, Mayer’s collectors and the Chapter 13 trustee moved to dismiss the case.  They argued that Mayer’s possession curiosity in and sole supply of revenue from Rosinbomb, a “marijuana-related business” below federal legislation, violated the CSA and disqualified him from chapter.  In response, Mayer argued that Rosinbomb’s equipment and tools have been utilized by non-cannabis firms and customers and that Mayer may fund his plan and pay his collectors in full from belongings legally obtained below state and federal legislation – together with an anticipated inheritance from his deceased father’s property.

Sadly for Mayer, the Court docket discovered there was no credible proof to assist his claims that ample revenue could possibly be generated from tools gross sales to federally-lawful hemp and different non-cannabis prospects and that the inheritance claimed by Mayer was speculative.  The Court docket dismissed the case, discovering that Mayer’s solely dependable supply of revenue got here from a enterprise whose operations violate the CSA, since Rosinbomb’s enterprise actions themselves quantity to the sale of federally unlawful hashish paraphernalia below the CSA.

Mayer was not concerned in a plant-touching hashish operation.  He didn’t develop or promote hashish crops or merchandise, and neither did Rosinbomb.  IT DIDN’T MATTER.  Rosinbomb’s prospects “touched the plant” through the use of the Rosinbomb equipment to extract hashish oils and rosin.  These plant-touching prospects paid Rosinbomb, which paid Mayer.  Ergo, Mayer’s private revenue constituted proceeds of a federally-illegal exercise.  Subsequently, he may discover no shelter in chapter.  

Is there a degree when a debtor’s connection to marijuana turns into too attenuated to bar them from the chapter courts?  We do not but know.   For now, state-legal hashish companies and their operators – even those that don’t straight contact the plant or its merchandise – will proceed to wrestle to avail themselves of chapter safety.  It is a downside for the hashish business, which faces the identical financial pressures confronted by all giant and small companies.  Bankruptcy – from giant industrial reorganizations below Chapter 11 to small-business Subchapter V to particular person Chapter 7 and 13 circumstances — is a refuge for sincere however unlucky firms and people looking for to reorganize their affairs and procure a recent begin.  Sadly, for many gamers within the business, chapter will not be an possibility – no less than not one they’ll assume is accessible to them.

Whereas federal legislative efforts to offer these protections have stalled, the case legislation continues to develop.  For now, this case serves as one other reminder that debtors and their attorneys should rigorously assess all hyperlinks to the hashish business, direct and oblique, earlier than submitting chapter.  As proven in Mayer, even an oblique hyperlink to a non-plant touching enterprise might be grounds for disqualification and dismissal. 

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