A bankruptcy court’s recent denial of a debtor’s petition for bankruptcy relief on narrow grounds casts a long shadow on the viability of bankruptcy relief for those employed in the cannabis industry. Though confining the court’s holding to this debtor’s case, the court concluded that because the debtor engaged, and intended to continue engaging, in activities that violate the Federal Controlled Substances Act, the debtor could not objectively have filed for bankruptcy or proposed a plan of reorganization in good faith, as required by Federal bankruptcy law. While the Court noted the debtor’s warning that dismissing the case of “a ‘mere employee’ with no ownership interest in a marijuana business may lead to vast denials of bankruptcy relief for other debtors with employment or other relationships with cannabis-related activities,” the Court declined to extend its ruling beyond the facts before it.
The debtor in this case worked as a “budtender” at a cannabis dispensary in Massachusetts. The debtor’s role later expanded into management but at no point did he possess ownership interest in the cannabis business. The debtor proposed to fund his reorganization plan with wages earned from his employment and had no intention of discontinuing his work in the cannabis industry.
The court addressed two issues of first impression: whether the debtor lacked “good faith” in petitioning and proposing a plan for bankruptcy; and whether “cause” existed to dismiss the debtor’s case. The U.S. Bankruptcy Code defines neither term. But, the debtor objectively lacked good faith, according to the court, because he sought relief under the Federal bankruptcy regime despite having violated – and intending to continue violating – the Federal Controlled Substances Act. “Cause” for dismissal dovetailed from this finding of lack of good faith. The court acknowledged the inconsistencies in Federal and state regulation of cannabis but concluded that federal statutes dictated its decision.
The court did not examine whether the legality of the cannabis industry under Massachusetts law could have impacted the analysis of whether the debtor possessed good faith. The tension between the court’s narrow holding and far-reaching dicta results in uncertainty around whether this form of Federal relief may be available to those employed in the cannabis industry but also those adjacent to the industry.
“The Debtor’s Chapter 13 plan as currently proposed is to be funded by the wages derived from … illegal activities, which would require the Chapter 13 trustee to knowingly administer wages derived from an active participant in a criminal enterprise,” Katz wrote. “Regardless of the Debtor’s subjective intent in filing the case or proposing the current Chapter 13 plan … the Court cannot find, under an objective standard, that the case was filed in good faith or that the plan was proposed in good faith as required by §§ 1325(a)(7) and (a)(3), since, from the inception of this case, the Debtor has engaged in and benefited from, and intends to continue to engage in and benefit from, activities that violate federal criminal law.”