Bankruptcy courts generally have been a rather hostile forum for debtors employed in the marijuana industry.
While 24 states have legalized recreational marijuana use, it remains a criminal activity under the federal Controlled Substances Act, and bankruptcy courts generally have been a rather hostile forum for debtors employed in the marijuana industry.
Against that backdrop, it was not surprising that the U.S. Bankruptcy Appellate Panel for the 1st U.S. Circuit Court of Appeals at Boston recently affirmed the dismissal of a Massachusetts cannabis dispensary employee’s Chapter 13 bankruptcy petition because his plan would have funneled income from illegal activity under federal law to creditors. But in its reasoning, the court may have opened the door for future debtors employed in the industry under certain conditions.
The appellate panel noted that the nature of the debtor’s employment by itself does not make the debtor ineligible to file a Chapter 13 petition in good faith. If a cannabis dispensary employee has funds from another source unrelated to marijuana activities, that money could be used, the panel wrote.
“The problem is not everyone is earning money from somewhere else,” says Henry J. Sommer, president of the National Consumer Bankruptcy Rights Center.
“The ruling
Scott H. Blumsack, the employee, brought Blumsack v. Harrington. He’s worked in Massachusetts, where it is legal for people age 21 or older to use or sell marijuana for medicinal and recreational use.
“As far as eligibility goes, Congress has not articulated a ‘zero-tolerance’ policy that requires dismissal of any bankruptcy case involving violation of the CSA (or other activity that might be proven to be illegal),” according to the opinion.
That language pleased Blumsack’s attorney, Dmitry Lev, because it rejected the lower court’s ruling that would have categorically prohibited people employed in the cannabis industry from seeking Chapter 13 relief.
“We wanted to shine a spotlight on the fact that over 22,000 Massachusetts cannabis industry employees and almost half a million nationwide had no assurances of being able to obtain debt relief via the bankruptcy courts,” Lev says.
His client worked as a “budtender,” which is somewhat like a bartender but with marijuana instead of alcohol. The U.S. trustee argued that it would be impossible for Blumsack to segregate marijuana-derived income from other assets unrelated to his employment at a marijuana business.
While the ruling provided little solace for Blumsack, all was not lost for future debtors.
“One can easily imagine a situation involving a debtor who needs the relief afforded by Chapter 13 and can fund a plan with money that was not derived from pre- or post-petition cannabis-related employment,” wrote Judge Michael Fagone for the panel.
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