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Is the marijuana industry covered under bankruptcy law?

Business owners and entrepreneurs in Colorado have seen marijuana as a new market. But what happens when that business fails? Marijuana is just like any other industry in that some will succeed and others will fail. However, when a business in the marijuana industry fails it is not covered under Chapter 13 bankruptcy law.

There have been a few examples of bankruptcy filings in the marijuana industry around the United States. In Oregon, a bankruptcy court refused to accept a person's repayment plan filed under Chapter 13 because revenues for his business came from a warehouse leased to marijuana growers who were in compliance with state law, but not federal law. In California, a medical marijuana dispensary filed for Chapter 11 bankruptcy, but the case was dismissed because profits for the business were deemed legal under state law, but not federal law. Right here in Colorado, a commercial landlord filed to reorganize under Chapter 7 but his motion was struck down because 25 percent of his landlord profits were received from people who profited from growing marijuana, which again, is legal under state law but not federal law.

The reason for bankruptcy law failing to cover these people is because marijuana is not recognized as a legal industry at the federal level. Since bankruptcy law is federal, marijuana profits made within the state are not counted as legal income. This leaves marijuana growers, distributors, sellers and anyone connected to this industry, including landlords of these people, high and dry when it comes to bankruptcy law. Everyone in the supply chain is affected by the sale of marijuana.

There seem to be several inadequacies under federal bankruptcy law when it comes to the sale of marijuana. Until marijuana is recognized under federal law as a legal source of income, bankruptcy law will not cover this business. Entrepreneurs in this industry should be aware of all possible risks in doing business in the marijuana industry. Landlords should also be aware of the high-level risk certain tenants could pose if connected to the marijuana industry.

Source: dailybusinessreview.com, "Attention Medical Marijuana Business Pioneers: Some of you will fail," Bill Simonitsch, Aug. 7, 2014

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