Marijuana Businesses In Colorado Unable To File For Bankruptcy

Marijuana Businesses In Colorado Unable To File For Bankruptcy

The burgeoning marijuana industry in Colorado has run into yet another legal snafu, as inconsistencies between state and federal laws are preventing businesses and owners from filing for protection under the bankruptcy law.

Attorneys for Sarah and Frank Arenas of Denver filed a 43-page appeal stating that a judge dismissed their August bankruptcy petition in error because their assets were derived primarily from the medical marijuana industry, The Denver Post reported. By refusing to protect such assets in bankruptcy in the same way that other assets are, the appeal argues, the federal government is passively prosecuting crimes that it earlier said it would not.

The Obama administration said in late August that it would not challenge state laws legalizing marijuana as long as strict regulations on the sale and distribution of the drug are enforced, according to The Washington Post.

“The [Arenases] should not be faulted, or more importantly lose the right to a discharge of their debts, for playing by rules created by the same agency that seeks to dismiss their bankruptcy case for breaking those rules,” attorney Daniel Garfield wrote, as cited by The Denver Post. “The federal government has deliberately and actively allowed a legal marijuana industry to flourish in Colorado and not to prosecute participants in that industry. The federal government has made a conscious decision to allow [the Arenases’] otherwise illegal business to operate.”

The U.S. Bankruptcy Appellate Panel of the 10th Circuit Court will decide whether to overturn or uphold the lower court’s ruling.

Either decision is likely to be used as an important precedent going forward. Should the ruling be upheld, it will create more uncertainty in the already somewhat shaky business climate that exists in the Colorado marijuana industry. If the ruling is overturned, businesses in this sector may take it as a sign that the federal government is ready to recognize their legitimacy, perhaps motivating them to fight for other, similar, business rights.