Though the sale of marijuana is legal under Colorado law, a U.S. bankruptcy judge has chosen to dismiss a Denver marijuana business owner’s bankruptcy filing. Why? Because the sale of marijuana is still in violation of the  federal Controlled Substances Act.

Devastating

Frank Anthony Arenas filed his Chapter 7 protection in U.S. Bankruptcy Court in Denver. In Chapter 7, the debtor turns over assets to a trustee that then liquidates the assets and provides the creditors with the proceeds. U.S. bankruptcy judge, Judge Howard Tallman said he realizes that in dismissing the case, the “result is devastating for the debtor.” This is the second marijuana business related bankruptcy that has been tossed out of court in Colorado. Tallman made the same decision in 2012 when he dismissed a case filed by Rent-Rite Super Kegs West Ltd, a company that operated a warehouse partially rented by a tenant that was cultivating marijuana. And at least two other like cases have been dismissed in California.

The Trouble with Federal Bankruptcy Laws

The fact that this type of business is between legal boundaries – held to differing state and federal laws – poses a number of problems. “Violations of federal law create significant impediments to the debtors’ ability to seek relief from their debts under federal bankruptcy laws in a federal bankruptcy court,” Tallman wrote in the Arenas decision.

Arenas’ Case

Arenas has appealed the decision to Denver’s U.S. 10th Circuit Court of Appeals. According to the bankruptcy petition filing, Arenas owes more than $556,000 to unsecured creditors. His assets are listed at $595,925, personal property at $47,191 and monthly income at $4,315.16. During the case he testified that he owns about 25 marijuana plants that have been valued at $250 each.

In his decision, Tallman alluded to the contradictions that marijuana laws pose to bankruptcy. Because of federal law, a trustee is unable to take control of the assets to liquidate them. The debtors also can’t convert the case to Chapter 13, which allows a debtor to pay off the debts over time, because profiting from marijuana sales is essentially profiting from “criminal activity under federal law.”

Sam Kamin, professor at University of Denver’s Sturm College of Law says that,”As long as it is illegal under federal law, we are going to have weird anomalies like that.”