No Bankruptcy Aid For Marijuana Businesses, Justice Department Officials Say

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“Marijuana continues to be regulated by Congress as a dangerous drug, and as the Supreme Court has recognized, the federal prohibition of marijuana takes precedence over state laws to the contrary,” Clifford J. White III, director of the Justice Department’s Executive Office for U.S. Trustees, and John Sheahan, a trial attorney for the agency, wrote in an article published on Friday.

The United States Trustee Program’s position, they say, is that the bankruptcy system cannot aid in liquidating or restructuring any assets associated with cannabis.

“The USTP’s response to marijuana-related bankruptcy filings is guided by two straightforward and uncontroversial principles,” the two Justice Department officials wrote in the ABI Journal. “First, the bankruptcy system may not be used as an instrument in the ongoing commission of a crime and reorganization plans that permit or require continued illegal activity may not be confirmed. Second, bankruptcy trustees and other estate fiduciaries should not be required to administer assets if doing so would cause them to violate federal criminal law.”

White and Sheahan, who are career Justice Department officials, not Trump administration political appointees, say the prohibition on handling cannabis assets goes beyond activities that directly touch the plant and also extends to real estate leases and investments.

“Thus, not only would a trustee who offers marijuana for sale violate the law but so, too, would a trustee who liquidated the fertilizer or equipment used to grow marijuana, who collected rent from a marijuana business tenant, or who sought to collect the profits of a marijuana investment,” they wrote.

Under the Controlled Substances Act, the federal officials say, “there is no distinction between the seller or the grower of marijuana and the supposedly more ‘downstream’ participants… [A]ll are in violation of federal criminal law.”

The new article is a follow-up to a memo White issued in April explaining the office’s position and urging private trustees who administer bankruptcy cases to report any marijuana activity they notice to Justice Department officials.

“In recent months, we have noticed an increase in the number of bankruptcy cases involving marijuana assets,” he wrote at the time. “This is to reiterate and emphasize the importance of prompt notification to your United States Trustee whenever you uncover a marijuana asset in a case assigned to you. Our goal is to ensure that trustees are not placed in the untenable position of violating federal law by liquidating, receiving proceeds from, or in any way administering marijuana assets.”

The Justice Department’s Trustee Program is essentially a watchdog for bankruptcy proceedings. The 21 regional U.S. trustees, appointed to five-year terms by the attorney general, are charged with appointing and supervising the more than 1,100 private trustees who primarily handle individual bankruptcy cases across the country.

White and Sheahan’s new article sheds more light on the federal government’s position on marijuana-related cases, and comes as a response to a previous piece in the American Bankruptcy Institute-published journal that pushed back on the April memo.

Cannabis industry cases are distinct from others involving illegally-derived assets such as bankruptcy proceedings stemming from “Ponzi schemes and other criminal activities – seen in such notorious cases as Enron, Dreier LLP, and Madoff,” they argued.

Those filings, they say, “deal with the aftermath of fraud, usually after individual wrongdoers had been removed from the business.”

Cannabis cases, on the other hand, “involve companies that openly propose to continue their illegal activity during and after the bankruptcy,” the federal officials write. “Those cases present a challenge to the bankruptcy system because they generally involve assets that are illegal even to possess. In contrast to other types of cases involving illegal businesses, in which the criminal activity has already terminated and the principal concern of the bankruptcy court is to resolve competing claims by victims for compensation, a marijuana bankruptcy case may involve a company that not only is continuing in its business, but is even seeking the affirmative assistance of the bankruptcy court in order to reorganize its balance sheet and thereby facilitate its violations of the law going forward.”

The new article comes as the Justice Department’s overall position on marijuana remains uncertain. U.S. Attorney General Jeff Sessions has in recent weeks sent mixed signals about his plans for federal marijuana enforcement policy under the Trump administration.

Last month, Sessions testified before Congress that an Obama-era Justice Department memo that generally allows states to implement their own marijuana laws without interference remains in effect. But last week he told reporters at a briefing that his department is actively conducting talks about potential changes to the policy.

For now, White and Sheahan argue that the trustee program’s position is not to “turn a blind eye to bankruptcy filings by marijuana businesses.”

“Rather than make its own marijuana policy, the USTP will continue to enforce the legislative judgment of Congress by preventing the bankruptcy system from being used for purposes that Congress has determined are illegal,” they write.

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