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Medical Marijuana Dispensaries
MEDICAL MARIJUANA DISPENSARIES
AND
BANKRUPTCY PROTECTION: AN UNCOMFORTABLE FIT
DAVID R. WEINSTEIN
APRIL 2016
I.
INTRODUCTION
While it may seem implausible at first, marijuana stores. . . er. . .medical marijuana
dispensaries. . .sometimes run into financial problems too. Since the United States has long had
a robust system that allows for entrepreneurial experimentation and sometimes failure, one might
think that like other legal businesses, marijuana dispensaries could seek bankruptcy protection
when needed. One who thinks that would be wrong, at least so far. Business enterprises driven
by medical marijuana – a recent phenomenon still only 20 years in the making – have found it
nearly impossible to secure the benefits of bankruptcy protection.
This paper explores recent decisions, mostly from bankruptcy courts, that deny
bankruptcy protection to medical marijuana dispensaries and associated enterprises.1
This paper
also asks whether, despite near unanimity to date (in a small sample), courts have been too quick
to close the court house door.
1
One hesitates to use the term “business” since most authorizing state laws require or
envision dispensaries to be not-for-profit; whether a non-profit marijuana dispensary is not
profitable is yet another question, one that is beyond the scope of this paper.

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Medical Marijuana Dispensaries
II.
THE PROBLEM
Since California passed the first medical marijuana law in 1996, at least 19 states and the
District of Columbia have followed suit. Assuming compliance with state and local law
restrictions (which vary state to state), enterprises that dispense medical marijuana to approved
patients, grow it or lease space to those who do are perfectly legal under state law. These
enterprises often handle thousands of dollars in revenue daily. Yet the principal product they
dispense is identified as a Schedule I “controlled substance” under federal law. 21 U.S.C.
§ 812(c)(10); §§ 841-863 (describing prohibited activities concerning controlled substances).
See United States v. Oakland Cannabis Buyers’ Co-op, 532 U.S. 483, 121 S.Ct. 1711 (2001); In
re McGinnis, 453 B.R 770, 772 n.2 (Bankr. D. Or. 2011).
Can an enterprise that employs people, pays taxes and rent and serves a legislatively
sanctioned, and increasingly popular, purpose take advantage of laws than protect the enterprise
and its creditors from potential dismemberment and that facilitate orderly reorganization or the
liquidation of assets when the need arises? So far, the answer is “No”. But should it be?2
2
Another question (sequence of questions) that stretches the analysis and is also beyond
this paper is, if a medical marijuana enterprise should be allowed to seek bankruptcy protection,
must it first be in perfect compliance with pertinent state law? If allowing bankruptcy protection
is generally permissible, ought a prospective debtor be disqualified if it is initially licensed but
marginally out of compliance with state law? What about if it is substantially out of compliance?
Are the same qualification requirements applied to non-marijuana enterprises? Should they be?
Overall, should marijuana-related enterprises be treated differently at all?

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Medical Marijuana Dispensaries
III.
UNFRIENDLY CASE LAW
The case law has not been receptive to protecting dispensaries or other medical
marijuana-driven enterprises under United States bankruptcy law. To the date of this paper, no
published decision has allowed it.
A. Summary.
The cases generally focus the following main points, most of which are close
variations on the pivotal conclusion that the enterprise or (and) its principal assets are illegal
under federal law.
1. The business operation is illegal under federal law.
2. Federal judges are sworn to uphold federal law, and trustees and debtors-
in-possession cannot administer illegal goods.
3. There is risk of forfeiture of the assets under federal criminal law.
4. A plan cannot be proposed that satisfies the “not by means prohibited by
law” provisions of the Bankruptcy Code.
5. The fact that federal prosecutors recently have been standing down with
respect to potential prosecution of marijuana dispensaries neither changes the law nor justifies
access to bankruptcy relief.
B. Selected Cases Summaries.
Below are summaries of representative cases. None have allowed medical
marijuana-driven debtors to take advantage of the Bankruptcy Code.
1. In re Arenas, 535 B.R. 845 (BAP 10th
Cir. 2015). This case is unlike the
others in that it is the only reported appellate decision to date. It is also unlike the others in that

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Medical Marijuana Dispensaries
the bankruptcy administration began and proceeded. The Arenases filed a Chapter 7 case and the
trustee filed a no-asset report. When a creditor approached the trustee about purchasing the
debtors’ building (in which the inquirer was a tenant), the trustee asked the United States
Trustee’s advice (it is unclear whether the case trustee had asked the United States Trustee’s
advice before that and assuming not, why not). When the debtor sought to convert to Chapter
13, the United States Trustee objected and moved to dismiss. The bankruptcy court ordered
dismissal and the BAP affirmed, finding the debtors could not fund a plan without breaking the
law. “[T]heir reorganization would be funded from profits of an ongoing criminal activity under
federal law” and the court would be “unable to find, under § 1325(a)(3), that their plan was
proposed in good faith and not by any means forbidden by law” (quotations and emphasis
omitted).
2. In re Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015) (Dales, BJ). This
case began as a Chapter 13 and the United States Trustee moved to dismiss. The court expressed
the same concerns identified in Arenas. The court here also pointed out that it is sworn to uphold
federal law and that a debtor-in-possession could not administer contraband. However, the court
did not unconditionally dismiss. It recognized that the debtor needed bankruptcy relief and gave
him the choice of that relief, conditioned on abandonment of the medical marijuana business, or
dismissal.
Query: Does this leave open the notion of devising some other means of
harmonizing the ostensibly conflicting concerns? And see McGinnis, below.
3. In re Medpoint Mgmt., LLC, 528 B.R. 178 (Bankr. D. Ariz. 2015)
(Collins, CJ). This case began with an involuntary petition resulting from in-fighting among
former colleagues. The debtor asserted that medical marijuana enterprises cannot be debtors

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under the Code. The court agreed, citing concerns about prospective forfeiture of assets and that
a trustee would be in an untenable position. In another twist, the court relied on the unclean
hands doctrine, which is something often used against a debtor to support dismissal of a
voluntary case, to find that the petitioners had unclean hands on account of their awareness of
and involvement with the medical marijuana enterprise (it is unclear if a basis for the unclean
hands conclusion was that petitioners should have known that bankruptcy relief was
unavailable).
4. In re Rent-Rite Super Kegs West, Ltd., 484 B.R. 799 (Bankr. D. Colo.
2012) (Tallman, CJ). The debtor leased warehouse space to medical marijuana growers and its
secured creditor moved to dismiss. The court first held that there was no federal pre-emption of
state law, but also noted that state law cannot nullify federal law. The court also expressed
concern that the moving party’s collateral was “at risk” due to possible forfeiture or raids – but
seemed unconcerned either about the fact that such risk was a constant in or out of bankruptcy,
and indeed was probably lessened at least somewhat by the pendency of the debtor’s bankruptcy
case; or that the secured creditor had been, and would continue to be, paid with “illegal” funds
which presumably also could be subjected to forfeiture.
5. In re McGinnis, 453 B.R. 770 (Bankr. D. Or. 2011) (Alley, CJ). The
Chapter 13 debtor in this case generated his own medical marijuana profits and also leased space
to other growers. Although it seemed clear that the debtor could not fund a plan without using
medical marijuana funds, and hence a plan would violate § 1325 (a)(3) (a plan cannot be
proposed by means forbidden by law), the debtor was given a chance to show he could formulate
a plan not dependent on medical marijuana proceeds.

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Medical Marijuana Dispensaries
IV.
IS THERE MORE TO THIS STORY?
The case law to date has been uniform. In some respects, it has also been caustic or
dismissive. For example, the Arenas court minced no words: “the debtors cannot obtain
bankruptcy relief because their marijuana business activities are federal crimes”. 535 B.R. at
849-50. The Johnson court wryly observed “one person’s pusher is another’s caregiver”, 532
B.R. at 54, and went on to put caregiver in quotes and refer to “so-called ‘medical marijuana’”.
Id. at 56.
Each case to date seems to have assumed that a medical marijuana enterprise is “criminal
under federal law” and, therefore, it cannot be made to fit a bankruptcy template. But is the
question necessarily so simple? Is there more thought to be devoted to whether medical
marijuana enterprises should be categorically excluded from the bankruptcy laws?
A. Appellate Silence.
For one thing, the Tenth Circuit BAP opinion in Arenas is the only appellate court
that has spoken to the issue. No circuit court of appeals has yet been heard from.
B. Butner v. United States.
Additionally, no case has considered whether Butner v. United States, 440 U.S.
48, 99 S.Ct. 914 (1979) has any impact here. As every bankruptcy practitioner knows, Butner
requires reference to state law to define property rights in bankruptcy cases: “Property interests
are created and defined by state law”. Id. at 55, 99 S.Ct. at 918. While not squarely on point and
while Butner also states that “[u]nless some federal interest requires a different result, there is no
reason why such interests should be analyzed differently simply because an interested party is
involved in a bankruptcy proceeding”, Butner surely can be read to raise a question as to whether

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bona fide state law interests can be (should be) discriminated against in this fashion. Nothing in
the Code excludes coverage for a marijuana enterprise and indeed, Congress knew how to limit
bankruptcy access when it wanted to, in § 109 (“Who May Be a Debtor”). Are bankruptcy
courts required to acknowledge and accommodate state law-created property interests? Would
a United States district court have to dismiss a diversity lawsuit brought by a licensed dispensary
against its diverse landlord? Would it have to dismiss a lawsuit alleging that a dispensary
violated federal labor laws? Or one raising anti-competitive issues?
C. Anomalies Peek Through the Negative Case Law.
While unanimously against access to the bankruptcy courts by medical marijuana
enterprises, the case law nevertheless raises questions about that conclusion. For example, the
Arenas case started as a Chapter 7 case and proceeded as far as a no-asset report. Thus, the
debtors were apparently in line for a discharge. It was not until a creditor expressed interest in
purchasing an asset that the case trustee asked the United States Trustee if he could proceed,
whereupon the United States Trustee moved to dismiss. 535 B.R. at 847-48. But isn’t issuance
of a no-asset report and (prospectively) a discharge as much an “administration” as the sale of an
asset?
In Rent-Rite, the secured creditor moved to dismiss. Since the court expressed concern
that its collateral was at risk of forfeiture, the secured creditor may have made that argument.
But if true, that risk was a constant: the secured creditor (and the debtor) faced possible forfeiture
whether the obligor was a debtor in bankruptcy or not. And that concern is particularly curious
in that “protection” of the collateral (debt service) had been made with proceeds of contraband
all along and neither the court nor the movant-secured creditor apparently had concern about the
creditor’s receipt of contraband or that it could be made the subject of a forfeiture action too.

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Several cases have referred to federal law enforcement’s unofficial stand-down on
raiding state-legal dispensaries and they uniformly find that this does not change the law, and
these informal policies could change. See e.g., Arenas, 535 B.R. at 852 n.39 (“subsequent
Administrations and Attorneys General could exercise their prosecutorial discretion to take a
different approach”); Johnson, 532 B.R. at 56 n.5 (while “high-ranking officials at the United
States Department of Justice. . .sensibly encourage prosecutors to think twice before suing cancer
patients in states that permit medical use of marijuana. . .the illegal distribution and sale of
marijuana is [still] a serious crime”); Rent-Rite, 484 B.R. at 805 (“[u]ntil Congress changes the
law, the Debtor’s operations constitute a continuing criminal violation of the CSA and a federal
court cannot be asked to enforce the protections of the Bankruptcy Code in aid of. . .a continuing
federal crime”). But what would result if that policy expanded or became more definite?
Suppose the Department of Justice, but not Congress, decided overtly and definitively not to
enforce the Controlled Substances Act against dispensaries? Is that an issue more suited to the
feasibility analysis than qualification to become a debtor in the first place? Is there an analogue
to immigration law issues that arise when some states, even municipalities decline to support
federal prosecution of the violation of immigration laws? Do these bankruptcy decisions mean
those state and municipal officials are violating federal law such that they should be removed
and jailed?
D. Is a State-Law Sanctioned Medical Marijuana Enterprise Actually
“Criminal”?
The cases have spent no time wondering if a state-sanctioned medical marijuana
enterprise actually is “criminal”. They have simply observed the inclusion of marijuana on
Schedule I of the Controlled Substances Act and concluded – or assumed – that the enterprise

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and its assets are “illegal” or “criminal”. Although none of the recent cases rely on Oakland
Cannabis Buyers for that threshold proposition, they may be on solid ground in that the Supreme
Court said that under federal law “marijuana has no currently accepted medical use at all”. Id. at
491, 121 S.Ct. at 1718. This seems to conflict directly with the state law predicates that
marijuana does have accepted medical use. Then again, does the pronounced stand-down by
federal prosecutors raise questions about whether medical marijuana is “criminal”?
Section 903 of Title 21 makes clear that Congress did not intend to pre-empt the
field. See Rent-Rite, 484 B.R. at 804. Section 903 provides that “No provision of this
subchapter shall be construed as indicating an intent on the part of Congress to occupy the field
in which that provision operates, including criminal penalties, to the exclusion of any State law
on the same subject matter which would otherwise be within the authority of the State. . ..”
Notwithstanding Oakland Cannabis Buyers, which was addressing a different question, namely
whether a “medical necessity defense” can be read into the Controlled Substance Act, can that
provision be interpreted to mean that the criminal penalties should not apply where a state has
acted on “the same subject matter”?
E. Emory Bankruptcy Developments Journal Comment.
Medical Marijuana Dispensaries in Chapter 11 Bankruptcy is published in 30
Emory Bankruptcy Developments Journal 105 (2013). The Comment reports on some early
cases, including McGinnis (above), in which dispensaries failed in efforts to secure bankruptcy
relief. The Comment “argues that the requirements in §§ 1112(b), 1129(a)(3) and 1129(a)(11) to
propose and confirm a Chapter 11 plan do not foreclose bankruptcy protection for a medical
marijuana business”. Id. at 105. The author argues, for example, that the federal stand-down
works in favor of a finding of feasibility, since a plan proponent is not required to guarantee a

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plan’s success but rather, to only show a reasonable prospect of success. Comment, pgs. 121-23.
The author also argues that there is no lack of good faith in a dispensary’s efforts to secure
bankruptcy relief (courts that have addressed this tend to agree).
Perhaps the most significant issue raised in the Comment is whether § 1129(a)(3)
authorizes inquiry into the substantive business of a debtor at all, or whether under § 1129(a)(3)
and the court is limited to examining the process of confirming a plan. Accounting (negatively)
for the nature of the debtors’ business affairs is at the very heart of the so-far negative case law.
The Comment, however, cites a number of non-marijuana cases for the proposition that in
considering a plan, a court should, and perhaps must, confine itself to the means and process by
which a plan is put together, votes are solicited and so on. Comment, pgs. 117-121.
For example, the author cites In re Food City, Inc., 110 B.R. 808 (Bankr. W.D.
Tex. 1990) in which the bankruptcy judge said that he should not act as “an ombudsman without
portfolio, gratuitously seeking out possible ‘illegalities’ in every plan” (110 B.R. at 812;
Comment, p. 118); and that requiring a certification “that the plan does not violate any law
imposes an unrealistic due diligence burden”. 110 B.R. 813; Comment, p. 119.
In Food City, the debtor confirmed a plan in which some of its current
stockholders would be entitled to retain their stock upon making certain payments. It was
conceded that the provision might not qualify (probably did not qualify) for the exemption
afforded stock issued under a plan in § 1145 of the Bankruptcy Code. Id. at 809-10. After
observing that § 1145 did not require its own compliance, the widely respected Judge Leif Clark
went on to hold that this made no difference because confirmation of a plan does not equate with
“a ‘clean bill of health’ with regard to all laws with which a given plan might conceivably
conflict”. Id. at 812. Judge Clark found that it would be “inimical to the basic functions of

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bankruptcy judges” and would add “a thoroughly unnecessary gloss on the statute”, to require
bankruptcy judges to seek out “possible ‘illegalities’ in every plan”. Id.
Other cases have likewise restricted § 1129(a)(3) to the process by which a plan is
confirmed and not the contents of the plan. See e.g., In re 431 W. Ponce De Leon, LLC, 515
B.R. 660, 673 (Bankr. N.D. Ga. 2014) (it is the plan’s proposal that cannot be by means
forbidden by law, not its execution); In re Klosterman Devel., Inc., 2013 WL 4605451, *6
(Bankr. N.D. Ohio 2013) (same); In re Frascella Enterprises, Inc., 360 B.R. 435, 445 (Bankr.
E.D. Pa. 2007) (confirmation does not insulate the reorganized debtor from prosecution for
future illegal conduct).
The Comment also draws attention to In re Carolina Tobacco Co., 360 B.R. 702
(Bankr. D. Or. 2007). In Carolina Tobacco, a pre-petition settlement of tobacco litigation
required the debtor to make certain escrow deposits under the settlement, failure of which would
allow a state to prevent it from doing business in the state. Id. at 706-07. The debtor confirmed
a plan that allowed it nearly four extra years to make the escrow deposits. The district court
affirmed, “even though it means that debtor will be out of compliance with state law until the
prepetition escrow deposits are made”. Id. at 713. See also, In re Renegade Holdings, Inc., 429
B.R. 502, 516-17 (Bankr. M.D.N.C. 2010), vacated on other grounds, 2010 WL 2772504 (Bankr.
M.D.N.C. 2010).
These cases suggest that the medical marijuana case law that depends heavily on
the conclusion that § 1129(a)(3) is violated (would be violated) by a plan built upon proceeds of
medical marijuana may have made a fundamental error of law as to how § 1129(a)(3) should be
applied. Without that predicate, the argument – assumption – that “illegal” medical marijuana
enterprises cannot proceed under Title 11 would be significantly weakened.

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V.
CONCLUSION
The Bankruptcy Code and the Controlled Substances Act are both federal statutes.
Neither interferes with the other on its face, nor is either predicated on the other. It may be,
therefore, that it is less than obvious that the latter trumps and nullifies the former.
We collect federal tax on illegal gambling and we collect federal tax on medical
marijuana dispensaries. If we can tax it, why can’t we reorganize it?