Bankruptcy may be available debtors in the marijuana industry
The First Circuit Court of Appeals dismissed a chapter 13 bankruptcy case where the debtor’s income came from the marijuana industry.
In chapter 13 bankruptcy the debtor (the person filing for bankruptcy) pays some of their debts back over time. The debtor makes the monthly payment from future income and pays a court appointed trustee.
In, Blumsack v. Harrington, 657 B.R. 505 (B.A.P. 1st Cir. 2024), the debtor worked in the marijuana industry. The Court believed that since the debtor’s income was derived from an illegal source, the debtor was ineligible to fund his chapter 13 plan with that income.
Although the debtor’s job was not a criminal enterprise in Massachusetts it remains a federal crime.
The Blumsack Court did leave open the possibility that a chapter 13 debtor may be able to fund a chapter 13 plan with funds from another source.
"We perceive no reason to prohibit segregation and tracing as tools in the case of a debtor employed in the marijuana industry seeking to fund a chapter 13 plan. In short, the Trustee's concerns about the fungibility of money do not warrant the restrictive eligibility bar that he advocates on appeal."
Blumsack v. Harrington, 657 B.R. 505, 518-19 (B.A.P. 1st Cir. 2024)
But what about a person that wants to file chapter 7 bankruptcy. There is no clear answer here in Massachusetts.
The United States Bankruptcy Court for the District of Northern California in the case of In re Callaway, No. 24-30082-DM, 2024 Bankr. LEXIS 1515 (Bankr. N.D. Cal. June 26, 2024), did not dismiss the debtor’s bankruptcy case.
Callaway, the debtor, disclosed in his chapter 7 bankruptcy filing ownership interest in several cannabis dispensaries. The government moved to dismiss the case. The Court ruled in Callaway’s favor and allowed the case to move forward.
"The Dismissal Motions do not justify a discretionary dismissal of this case. There is no clear basis to disqualify a debtor from the benefits of chapter 7 because of perceived but unanalyzed difficulties the chapter 7 trustee might face when administering the bankruptcy estate. To somehow equate the trustee's dilemma with cause to deny this debtor's right to file and stay in chapter 7 has not been explained by the Dismissal Motions, and the court would be abusing its discretion under Section 707(a) to grant them for the reasons argued in those motions."
In re Callaway, No. 24-30082-DM, 2024 Bankr. LEXIS 1515, at *20 (Bankr. N.D. Cal. June 26, 2024)
