by Jake Greenberg
The paradox of federal and state marijuana laws has finally reached Florida. On June 2, 2017, Florida Gov. Rick Scott executed a proclamation calling for the Florida Legislature to convene a special session from June 7, 2017, through June 9, 2017.1 Although not originally placed on the special session agenda, the members of the legislature met to discuss the implementation of Amendment 2 to the Florida Constitution, which legalizes the use and sale of medical marijuana in Florida.2 While Amendment 2 was approved by 71.3 percent of Florida voters, the Florida House of Representatives and Senate were divided on how it should be implemented. This led to an impasse during the regular session, which ended on May 8, 2017.3
On June 9, 2017, the Florida Legislature passed Senate Bill 8-A, the Medical Use of Marijuana Act, which was signed into law by Gov. Scott on June 23, 2017.4 Prior to Amendment 2, only seven businesses were licensed to cultivate and sell low-THC marijuana in the state of Florida.5 Each of those businesses must be vertically integrated from seed to sale, requiring each license holder to be the same company cultivating, processing, and ultimately selling its marijuana to patients.6
Under the Medical Use of Marijuana Act, 10 additional businesses will be issued licenses to grow and dispense marijuana in Florida, bringing the total number of licensed businesses to 17.7 An additional four licenses will be issued for every 100,000 active registered qualified patients in the state’s medical marijuana use registry.8 Further, the bill permits each license holder to open up to 25 dispensary storefronts, and an additional five storefronts when the medical marijuana use registry reaches 100,000 active registered qualified patients.9 This limitation expires in 2020.10
As an emerging market, the medical marijuana industry is served by a variety of small businesses. Many of these businesses are highly leveraged start-ups hoping to strike gold with cannabis. However, these businesses also face a significant risk of default and possibly bankruptcy.
Marijuana Remains Illegal Under Federal Law
Businesses working with marijuana companies may fall victim to guilt by association. Despite the growing acceptance of marijuana — 29 states, the District of Columbia, Guam, and Puerto Rico have legalized marijuana for medicinal use, and eight states have legalized marijuana for recreational use — marijuana remains illegal in all forms under federal law pursuant to the Controlled Substances Act (CSA).11 Under the CSA, marijuana is classified as a Schedule I substance along with other drugs like heroin, mescaline, and lysergic acid diethylamide (LSD).12 The CSA prohibits the use, distribution, possession, or cultivation of marijuana13 and §856 of the CSA makes it a federal crime to:
“Manage or control any place, . . . as an owner, . . . and knowingly use and intentionally rent, lease, profit from, or make available for use, with or without compensation, the place for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance.”14
This has created a significant problem for many businesses that work with marijuana companies because the cultivation, processing, sale, and possession of cannabis under state law still violates the CSA.15 For example, the Money Laundering Control Act of 1986 prevents banks from accepting funds derived from the sale of marijuana, irrespective of state laws.16 Specifically, the act makes it unlawful to conduct financial transactions involving the proceeds from the sale of a controlled substance (e.g., marijuana) as defined in the CSA.17 Moreover, compliance with state laws is not a defense to an individual’s or business’s violation of the CSA.18
Because marijuana is illegal under federal law, many businesses transacting with marijuana companies have found themselves in difficult legal situations. In response to the growing tension between federal and state marijuana laws, the U.S. Department of Justice (DOJ) issued a memorandum on August 29, 2013, providing guidance regarding marijuana enforcement. This memorandum, issued by then Deputy Attorney General James M. Cole, is widely known as the Cole memo.19 The Cole memo provides enforcement priorities for the DOJ.20
In determining whether to prosecute CSA violations for marijuana, the Cole memo establishes how the DOJ should exercise prosecutorial discretion in enforcing marijuana laws under the Controlled Substances Act, and instructs the DOJ to look at the following eight enforcement priorities:
1) Preventing the distribution of marijuana to minors;
2) Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
3) Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
4) Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
5) Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
6) Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
7) Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
8) Preventing marijuana possession or use on federal property.21
However, it is important to realize that the Cole memo is neither a statute nor regulation and is not binding on the DOJ.22 In fact, the Cole memo can be rescinded or revised at any time and specifically provides that:
“This memorandum is not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter civil or criminal. . . . Finally, nothing herein precludes investigation or prosecution, even in the absence of any one of the factors listed above, in particular circumstances where investigation and prosecution otherwise serves an important federal interest.”23
Bankruptcy Up In Smoke
In February 2017, this bubbling conflict of laws came to a head before the U.S. Bankruptcy Court for the Southern District of Florida. On February 14, 2017, Judge Laurel Isicoff delivered one debtor an unfortunate Valentine’s Day surprise: that its Ch. 11 plan of reorganization could not be confirmed because it depended on income derived from the sale of marijuana.
In Arm Ventures, LLC, 564 B.R. 77 (Bankr. S.D. Fla. 2017), a single-asset debtor owning a commercial property in foreclosure sought reorganization based upon the possibility that its tenant would be approved by the state of Florida as a medical marijuana dispensary. The debtor’s reorganization plan proposed renting the commercial property to a business generating income as a licensed medical marijuana dispensary. The debtor’s sole secured creditor argued, inter alia, that the plan must be dismissed because it was based on income generated from the sale of marijuana in violation of the CSA.24 While this was an issue of first impression in the Southern District of Florida, other courts dealing with this issue have universally refused to confirm any plan that depends on income from the sale of marijuana.
The debtor in Arm Ventures was ordered to file an amended plan that did not depend on marijuana as a source of income. However, the debtor’s amended plan continued to rely on income generated from the sale of medical marijuana to make plan payments. The bankruptcy court, in rejecting the amended plan, reasoned:
“[T]he law is very clear — a bankruptcy plan that proposed to be funded through income generated by the sale of marijuana products cannot be confirmed unless the business generating the income is legal under both state law and federal law. Moreover, the conditions for feasibility are so speculative — both as to timing and authority — that any plan proposed by the [d]ebtor based on the sale of marijuana is not confirmable, certainly not for the foreseeable future.”25
After reviewing cases from Colorado,26 Michigan,27 and the U.S. Bankruptcy Appellate Panel for the 10th Circuit,28 the bankruptcy court in Arm Ventures concluded that “[e]ven if the [d]ebtor was otherwise of ‘pure mind and heart’ when this case was filed, the very fact that the [a]mended [p]lan is based on income derived from the sale of marijuana can be deemed ‘bad faith.’”29 The bankruptcy court found that “the [a]mended [p]lan is based on an enterprise illegal under [f]ederal law, and therefore one that [the court] cannot confirm because the [d]ebtor cannot satisfy the good faith requirements of 11 U.S.C. §1129(a)(3).”30
The bankruptcy court’s findings in Arm Ventures are consistent with those of the U.S. Bankruptcy Court for the District of Colorado, which held that “under no circumstances can the [c]ourt place itself in the position of condoning the [d]ebtor’s criminal activity by allowing it to utilize the shelter of the [b]ankruptcy [c]ourt while continuing its unlawful practice of leasing space to those who are engaged in the business of cultivating a Schedule I controlled substance.”31
While the bankruptcy court in Arm Ventures acknowledged the case was ripe for dismissal, it also recognized there was significant noninsider unsecured debt and, therefore, exercised its equitable powers to give the debtor a final opportunity to formulate a plan that was not dependent upon the sale of marijuana and, if unable to do so, to convert the case to a Ch. 7.32 Notably, the only way the case could have been converted to a Ch. 7 was if assets of the estate did not include any marijuana products.
Other courts have analyzed the issue of a marijuana business filing a Ch. 7 bankruptcy case. In Arenas v. United States Trustee (In re Arenas), 535 B.R. 845, 847 (B.A.P. 10th Cir. 2015), the U.S. Bankruptcy Appellate Panel (BAP) for the 10th Circuit considered a marijuana business operating in compliance with Colorado’s state law that filed a Ch. 7 petition. The United States Trustee filed a motion to dismiss the case under 11 U.S.C. §707(a)(1) on the grounds “that it would be impossible for a [Ch.] 7 trustee to administer the [debtors’] [a]ssets without violating federal law.”33 While the debtors argued “the [t]rustee could have abandoned the marijuana assets,” the 10th Circuit BAP concluded:
“If the [t]rustee abandoned the [a]ssets, the debtors would retain their business after exposing the [t]rustee to grave risk, provide the creditors with little or no recovery, and receive a discharge, protected all the while from their creditors’ collection efforts by the automatic stay and then the discharge injunction. That is the epitome of prejudicial delay. The bankruptcy court did not abuse its discretion by dismissing the debtor’s [Ch.] 7 case.”34
The 10th Circuit BAP further stated:
“As for the debtors’ claim that the bankruptcy court should have required the [t]rustee to abandon the marijuana assets if he couldn’t administer them…this bankruptcy estate, shorn of its marijuana assets, would likely yield no dividend to the creditors. The debtor would get a discharge and get to keep (via abandonment) their marijuana assets while being protected from collection activities. This also strikes us as prejudicial delay that amounts to cause for dismissal.”35
As courts of equity, bankruptcy courts always attempt to strike a just and reasonable balance between providing relief to the debtor and compensating creditors. However, so long as marijuana remains illegal under federal law, bankruptcy courts are unable to provide any relief for otherwise well-intentioned debtors. As highlighted above, this unfortunately hurts not only debtors, but also unsecured creditors.
The Future of the Marijuana Industry Is Still Green
The inability to seek bankruptcy protection creates a significant problem for businesses in an industry that, while booming, is already plagued with doubt, insecurity, and looming criminality. Recently, Forbes reported that “[r]etail sales [of marijuana] in the U.S. from 20 jurisdictions were $6.5 billion, but according to Greenwave Advisors, that number is projected to grow to $30 billion by 2021.”36
“Another metric that shows how big the industry has become is the employment figures. The [Marijuana Business Daily] report says that the cannabis sector now employs between 165,000 and 230,000 full- and part-time workers. ‘To put this in perspective, there are now more marijuana workers than there are bakers or massage therapists in the United States....’ It even outnumbers dental hygienists.”37
While the marijuana industry is already creating significant opportunities for many individuals and businesses, the risks posed by engaging in, or with, the marijuana business is impossible to quantify.
Despite society’s increasing acceptance of marijuana, it remains illegal under federal law. The aforementioned opinions highlight the significant risk to not only the marijuana businesses themselves, but also each and every business that works with a marijuana business. While Arm Ventures involved a commercial landlord, there will likely be similar litigation involving insurance companies, contractors, utility companies, and a number of other businesses that provide ancillary services to marijuana companies.38
1 State of Florida Executive Office of the Governor, Proclamation (June 2, 2017), available at http://www.flgov.com/wp-content/uploads/2017/06/SGS-BIZHUB17060209430.pdf.
2 Fla. Const. art. X, §29(a)(1). “The medical use of marijuana by a qualifying patient or caregiver in compliance with this section is not subject to criminal or civil liability or sanctions under Florida law.”
3 John Pacenti, Medical Marijuana: Health Department Must Pick up Legislature’s Fumble, Palm Beach Post, May 9, 2017, available at http://palmbeachhealthbeat.blog.palmbeachpost.com/2017/05/09/legislatures-failure-hands-medical-marijuana-to-health-department/.
4 The Florida Senate, S.B. 8-A (June 23, 2017), available at https://www.flsenate.gov/Session/Bill/2017A/00008A.
5 Dara Kam, McCrory’s Sunny Hill Gains Florida Medical-Marijuana License, Orlando Sentinel, Dec. 21, 2016, available at http://www.orlandosentinel.com/business/os-nsf-mccrorys-florida-marijuana-license-20161221-story.html; David Smiley, Florida’s Marijuana Growers Capitalize Amid Uncertain Market,” Miami Herald, Apr. 1, 2017, available at http://www.miamiherald.com/news/local/community/miami-dade/article142076874.html; Joe Reedy, Associated Press, Legislature Back on Path to Passing Medical Marijuana Bill, U.S. News and World Report, June 7, 2017, available at https://www.usnews.com/news/best-states/florida/articles/2017-06-07/legislature-still-debating-medical-marijuana-legislation.
6 “A licensed medical marijuana treatment center shall cultivate, process, transport, and dispense marijuana for medical use. A licensed medical marijuana treatment center may not contract for services directly related to the cultivation, processing, and dispensing of marijuana or marijuana delivery devices, except that a medical marijuana treatment center licensed pursuant to subparagraph (a)1. may contract with a single entity for the cultivation, processing, transporting, and dispensing of marijuana and marijuana delivery devices.” S.B. 8-A §(8)(e), 2017A Leg., Spec. Sess. (Fla. 2017); Nathan Hale, Contention Gives Way to Compromise in Fla. Special Session, Law 360 (June 9, 2017), https://www.law360.com/articles/933366/contention-gives-way-to-compromise-in-fla-special-session.
7 S.B. 8-A §(8)(a)2, 2017A Leg. Spec. Sess. (Fla. 2017).
8 S.B. 8-A §(8)(a)4. “Within [six] months after the registration of 100,000 active qualified patients in the medical marijuana use registry, the department shall license four additional medical marijuana treatment centers within [six] months after the registration of each additional 100,000 active qualified patients in the medical marijuana use registry that meet the requirements of this section.”
9 S.B. 8-A §(8)(a)5.a. “A medical marijuana treatment center may not establish or operate more than a statewide maximum of 25 dispensing facilities, unless the medical marijuana use registry reaches a total of 100,000 active registered qualified patients. When the medical marijuana use registry reaches 100,000 active registered qualified patients, and then upon each further instance of the total active registered qualified patients increasing by 100,000, the statewide maximum number of dispensing facilities that each licensed medical treatment center may establish and operate increases by five.”
10 Id. at §(8)(a)5.d.
11 21 U.S.C. §812 Schedule I(c)(10).
12 21 U.S.C. §812 Schedule I(b)(10), (c)(9), (c)(10), and (c)(11).
13 21 U.S.C. §§841(a) and 844(a). Under the CSA, “the manufacture, distribution, or possession of marijuana [is] a criminal offense, with the sole exception being use of the drug as part of a Food and Drug Administration preapproved research study.” Gonzales v. Raich, 545 U.S. 1, 14 (2005); 21 U.S.C. §§812(c), and 823(f).
14 21 U.S.C. §856(a)(2).
15 21 U.S.C. §§841(a), and 844(a); United States v. Oakland Cannabis Buyers’ Coop., 532 U.S. 483 (2001).
16 Money Laundering Control Act of 1986, Pub. L. No. 99-570; 18 U.S.C. §§1956, and 1957.
17 18 U.S.C. §§1956(a)(1)(A)(i); 1956(c)(7)(B)(i).
18 The CSA prohibits the manufacture, distribution, and possession of marijuana. Anyone in any state who possesses, distributes, or manufactures marijuana for medical or recreational purposes (or attempts or conspires to do so) is committing a federal crime. The federal government can prosecute such offenses for up to five years after they occur. See 18 U.S.C. §3282. “Under the Supremacy Clause of the Constitution, state laws cannot permit what federal law prohibits. U.S. Const. art VI, cl. 2. Thus, while the CSA remains in effect, states cannot actually authorize the manufacture, distribution, or possession of marijuana. Such activity remains prohibited by federal law.” 16 Cal. Daily Op. Serv. 8916, 2016 Daily Journal D.A.R. 8484. United States v. McIntosh, 833 F.3d 1163, 1180 n.5 (9th Cir. 2016); see also United States v. Oakland Cannabis Buyers’ Cooperative, 532 U.S. 483 (2001).
19 James M. Cole, Memorandum for All United States Attorneys, U.S. Department of Justice Office of the Deputy Attorney General (Aug. 29, 2013), available at https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf [hereinafter Cole memo 2013].
22 Marijuana remains illegal under federal law, even in those states in which medical marijuana has been legalized. See 21 U.S.C. §903 (providing for preemption where “there is a positive conflict between [a provision of the CSA] and that [s]tate law such that the two cannot consistently stand together”). That the Department of Justice has chosen to prioritize certain types of prosecutions unequivocally does not mean that some types of marijuana use are now legal under the CSA. United States v. Canori, 737 F.3d 181, 184-85 (2d Cir. 2013) (citations omitted).
23 Cole memo 2013.
24 Arm Ventures, LLC, 564 B.R. at 81.
25 Id. at 84.
26 In re Rent-Rite Super Kegs W. Ltd., 484 B.R. 799 (Bankr. D. Colo. 2012).
27 In re Jerry L. Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015).
28 Arenas v. United States Trustee (In re Arenas), 535 B.R. 845 (B.A.P. 10th Cir. 2015).
29 Arm Ventures, 564 B.R. at 85; see also Rent-Rite Super Kegs W. Ltd., 484 B.R. at 852-853 (“[T]he court also recognized that lack of good faith carries an objective rather than a subjective meaning. If the debtors are incapable of proposing a confirmable plan, it is objectively unreasonable for them to seek [Ch.] 13 relief whether their intentions are kindly or not.”).
30 Arm Ventures, 564 B.R. at 85.
31 Rent-Rite Super Kegs W. Ltd., 484 B.R. at 809.
32 On March 9, 2017, “[t]he [c]ourt having reviewed the filings in this [Ch.] 11 bankruptcy case, and heard the statements, arguments and/or objections made by counsel for Ocean Bank, the United States Small Business Administration, the United States Trustee, and the Debtor regarding the Debtor’s Motion to Continue Hearing on Approval of Second Amended Disclosure Statement and Motion to Extend Automatic Stay to Modern Pharmacy, LLC . . .” dismissed this matter with prejudice for a period of one year from March 1, 2017, through February 28, 2018. Arm Ventures, LLC Case No.16-23633-LMI [D.E. 261] (Bankr. S.D. Fla. March 9, 2017).
33 Arenas, 535 B.R. at 848.
34 Id. at 853-54.
35 Id. at 854.
36 Debra Borchardt, The Marijuana Industry Is Getting Supersized, Forbes (May 8, 2017), available at https://www.forbes.com/sites/debraborchardt/2017/05/08/the-marijuana-industry-is-getting-super-sized/#600a8c2e126e.
37 Debra Borchardt, Report: Total Marijuana Demand Tops Ice Cream in U.S., Forbes (May 17, 2017), available at https://www.forbes.com/sites/debraborchardt/2017/05/17/new-report-says-total-marijuana-demand-tops-ice-cream/#10fb52445b5e.
38 See, e.g., Mann v. Gullickson, No. 15-CV-03630-MEJ, 2016 U.S. Dist. LEXIS 152125 (N.D. Cal. Nov. 2, 2016) (deciding whether a contract is enforceable in light of the prohibition of medical marijuana under federal law and the legalization of medical marijuana under California law); Green Cross Med., Inc. v. Gally, No. 1 CA-CV 16-0019, 2017 Ariz. App. LEXIS 74, at *1 (Ariz. Ct. App. Apr. 18, 2017) (deciding whether a lease permitting a lessee to operate a medical marijuana dispensary was void from its inception); Green Earth Wellness Center v. Atain Specialty Insur., 163 F. Supp. 3d 821 (D. Col. 2016) (deciding whether an insurance policy was void on public policy grounds and whether the insurer was obligated to pay a claim for damage to harvested marijuana plants).
Jake Greenberg is an attorney with Ehrenstein Charbonneau Calderin in the firm’s commercial and business litigation practice in Miami. He represents businesses, start-up companies, and individuals in a variety of complex commercial disputes. Greenberg received his J.D. from the University of Miami School of Law.
This column is submitted on behalf of the Business Law Section, Melanie E. Damian, chair, and Jennifer Morando, editor.