Justice Department Blocks ‘Essential’ Marijuana Workers from Bankruptcy Protection

The Justice Department is preventing struggling cannabis businesses and their workers from accessing bankruptcy to weather the coronavirus-related downturn, even in states that determine medical marijuana is an essential industry during the pandemic.

Source: WSJ | Published on May 29, 2020

Glass jar full of Cannabis Sativa for sale at a market stall.

The department’s policy means the financial safety net that bankruptcy provides consumers who fall behind on their mortgages or car payments is likely out of reach for those who work in the marijuana industry or businesses supporting state-regulated dispensaries or growers.

Cannabis remains illegal under federal law, which includes the U.S. bankruptcy code, though Congress is considering legislation to decriminalize it nationwide.

In 2017, Justice Department officials who oversee the nation’s bankruptcy courts ramped up enforcement of the federal marijuana ban on individuals with income from the cannabis industry.

Lawyers have attempted to get around the prohibition by segregating marijuana wages or rent collected from cannabis growers from bankruptcy repayment plans, leaving it up to judges to decide what is allowed. Courts have mostly sided with the Justice Department, though some individuals have voluntarily given up on their pending bankruptcy cases after the government argued against them in court.

“Unfortunately, the courts find themselves in a game of whack-a-mole; each time a case is published, another will arise with a novel issue dressed in a new shade of gray,” Judge Michael Romero of the U.S. Bankruptcy Court in Denver said in a March ruling. The judge sided with the Justice Department in a case concerning a legal settlement involving a woman’s investment in a medical-marijuana business.

People working in the marijuana industry will face challenges if they file for bankruptcy until Congress addresses the conflict with federal drug laws, Judge Romero said.

Nearly 248,000 people have full-time jobs in the cannabis industry and more than two dozen states and Washington, D.C., have allowed medical-marijuana dispensaries to remain open during the pandemic, according to Seattle-based Leafly, a cannabis website.

A Justice Department spokeswoman said enforcement actions are based on the legal principle that the U.S. bankruptcy code can’t be used to aid in the violation of federal criminal law.

The conflict between state and federal law leaves financially vulnerable people who could benefit from bankruptcy at risk during a time of high unemployment. A Justice Department lawyer said in court last week that a Pennsylvania couple should be dismissed from chapter 13 bankruptcy because the wife is working for a business that produces marijuana.

Carl and Jennifer Richter of Brookville, Pa., sought court protection in November after he had a heart attack and could no longer work as a supermarket meat manager. Ms. Richter, who was working part time at a garden center, found a new job to support their two daughters as a head cultivator for cannabis business Cresco Labs Inc.

The couple had accumulated credit-card debt after his heart attack and also had student-loan, mortgage and car payments, according to court papers. Borrowers earning regular wages can use chapter 13 bankruptcy to halt debt collection and propose plans to repay their debt over three to five years. The Richters proposed paying down $840 a month over five years.

To get around the federal marijuana ban, the couple proposed segregating Jennifer Richter’s wages from her husband’s disability benefits, which would be used to fund their repayment plan. But the Justice Department argued that even if the funds were segregated, the repayment plan would undermine federal drug law.

“I think she’s an honest and hardworking debtor seeking a fresh start,” Judge Thomas Agresti of the U.S. Bankruptcy Court in Erie, Pa., said during a telephone hearing last week in which he described the Justice Department’s marijuana stance as draconian.

Ronda Winnecour, the bankruptcy trustee overseeing the Richters’ case, opposed the Justice Department and said Tom Wolf, Pennsylvania’s Democratic governor, had designated medical marijuana a “life-sustaining business” during the Covid-19 pandemic.

“Unemployment is at a record high, many thousands of people are suffering the medical and economic effects of Covid-19, and the Richters are among those people with a plan for survival,” Ms. Winnecour said in a court filing.

The Richters on Tuesday asked to voluntarily dismiss their bankruptcy case before Judge Agresti had ruled, saying in a court filing that they “assumed they were doing nothing wrong” but “no longer want to participate in a case where the [Justice Department] asserts that they have.”