Why Legal Marijuana-Related Companies Aren’t Permitted to File for Bankruptcy

chapter 7 bankruptcyColorado’s legal pot industry may be booming, but the companies struggling to stay afloat in the industry are getting a major buzz kill: under federal law, which still considers marijuana production and distribution illegal, it is impossible to file a Chapter 11 or Chapter 7 bankruptcy.

According to the Denver Post, U.S. Bankruptcy Court Judge Howard Tallman ruled in late September that entrepreneur Frank Anthony Arenas’ Chapter 7 bankruptcy filing was null because his business’ activities violate the Controlled Substances Act, even though they are legal within the state of Colorado.

Tallman also remarked that he realized the “result is devastating for the debtor.”

“Violations of federal law create significant impediments to the debtors’ ability to seek relief from their debts under federal bankruptcy laws in a federal bankruptcy court,” Tallman wrote of the Arenas decision.

This isn’t the first time a marijuana-related business has had its attempt to get help with filing bankruptcy dismissed by the federal bankruptcy court. In 2012, Tallman made a similar decision regarding the filing of Rent-Rite Super Kegs West Ltd, a company whose warehouse had partially been rented out to a marijuana grower, the Denver Post reports.

Arenas has filed an appeal for the decision alongside his Chapter 7 bankruptcy attorney with the U.S. 10th Circuit Court of Appeals in Denver. In his petition, Arenas, a wholesale producer and distributor of Colorado’s newest cash crop, stated he has more than $556,000 in debt owed to his creditors, along with $595,925 in assets, personal property worth $47,191 and a monthly income of about $4,300. In a Chapter 7 bankruptcy, an individual liquidates all his or her debts in order to start anew with one’s finances.

In Tallman’s decision, he states that Arenas’ filing can’t be converted to a Chapter 13 bankruptcy, either — as the Chapter 13 bankruptcy timeline and debt repayment plan would be funded “from profits of an ongoing criminal activity under federal law,” he wrote.

Until marijuana is decriminalized by the federal government, it’s unlikely that businesses that produce and distribute it in Colorado will be able to seek bankruptcy help.