DOJ Reminds Cannabis Companies They Cannot Make Bankruptcy Claims

In an article in the American Bankruptcy Institute print journal, the Justice Department has clarified their position on cannabis businesses declaring bankruptcy. Written by Clifford J. White III, director of the Justice Department’s Executive Office for U.S. Trustees, and John Sheahan, an attorney for the DOJ, the article is in addition to an April 2017 memo in which the DOJ reminds bankruptcy trustees to report all cannabis bankruptcy claims and states unequivocally that trustees should not administer bankruptcy claims involving cannabis.

The article was crafted in response to a piece which appeared in the same journal in September and contradicted the April DOJ memo. The authors of that piece pointed out that bankruptcy courts often settle bankruptcy claims involving illegal activity and criminal conspiracies. They cited cases like Enron, Drier LLP, and Madoff Securities, and suggested the DOJ may be tipping the scales in a process that should remain neutral.

The two long-time DOJ officials wrote in their recent rebuttal,

“First, the bankruptcy system may not be used as an instrument in the ongoing commission of a crime and reorganization plans that permit or require continued illegal activity may not be confirmed. Second, bankruptcy trustees and other estate fiduciaries should not be required to administer assets if doing so would cause them to violate federal criminal law. … Rather than make its own marijuana policy, the USTP will continue to enforce the legislative judgment of Congress by preventing the bankruptcy system from being used for purposes that Congress has determined are illegal.”

They go on to clarify that cannabis business suppliers, investors in cannabis businesses, or landlords who rent space to cannabis businesses may not use bankruptcy as a way to correct their balance sheets, and should not expect protection under the bankruptcy code.

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