Court Finds Pot Shop Employee Not Eligible for Bankruptcy Protections

Sure, marijuana is legal in 37 states, but it’s still not legal according to federal law. That inconvenient contradiction between state and federal law creates some strange scenarios. And in Massachusetts, one “budtender” experienced it firsthand as the United States Bankruptcy Court District of Massachusetts has ruled him ineligible for chapter 13 bankruptcy due to his federally illegal occupation.

A debtor and petitioner for chapter 13 bankruptcy protection, Scott Blumsack, works as a full-time employee of a retailer, wholesaler and producer of cannabis products. He manages 19 employees at one of its retail operations.

He at no point possessed an ownership interest in the cannabis business. He had proposed to fund his bankruptcy reorganization plan (Chapter 13) with wages earned from his, legal by Massachusetts law, employment. A line of work that he intended to continue.

Under most any other situation, a person’s line of work would have little consequence to their eligibility for protection under the federal bankruptcy law. But the legal terms of “good faith” and “cause” came into play in this ruling. Two terms that The U.S. Bankruptcy Code fails to define.

According to the court, because he sought relief under the Federal bankruptcy regime despite having violated – and intending to continue violating – the Federal Controlled Substances Act, he lacked “Good Faith” as required by Federal bankruptcy law. While the court acknowledged the obvious inconsistencies in Federal and state laws involving the regulation of the cannabis industry, it finally concluded that they were bound by federal statutes in rendering their decision.

Lacking the “good faith”, the court found that there was “cause” for dismissal of the case.

Despite warning from the debtor that the dismissal of this case, that of “a ‘mere employee’ with no ownership interest in a marijuana business may lead to vast denials of bankruptcy relief for other debtors with employment or other relationships with cannabis-related activities,” the Court declined to extend its ruling beyond the facts of the case presented before it.

“The Debtor’s Chapter 13 plan as currently proposed is to be funded by the wages derived from … illegal activities, which would require the Chapter 13 trustee to knowingly administer wages derived from an active participant in a criminal enterprise,” Elizabeth D. Katz United States Bankruptcy Judge wrote. “Regardless of the Debtor’s subjective intent in filing the case or proposing the current Chapter 13 plan … the Court cannot find, under an objective standard, that the case was filed in good faith or that the plan was proposed in good faith as required by §§ 1325(a)(7) and (a)(3), since, from the inception of this case, the Debtor has engaged in and benefited from, and intends to continue to engage in and benefit from, activities that violate federal criminal law.”