The U.S. Department of Justice is reminding federal bankruptcy officials that they cannot assist in liquidating or restructuring any businesses involving marijuana.
Trustees administering bankruptcy proceedings “shall move to dismiss or object in all cases involving marijuana assets on grounds that such assets may not be administered under the Bankruptcy Code,” Clifford J. White III, director of the Justice Department’s Trustee Program, wrote in a memo issued on Wednesday.
“In recent months, we have noticed an increase in the number of bankruptcy cases involving marijuana assets,” White wrote to the more than 1,100 private trustees who administer bankruptcy cases across the country. “This is to reiterate and emphasize the importance of prompt notification to your United States Trustee whenever you uncover a marijuana asset in a case assigned to you. Our goal is to ensure that trustees are not placed in the untenable position of violating federal law by liquidating, receiving proceeds from, or in any way administering marijuana assets.”
The directive from White, who has run the Trustees Program since the George W. Bush administration, is more of a reminder of the federal government’s existing position than an announcement of an entirely new policy.
In webpage summary accompanying the new letter, the Justice Department says that it has “long taken the position that debtors with assets or income derived from marijuana may not proceed through the bankruptcy system,” adding that the White’s memo “seeks to ensure the uniform application of the bankruptcy laws by making sure that all of the private trustees know about and adhere to this longstanding policy.”
The Trustee Program is has been described as a “watchdog over the bankruptcy process.” There are 21 regional U.S. trustees, appointed by the U.S. attorney general to five-year terms, who are responsible for appointing and supervising the private trustees who primarily handle individual cases.
The U.S. trustees are required by law to refer information on potential criminal activity to federal prosecutors.
In a new Frequently Asked Questions document, the Justice Department spells out the sticky situation that marijuana business owners seeking bankruptcy protection face:
“Consumer debtors who own marijuana plants or products may seek a discharge of their debts in return for giving up those assets to a trustee who would sell those assets to pay back creditors. In other cases, the debtors may seek to use the bankruptcy laws to rehabilitate an ongoing marijuana business, or may propose to use marijuana profits to fund a payment plan to their creditors. In all of these cases, the debtors’ actions are impermissible because they enlist the aid of the federal bankruptcy system to facilitate the sale of a federally proscribed controlled substance.”
The Department further explains that “there often are many grounds for the [Trustee Program] to dismiss a marijuana case” or take other action:
“For example, the law does not allow a consumer or business to confirm a bankruptcy repayment plan that contemplates and relies on activity forbidden by law. For example, funding a plan from income derived from a substance that is illegal under the Controlled Substances Act would be a means forbidden by law. Similarly, a trustee may not sell marijuana because selling a controlled substance violates federal law.”
A number of courts have already ruled against marijuana business owners seeking bankruptcy protection.
The new bankruptcy memo comes amid growing uncertainty about the Trump administration’s overall approach to marijuana.
Whereas the Obama administration in its second term generally allowed states to implement their own cannabis laws largely without federal interference in according with a Justice Department directive known as the “Cole Memo,” current U.S. Attorney General Jeff Sessions is a vocal opponent of legalization.
As a candidate, President Trump repeatedly pledged to respect state marijuana laws, but Press Secretary Sean Spicer said in February that he expects to see “greater enforcement” of federal prohibition policies.
Sessions has called the Cole Memo “valuable” and “valid,” but earlier this month officially launched a process to review federal marijuana enforcement policy. A decision is not expected until after late July, when a task force is set to issue recommendations to the attorney general.
For now, White told trustees that he appreciates their “continued and heightened attention to our directive for prompt notification of all cases involving marijuana assets.”