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Federal Drug Law Violation: Impacts Bankruptcy Code Relief?

Posted By USFN, Thursday, July 23, 2015
Updated: Wednesday, September 9, 2015

July 23, 2015 


by John Kapitan
Trott Law, P.C. – USFN Member (Michigan)

The Michigan Medical Marijuana Act (MMMA) authorizes a Michigan resident to cultivate, possess, and even distribute some amount of marijuana, or its products, without offending the laws of Michigan. Federal law, in contrast, criminalizes possession and distribution of the plant with exceptions only for federally-approved research activities.

The question of whether the business of a chapter 13 debtor (legitimate under the state laws in Michigan, but criminal under federal law) precludes a court from granting relief available under the Bankruptcy Code was recently decided in the case of In re Johnson, 2015 Bankr. LEXIS 1983 (Bankr. W.D. Mich. 2015).

In Johnson, the debtor sought relief under chapter 13 of the Bankruptcy Code to save his residence, prevent the termination of utility services, and avoid repossession of his vehicle. The United States Trustee moved to dismiss the case because the debtor was engaging in the marijuana industry and believed that the court should not enforce the protections of the Bankruptcy Code to aid violations of federal law.

According to the debtor’s Schedules, Statement of Financial Affairs, and testimony during an evidentiary hearing, the debtor’s income was derived from Social Security benefits and through the cultivation and sale of marijuana to three patients through a regulated dispensary pursuant to the MMMA. A review of the debtor’s proposed plan indicated that the monthly payment was well below his monthly Social Security benefit, and the debtor testified that none of the proceeds from his activities under the MMMA would be used to fund the plan.

Cognizant of the debtor’s dire need of bankruptcy relief, the court refrained from dismissing the case, but enjoined the debtor from conducting his medical marijuana business while the case was pending in order to provide him with limited additional time to decide whether to continue his business activity or to dismiss the case.

In reaching this decision, the court did not believe it mattered that the plan was funded solely from Social Security benefits because, as a statutory matter, the same reasons that preclude the Standing Trustee from holding contraband (or using proceeds or instrumentalities of federal criminal activity) apply to the debtor. As such, the debtor could not conduct an enterprise that admittedly violates federal criminal law while enjoying the federal benefits which the Bankruptcy Code affords him, as there is no constitutional right to obtain a discharge of one’s debts in bankruptcy. Additionally, the court noted that it is not asking too much of debtors to obey federal laws, including criminal laws, as a condition of obtaining relief under the Bankruptcy Code.

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