Although a bankruptcy court cannot entertain the bankruptcy of a company in the medical marijuana business, the court can nonetheless assess damages against creditors for filing an unsuccessful involuntary petition.
Creditors filed an involuntary chapter 7 petition against a company that advised medical marijuana dispensaries in Arizona, where it is legal. After a hearing that dealt only with the legality of the alleged debtor’s business, the bankruptcy court dismissed the involuntary petition after concluding that a trustee inevitably would be in the position of violating the federal Controlled Substances Act.
Alternatively, the bankruptcy court dismissed the involuntary petition because the creditors had unclean hands since they knew or should have known that the alleged debtor’s business was illegal under federal law.
Although the bankruptcy court never developed a record focusing on the petitioners’ bad faith, the bankruptcy judge also denied the alleged debtor’s motion for damages under Section 303(i).
The Ninth Circuit Bankruptcy Appellate Panel, in a non-precedential opinion on June 3, reversed the bankruptcy court for failing to allow the alleged debtor to introduce evidence about the petitioners’ bad faith.
Although a marijuana business legal under state law is ineligible for bankruptcy relief, the B.A.P.’s opinion means that an alleged debtor advising marijuana dealers is not precluded from obtaining all forms of relief in federal court, such as the imposition of damages for filing an unsuccessful involuntary petition.
The opinion does not necessarily mean that actual marijuana dispensaries can obtain damages for defeating involuntary petitions, because the appeal before the B.A.P. only dealt with an advisor where imposing damages on the creditors would not run the risk of violating federal drug laws.
Still, the B.A.P. opinion implies that the unclean hands of someone in the marijuana business does not preclude all forms of relief from a federal court.