Marijuana Businesses Spark Tensions Between State and Federal Law

As expected, a surge of new businesses emerged in response to the state-level legalization of marijuana, which is currently legal in twenty-nine states, including Florida. This not only gave rise to a new form of business, but also allowed attorneys specializing in start-up companies to increase their clientele.

Marijuana, however, is legal only under state law, not federal law.  In fact, the federal U.S. drug policy statute, the Controlled Substances Act, still lists marijuana as a “controlled substance.”  This tension between state and federal law also affects attorneys from an ethical standpoint.  Specifically, Rule 4-1.2 of the Florida Rules of Professional Conduct states that a lawyer cannot counsel or assist a client in conduct that the lawyer knows is criminal.  In essence, an attorney can counsel and assist a client who owns a marijuana business, as state law permits, yet simultaneously violate federal law.  Although The Florida Bar, and other bar associations, have released guidelines to help lawyers navigate through this conflict in their representation, there is still uncertainty as to the scope of such representation.

This tension between state and federal law becomes even more apparent in the area of bankruptcy. Chief Judge Laurel M. Isicoff, of the Bankruptcy Court for the Southern District of Florida, recently denied confirmation of a Chapter 11 plan for reorganization because the debtor’s plan proposed the rental of a commercial property that would obtain funds stemming from a marijuana business.  Although it was an issue of first impression in this jurisdiction, the court looked at other jurisdictions, which have unanimously held that “the cultivation and sale of marijuana is illegal under federal law and therefore the federal law and the federal courts are not available to any person engaged in that business.” Further, the court considered the plan a violation of the good faith requirement because it was “based on an enterprise illegal under [f]ederal law.”  Debtor amended the plan, yet the court still viewed the amendment as reflecting funds from a marijuana business.

The court was direct in its position and stated that “the law is very clear—a bankruptcy plan that proposes to be funded through income generated by the sale of marijuana products cannot be confirmed unless the business generating the income is legal under both state law and federal law.”  As a result, the debtor sought to convert to a Chapter 13, which allows for the discharge of more types of debts than in a Chapter 11; however, the court denied the debtor’s request, holding that the plan, under a Chapter 13, would “require the . . . Trustee to violate federal criminal law to administer the plan payments,” which is also impermissible.

Unfortunately, it appears this tension will exist for some time, as it does not seem likely that the federal government will sanction the legalization of marijuana any time soon.

Read full bankruptcy opinion here.