Justice Department Says People in Marijuana Business Can't Use Bankruptcy

People who make money from the marijuana industry can't use the federal bankruptcy courts when they get into financial trouble, says a Justice Department bankruptcy watchdog.

U.S. Trustee Program director Cliff White wrote a letter to trustees who handle consumer bankruptcy cases earlier this week reminding them that the drug is illegal under federal law and warning them not to handle any money from the sale of marijuana-related property.

The one-page letter, sent on Wednesday, said the Justice Department division has seen an increase in the number of bankruptcies where "marijuana assets" are disclosed.

The division oversees trustees who handle personal and corporate bankruptcy filings. Often, their role requires them to take in monthly payments that a bankrupt person makes on a debt-repayment plan. Trustees may also be required to sell off a bankrupt person's valuable property.

"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," Mr. White said.

As states take uncoordinated steps toward recognizing the industry, the federal government still classifies the substance as a dangerous drug. Mr. White said in his letter that the directive "pertains even in cases in which such assets are not illegal under state law." Federal bankruptcy law requires a bankrupt person or business to list all of their valuable possessions and, as part of the process, put some of them up for sale to pay off debts.

The disconnect also has prompted several bankruptcy judges to kick marijuana growers out of court.

U.S. Trustee Program spokeswoman Jane Limprecht declined to say how many bankruptcies with marijuana assets have been recorded.

While the letter reinforced the Justice Department division's longstanding policy, the reminder came several months into the tenure of Attorney General Jeff Sessions, who has hinted at stepping up prosecutions of marijuana sales and has blamed the drug for incidents of violent crime.

It is unclear whether the Trump administration's drug policy will include a crackdown on marijuana use, and Mr. Sessions has yet to issue clear policies on the matter.

Criminal justice advocates, in response, note that crime rates remain near multidecade lows and that several Republican-led states are embracing policies to scale back their prison populations.

Under President Obama, prosecutors were urged to charge nonviolent drug defendants with offenses carrying lighter sentences under the sentiment that tough mandatory sentences had fueled a costly, oversize prison population with little effect on the crime rate.

The letter from Mr. White drew criticism from the country's largest group of consumer bankruptcy lawyers. North Carolina lawyer Ed Boltz, who monitors federal policy for the National Association of Consumer Bankruptcy Attorneys, said the Justice Department division doesn't have rule-making authority and can't decide who should have access to bankruptcy protection.

"The courts and Congress are the appropriate groups to say who is eligible to file for bankruptcy," he said in an interview.

Bankruptcy judges haven't needed much convincing that companies in the marijuana industry do not belong in a federally overseen court system.

Several bankruptcy judges in Colorado have dismissed cases for marijuana-related companies, including a medical marijuana grower that filed in May 2012 with $130,000 worth of unharvested marijuana leaves listed on the bankruptcy petition. The filing temporarily halted the company's eviction.

In 2015, panel of federal judges denied a pot-growing Denver couple's request for bankruptcy, saying that process could require a trustee to handle and sell their marijuana plants.

The couple was "unfortunately caught between pursuing a business that the people of Colorado have declared to be legal and beneficial, but which the laws of the United States -- laws that every United States judge swears to uphold -- proscribe and subject to criminal sanction," the judges said in their ruling.

--Beth Reinhard contributed to this article.

Write to Katy Stech at katherine.stech@wsj.com

(END) Dow Jones Newswires

April 28, 2017 17:49 ET (21:49 GMT)