Pubdate: Thu, 01 Jan 2015
Source: Denver Post (CO)
Copyright: 2015 The Denver Post Corp
Contact:  http://www.denverpost.com/
Details: http://www.mapinc.org/media/122
Author: David Migoya

APPEAL PAINTS POT CONFLICT

Feds Are Inconsistent About Prosecutions, Defendants Claim.

The federal government cannot passively allow a billion-dollar 
marijuana industry to flourish by not prosecuting certain crimes and 
then later deny its participants bankruptcy protection, a new court 
filing says.

By refusing to allow marijuana derived assets to be protected in 
bankruptcy in the same way other assets are, the government is 
passively prosecuting the crimes it had earlier said it would not, "a 
Catch-22" of the U.S. Department of Justice's own making, according 
to an appeal filed by a Denver couple whose bankruptcy was dismissed 
because much of their income was derived from a medical marijuana business.

Attorneys for Frank and Sarah Arenas of Denver argue in a 43-page 
brief that a bankruptcy judge erred when he dismissed their petition 
in August because their assets were derived from activity that is 
illegal under federal law.

"The (Arenases) should not be faulted, or more importantly lose the 
right to a discharge of their debts, for playing by rules created by 
the same agency that seeks to dismiss their bankruptcy case for 
breaking those rules," attorney Daniel Garfield wrote, arguing the 
court could simply refuse certain assets and allow the case to continue.

"The federal government has deliberately and actively allowed a legal 
marijuana industry to flourish in Colorado and not to prosecute 
participants in that industry," Garfield wrote. "The federal 
government has made a conscious decision to allow(the Arenases') 
otherwise illegal business to operate."

If the U.S. Bankruptcy Appellate Panel of the 10th Circuit upholds 
the lower court ruling, the ramifications could be substantial. 
Bankruptcy petitions by individuals or businesses whose income was 
derived from marijuana - whether an employee of the shop or a 
business that supplies one-would be denied.

The potential impact would reach into at least 23 states where 
marijuana sales are legal in some form.

The Arenases' bankruptcy is the latest in a series of cases in which 
federal and state laws governing marijuana have clashed.

The federal government in February said it would not prosecute legal 
marijuana businesses in states that approved its sale as long as the 
businesses did not violate certain conditions, such as selling to 
children or trafficking across state lines. Banks were also required 
to step up oversight of any accounts they held.

The Arenases filed for personal bankruptcy protection in February, 
listing among their assets a building at 28th and Larimer streets.

Frank Arenas, 58, grew and sold medical marijuana in one part of the 
building as FSA and leased the other half to a different medical 
dispensary, Denver Patients Group.

During the bankrutpcy, DPG offered to purchase the building, but that 
added to the concern that marijuana income would taint the case.

Sarah Arenas, 52, suffered a stroke in 2011 and has since been 
disabled, reliant on disability and pension payments. That income is 
not considered tainted in the bankruptcy case, only that which is 
tied to the marijuana businesses.

Other factors eventually pushed the Arenases to seek bankruptcy 
protection. Neither Sarah nor Frank would comment for this story.

Bankruptcy laws under Chapter 7 liquidation require a trustee to be 
named and assets sold. That puts the U.S. trustee's office in a 
position of having to sell an illegal product for the benefit of 
creditors, or to sell assets derived from money that comes from the 
illegal product.

The conflict, U.S. Bankruptcy Judge Howard Tallman said, is between a 
federal law that deems marijuana illegal and a state law that allows 
for its sale.

"Any (bankruptcy) plan proposed by the debtors would necessarily be 
executed by unlawful means," Tallman wrote in his nine-page opinion 
in August. "Administration of this case ... is impossible without 
inextricably involving the court and the trustee in the debtors' 
ongoing criminal violation of the (Controlled Substances Act)."

Tallman in an earlier case determined bankruptcy laws would not 
extend to those with pot-derived assets, but the case sidestepped the 
issue by dumping the tainted assets.

Thomas and Susan Wright, owners of RentRite Super Kegs West, in 2012 
sought Chapter 11 reorganization, hoping to pay creditors and resume 
their enterprise, which included a building on East 48thAvenue.

But a venture-capital group that held the rights to a $1.7 million 
note on their commercial mortgage petitioned the court, saying 
bankruptcy could not protect an illegal business - the Wrights leased 
a portion of the building to three marijuana-related businesses.

"A federal court cannot be asked to enforce the protections of the 
Bankruptcy Code in aid of a debtor whose activities constitute a 
continuing federal crime," Tallman wrote in the Wright case

The Wrights relinquished the building to the venture capital group 
and their bankruptcy was allowed to continue.
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MAP posted-by: Jay Bergstrom