Can a landlord debtor obtain bankruptcy protection when it receives rent from a marijuana distribution-related business? The question has been of great concern to bankruptcy lawyers since California began to permit the sale and use of cannabis since it is still a crime under Federal Law.

In In re Olson, the bankruptcy court, on its own motion, characterized as “illegal proceeds” under Federal law, the rent the debtor continued to collect from a marijuana dispensary tenant with whom the debtor was involved in ongoing litigation that precipitated the filing of the debtor’s bankruptcy petition. It, thus, dismissed the debtor’s bankruptcy case.

The debtor claimed the Court had abused its discretion by dismissing the case and appealed to the Bankruptcy Appellate Panel for the Ninth Circuit. The Panel sided with the debtor. However, it did so because the bankruptcy court failed to articulate its legal basis for dismissing the case “with clarity and precision” and never made factual findings to support its conclusion that the debtor had violated the Controlled Substances Act by accepting rent from the dispensary. The bankruptcy court never found that the debtor acted in bad faith; that the rents were to be used to fund a bankruptcy Chapter 13 plan; or that the trustee would be administering the proceeds of an illegal business.

Landlords need to engage in additional due diligence and act with greater prudence when leasing property to businesses that dispense cannabis. In re Olson does not mean a landlord will be entitled to bankruptcy protection even if it receives income from a marijuana distribution business. Rather, it demonstrates the possibility that landlords can lose their right to file for bankruptcy protection if they lease to marijuana distribution businesses. The same considerations are applicable to any debtor seeking bankruptcy protection who is directly or indirectly involved in the cannabis industry.

Many of the issues attendant to Federal Law marijuana prohibitions that contradict or affect the State’s legal cannabis businesses can be avoided or ameliorated by proper legal planning and organization. If you are directly or indirectly involved in the legal cannabis industry, or merely accept rent from a cannabis-related business, it is imperative that you seek legal counsel before you use the Courts to enforce or interpret your rights.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.