As the legalized marijuana at the state level continues to thrive, bankruptcy courts flirt with marijuana’s place within the Bankruptcy Code. One principle begins to emerge: while presence of marijuana does not automatically call for dismissal, if the court and trustee have to participate in or condone the illegal conduct in any way, the case will be dismissed.

Background:

Since the legalization of marijuana has occurred in several states over the past several years, multiple courts have ruled that the continued illegality of marijuana on a federal level prevents debtors entrenched in the marijuana industry from garnering the benefits of bankruptcy protection. See In re Rent Rite Super Kegs W. Ltd., 484 B.R. 799 (Bankr. D. Colo. 2012) (A debtor whose plan relied on roughly 25% of its income from renting property to marijuana growing operation was “cause” to dismiss case under 11 U.S.C 1112(b), constituted gross mismanagement of the estate, and debtor was not operating with “clean hands.”); In re Arenas, 514 B.R. 887 (Bankr. D. Colo. 2014) (prohibition against marijuana related activities extended to cases under Chapter 7 and Chapter 13).

U.C.C Section 9-319(a) grants a consignee ownership rights in consigned goods. Does it also apply to proceeds from the sale of those goods? In the recent decision of In Re Pettit Oil Company, the Ninth Circuit said that it does, holding that proceeds from goods held by a consignee at the time of a bankruptcy filing are subject to the perfection and priority rules in the Bankruptcy Code.