US: Recent bankruptcy court decision leaves door open to bankruptcy relief

A Massachusetts Bankruptcy Court's recent appellate decision in Blumsack v. Harrington (In re Blumsack) leaves the door open for those employed in the cannabis industry to seek bankruptcy relief where certain conditions are met. This is a departure from the bankruptcy court's decision, which dismissed an individual's petition for Chapter 13 bankruptcy relief because – as a "budtender" at a cannabis dispensary in Massachusetts – he engaged in (and planned to continue engaging in) activities that violated the federal Controlled Substances Act (CSA) and thus per se lacked the requisite "good faith" to petition and propose a plan for bankruptcy.

Chapter 13 of the federal bankruptcy code requires that the court confirm a bankruptcy plan if various factors are met, including that "the plan has been proposed in good faith" and "the action of the debtor in filing the petition was in good faith." "Good faith" is undefined in the code. A "totality of the circumstances" analysis applies to determine whether good faith is present.

The bankruptcy court created a bright-line rule denying bankruptcy relief to those who undertake and earn income from actions that violate the CSA because such conduct displayed, in the bankruptcy court's eyes, a lack of good faith. The appellate court disagreed. First, the appellate court noted that despite observing that a "totality of the circumstances" analysis applied, the bankruptcy court did not employ this analysis but instead "grounded [its ruling] in a single consideration – the debtor's ongoing violation of the CSA." (As we mentioned previously, the bankruptcy court did not consider whether "good faith" may be impacted by the legality of the debtor's activity under state law.) Second, a "good faith" analysis must be tethered to the debtor's actions in filing the petition rather than an unchecked referendum on the debtor's conduct generally (here, the nature of his employment). Finally, whether bankruptcy relief may be categorically unavailable to debtors participating in the cannabis industry is a policy decision for the legislature to decide.