Does the SAFE Act Go Far Enough? Why Legalization of Cannabis Is Inevitable

In Massachusetts, I bet there is a couple scratching their heads for the last month, trying to figure out how to get their finances in order after the Court of Appeals for the First Circuit ruled on March 5 that the husband was not entitled to the protections afforded by a Chapter 13 bankruptcy because he was employed at a business that legally cultivated cannabis within the state, even as it remained illegal as a matter of federal law.

The case is the latest example of why the SAFE Act doesn’t go far enough when it comes to protecting financial institutions in this country.

Why? Simply put, it is impossible for an industry to grow into maturity unless it has unfettered access to the financial system to the same extent as any other legal business. As things stand now when it comes to cannabis, however, Marijuana Related Businesses (MRBs), and apparently their employees, lack unburdened access to some of the most basic legal protections afforded to other legal businesses. Most notably, access to reorganization afforded by bankruptcy.

The SAFE Act, which has passed the House of Representatives at least five times, would generally permit financial institutions to provide financial services to businesses and individuals engaged in the cannabis industry in states where it is illegal to do so. Senator Chuck Schumer (D-N.Y.) has pointed to the legislation as one area where there might be the potential for compromise with the House. Unfortunately, however, more than a decade of experience has demonstrated that the SAFE Act does not go far enough. What we need is comprehensive legislation that addresses bankruptcy administration and other debitor and creditor considerations such as the legal status of collateral.

To people who follow the industry closely, my concern is not a new one. Several high-profile cases have ruled that MRBs are not entitled to bankruptcy protections, at least in those situations where the reorganization plan would require the trustee to distribute the proceeds of cannabis sales that are unequivocally illegal for the matter of federal law. As the Tenth Circuit noted in re Arenas, “a state citizen that chooses to defy one federal law puts himself in an awkward position when he seeks relief under another federal statute – especially when granting that relief directly involves a federal court in administering the instrumentalities of federal criminal activity,” (514 B.R. 887, 893 (Bankr. D. Colo. 2014), aff’d, 535 B.R. 845 (10th Cir. BAP (Colo.) 2015)). For an excellent discussion of these issues see (Edward S. Adams, When Cannabis Businesses Fail: Assignment for the Benefit of Creditors As an Alternative to Bankruptcy, 2022 Utah L. Rev. 967, 981 (2022).

Previous cases have involved business owners seeking bankruptcy protection.

In re Blumsack, 657 B.R. 505 (B.A.P. 1st Cir. 2024) what’s worth noting is that it is one of the first I have seen to extend the same prohibitions to employees of an MRB.

Scott Blumsack worked at a cannabis dispensary in Massachusetts. He filed for Chapter 13 bankruptcy and proposed a plan that would have been funded with his earnings from employment at the dispensary. The trustee successfully argued that the proposed plan should not be confirmed and instead that the bankruptcy should be dismissed because it would be funded by earnings made in violation of the federal Controlled Substances Act (CSA). The bankruptcy court was arguing for an interpretation of the law that would have categorically prohibited employees of marijuana businesses, and maybe even marijuana related businesses, from bankruptcy protections.

In a decision issued in March, the Court of Appeals for the First Circuit modified the bankruptcy court’s decision. On the one hand, it rejected a per se rule barring cannabis employees from bankruptcy courts. Instead, it suggested that there may be circumstances where individuals such as the Blumsacks may be entitled to bankruptcy protection if they can demonstrate that the reorganization plan would not involve the distribution of “illegal” proceeds. On the other hand, the court confirmed the dismissal of the bankruptcy, demonstrating just how difficult this will be to approve. For instance, in this case, Mrs. Blumsack was a state employee who was willing to pull $70,000 out of her retirement savings to help fund the plan but the court determined that even this was not enough to remove the taint of illegality.

What concerns me is that the SAFE Act would do nothing to address the application of bankruptcy law and other federal laws involving creditors such as asset forfeiture. While it is extremely helpful to give financial institutions the legal protection to open up accounts for businesses and their employees, so long as other areas of the law remain so uncertain, the legal protections will ultimately be of limited value. We may be simply replacing one set of legal issues with another.

When it comes to lobbying, it is absolutely crucial to accept compromises to keep the ball moving forward. If you sit around and wait for a perfect piece of legislation, you’re going to be waiting an awful long time. But I think the difficulties with which the federal bankruptcy courts are grappling demonstrate that ultimately Congress must either decide to legalize cannabis sales and production as a matter of federal law, or preempt the state laws that have already legalized its sale and distribution. Since this last option is no longer realistic, Congress has no choice but to eventually legalize marijuana’s sale and use as a matter of federal law.

Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at henrymeieresq@outlook.com.