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When Your Medical Marijuana Business Fails, You're Screwed

As support for Amendment 2 picks up across the state, Floridians are eager to get their hands in the medical weed industry game. But it's become clear recently that the Republican-controlled Legislature might cap the number of dispensaries and limit the number of people who can cash in.

Consider California. When medical pot was first legalized there, dispensaries popped up everywhere. Voters decided to limit them, and many closed down, leaving would-be entrepreneurs in the dust.

See also: How to Get Rich in the Medical Marijuana Business (or Go Broke Trying)

But what happens when a medical marijuana business fails? Four court rulings from Colorado, California, and Oregon suggest it's not pretty. Because medical marijuana still isn't legal on a federal level and bankruptcy cases are handled in federal court, the government won't let anyone involved with pot restructure his debt. To the feds, dealing with weed is still "illegal activity," even if it's perfectly above board to be a warehouse landlord, dispensary owner, or caregiver in your state.

Here's how courts have ruled in the past:

- Oregon, June 9, 2011: A debtor tried to file Chapter 13 bankruptcy. He made his money from Oregon Medical Growers LLC, which leased a warehouse to people who grow pot as well as a tattoo parlor. Because part of the debtor's income was derived from doing business with pot growers, a debt repayment plan was denied by the courts.

- California, November 29, 2011: Plaintiff Northbay Wellness Group was set up to sell medical weed. Its attorney told the owners not to pay state income taxes, a piece of bad advice that cost them hundreds of thousands of dollars later on. When the company tried to sue, the courts invoked the "clean hands doctrine" that "closes the doors of a court to one who is tainted relative to the matter in which he seeks relief, no matter how improper may have been the behavior of the defendant."

- California, October 4, 2012: Mother Earth's Alternative Healing Cooperative Inc. tried to file Chapter 11 bankruptcy. The court said no, because it was in violation of the Controlled Substances Act.

- Colorado, December 19, 2012: A landlord tried to file Chapter 11 without knowing that 25 percent of his income came from a tenant who grew pot. This violated a so-called "crack house" statute, which caused the courts to dismiss the case.

Bill Simonitsch, a commercial litigator in Miami, says that if people want to set up medical marijuana businesses in Florida, they should be aware of the attendant risks.

See also: "Charlotte's Web" Medical Marijuana Bill Isn't Enough for Many Parents of Epileptics

"Everyone sees dollar signs," he says. "But if you have someone not thinking about what happens when a medical marijuana business fails, then they're putting their own personal assets at risk or a related business at risk." If you're trying to start a medical marijuana business, Simonitsch suggests setting it up as a completely separate corporation to insulate yourself from risking it all.

Even if medical marijuana doesn't pass in November, Gov. Rick Scott has approved in concept that five growers will cultivate a low-THC strand starting in January. Those growers must have been Florida farmers for more than 30 years. The idea was to prevent people swooping in from out-of-state to bank on the new legislation. But that rule might present serious problems for established businesses that want to get a piece of the action.

"If they begin engaging without splitting off the operation and actual plot of land into a different business entity and the entire operation becomes financially distressed due to the medical marijuana part, they most likely won't be able to restructure their debt and they would have to liquidate everything," Simonitsch says.

So while any business venture is a game of chance, adding medical marijuana to the mix greatly amplifies the risk. Bankruptcy courts dealing with dispensaries and warehouses is new phenomenon, but if past rulings are any indication (and they are), the feds aren't exactly going to be sympathetic when your plans to become a marijuana kingpin go South.

Send your story tips to the author, Allie Conti.

Follow Allie Conti on Twitter: @allie_conti

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