Distressed Issues And Alternatives To Bankruptcy For Cannabis Businesses

• Jurisdiction: United States,Federal
• Law Firm: Fairfield and Woods
• Subject Matter: Wealth Management, Food, Drugs, Healthcare, Life Sciences, Insolvency/Bankruptcy/Re-structuring, Cannabis & Hemp, Financial Restructuring, Insolvency/Bankruptcy, Wealth & Asset Management, Food and Drugs Law
• Author: Mr Dan Garfield
• Published date: 17 April 2023

Bankruptcy Remains Closed to Cannabis Businesses

Cannabis businesses and owners remain (mostly) barred from filing for federal bankruptcy protection, but as more states legalize and as more "ancillary" businesses seek to file, courts continue to grapple with court supervisions of distressed cannabis businesses.

It remains the case that businesses and individuals which "touch the plant," that is, which grow or sell marijuana (aka marijuana regulated businesses, or "MRBs"), are unable to seek bankruptcy protection, whether or not such businesses or owners are in compliance with state marijuana laws. Until Congress legalizes marijuana or takes some other action to make marijuana legitimate federally (for example, the proposed STATES Act, where marijuana would be legal federally to the extent legalized under state law), the federal courts and the United States Trustee's Office (which acts as a sort of ombudsman in bankruptcy cases) seems unlikely to change.

Almost every bankruptcy court that has considered the matter has dismissed a bankruptcy case where it could not proceed without the MRB debtor or the trustee having to administer an estate with assets consisting of marijuana or the proceeds of marijuana. See, e.g., In re Arenas, 535 B.R. 845 (B.A.P. 10th Cir. 2015); In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (Bankr. D. Colo. 2012); In re Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015); In re Medpoint Mgmt., 528 B.R. 178 (Bankr. D. Ariz. 2015). Additionally, the United States Trustee's Office has a policy to dismiss marijuana-related cases. Letter from Clifford J. White, Executive Office for the United States Trustee, dated April 26, 2017 ("It is the policy of the U.S. trustee program that the U.S. trustees shall move to dismiss or object in all cases involving marijuana assets on grounds that such assets may not be administered under the Bankruptcy Code . . . .").

More recently, courts have started to grapple with non-MRB's which knowingly do substantial business with MRBs. The case that has received the most "notoriety" is In re Way to Grow, Inc., 597 B.R. 111 (Bankr. D. Colo. 2018). This case provides a detailed discussion of the current state of case law concerning MRB debtors.

Given that the cannabis industry continues to have economic difficulties despite growing revenues for various reasons (e.g., the retrenchment of Canadian cannabis companies from acquisitions in the United States; Section 280E of the Internal Revenue Code; high excise and other state taxes bolstering the black market; oversupply in more mature markets such as California, Colorado, and Oregon), legal practitioners looking to restructure their MRB clients or to advise their MRB-creditor clients will be forced to do so under the various state debtor-creditor laws.

Alternatives to Bankruptcy

While the lack of access to the federal bankruptcy system remains problematic for the cannabis industry, the sustained drop in...