Chapter 420 – Are Bankruptcy Courts About To Open Up For Cannabis Companies?

By Lee Pacchia

The legal cannabis industry has grown rapidly in recent years, with the majority of states now permitting at least some form of cannabis usage. But as with any new industry, there are still many challenges and obstacles that lie ahead. One of the biggest concerns currently facing cannabis companies is the dramatic change in credit markets and the deterioration of the broader economy in recent months, highlighted by the recent failures of Silicon Valley and Signature banks.

While cannabis companies enjoyed a wide range of relatively inexpensive financing options in prior years to fund startups and expansions, recent fluctuations in credit markets have left operators with substantially fewer options. In most industries, this kind of market dynamic would often result in an uptick in Chapter 11 bankruptcies, as companies seek court protection for time and space to diagnose and fix whatever ails them. Legal cannabis, however, is not like most industries.

Generally speaking, cannabis companies have not been allowed to file for Chapter 11 bankruptcy protection — at least not to date. The issue is rooted in the fact that while 33 states have legalized some form of marijuana use, cannabis remains illegal under a federal law known as the Controlled Substances Act (CSA). This creates a tricky legal situation for cannabis companies seeking bankruptcy protection, as Chapter 11 is only available to businesses that are legal under federal law.

But all of this might be about to change, at least in certain parts of the country, thanks to a recent decision out of a bankruptcy court in California. In a case known as The Hacienda Company, LLC, a bankruptcy judge recently denied a motion to dismiss the case of a debtor in the business of manufacturing and packaging cannabis products. The decision gives Hacienda creditors a chance at recouping reasonable value on their claims and potential purchasers an opportunity to bid on the company’s intellectual property. Legal insiders took note of the Hacienda decision not only for its immediate impact, but also for where it sits in a progression of cannabis friendly bankruptcy decisions coming out of the Ninth Circuit. Michael Herz, bankruptcy partner at law firm Fox Rothschild, put it to us this way:

The [Hacienda] decision is a continuation of a trend of courts within the Ninth Circuit exhibiting an increasing receptiveness to allowing bankruptcies with cannabis-related elements to proceed.  This decision may be the greatest indication yet of courts in the Ninth Circuit being more concerned with the practical necessities of allowing cannabis-related bankruptcies to continue (e.g., the right to pursue a fresh start in an industry that is legal under state law) over the federal legal tensions between the Bankruptcy Code and the CSA.

It’s important to note that this is still a relatively new area of law and only time will tell how other parts of the country will see these issues. Of course, Congress could make all of this moot with legislation. But, for now at least, we’ll continue to read the courthouse tea leaves for clarity on whether cannabis companies can enjoy the same protections other industries enjoy under the law.

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