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Cannabis Businesses In Bankruptcy
Among the various state and federal insolvency schemes, the U.S. Bankruptcy Code is, as a practical matter, the only one that allows a business in financial distress to reorganize its debts and continue as a going concern, as opposed to simply closing up shop or selling its assets. The ability to file a federal bankruptcy case is thus an important resource for struggling businesses. It is particularly important to start-up businesses in an emerging field, such as the production and marketing of cannabis-related products.
It is precisely this resource, however, that is currently being denied to cannabis-related businesses. While many states have legalized the use of marijuana, whether in the form of medical marijuana dispensaries or simply approving it for recreational use, use of marijuana for any purpose is still barred by federal law, specifically, the Federal Controlled Substances Act, 21 U.S.C. §§801-904 (the CSA). Thus, cannabis-related businesses — whether growers, marketers, retail stores or medical dispensaries, not to mention anyone whose business involves dealings with one of the above categories — must make sure that they conduct their business so as not to violate federal law. Primarily, this means confining activities to one state so as not to invoke federal jurisdiction.
But if a cannabis-related business runs into financial difficulty and wants to reorganize, it will be forced to invoke federal jurisdiction, in the form of the Bankruptcy Code. The Department of Justice, which monitors all bankruptcy cases through the U.S. Trustee Program, has been taking a very active stance against bankruptcy cases filed by cannabis-related businesses. The U.S. Trustee has argued in case after case — successfully — that to permit the maintenance of a bankruptcy case filed by a cannabis business is improper, since it would require a federal court to put its stamp of approval on a business which would violate federal criminal law. A representative sample of such holdings includes In re Rent-Rite Super Kegs West, Ltd., 484 B.R. 799, 805 (Bankr. D. Colo. 2012); In re Arenas, 535 B.R. 845 (10th Cir. BAP 2015); In re Medpoint Mgmt., 528 B.R. 178, 188 (Bankr. D. Ariz. 2015); In re McGinnis, 453 B.R. 770, 772 (Bankr. D. Or. 2011); and In re Way to Grow, 597 B.R. 111 (Bankr. D. Colo. 2018).
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