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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Bankruptcy Court Creates Potential Loophole for Cannabis Businesses Seeking Ch. 7 Protection

By Lawrence J. Kotler and Ryan Spengler
September 01, 2024

In a recent opinion, the U.S. Bankruptcy Court for the Northern District of California (the court) in the matter of In re Callaway, No. 24-30082-DM, 2024 WL 3191673 (Bankr. N.D. Cal. June 26, 2024), created a potential loophole for plant-touching cannabis businesses desiring bankruptcy protection when it denied two separate motions to dismiss an individual's Chapter 7 bankruptcy case. In particular, the court found that the simple administration of certain ownership interests of retail cannabis dispensaries "is not in and of itself necessarily equivalent to administering marijuana assets." And, as such, a Chapter 7 trustee could administer and monetize these ownership interests without violating the law.

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Background

In this case, Christopher Michael Callaway (the debtor) owned and operated several retail cannabis dispensaries in San Francisco. One of the dispensaries never opened due to litigation with the M. Dattani Credit Trust (the Dattani Trust), which litigation ultimately led to the debtor filing for bankruptcy relief under Chapter 7 of the Bankruptcy Code (the code).

In addition to the cannabis dispensaries, the debtor also had other noncannabis businesses along with certain intangible property such as domain names. The debtor did not list any tangible assets related to cannabis in his Schedules A/B (the debtor's property) because all of the cannabis assets were owned by the debtor's LLCs "and as such, were not property of the bankruptcy estate." Additionally, the debtor scheduled claims for accrued but unpaid distributions as a minority owner of one of the cannabis dispensaries, which he claimed was valued at several hundred thousand dollars. In his Schedule I (the debtor's income), the debtor reported post-petition monthly income from a cannabis business.

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