As the trend to legalize the medical and recreational use of marijuana continues to blaze through the states, federal law, and bankruptcy courts by extension, have not yet followed suit.[1] Bankruptcy courts have historically prevented cannabis – and even cannabis-ancillary companies – from filing for protection under the United States Bankruptcy Code[2] because marijuana remains illegal under the Controlled Substances Act (CSA) at the federal level.[3] Consequently, financially distressed companies in states where marijuana is legal still have limited restructuring options and must rely on state law options.
Typically, traditional businesses can file for bankruptcy in order to obtain “breathing room” from creditors, restructure debts, and escape certain litigation and collection efforts. So how does a struggling cannabis business, or a business that provides goods or services to the cannabis industry, avail itself of similar legal relief in order to compliantly reset the business on a new path, or even responsibly exit the market? While this lack of bankruptcy protection can be detrimental for many distressed cannabis companies, there are some state-law options available. First, a cannabis company could use an assignment for the benefit of creditors (ABC). An ABC is a state-law mechanism for the orderly (structured) liquidation of assets. An ABC is similar to a Chapter 7 bankruptcy proceeding where the debtor’s estate is liquidated in an orderly fashion, but ABCs are not governed by the Bankruptcy Code. Instead...
