The trend to legalize the medical and recreational use of marijuana continues to blaze through the states, but 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 U.S. Bankruptcy Code[2] because marijuana remains illegal under the Controlled Substances Act, or 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.
The U.S. cannabis industry is expected to reach $32 billion in annual sales this year, according to cannabis retail software company Flowhub Holdings Inc.[4]
However, cannabis businesses — and even traditional businesses throughout a wide range of industries, from fertilizer companies to software developers — are required to successfully navigate “a labyrinth of confusing, contradictory and multijurisdictional regulations” at the local, state and federal levels simultaneously to successfully operate their business today, according to a 2019 article in the American Bankruptcy Institute Journal.
Despite this substantial revenue, those challenges, taken together with the other barriers facing the industry — such as high state and federal tax rates coupled with the inability to deduct normal business expenses, lack of access to insurance, limited options for raising capital, and even the inability to simply deposit money with a bank — create an environment in which such businesses consider themselves “rigged for all to fail.”[5]
When traditional businesses fail or experience financial distress, they can file for federal bankruptcy protection to obtain breathing room from creditors, restructure debts, and escape certain litigation and collection efforts.
However, when a cannabis business fails, bankruptcy protection is typically not available, begging the question: How does a cannabis business, or a business that provides goods or services to the cannabis industry, avail itself of similar legal relief to compliantly reset the business on a new and profitable path, or even responsibly wind down the business and exit the market?
Despite being subject to various federal laws, including tax and discrimination, the current status of marijuana as a Schedule I substance and recent trends in court decisions make it clear that marijuana growers, processors and distributors may not file for federal...
