As these within the hashish trade are totally conscious, the choice of chapter has not been obtainable to hashish or many cannabis-adjacent companies to this point. The courts have persistently indicated debtors who work within the hashish trade or derive significant revenue from hashish exercise (immediately or not directly) can not use chapter, a federal mechanism, as long as marijuana stays unlawful below federal legislation. The seminal Arenas resolution from 2014 noticed that issues get particularly awkward when “granting [relief to the debtor] immediately includes a federal court docket … administering the fruits and instrumentalities of federal prison exercise.”
This rationale has prevailed with out exception for a decade now. Right here and there, a chapter court docket will break free in very restricted and particular situations, like when the Ninth Circuit confirmed a plan of reorganization for a gaggle of cannabis-adjacent actual property firms in 2019 (see that put up right here). A current case highlights maybe one other particular state of affairs during which a distressed hashish enterprise was given the prospect to pursue chapter below federal legislation.
Information of In re: The Hacienda Firm, LLC
The Hacienda Firm, LLC (“HC”) was within the enterprise of wholesale manufacturing and packaging hashish merchandise below the “Lowel Herb Co.” model, often known as “Lowell Farms.” It stopped working in February 2021. After it ceased operations, it transferred its worth to a publicly traded Canadian firm by structuring the sale as certainly one of mental property, not the sale of an working hashish enterprise. The Canadian firm’s sole enterprise is hashish progress and sale, which is authorized below Canadian legislation. In return, HC obtained 9.4% of the shares of the Canadian firm.
After this, HC filed for chapter within the Central District of California. The US Trustee subsequently filed a movement to dismiss HC’s chapter case below the identical rationale that permitting chapter would essentially contain violations of the Managed Substances Act (“CSA”).
The Court docket’s ruling and rationale
The Court docket denied the Trustee’s movement to dismiss. It began its opinion by indicating that the Trustee had failed to ascertain any ongoing violation of the CSA, solely pre-petition violations – which was a big issue:
“… [T]he tentative ruling is that this interpretation of part 856(a) of the CSA goes too far. Debtor’s passive possession of inventory, with intent to liquidate that inventory to pay collectors and thereby terminate any reference to canabis, seems to be the other of an intent to revenue from an ongoing scheme to distribute canabis. Due to this fact, the tentative ruling is that the UST has not established a violation of part 856(a) of the CSA. … Debtor doesn’t suggest, postpetition, to make use of any of its remaining property to “make investments” in any enterprise (canabis-related or in any other case). As a substitute, Debtor proposes to promote the inventory and distribute the ensuing money to collectors.”
Finally, the Court docket believed a chapter court docket might use its discretion to find out whether or not the debtor’s connections to hashish earnings or previous or future investments in hashish warranted dismissal of its petition or not. In stark distinction to the pattern, the Court docket went on to jot down that Congress didn’t undertake a “zero tolerance” coverage for any illegality. It wrote that “among the largest enterprise chapter circumstances, like Pacific Fuel & Electrical Co. … of ‘Erin Brockovich’ fame, contain alleged or precise prison exercise.” Equally, even small enterprise bankruptcies that contain eating places or condominium buildings repeatedly contain violations of well being and security rules:
“If all the foregoing examples had been ‘trigger’ for dismissal, this Court docket may need to dismiss most chapter circumstances. That may hurt all the constituencies that Congress tried to guard utilizing all the instruments of the Chapter Code, together with collectors, debtors, workers of debtors, and native governments and communities that rely upon debtors’ capacity to reorganize their funds and resume making contributions to commerce and society.”
Takeaway
As we’ve written with different circumstances, it is a very restricted scenario the place the debtor divested hashish from its property. A hashish firm gained’t have the ability to reorganize below Chapter 11 or liquidate below Chapter 7 if it’s nonetheless a going concern with hashish merchandise. Nonetheless, the dicta and general message of the opinion clearly marks a break from the zero-tolerance strategy that has been typical for these circumstances.
It needs to be famous that the Trustee did file an attraction of the choice on January 9, 2023. We’ll monitor that docket and report again on how the appellate continuing performs out over the approaching months.
For different posts we’ve written about this subject, take a look at: