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Bankruptcy Court Doors Swing Open For Cannabis Companies, But Just Slightly



Are bankruptcy doors now opening for cannabis companies?  A decision last week from a California bankruptcy court indicates perhaps so, at least for cannabis companies that are no longer operating.

Factual Background

The Hacienda Company, LLC (the “Debtor”) was in the business of wholesale manufacturing and packaging cannabis products.  After it ceased operations in February 2021, the Debtor transferred its value, through the sale of intellectual property, to a publicly traded Canadian company, Lowell Farms, Inc. (“Lowell Farms”), receiving approximately 9% of Lowell Farms’ stock in consideration.  Lowell Farms’ sole business is cannabis growth and sales.

The Debtor filed its chapter 11 petition on September 21, 2022.  In response, the United States Trustee (the “UST”) filed a motion to dismiss the case for “cause” under section 1112(b) of the Bankruptcy Code, arguing that dismissal was required because: (a) the Debtor’s equity ownership in Lowell Farms violated the Controlled Substances Act (the “CSA”); (b) the Debtor is grossly mismanaging the estate because all of its assets are subject to forfeiture under the CSA; and (c) the Debtor filed its case in bad faith because any plan proposed by the Debtor would be funded from sources obtained in violation of the CSA.

The filing of the motion to dismiss could not have been a surprise to the Debtor given the general hostility of bankruptcy courts to cannabis debtors (see Cannabis and District Courts: Are Those Courthouse Doors Closed Too? | Restructuring GlobalView (, Cannabis and Bankruptcy: 2020 in Review | Restructuring GlobalView (, Up in Smoke: More Cannabis Companies Get Shut Out of Bankruptcy | Restructuring GlobalView (  However, and most likely to the shock of both the Debtor and the UST, on December 21, 2022, the bankruptcy court entered an order denying the UST’s motion to dismiss, and on January 20, 2023, the bankruptcy court issued its memorandum opinion.

The Bankruptcy Court’s Opinion

In its opinion, the bankruptcy court began by explaining why violations of the CSA may constitute “cause” for dismissal.  The court specifically noted that such violations may evidence a lack of good faith and gross mismanagement of the estate, and further that CSA violations may warrant dismissal under general principals of equity.  However, the court recognized the admonition of the Ninth Circuit Bankruptcy Appellate Panel in In re Burton, 610 B.R. 633, 637-638 (9th Cir. BAP 2020) that “the mere presence of marijuana near a bankruptcy case does not automatically prohibit a debtor from bankruptcy relief.”  The court also noted that it has “some degree of discretion” in considering dismissal, particularly when there are no ongoing postpetition violations of the CSA.  With these general principals in mind, the bankruptcy court examined the particular facts of the Debtor’s case.

First, the bankruptcy court rejected the UST’s argument that the Debtor’s ownership of the Lowell Farms stock constituted a violation of the CSA.  The UST argued that ownership of the stock violated section 856(a) of the CSA which makes it illegal to “profit from” a place used to manufacture, store, distribute or use cannabis.  Although it noted that the Debtor’s ownership of the stock put it in “uncomfortably close proximity to the cannabis industry,” the bankruptcy court held that the Debtor’s passive ownership of the stock, which it intended to liquidate to pay creditors, would terminate the Debtor’s connection with cannabis and was, in fact, the “opposite of an intent to profit from an ongoing scheme to distribute cannabis.”

Second, the bankruptcy court rejected the UST’s argument that the Debtor was violating the CSA by its postpetition use of the Lowell Farms stock or the stock proceeds.  Section 854 of the CSA makes it illegal for a person who has received income derived from a violation of the CSA to “use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise [engaged in or affecting interstate or foreign commerce].”  Because the Debtor did not propose to use any of the stock or proceeds of the stock to invest in any cannabis enterprise but was instead proposing to sell the stock and distribute the proceeds to creditors, the court held that there was no violation of section 854.

Third, the bankruptcy court rejected the UST’s argument that any future bankruptcy trustee would have to engage in illegal activity if the Debtor was found to have cannabis or cannabis-related products.  The court noted that should such a contingency arise, a trustee could request the responsible federal authorities to dispose of the cannabis and, in an interesting aside, even hinted that a future trustee might have a duty to administer cannabis assets rather than simply turn the assets over to the federal authorities.  In short, based on the record before it, the bankruptcy court found that the UST had not satisfied its burden to show that any future trustee would have to violate the CSA.

Fourth, and perhaps most dramatically, the bankruptcy court rejected the concept of a “zero tolerance” policy under section 1112(b) of the Bankruptcy Code for illegal conduct, including violations of the CSA. The court noted that interpreting “cause” under section 1112(b)(4) in such a way could prevent courts from considering a host of bankruptcy cases where there were prepetition violations of nonbankruptcy laws.  In fact, the court noted that some of the largest bankruptcy cases (e.g., Enron Corporation and Bernie Madoff) involved alleged or actual criminal liability and applying the UST’s argument to its natural conclusion would lead to the mandated dismissal of these cases.  The court reasoned that this would be contrary to the Bankruptcy Code’s policy of maximizing value for the benefit of creditors and preventing individual races to the courthouse.  In light of these concerns, the court adopted a middle ground in interpreting “cause,” writing:

[T]his Bankruptcy Court does not interpret Congress’ mandate that this Bankruptcy Court “shall” dismiss or convert a bankruptcy case for “cause” under § 1112(b) to mean that any violation of criminal law requires dismissal. Rather, this Court interprets the statute as giving discretion to determine whether dismissal is warranted based on all the facts and circumstances.

[T]his Bankruptcy Court interprets both § 1112(b) and the UST’s [motion to dismiss] as adopting a middle ground, under which this Bankruptcy Court must exercise its discretion to determine whether, given all the facts and circumstances, a debtor’s connection to cannabis profits and any past or future investment in cannabis enterprises warrants dismissal of this bankruptcy case.

Finally, the bankruptcy court held that even if the UST had established “cause”, there were “unusual circumstances” that prevented dismissal under section 1112(b)(2).  Specifically, the court pointed to the fact that the Debtor had divested itself, prepetition, of any direct involvement in the cannabis industry.  Further, the court found that there was a realistic possibility of a “substantial” distribution to creditors through the liquidation of the Lowell Farms stock.  Based on these facts, the court held that conversion or dismissal was not in the best interests of creditors.


Does the bankruptcy court’s opinion in Hacienda Company change the landscape for struggling cannabis companies?  Perhaps to some extent, particularly if the cannabis companies had shut down their cannabis businesses prepetition and are seeking to use Chapter 7 simply to liquidate their remaining assets.  In those cases, a court might be open to allowing the bankruptcy case to proceed.  Further, cannabis companies in need of bankruptcy relief should be heartened by the court’s conclusion that it would, in lieu or dismissal, “defer to prosecutors … to use their discretion about whether and how to address any violations of nonbankruptcy law.”

The larger, and so far unanswered, question is whether the bankruptcy court’s rationale in Hacienda Company, particularly its rejection of a “zero tolerance” policy and its asserted equivalence between violations of the CSA and other nonbankruptcy law, can be read to support more expansive uses of the Bankruptcy Code by cannabis companies.  For instance, can a cannabis company file bankruptcy to sell its assets (operating or not) under section 363 of the Bankruptcy Code?  Can a cannabis company utilize chapter 11 to reorganize its affairs?  Can a foreign cannabis company utilize chapter 15 to seek U.S. recognition of a foreign insolvency proceeding?  Perhaps the only thing we know is that the UST will continue to oppose cannabis bankruptcies and that the outer boundaries of what is and is not permitted will continue to be litigated, at least until Congress removes cannabis from the list of controlled substances.

The UST has appealed the denial of the motion to dismiss.  We will monitor the appeal and update our post when a ruling has been issued.

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How can it help distressed cannabis companies today?




Without the option to declare bankruptcy—due to federal illegality—the only recourse for cannabis businesses in distress to become solvent and / or distribute assets to creditors is to enter into an expensive and difficult judicial cannabis receivership. Receiverships are inherently adversarial, and the required input from third-party experts, lawyers and regular engagement with the courts can be incredibly costly.

Meanwhile, businesses operating in mainstream sectors have the ability to declare bankruptcy. This is also a court-ordered procedure that allows companies to satisfy lenders by liquidating assets, restructuring operations and finances, and to enjoy a break of sorts to make deals with creditors and renegotiate contracts and leases. Without a change to federal banking laws, cannabis companies are blocked from the benefits of bankruptcy, and the situation is only getting worse.

Given the current tight capital market environment, the increase in cannabis distressed assets, and the shortage of options to cannabis operators to address said challenges, is there a possible alternative option to alleviate the rather dire situation?


Genesis—Transition from Equity Financing to Debt Financing

Equity financing has been the most prominent way to raise capital in cannabis for the last several years. However,recent data collected by Viridian Capital Advisorsreveals that debt currently makes up 93% of capital raised by U.S. cannabis cultivation and retail companies, compared to 55.7% in U.S. industries overall.

This change in the capital-raising environment, which has led to an increased number of creditors in the sector, combined with continued market pressures on cannabis businesses to remain competitive, make it highly likely that the industry will inevitably see more receiverships.

Ultimately, while debt financiers are willing to lend cannabis businesses money, they expect to be paid back on time and often with high interest. If the business begins to struggle and enters a distressed phase that leads to receivership, the business assets will be sold off and the secured lenders will be the first to get paid, while the business itself is likely not to recover much.

Consider an Administrative and Collateral Agent

With receiverships punishingly expensive and the debt financing landscapebordering on predatorial, distressed cannabis businesses are desperate for any assistance or support available.  An Administrative and Collateral Agent (ACA) could be the alternative support required, benefitting borrowers, lenders and regulators alike, and offering a more cost-effective and less punitive option to courts, receivers and lawyers.

Instead of dealing with the courts and an expensive court-appointed receiver, cannabis companies seeking relief could turn to an ACA to facilitate mediation between parties and create alignment within the industry, which does not exist today.

An ACA could create a level of trust, transparency and complementary positioning with industry participants that simply has not yet existed in cannabis. The use of an ACA could challenge the competing perceptions that there is already alignment between regulators, operators and lenders, or that a useful alignment between these parties could ever exist.

An ACA could be a real and valuable tool for state governments and regulators as they begin to understand that it is in their best interests to assist cannabis businesses in their states in the face of continued federal illegality and restrictions. Under a private agreement between parties, the ACA would conduct something more akin to an administrative receivership as opposed to the traditional judicial receivership that is the only current option for insolvent cannabis businesses to seek relief.

Building upon a Cannabis Credit Rating Framework

Ideally, an ACA would work within an industry-specific credit rating system for cannabis businesses in distress in order to work within an established framework for potential investors. If cannabis companies are ranked across an equitable, systematic and formulaiccredit rating system, borrowers, lenders and regulators would benefit from the quantifiable transparency afforded by said rating, and debt financing would have an inherent regulatory-like structure to prevent predatory lending. By avoiding the courts, the distressed cannabis company would save time, money and create a more attractive scenario for potential lenders.

Initial Path to Mitigating Solutions

While the current challenges facing cannabis businesses today are well documented and have risen to both creditors and regulators attention, a viable solution has yet to be identified. Most likely no one solution exists beyond waiting for the economic and capital environments to evolve. Yet, mitigating options do exist.

The introduction of an ACA is one such option. Questions remain as to the mechanics, regulatory, operative and fiscal alike, as well as who to trust to take it on. The introduction of a credit rating framework is the first step to creating a solid foundation from within which an ACA can operate transparently and equitably. Any potential buy-in from regulators, creditors and operators remains an open question.

All of that said, there is today an unprecedented set of market forces that is pushing all cannabis stakeholders to think outside of the box. The still growing opportunities in the cannabis industry, the will of operators to survive and succeed, as well as the increasing exposure from creditors, all point to not only an acceptance for the need of an alternative, but to the drive to do things differently.

Is your cannabis business in distress? Would you benefit from expert guidance and support in deciding on whether to enter into a receivership?Reach out to United CMC today.

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United States: Alex Malyshev And Melinda Fellner Discuss The Intersection Of Tax And Cannabis In New Video Series – Part VI: Licensing (Video)




Carter Ledyard is pleased to announce the launch of our short-video series on the cannabis industry focusing on business and legal issues for those companies and entities interested in doing business in New York.

This series offers a perspective on tax policy and specific statutes affecting cannabis businesses today. Our cannabis shorts are a great way to get to know our professionals, Alex Malyshev and Melinda Fellner, in quick and easy to watch clips, packed with the salient information you need.

In Part VI of our series, Alex and Melinda discuss licensing for cannabis businesses in New York. Watch below!


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Pennsylvania Court Holds that It Is “High Time” Employers Reimburse Employees Who Use Medical Marijuana to Treat Work Related Injuries




On March 17, 2023, the Commonwealth Court of Pennsylvania issued a decision regarding employee use of medical marijuana in the workers’ compensation context.  The decision in Fegley v. Firestone Tire & Rubber (Workers’ Comp. Appeal Bd.) addresses an issue of first impression.  The court held that an employer’s failure to reimburse an employee’s out-of-pocket costs for medical marijuana to treat his work-related injury was a violation of the Pennsylvania Workers’ Compensation Act (“WC Act”).  The decision is significant for Pennsylvania employers.  Given this decision, Pennsylvania employers could be subject to penalties under the WC Act if they do not reimburse employees for medical marijuana use—even though marijuana is illegal under federal law and cannot be prescribed by any doctors.


The employee in the underlying case sustained a work-related injury to his back.  After decades of taking prescribed opiates and narcotics, the employee began using medical marijuana at the recommendation of his doctor.  His pain level improved through use of marijuana, to the point that he was able to wean himself off of the prescription drugs.  An entity responsible for evaluating the appropriateness of treatment for work-related injuries under the state workers’ compensation system found that the employee’s medical marijuana use was reasonable and necessary.  However, the employer refused to reimburse the employee for the cost of his medical marijuana treatment.

The employee filed a claim seeking penalties for the employer’s alleged violation of the WC Act by failing to pay for the cost of his medical marijuana use.  The employer prevailed at the agency level on the grounds that the Pennsylvania Medical Marijuana Act (“MMA”) says that coverage is not required for medical marijuana and requiring an employer to fund marijuana use would violate federal law and did not violate the WC Act.  The employee then appealed to the Commonwealth Court of Pennsylvania.


In a 5-2 decision, the Commonwealth Court of Pennsylvania disagreed with the agency ruling below, and thus reversed and remanded.  In reaching its decision, the Court analyzed the contours of, and the relationship between, the WC Act, the MMA, and related federal law.

Starting with the basics, the Court observed that the WC Act requires reimbursement to employees for reasonable and necessary medical expenses resulting from work-related injuries.  The Court also observed that the MMA deems marijuana to be a legitimate therapy for treatment of medical issues under proper circumstances.  And the MMA seeks to protect individuals who use medical marijuana by stating that medical marijuana patients shall not be “denied any right or privilege, . . . solely for lawful use of medical marijuana . . .”

The MMA, however, also has a section entitled “Conflict”, which provides that “[n]othing in [the MMA] shall be construed to require an insurer or a health plan, whether paid for by Commonwealth funds or private funds, to provide coverage for medical marijuana.”  This did not end the Court’s inquiry.  The Court found that the absence of the word “reimbursement” in this Conflict provision is significant.  While a well-reasoned dissenting opinion described “coverage” and “reimbursement” as “two sides of the same coin”, the majority disagreed.  The Court held that “coverage” and “reimbursement” have materially distinct definitions.  The Court reasoned that the MMA does not require coverage for medical marijuana, but there is no language in the MMA precluding a WC carrier from reimbursing a claimant for medical expenses that are reasonable and necessary to treat a work-related injury.  In the Court’s view, employers must therefore reimburse employees for medical marijuana treatment that is reasonable and necessary for work-related injuries.  This conclusion, the Court noted, is consistent with the WC Act’s reimbursement requirement, along with the MMA’s endorsement of medical marijuana and corresponding prohibition against the denial of rights or privileges based solely on medical marijuana use.

The Court also addressed the relationship between state and federal law.  The MMA contains a provision stating that [n]othing in [the MMA] shall require an employer to commit any act that would put the employer or any person in violation of federal law.”  Under federal law, it is unlawful for “any person knowingly or intentionally – [] to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance[.]” 21 U.S.C. § 841(a).  The Court did not find this to be a persuasive reason for reaching a different decision because reimbursement is not the same as manufacturing, distribution, or dispensing of marijuana.  Thus, reimbursement is not illegal.

In her dissent, Judge Christine Fizzano Cannon discussed the interplay between state and federal law.  She wrote that “[a]lthough the MMA legalizes the use of medical marijuana in Pennsylvania, a provider still cannot legally dispense medical marijuana under federal law” because it is illegal.  She reasoned that an illegal treatment cannot be reasonable or necessary under the WC Act and, in turn, an employer should not be responsible for reimbursement.


This decision—unless it is overturned or superseded—has immediate impact on employers in Pennsylvania.  Indeed, they are now required to reimburse employees for medical marijuana treatment for work-related injuries under the WC Act.  Failure to do so could result in penalties.  This holding is consistent with holdings in New Mexico, New Jersey, New Hampshire, New York and Connecticut.  However, it is contrary to holdings in Massachusetts, Maine, and Minnesota.

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