Bankruptcy Courts Remain Inhospitable to Cannabis Industry
In our July 2019 Maryland Legal Alert, we reported on Garvin v. Cook Invs. NW, a decision from the United States Court of Appeals for the Ninth Circuit in which the court affirmed the confirmation of a Chapter 11 plan of reorganization over the U.S. Trustee’s objection, despite the fact that rental income from a cannabis business provided indirect support to the debtors’ plan. Many cannabis-related bankruptcies are terminated by similar motions to dismiss because the cultivation and sale of cannabis remains a federal crime.
Though this case may have appeared to clear a path for businesses with ties to the cannabis industry to seek bankruptcy protection, we noted that certain procedural quirks in the case likely limited the utility of this holding. Recent bankruptcy cases from Colorado and Michigan dismissing Chapter 11 petitions filed by businesses tied to the cannabis industry have cast doubt on the Garvin decision.
The Colorado case concerned debtors that sold indoor hydroponic and gardening-related supplies. The court denied confirmation and dismissed the debtors’ cases for cause, given that their business relies on the sale of supplies that would be used to grow cannabis. The court questioned the Garvin court’s focus on whether the plan was proposed by “means forbidden by law” (rather than review the plan’s terms for potential illegalities). The court instead held that dismissal was warranted, because a Chapter 11 debtor simply cannot propose a plan in good faith when the plan relies on profits from cannabis.
Similarly, in the Michigan case, the court dismissed a Chapter 11 petition on bad faith grounds. The debtor’s sole shareholder filed the petition to avoid a lease with a cannabis dispensary so he could establish his own cannabis dispensary at the property. In so holding, the bankruptcy court questioned the Garvin decision as implicitly sanctioning violations of federal law.
Chapter 13 consumer debtors with ties to the cannabis industry have similarly faced roadblocks to bankruptcy relief. In a recent Chapter 13 case from Colorado, the U.S. Trustee objected to the debtors’ plan, because the debtors had reduced the amount of their disposable income available to fund plan payments to account for their monthly medical cannabis expense. The court denied confirmation, reasoning that the debtors’ plan would have forced the court to authorize an activity that remains illegal under federal law.
Practice Pointer: The Garvin decision has proven to be more of an anomaly than a pathway for debtors with ties to the cannabis industry to seek relief under bankruptcy law. So long as cannabis remains a controlled substance under federal law, persons and businesses with ties to the cannabis industry will be hard-pressed to seek relief under the Bankruptcy Code.
Please contact Bryan Mull for more information concerning this topic.
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