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U.S. cannabis businesses undergoing distress often face hurdles in seeking bankruptcy protection, a common challenge in an industry prone to business downturns. However, there’s a glimmer of hope on the horizon with potential federal rescheduling of cannabis and shifting perspectives evident in recent bankruptcy cases.
Duane Morris Law firm associate, Ryan Spengler, expressed cautious optimism, noting that advancements in court rulings coupled with potential rescheduling may pave the way for new bankruptcy avenues for U.S. marijuana businesses. He stated that even before federal rescheduling, if bankruptcy courts begin to show leniency towards marijuana-related companies, it could signal a positive trend for the industry.
Meanwhile, distressed marijuana enterprises are exploring out-of-court restructuring and state court receiverships as alternatives to filing for federal bankruptcy. Some are even turning to Canadian insolvency rules, where applicable.
Federal bankruptcy laws in the United States mandate that bankruptcy plans must be proposed in good faith and in compliance with all applicable regulations. Since cannabis remains illegal under federal law, even state-regulated cannabis companies are excluded from federal bankruptcy protections.
Although rescheduling marijuana might seem like a solution, Spengler points out that it wouldn’t address the federal barrier to bankruptcy. He explains that regardless of whether marijuana is classified as Schedule I or III, bankruptcy courts would still view it as a federal violation.
New court rulings, nevertheless, provide some hope. A possible change in perspective is indicated by the fact that certain courts have started to permit the division of assets connected to cannabis for the advantage of debtors and creditors.
For instance, a 2023 ruling by a California bankruptcy court set a precedent by allowing the sale of stock in a Canadian marijuana company as part of a bankruptcy plan. Similarly, another case in 2023 saw approval from a bankruptcy court indicating the potential for more innovative approaches in marijuana bankruptcy cases.
Rescheduling marijuana could present fresh prospects for bankrupt cannabis companies, according to Kevin McLaughlin, a partner at Centri Business Consulting. He anticipates that eliminating 280E taxation, which is associated with Schedule III classification, could make cannabis businesses more attractive for restructuring. Despite the limitations in bankruptcy options, McLaughlin notes that cannabis companies still have alternatives such as out-of-court restructuring and receivership.
In the meantime, as regulated cannabis companies await changes in bankruptcy laws, income derived from the marijuana industry also poses challenges in personal bankruptcy cases.
Recent court decisions indicate a gradual shift away from a strict stance against marijuana-involved debtors seeking bankruptcy relief. This shift offers a glimmer of hope for individuals working in the industry who may seek bankruptcy protection in the future.
Any positive reforms to the existing federal marijuana policies are likely to be a welcome development to industry actors such as Cresco Labs Inc. (CSE: CL) (OTCQX: CRLBF) given how much the current prohibitionist environment has hamstrung their operations and growth.
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