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FEATUREBANKRUPTCY & COMMERCIAL LAW

IS YOUR CANNABIS BUSINESS

GOING UP IN SMOKE?

BY NATHANIEL R. SINN & HEATHER E. HEBERLEIN

t is no secret that the cannabis business distribution or sale of cannabis.
is booming. Since 2012, 33 states and the In re Way to Grow Inc., 597 B.R.
District of Columbia have legalized the use 111 (Bankr. D. Colo. 2018), stay
of marijuana for medical or recreational pending appeal denied No. 18-cv-
I purposes (or both), and an entire industry 3245-WJM, 2019 WL 669795 (D.
has been (and continues to be) born around it. Colo., Jan. 18, 2019).
With such rapid expansion in this relatively new
industry, competition will inevitably cause some The Start of a Shift?
of these companies to fail. According to the Small Although the federal government is
Business Administration, approximately 30% of unlikely to change marijuana’s classification
all new businesses fail during the first two years of under the CSA soon, there has been some
operation; 50% fail within the first five years; and progress in the area. Two recent opinions
66% fail within the first ten. Yet, because marijuana suggest a slight shift may be occurring, perhaps
remains classified a “Schedule I” substance under to address the dichotomy between the push by State Law Alternatives
the federal Controlled Substances Act, 21 U.S.C. states to legalize marijuana and federal drug In the meantime, distressed
§801 et seq. (the CSA), filing for protection under laws. In In re Arm Ventures, LLC, 564 B.R. 77 cannabis companies may be
the Bankruptcy Code largely continues to be an (Bankr. S.D. Fla. 2017), the bankruptcy court able to utilize a variety of state-law remedies.
unavailable remedy for these businesses (and the declined to dismiss a chapter 11 case “ripe for In Ohio, two such remedies include an
individual principals). dismissal” because there were significant non- assignment for the benefit of creditors (ABC)
insider unsecured claims, and gave the debtor and a receivership.
Establishment of the General Rule leave to propose a plan that did not depend on
The rationales for dismissal set forth in two of marijuana as a source of income. And, in In re Assignment for the Benefit of Creditors
the earliest cannabis cases — In re Rent Rite Cook Investments NW, Spnwy, LLC, Case No. In general, an ABC is an “[a]ssignment of a
Super Kegs W. Ltd., 484 B.R. 799 (Bankr. D. Colo. 16-47782 (Bankr. W.D. Wash., Jun. 21, 2017) the debtor’s property to another person in trust so as
2012) and In re Arenas, 514 B.R. 887 (Bankr. D. bankruptcy court declined to dismiss the chapter to consolidate and liquidate the debtor’s assets for
Colo. 2014) — are utilized in nearly all of the 11 case of a single-asset real estate debtor leasing payment to creditors, any surplus being returned
cases decided since. In both cases, the court space to a marijuana grower operating lawfully to the debtor.” Black’s Law Dictionary (11th ed.
dismissed the case of a landlord whose tenant under Washington state law and confirmed 2019). Originally creatures of common law, many
used the leased space to cultivate marijuana. In its reorganization plan over the objection of states codified ABC’s beginning in the late 1800s.
Rent Rite, the court found cause for dismissal the UST. The basis of UST’s objection was that See, i.e. Brashear v. West, 32 U.S. 608 (1833).
under 11 U.S.C. §1112(b) on theories of: (1) gross the debtor’s plan was unconfirmable under 11 In Ohio, ABCs are governed by O.R.C
mismanagement of the estate; (2) unclean hands; U.S.C. §1129(a)(3), which requires a plan not be §1313.01, et seq., which provides a comprehensive,
and (3) no prospect for confirming a plan due proposed by means forbidden by law. The Ninth albeit dated, statutory scheme outlining the
to reliance on activity illegal under the CSA. In Circuit Court of Appeals affirmed the decision requirements of an assignee. ABCs typically are
Arenas, the court dismissed the debtors’ chapter of the previous courts holding that §1129(a)(3) implemented for the liquidation of an insolvent
7 case finding that a trustee could not lawfully forbids confirmation of a plan that is proposed business, and the statute requires the assignee to
administer the debtors’ assets. in an unlawful manner, but does not forbid sell all real and personal property owned by the
More recently, in December 2018, a court held, confirmation of a plan that has substantive assignor. O.R.C. §1313.21. But, the probate court
for the first time, that bankruptcy protection provisions that depend on illegality. Gavin v. has discretion to permit the assignee to operate
may not be available to “downstream” cannabis Cook Investments NW, SPNWY, LLC (In re Cook the assignor’s business with the consent of “three-
businesses, i.e., those businesses peripherally Investments NW, Spnwy, LLC), 992 F.3d 1031 fourths in number and amount” of the assignor’s
related to the cultivation, manufacture, (9th Cir. 2019). creditors. O.R.C. §1313.31

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