Member Article

Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) is intended to give a debtor time and ability to restructure its balance sheet and business or to liquidate its assets responsibly in order to maximize recoveries of creditors. The Bankruptcy Code has the added benefit of the automatic stay, which generally prevents collection actions or actions to exercise rights and remedies against the debtor’s assets during the pendency of the bankruptcy case.

While the Bankruptcy Code and the filing of a bankruptcy case can be a powerful tool for debtors to restructure and contains many important protections for creditors, filing for bankruptcy has historically not been an option for many marijuana companies and companies ancillary to the marijuana industry.

While a majority of states have legalized marijuana for medical use and a growing number of states have legalized marijuana for adult recreational use, on the federal level, it remains unlawful to cultivate and dispense marijuana, knowingly rent space to a company cultivate or dispensing marijuana, and generally to conduct any ancillary or management functions for companies cultivating or dispensing marijuana.

Accordingly, courts and government watchdogs have been hostile to marijuana and marijuana-related companies availing themselves of the protections of the Bankruptcy Code when their business operations are illegal under federal law.^[1]Typically, a debtor in a Chapter 11 case will almost immediately be confronted by a motion to dismiss its Chapter 11 case, often brought by the United States Trustee (the government office charged with overseeing the bankruptcy process) but sometimes by other parties in interest.^[2]The party seeking dismissal utilizes Section 1112(b)(1) of the Bankruptcy Code, which provides for dismissal upon the showing of “cause.” “Cause” is defined in a nonexclusive list in Section 1112(b)(4) of the Bankruptcy Code, and parties seeking dismissal of the marijuana-related Chapter 11 case often allege that the cause present is either gross mismanagement of debtor’s estate (Section 1112(b)(4)(B)) or the debtor’s inability to confirm a plan of reorganization because the marijuana-related debtor cannot propose a plan of reorganization in good faith and not by any means forbidden by law (Section 1129(a)(3)) or a plan that is feasible (Section 1129(a)(11), i.e., the debtor’s plan demonstrates a reasonable assurance of success).

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