Can Cannabis Businesses File for Bankruptcy?

After a challenging year for many businesses, small businesses in particular, filing for bankruptcy may be the only viable option left. The Covid-19 pandemic continues to impact a range of markets, and filing for bankruptcy gives honest debtors a chance to rebuild. However, marijuana remains illegal under federal law, and hemp and cannabis businesses are commonly deemed ineligible for this recourse as federal bankruptcy courts cannot support either the possession or sale of illegal assets. 

While no business wants to consider bankruptcy as an option, commercial bankruptcy often provides a valuable lifeline for troubled companies, especially during an economic downturn. But what are some of the alternatives to bankruptcy for cannabis businesses? Have the events of 2020 set any new precedents for bankruptcy in the cannabis industry? Below we take a closer look at some of the options and recent developments for cannabis business owners. 

Possible Alternatives to Bankruptcy for Cannabis Businesses

Business owners facing financial distress in the cannabis space are left with few alternatives. An assignment for benefit of creditors, otherwise known as an “ABC,” gives businesses the ability to assign their assets to a third party and enables the company to discontinue in an organized manner. ABCs are created and managed under state law, which gives legal cannabis businesses operating under respective state law a valid option.

As a second alternative to bankruptcy for cannabis businesses, a receivership assists businesses in recovering funds. In this financial process, the state appoints a third-party trustee to restructure and run the business. Receivership can sometimes be a controversial procedure, as the third party “receiver” acquires control and management abilities, but this is often still favorable to shutting down completely. Additionally, the cannabis business owners may be able to negotiate beneficial provisions, such as the ability to sell company assets.

Lastly, cannabis businesses may initiate “workout negotiations” with the creditors. This procedure takes place outside of the court system and requires that the involved parties reach a mutually favorable agreement. 

Progress Regarding Bankruptcy For Cannabis Businesses

Lawmakers, bankruptcy lawyers, and industry members alike expected to see significant progress after the 2014 Farm Bill and the 2018 Farm Bill were passed, especially as hemp was legalized and removed from the Controlled Substances Act, but hemp and cannabis businesses continue to face challenges regarding bankruptcy. However, in November of 2020, hemp business GenCanna Global’s Chapter 11 Plan of Liquidation was finally confirmed. The Eastern District of Kentucky Bankruptcy Court approved the sale of $77 million to its lender and creditor, MGG Investment Group. The bankruptcy petition contained 81 different companies, and the remaining assets are to be distributed in order of priority.  

While filing for bankruptcy is not an ideal circumstance for a cannabis business owner, this bankruptcy case is promising news, as it brings the cannabis industry one step closer to clarity and structure. 

The cannabis lawyers at Ritter Spencer Cheng are well-versed in a range of practice areas, including cannabis law, hemp and CBD law, medical marijuana law, business and corporate law, bankruptcy law, and more. David Ritter offers over 24 years of experience in commercial and business litigation as well as business restructuring and bankruptcy law. Chelsie Spencer demonstrates years of experience in cannabis and hemp law and represents all facets of the legal marijuana industry. Contact Ritter Spencer Cheng or give us a call at 214.295.2070 for more information.