Drugs, including cannabis (marijuana)

Bankruptcy Courts Traditionally Eject Marijuana Debtors

Bradley Arant Boult Cummings LLP – N. Chris Glenos, Elizabeth R. Brusa and Whitt Steineker

“One of the first landmark bankruptcy cases regarding dismissal due to the debtor’s involvement in the marijuana industry is In re Rent-Rite Super Kegs West Ltd. In Rent-Rite, a secured creditor moved to dismiss the bankruptcy case of a landlord debtor that leased warehouse space to a tenant whose business involved growing marijuana. The court found cause to dismiss under section 1112(b) of the Bankruptcy Code due to the debtor’s gross mismanagement of the estate. Specifically, because the debtor leased space to a tenant for its marijuana business operations, which remained illegal under federal law, the debtor subjected the estate to federal seizure and forfeiture. Additionally, the court held that the debtor had unclean hands due to its continued marijuana business activities in violation of federal law. Finally, the court held that any Chapter 11 plan the debtor could propose would rely on income from a business activity illegal under federal law.”

Ninth Circuit bucks prior trends – 2019

“Bucking prior trends from bankruptcy courts, the Ninth Circuit recently affirmed a bankruptcy court’s refusal to dismiss a case in which the debtors’ business conduct violates the CSA. The debtors in Garvin v. Cook Investments NW, SPNWY, LLC, owned and managed real property that they leased to a tenant that grew marijuana. During the bankruptcy case, the UST moved to dismiss the debtors’ case due to the debtors’ violation of the CSA. The bankruptcy court denied the UST’s motion at that time because, although the debtors’ first proposed plan relied on rental income from a tenant that grew marijuana, the debtors stated at oral argument that they could revise the plan to reject the lease and fund the plan from other income. However, the court granted the UST leave to renew its motion to dismiss at the confirmation hearing if the plan still assumed the problematic lease and relied on its income for funding.”

At the time of plan confirmation, the U.S. Trustee did not renew its objection based on “gross mismanagement,” and the Ninth Circuit, in turn, found that such an objection was waived. The U.S. Trustee did, however, object to plan confirmation, arguing that the plan was “proposed…by…means forbidden by law.” The Ninth Circuit disagreed and confirmed the plan. In reaching its conclusion, the court held that it was not faced with a conflict between federal and state drug law, but rather a straightforward question of statutory interpretation, according to the commentary.

In another loss for the cannabis industry, a district court recently affirmed the dismissal of chapter 11 petitions filed by companies that sold product used by both state-licensed marijuana growers and non-marijuana growers. The district court’s decision in Way to Grow, Inc. Case 1:18-cv-03245-WJM-STV (diled 09/18/19 USDC Colorado) demonstrates that the door that was opened by the Ninth Circuit in Garvin v. Cook Invs. NW, 922 F.3d 1031 (2019) to cannabis companies was at best only partially opened. “The result in this case may be viewed by many as inequitable. The Debtors are insolvent, and their business could benefit significantly from reorganization under the Bankruptcy Code. The Debtors likely did not seek bankruptcy relief in bad faith on a subjective standard. But for the marijuana issue, this would be a relatively run-of-the-mill Chapter 11 proceeding. As stated, even following those courts which have crafted alternatives to dismissal when debtors were violating the CSA would produce no practical or efficient alternative to dismissal in this case. At bottom, if the result in this case is unjust, Congress alone has power to legislate a solution.”

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article: Sowing the Seeds of Marijuana Bankruptcy: a Look at Garvin v. Cook Burns & Levinson LLP – Joshua M. Robinson

Additional article: Garvin and its Aftermath: The Ninth Circuit Upholds a Bankruptcy Plan Contemplating Income From a Cannabis-Related Source and Several Bankruptcy Courts Quickly Weigh In.