Cannabis Musings - September 26, 2023
Bankruptcy is still not available to U.S. cannabis companies, unless you're no longer a cannabis company, in which case, well, maybe.
Friends, it’s pretty much axiomatic these days that US plant-touching cannabis companies can’t file for protection under the Bankruptcy Code. We’ve talked about this problem before and the unprecedented dynamic it has created for operators, lenders, investors, landlords, creditors, etc.
And yet, just last week, a federal bankruptcy court in California (reminder: there’s no state-level bankruptcy) allowed The Hacienda Company, LLC’s (f/k/a Lowell Farms) bankruptcy filing, despite the objections of the U.S. Trustee (a program within the U.S. Department of Justice, that, among other things, gets involved in bankruptcy cases to enforce bankruptcy laws) that Hacienda was engaged in illegal cannabis-related activities, requiring the case to be dismissed (because, essentially, the Bankruptcy Code doesn’t support illegal businesses).
What’s the deal with that? Does this mean that cannabis operators may finally take advantage of the mechaye of the Bankruptcy Code, like stopping litigation and cramming down creditors? If you’ve been reading these Cannabis Musings for long enough, you’ve likely already surmised that the answer to that question is “no.” Here’s why.
This is a fairly unique case that’s really specific to the facts. In short, Hacienda d/b/a Lowell Farms, a California-based, vertically-integrated cannabis company, sold its assets in early 2021 to a publicly-traded Canadian company (which was then itself renamed Lowell Farms, Inc.), taking back 9.4% of the stock of the now-named Lowell Farms, Inc. Hacienda then stopped all of its operations (given that it now did nothing other than hold stock) for about 18 months, after which it filed for bankruptcy.
This is the key fact – when Hacienda filed for bankruptcy, it wasn’t a plant-touching company. It was an ancillary business – a shell that held stock in a publicly-traded, plant-touching company.
The U.S. Trustee argued that Hacienda’s bankruptcy petition should be dismissed because, although Hacienda was not directly violating the Controlled Substances Act (an argument the U.S. Trustee lost in the same case back in January), Hacienda was still engaged in “conspiracy” to violate the Act, and that the distribution of money to creditors would be the proceeds of money laundering. Interestingly (and fairly conclusory), the court agreed that, “more likely than not,” Hacienda conspired with Lowell Farms, and didn’t withdraw from that conspiracy after selling the assets.
Nonetheless, that didn’t matter to the court:
…in this case Debtor [Hacienda] is attempting to divest itself of its investment in a Canadian cannabis business that is legally traded on a Canadian stock exchange; nothing that Debtor proposes to do postpetition will foster a single additional sale of cannabis products, nor will it add a single dollar to any cannabis-related enterprise; and Debtor’s proposed Plan provides for an orderly liquidation for the benefit of creditors, much as a receiver under the Money Laundering Statutes would do.
In other words, the court won’t keep Hacienda’s creditors from getting paid just because it owns a bunch of stock in a plant-touching company that it wants to sell. The court noted that there are plenty of cases where illegal operations (like Ponzi schemes) have filed for bankruptcy and the court allowed for the sale of assets to get cash back to the creditors.
To me, this is a really great and fair decision. The court is very much looking at the very heart of the bankruptcy code – the creditors – and finding a way to make sure that policy rules don’t patchke doing the right thing: the “unusual circumstances” of the case mean that “any dismissal would undermine a very realistic possibility of a substantial payment to creditors.”
At the same time, the court seemed to make it crystal clear that it wouldn’t have drawn the same conclusion if Hacienda were still a plant-touching operator at (or around) the time it filed for bankruptcy: “There is no doubt that a debtor’s connections with cannabis can, in some circumstances, result in dismissal of their bankruptcy case.” So, I wouldn’t expect this case to open the gates to the promised land for U.S. operators.
We should also consider this in light of an older bankruptcy case involving another ancillary business. Back in December 2018, a federal bankruptcy court in Colorado ruled that Way to Grow, a hydroponics gardening retail business, could not take advantage of bankruptcy where “business activities constituting violations of the [Controlled Substances Act] are a major part of [Way to Grow’s] ordinary course of business.” (emphasis added). Whatever that means. The court there found that Way to Grow “certainly know” they’re selling products to grow cannabis, they “tailor their business to cater to those needs, tout their expertise in doing so, and market themselves consistent with their knowledge,” and that business never “materially changed post-petition.”
So, if you’re an ancillary business that works with plant-touching companies, maybe you can file for bankruptcy, or maybe not – it sorta kinda depends (that’s not legal advice).
With apologies to George Orwell, some ancillary businesses apparently are more equal than others.
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Hauser Advisory provides advice and strategy on business lifecycle events and cannabis industry navigation, tapping into a deep, national network and twenty-five years of dealmaking and capital markets experience.
© 2023 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form.