According to many economists, a recession is likely in the near future. A recession is likely to impact many businesses, even those booming such as the cannabis industry in California. Provided recessions usually result in a spike in bankruptcies, I would like to briefly discuss the bankruptcy landscape involving cannabis and those involved in it.
April 26, 2017, Office of Trustee’s Directive
On April 26, 2017, Director Clifford J. White III from the Executive Office for United States Trustees directed all bankruptcy trustees to move to dismiss or object in all bankruptcy cases involving marijuana assets on grounds that such assets may not be administered under the Bankruptcy Code. Click here to Read. According to Director White, the purpose of this directive was to prevent trustees from violating federal law by liquidating, receiving proceeds from, or in any way administering marijuana assets. Essentially, this meant any bankruptcy filers who listed marijuana-derived assets would have their bankruptcy filings dismissed and they would not be eligible for bankruptcy.
Now what is a marijuana-derived asset? Marijuana assets are defined broadly and according to the Trustee’s office includes anyone associated with the growth, manufacturing, or sale of marijuana, including “downstream” participants:
Landlords who rent to marijuana business tenants
Home growers
Managers
Growers
Dispensary employees
Fertilizer manufacturers
Anyone who derives profits or proceeds from marijuana
Director White later defended the directive writing, “Illegal enterprises simply do not come through the doors of the bankruptcy courthouse seeking help to further their criminal activities.” Read More.
Ninth Circuit Issues a Narrow Ruling
In May of 2019, the Ninth Circuit issued an anticipated decision Garvin v. Cook Investments, NW, SPNWY, LLC 922 F.3d (1031) (9th Cir. 2019), upholding the confirmation of a reorganization plan in bankruptcy where the debtor leased land to a marijuana farmer. Many in the cannabis industry rejoiced that this was the Ninth Circuit paving the way for marijuana asset bankruptcies, however, the court limited its ruling to the specific arguments made by the trustee that the plan should not be confirmed because debtors had derived income from marijuana-related activities. Since publication of the ruling, it appears that other Circuit courts have declined to follow the lead of the Ninth Circuit.
Caution Those Cannabis Industry:
What does this mean for those associated with the cannabis industry who hold marijuana assets? This means that it is unlikely that debtors who have marijuana related assets will be discharged from bankruptcy. Be wary of some bankruptcy lawyers who boast having the knowledge and expertise to successfully navigate through bankruptcy involving marijuana assets. It appears that the Garvin decision was not as expansive as some had hoped and the Trustee’s Office will continue to oppose and object to debtor bankruptcies involving marijuana assets.
For most involved in the cannabis industry, business is booming and bankruptcy is not on the horizon. Still, an economic recession may loom in the distant future and the cannabis industry in certain areas is experiencing over-saturation. While an argument can be made that cannabis will weather the recession such as alcohol and tobacco industries, those in the cannabis industry should be keep an eye on the current political climate and recession.