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The Impact of COVID-19 on Creditor and Ancillary Relationships in the Cannabis Industry

March 24, 2020

Yesterday, Governor Hogan issued Executive Order 20-03-23-01, Maryland’s most restrictive coronavirus Executive Order to date.  The Order has the effect of shutting down any Maryland business deemed non-essential.  While medical cannabis growers, processors and dispensaries are permitted to continue operating as essential businesses providing health care and public health services, the medical cannabis industry, like all industries, is feeling the financial squeeze. 

 

Typically, when businesses experience a downturn they can look to the bankruptcy courts for help.  This is not true though for medical cannabis businesses.  Surprisingly, the inability to turn to the bankruptcy courts may extend beyond these specific cannabis businesses to the creditors, landlords and ancillary businesses associated with the medical cannabis industry as well.  Why is this?  The answer lies in the Controlled Substances Act (“CSA”) (21 U.S.C. §§ 801-971).

 

The CSA governs the manufacture, distribution, and dispensation of controlled substances in the United States. The Office of the United States Trustee, which conducts meetings of creditors and possesses certain policing/monitoring authority in the bankruptcy courts, has taken the position that a marijuana business cannot seek federal bankruptcy relief because the business itself violates the CSA.  The U.S Trustee has also taken the position that this prohibition extends to anyone providing ancillary services to a marijuana business.

 

In In re Arm Ventures, LLC, 564 B.R. 77 (Bankr. S.D. Fla. 2017), the bankruptcy court determined that the debtor, a commercial landlord of a building that had one unit leased to a marijuana business, could not reorganize in the bankruptcy court because the bankruptcy plan would be funded from income generated by the sale of marijuana.  In In re Medpoint Mgmt., 528 B.R. 178 (Bankr. D. Ariz. 2015), a creditor attempted to force a medical cannabis business into an involuntary bankruptcy.  The court in In re Medpoint Mgmt. determined that a creditor could not force a medical cannabis business to liquidate in bankruptcy because a chapter 7 trustee cannot liquidate the assets of a marijuana business without violating the CSA.  The court also found that the creditor could not force an involuntary bankruptcy because the creditor had unclean hands due to its relationship to the marijuana business. 

 

It’s also important to note that The Illicit Drug Anti-Proliferation Act of 2003 (21 U.S.C. § 856) expanded the CSA to include drug involved premises. This expansion of the CSA made it unlawful to “manage or control any place, whether permanently or temporarily, either as an owner, lessee, agent, employee, occupant, or mortgagee, and knowingly and intentionally rent, lease, profit from, or make available for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance” (21 U.S.C. § 856(a)(2).  It’s easy to see how a failing mortgage lender, lessor, or other creditor of a marijuana business could be seen as violating the CSA – and thus prohibited itself from seeking bankruptcy protection – in light of this statute.  Under certain circumstances, a creditor business could be prohibited from reorganizing if its plan would be funded by funds generated by a medical cannabis business.

 

Marijuana businesses or their creditors and ancillary businesses will find more success in navigating their financial difficulties by utilizing private workouts, receiverships, and other state court processes.  Going this route the first time will prevent a loss of time and valuable resources for businesses that need to think and act fast in this difficult time for all businesses.

 


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The contents of this Alert are for informational purposes only and do not constitute legal advice. If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or a member of the Shulman Rogers Cannabis Law Group.