As the pendulum of American politics has shifted once again, cannabis is back on the menu. The change in presidential administrations, along with sweeping approval by voters in those states where legalization of cannabis was on the 2020 ballot, makes it more likely that Congress will pass legislation to decriminalize the manufacture, sale and distribution of cannabis at the federal level. At the present time, at least 36 states and the District of Columbia have legalized cannabis in some form or fashion. Indeed, the recent slate of victories on state ballots across the United States evidences the growing acceptance of cannabis by the majority of Americans.
In a recent article entitled “The Uncertain Future of Distressed Cannabis Bankruptcies and the 2020 Elections” published by New Cannabis Ventures (Dec. 4, 2020), I consider how a Biden-Harris administration will push to decriminalize cannabis at the federal level, which will open the door to distressed cannabis companies to reorganize or liquidate in bankruptcy. https://www.newcannabisventures.com/the-uncertain-future-of-distressed-cannabis-bankruptcies-and-the-2020-elections/ Because marijuana currently remains an illegal Scheduled 1 controlled substance under the Federal Controlled Substance Act (the “FCSA”), it is a federal crime to knowingly or intentionally to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute or dispense marijuana. The United States Department of Justice has stated its commitment to enforce the FCSA consistent with Congress’ determination that marijuana is a dangerous drug, and its illegal distribution and sale provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. Because the United States Bankruptcy Code and the Bankruptcy Courts are creatures of U.S. federal law, Bankruptcy Courts have generally refused to afford companies that engage in the manufacture, sale or distribution of marijuana and cannabis-related products the same protections available to non-cannabis-related businesses with few exceptions. This even applies to ancillary businesses such as landlords that rent to marijuana dispensaries or hydroponic farms, even if such activities are legal under state law. Bankruptcy Courts have almost unanimously concluded that involvement in the marijuana industry “betrays a lack of good faith” that prevents one from seeking the shelter of federal law. Therefore, as long as cannabis remains a Class I controlled illegal substance under federal law, Bankruptcy Courts will continue to dismiss cases – at least those cases where cannabis-related businesses wish to reorganize.
However, the 2020 federal and state elections have breathed new life and momentum into the marijuana legalization movement. The Democrat-controlled House of Representatives recently passed the Marijuana Opportunity Reinvestment and Expungement Act (“MORE Act”) and sponsored the SAFE Banking Act, which respectively seek to decriminalize marijuana at the federal level, and allow federally regulated banks and financial institutions to serve cannabis-related businesses that comply with the laws in the states where they operate, making it legal for banks and financial institutions to do business with the cannabis industry without fear of federal arrest or prosecution. But such bills were unlikely to pass the Republican-controlled Senate, particularly during a contentious general election. However, the Democrats’ ability to pass such legislation, which would certainly be signed into law by President Biden, is now more likely given the Democrats’ surprise win of both Senate seats in the Georgia runoff elections, handing the Democrats a threadbare majority with Vice President Harris as the tie breaker. If the MORE Act is approved by Congress and signed into law by President Biden, bankruptcy will become a useful tool for distressed cannabis-related businesses to reorganize or liquidate. However, a divided government will result in piecemeal solutions for distressed cannabis-related businesses that will provide little guidance or certainty.
In “The Uncertain Future of Cannabis Bankruptcies and the 2020 Elections,” I explain how bankruptcy courts have generally addressed bankruptcy filings by cannabis-related businesses, the challenges facing cannabis-related business to confirm a Chapter 11 Plan or liquidate in bankruptcy, and addresses state law alternatives to bankruptcy including receiverships, assignments for the benefit of creditors, creditor compositions or out of court workouts.