What impact does cannabis have on bankruptcy proceedings?

Businesses in the US should be aware of ongoing proceedings in bankruptcy courts related to companies that have been involved in cannabis. Bankruptcy filings and proceedings are unavailable to these companies as it remains an illegal substance at the federal level. This means that businesses forming contracts with companies – even if those companies are only tangentially involved in cannabis – are at risk, even if they believe they are a secured creditor.

A number of cases have now shown the limitations of a recent judgement allowing a bankruptcy case to proceed in the Ninth Circuit Court of Appeals. In that instance, a judge ruled that the case could proceed as he narrowly interpreted a statute prohibiting illegal business activity only to the plan created to reorganise the business under Chapter 11 and not to the company’s activities as a whole, which were in any case legal under state law in many of the districts under the Ninth Circuit Court’s jurisdiction even if they were illegal under federal law.

However, other judgements have shown that this narrow interpretation is unlikely to be followed by other courts in other jurisdictions. A judge in Colorado was quick to criticise the Ninth Circuit Court’s decision.

“Whether, and under what circumstances, a federal bankruptcy case may proceed despite connections to the locally legal marijuana industry remains on the cutting-edge of federal bankruptcy law,” he said.

 “Despite the extensive development of case law, significant grey areas remain. Unfortunately, the courts find themselves in a game of Whack-a-mole; each time a case is published, another will arise with a novel issue dressed in a new shade of grey.”

Law firm Harris Bricken added that even those that would fit under the jurisdiction of the Ninth Circuit Court cannot consider themselves high and dry – with other cases still likely to be dismissed.

All this means that companies should be very aware of any cannabis activity being undertaken by trading partners as more and more CBD-related firms find they can no longer continue as viable operations.

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