While numerous states have legalized the cultivation, sale and use of marijuana for both medicinal and recreational purposes, such actions remain illegal under the federal Controlled Substances Act. Additionally, it is also illegal under the Controlled Substances Act to rent, lease, profit from or make available for use a location for the manufacture, storage or distribution of a controlled substance. As a result, the doors to U.S. bankruptcy courts have been closed as an available protection for troubled cannabis companies.
Given the impact of the ongoing coronavirus pandemic on the cannabis market and the uncertainty of bankruptcy protections, distressed cannabis companies are left out in the proverbial cold in the United States. So, not surprisingly, some cannabis companies with operations and assets in the United States have turned to Canada for relief.
Unlike in the United States, Canadian companies may seek relief under the Canadian Bankruptcy and Insolvency Act. If the Canadian company also has operations in the United States, it may seek to circumvent the general refusal of U.S. bankruptcy courts to administer cannabis-related companies by initiating a cross-border insolvency. Once the Canadian bankruptcy case is initiated, the “foreign representative” of the Canadian company must file a petition for recognition of the foreign proceedings in a U.S. bankruptcy court pursuant to Chapter 15 of the U.S. Bankruptcy Code. Once, and, if, the petition is accepted, the foreign representative may seek substantive relief, such as invoking the automatic stay, restructuring or liquidation of its assets, in U.S. Bankruptcy Court.
If a foreign case is recognized, a bankruptcy court may grant “any appropriate relief” in order to “effectuate the purpose of this chapter  and to protect the assets of the debtor or the interests of the creditors.” Such relief expressly includes:
– Staying the commencement or continuation of an individual action or proceeding concerning the debtor’s assets, rights, obligations or liabilities to the extent they have not been stayed under section 1520(a);
– Staying execution against the debtor’s assets to the extent it has not been stayed under section 1520(a);
– Suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor to the extent this right has not been suspended under section 1520(a);
– Providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities;
– Entrusting the administration or realization of all or part of the debtor’s assets within the territorial jurisdiction of the United States to the foreign representative or another person, including an examiner, authorized by the court;
– Extending relief granted under section 1519(a); and
– Granting any additional relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550 and 724(a).
However, 11 U.S.C. § 1506 provides that a U.S. bankruptcy court may “refuse to take an action governed by Chapter 15 … if the action would be manifestly contrary to the public policy of the United States.” Given the U.S. Trustee’s unwavering position on the denial of access to cannabis-related bankruptcies in the U.S. bankruptcy courts, the U.S. Trustee will certainly oppose any such Chapter 15 petition and argue that because cannabis is illegal under federal law in the United States it would be “manifestly contrary” to the country’s public policy to allow a cannabis business the protection of the U.S. bankruptcy courts.
Courts have interpreted the public policy exception narrowly and one that should be applied sparingly. The “key determination” in evaluating the public policy exception is whether the procedures used in the foreign court “meet our fundamental standards of fairness” (In re Toft). Bankruptcy courts that have invoked the public policy exception have done so when the case involves a violation of constitutional rights afforded under the U.S. Constitution.
In Toft, the court held that “the relief sought would directly compromise privacy rights subject to a comprehensive scheme of statutory protection, available to aliens, built on constitutional safeguards incorporated in the Fourth Amendment as well as the constitutions of many States.” The relief “would impinge severely a U.S. Constitutional or statutory right.” Bankruptcy courts have also refused to invoke the public policy exception merely because a conflict of law exists between the foreign jurisdiction and the United States.
Generally, bankruptcy courts have dismissed bankruptcy cases related to the cannabis industry for cause pursuant to 11 U.S.C. § 1112 or by invoking other bankruptcy statutory provisions. More recently, bankruptcy courts have attempted to evaluate the connection of the bankrupt debtor to the cannabis industry in assessing the continued viability of the bankruptcy case.
As a Colorado Bankruptcy Court recently opined (In re Malul) as to the gray area in cannabis bankruptcy law: “If the uncertainty of outcomes in marijuana-related bankruptcy cases were an opera, Congress, not the judiciary, would be the fat lady. 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. Despite the extensive development of case law, significant gray 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 gray.”
While several Canadian companies have filed bankruptcy in Canada, no company has attempted to test the waters with a Chapter 15 cross-border insolvency petition. Given the U.S. Trustee’s resistance to cannabis-related companies filing bankruptcy in the United States, along with the marching orders from the U.S. Trustee Office to seek dismissal of those cases, one should expect the same hurdles if a company filed a petition for cross-border insolvency.
While the U.S. bankruptcy courts have shown an easing of a per se approach to the dismissal of cannabis-related companies, a company whose operations are significantly composed of cannabis operations would still be denied access to those courts.
The unknown factor in what will be a challenging year for all businesses, including cannabis companies, is the result of the 2020 election and the prevailing candidate’s position on cannabis.