Federal Bankruptcy Unavailable To Cannabis Companies per DOJ Directive

December 12, 2017 Advisory

The legal cannabis industry is expected to sustain high rates of growth in the coming years. But the industry faces legal and organizational challenges due to strict federal cannabis policies. A directive from the Director of the United States Trustees earlier this year reminds cannabis businesses of the precautions they will want to take in planning for insolvency.

While medical cannabis is now legal in twenty-nine states and the District of Columbia,[1] cannabis remains an illegal substance under federal law. The federal government categorizes cannabis as a Schedule I drug under the Controlled Substances Act, alongside drugs such as heroin, LSD, and MDMA. A Schedule I drug is considered to have "no currently accepted medical use" and "a high potential for abuse."

The federal categorization of cannabis has repercussions on whether bankruptcy law is available for distressed companies with cannabis-based assets or operations. Bankruptcy law is federal, and bankruptcy proceedings are brought in the federal court system.

The Department of Justice (DOJ) affirmatively denied federal bankruptcy protection to companies with cannabis assets this April in a directive to the U.S. Trustees. Director of the U.S. Trustees Clifford White issued a letter stating that cases involving cannabis assets "may not be administered under the Bankruptcy Code . . . even in cases in which such assets are not illegal under state law."[2]

To read the full advisory, please click the PDF link below.

[1] "State Medical Marijuana Laws," September 14, 2017, National Conference of State Legislatures, http://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx.

[2] Clifford J. White, Executive Office for United States Trustees, letter to Chapter 7 and Chapter 13 U.S. Trustees, April 26, 2017, https://www.justice.gov/ust/file/marijuana_assets.pdf/download.

Thank you to Lena Bae and Richard Luedeman for their contributions to this article.

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