Hashish Chapter 101 – Canna Legislation Weblog ™

In a previous post, we discussed some of the emerging trends for cannabis-related businesses seeking bankruptcy protection (click here to view the previous post). But first and foremost, the question is, can a cannabis company file for bankruptcy waiver? This post reviews the first Arizona decision in the case of In re Medpoint Management, LLC, Case No. 2: 14-bk-15234-DPC. investigated, which was enacted on April 6, 2015. The Medpoint decision was made by the Venerable Daniel P. Collins, who was Chief Judge for the District of Arizona at the time of this decision.

The Medpoint case began with an involuntary petition by three filing creditors of Medpoint. Once an involuntary petition is filed, the alleged debtor has the option to respond to the petition and dismiss the lawsuit. That is exactly what happened in the Medpoint case.

Background information

Medpoint is a limited liability company incorporated under the laws of Arizona. Medpoint was a pharmacy management company operating under the Arizona Nature Wellness (“ANW”) pharmacy certification. Medpoint previously ran the marijuana business, relationships and cultivation of ANW. ANW had no employees, but Medpoint employed around 70 people. Medpoint acquired a stake in another company that held the management contract with ANW. In May 2014, ANW ended its relationship with Medpoint because ANW was dissatisfied with Medpoint’s performance under the management contract. Medpoint has failed to comply with a number of other agreements with the applicant creditors.

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While Medpoint made several arguments for why its case should be dismissed, the main argument related to whether a debtor could lawfully manage a marijuana-related business without violating the Controlled Substances Act (21 USC §801 et seq.).

The operational section of the Bankruptcy Act for filing a case dismissal is 11 USC Section 707 (a), which provides in the relevant part,

The court may dismiss a case under this Chapter only after notice and hearing and only for cause, including (1) undue delay by the debtor that is prejudicial to the creditors; (2) failure to pay any fees or charges required under Chapter 123 of Title 28; and (3) failure of the debtor in a voluntary case, within fifteen days or any additional time the court may grant after filing the motion to commence such case, as required by paragraph (1) of Section 521 (a.) Information to be submitted), but only at the request of the United States Trustee.

The court therefore asked whether there was any reason to dismiss Medpoint’s Chapter 7 case. Medpoint and the U.S. trustee argued that dismissal was warranted, while petitioning creditors argued that the court should issue an appeal under bankruptcy law.

In deciding to dismiss Medpoint’s lawsuit, the court used decisions from other counties addressing similar issues. The following is the Court’s discussion of the three cases it relied on.

In Arenas, the bankruptcy court found reason to dismiss the debtor’s claim because the debtor’s assets included marijuana and marijuana-related assets. In re Arenas, 514 BR 887, 892 (Bankr. D. Colo. 2014) (“The impossibility of lawfully administering the debtors ‘bankruptcy estate under Chapter 7 provides a reason for dismissing the debtors’ action under 11 USC § 707 (a) . “). The Arenas court ruled that “the trustee of Chapter 7 is the debtor. . . [could not] take control of the debtor’s property without violating Section 856 (a) (2) of the CSA “nor” to dissolve the inventory of marijuana plants that Mr. Arenas owned on the application date “, without violating Section 841 ( a) to violate the CSA. ID card. at 891. Since the trustee was unable to carry out his duties, the court found that the bankruptcy proceedings were pointless.

At Vel Rey, the Chapter 7 trustee wanted to run the debtor’s property in order to increase its sale value. In re Vel Rey Properties, Inc., 174 BR 859 (Bank No. DDC 1994). The trustee petitioned the bankruptcy court to be immunity from liability for any failure to comply with DC’s housing regulations while preparing the property for sale. ID card. 863. The court denied the trustee’s motion, stating that if either the trustee or the United States trustee refused, out of “concern”[] about personal liability. . . the court could simply dismiss the action under Section 707 for good cause. ”ID card. 866 (citing Ohio v Commercial Oil Serv. Corp., Inc., 58 BR 311 (Bankr. ND Ohio 1986)).

In another District of Colorado bankruptcy case, the owner was a landlord who received about 25% of its income from a marijuana company. In re Rent-Rite Super Kegs W. Ltd., 484 BR 799, 802-803 (Bankr. D. Colo. 2012). The bankruptcy court found that the letting to the marijuana company exposed the debtor to criminal liability and to the deterioration of the property. ID card. at 809. Due to the risks associated with the marijuana tenant, the bankruptcy court ruled that the debtor’s continued lease with the marijuana company was “gross mismanagement of the estate” and under Section 1112 (b) (4) (B). ID card.

On the basis of the above, the Medpoint court was convinced of the justification in these cases and rejected Medpoint’s involuntary petition.

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Several courts have found that a “reason” for dismissing bankruptcy cases was where the alleged debtor was directly involved in a cannabis deal. At least as far as these types of businesses are concerned, the law is clear – a business that is directly involved in the cultivation, cultivation, manufacture, or sale of cannabis is not eligible for bankruptcy protection. The law is less clear when a debtor has a weaker relationship with a cannabis company. For these debtors, the only real options may be government administration or unsupervised liquidation. The case law in this area is evolving.

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