United States: Are The Bankruptcy Courts Available For The Cannabis Industry?

Last Updated: March 19 2019
Article by Lance P. Martin

Since 2012, ten states and the District of Columbia have legalized marijuana for adult recreational use. 

Another 23 states have legalized some form of medical marijuana use.  At the federal level, the Agriculture Improvement Act of 2018, or AIA, decriminalized hemp and hemp-derived cannabidiol ("CBD"), by removing both substances from the definition of "marijuana" under the Controlled Substances Act of 1972 ("CSA").  With these legal changes, businesses of all stripes – from growers, extractors, and dispensers to product manufacturers, lenders, insurers, and others that do not "touch the plant" – have entered the cannabis industry across the country.  CBD is being touted as everything from a trendy additive to food and beverages – the new ginseng – to a miracle elixir, and products containing hemp-derived CBD are proliferating. 

Like any other industry, some cannabis businesses will thrive, others will struggle, and still, others will fail.  Many of these struggles are heightened for the cannabis industry due to unique regulatory challenges and difficulties obtaining insurance, banking services, merchant services, and access to capital.  When businesses struggle or fail in the cannabis industry, will the doors to the bankruptcy court be open to them – and their creditors – to reorganize their debts, liquidate their assets, and orderly pay claims?


In North Carolina, marijuana – and hemp if it contains too much delta-9 tetrahydrocannabinol ("THC") – is illegal.  But in those states that have legalized medical and/or recreational marijuana use, the courts have consistently held that businesses in the marijuana industry cannot rely on the protections of the Bankruptcy Code.

Recently, in In re Way to Grow, Inc., a bankruptcy court in Colorado – where recreational marijuana use is legal under state law – dismissed a bankruptcy filing by three companies who sold equipment for indoor hydroponic gardening.  The companies sold their equipment to growers of a variety of crops including marijuana, and their business plan and future expansion relied on continuing sales to marijuana growers.

The bankruptcy court pointed out that a party may not seek bankruptcy relief while violating or continuing to violate federal law.  Despite Colorado law, marijuana remains a Schedule I drug under the CSA, and growing and dispensing marijuana is a federal crime.  Therefore, businesses that grow or sell marijuana may not take advantage of bankruptcy, even to liquidate, because they violate federal law by growing or selling their products.  If they liquidated, then a trustee or debtor in possession would violate federal law when it sold marijuana products.

According to the Way to Grow court, the prohibition on bankruptcy relief also extends to businesses who do not "touch the plant."  In other words, it is no defense for a business to argue that it is not a grower or dispenser and that its products – like hydroponic gardening equipment – are not themselves illegal.  If a business sells or leases property to a business that touches the plant and continues to do so during bankruptcy, it enables another to produce or distribute marijuana and violates federal law.  The court found that the debtors knew their products were used to grow marijuana and they would have no viable business without their marijuana clients.  

Hemp and Hemp-Derived CBD

The AIA left regulation of hemp and hemp-derived CBD to the United States Department of Agriculture, the Federal Food and Drug Administration ("FDA"), and, if they so choose, applicable state-level agencies.  Simultaneous with the passage of the AIA, the FDA issued a non-binding press release.  It signaled the FDA's intent to regulate hemp and hemp-derived CBD being used to produce food, cosmetic, and dietary supplement products.  You can read more about the FDA's statement here

And then in February, the North Carolina Department of Agriculture and Consumer Services, Food and Drug Protection Division (the "Division") disclosed its intent to issue CBD Advisory Warnings.  The Division claims that under the Federal Food, Drug and Cosmetics Act, which has been adopted and implemented by North Carolina, (i) it is illegal to sell any human food or animal feed in North Carolina that contains CBD because CBD is the active ingredient in an FDA-approved therapy, (ii) CBD cannot be considered a dietary supplement because of its inclusion in an FDA-approved drug, and (iii) any product that contains CBD and makes health-related claims must be approved by the FDA before sale.  

The Division will issue warning letters to companies and retailers it believes violates these provisions.  For now, the Division has signaled that it will take an "educate first" approach with the industry.  But companies that ignore the Division's notices and demands may face additional future action, including product embargoes and seizures.  You can read more about the Division's statement here. 

For North Carolina businesses involved in the burgeoning market for edible and drinkable CBD products, there is uncertainty on how the bankruptcy courts will treat the positions of the FDA and the Division.  Will it be enough for a potential debtor to establish that it does business in the now "legal" – according to the AIA – hemp or hemp-derived CBD business?  Or will the FDA and Division's actions cause a bankruptcy court to treat certain CBD-related business activity as illegal – or illegal enough to deny it bankruptcy relief?  Unfortunately, the law is unsettled right now, and it is impossible to answer these questions with certainty.  Businesses should factor this uncertainty into their decisions.

Ward and Smith's  Hemp Law team has written extensively on these issues.  They caution that the legal landscape is dynamic, with major developments occurring rapidly.  Until the industry matures and federal and state regulators issue and implement final regulations, it is imperative that cannabis industry participants obtain timely updates and advice to protect their investments and minimize market risk. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions