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Discussions about the possibility of cannabis rescheduling have continued on and off for years, with recent reporting suggesting that the administration is again "considering" the move (which we have previously discussed here). While rescheduling could have material benefits for a company's operations and finances, what impacts might it have on a cannabis-related company's ability to file for bankruptcy relief?
To answer this question, it's first worth reviewing why cannabis-related companies may be prohibited from filing for bankruptcy protection. Cannabis remains a Schedule I controlled substance under the federal Controlled Substances Act, 21 U.S.C. §§ 801-904 (the "CSA"). The CSA prohibits, among other things, the manufacture, distribution, dispensing of, or possession with intent to manufacture, distribute, or dispense, a "controlled substance." See CSA, § 841(a). a "controlled substance" includes any drug or other substances categorized in Schedule I through V. Id., § 802(6).
While case law remains in flux, many courts have held that a bankruptcy case must be dismissed if it would require the court, trustee, or debtor in possession to administer assets that are illegal under the CSA or that would constitute proceeds of activity criminalized under the CSA. Other courts have held that a bankruptcy filing or chapter 11 plan of reorganization is not in good faith if made by a debtor involved in an illegal enterprise.
Given that the CSA has broad prohibitions on activity related to substances in any schedule, a rescheduling of cannabis would not save it from the reaches of the CSA. As such, on its face, a company engaged in cannabis-related activity post-rescheduling would still be prohibited from obtaining bankruptcy relief. However, this answer may be different in practice.
The United States Trustee (the "UST") is typically the party spearheading efforts to dismiss bankruptcy cases or defeat plans of reorganization on the basis of violations of the CSA. While they have been ardent in opposing cases for company engaged directly in growing or selling cannabis, they have sometimes been reticent to push back against companies involved in more ancillary streams of business, such as paraphernalia or growing inputs, in part due to finite resources and lower odds of success. As such, the UST may de-prioritize contesting cannabis-related bankruptcy proceedings post-rescheduling.
Therefore, re-scheduling may have the practical effect of expanding the availability of bankruptcy relief for cannabis-related companies. However, those companies would continue to face the risk of opposition by the UST – the doors may open further, but walking through them remains risky.
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