In a recent article, senior officials with the Department of Justice’s Office of the United States Trustee (the “UST”), the federal government’s watchdog of the bankruptcy system, reaffirmed the department’s position that bankruptcy relief is not available to businesses in the weed industry. Such a reaffirmation of a well-established policy is not new. However, the article is noteworthy in that it clarifies just how broadly the UST is willing to expand the scope of that policy and that it may prevent “downstream” participants, such as landlords of marijuana dispensaries, from accessing relief under the bankruptcy code.
The article correctly notes that “the bankruptcy system may not be used as an instrument in the ongoing commission of a crime,” that “reorganization plans that permit or require continued illegal activity may not be confirmed,” and that “estate fiduciaries should not be required to administer assets if doing so would cause them to violate federal criminal law.” As such, it is the UST’s position that it will seek dismissal of a bankruptcy case filed by a company in the business of selling marijuana. The larger question addressed by the article, however, is what happens when a bankruptcy case “would not require the trustee to sell marijuana (but would require the trustee to administer other marijuana-derived property)” or in a case “where the debtor is a ‘downstream’ participant in a marijuana business, such as a lessor of a building used for a marijuana dispensary[?]”
In the eyes of the UST, the answer is simple: “under the [Controlled Substances Act (the “CSA”)], there is no distinction between the seller or the grower of marijuana and the supposedly more ‘downstream’ participants[.]” All, according to the article, “are in violation of federal criminal law.” In other words, “not only would a trustee who offers marijuana for sale violate the law, so too would a trustee who liquidated the fertilizer or equipment used to grow marijuana, who collected rent from a marijuana business tenant or who sought to collect the profits of a marijuana investment.”
The cannabis industry is forecasted to enjoy billions in sales revenue over the coming years; however, a certain percentage of businesses – even in growing industries like cannabis– always fail or need restructuring. The cannabis industry in particular is vulnerable to an uncertain regulatory environment that may impact a business’s ability to grow and satisfy creditors (see TBT post). And while it remains to be seen just how far the UST will go to enforce its policy, the expansive scope of the UST’s position with regard to who may be barred from accessing the relief afforded by the bankruptcy process should, nonetheless, raise concerns within the weed industry. If, for example, a landlord is prevented from confirming a chapter 11 plan of reorganization because plan payments are derived from rental income from a marijuana dispensary, will this impact a landlord’s willingness to rent retail space to a dispensary? Or, will equipment suppliers think twice before entering into a contract with marijuana growers or increase the price for such supplies to account for the risk that they may not be permitted to seek the protection of the bankruptcy courts? The only certainty, as stated in the article, is that the UST “will continue to enforce the legislative judgement of Congress by preventing the bankruptcy system from being used for purposes that Congress has determined are illegal.”