William Hanlon
Because the hashish trade matures, there might be winners and losers. Losers lack entry to the U.S. Chapter Code. Marijuana associated belongings can’t be offered free and away from liens and encumbrances through the tried and true chapter part 363 sale, which leaves the loser’s collectors with out the perfect software to maximise the worth of the loser’s belongings, and deprives acquirers of a federal court docket order conveying belongings. What’s the state of play, and what’s the choice for the losers, their collectors, and the businesses that will purchase them?
STATE OF PLAY
The US Trustee Program (“USTP”), because the chapter system watchdog, has lengthy taken the place that the system is probably not used as in instrument in committing a criminal offense, and that trustees and property fiduciaries could not administer belongings in violation of federal prison regulation.[1] The prohibition extends past sellers and growers to landlords who knowingly hire, handle or use property “for the aim of producing, distributing, or utilizing any managed substance;” producers of drug paraphernalia, and anybody “who derives earnings or proceeds from an offense [of the Controlled Substances Act].”[2]
Chapter circumstances have been dismissed the place the plan needed to be funded with rental revenue from a dispensary,[3] as a result of the plan couldn’t be proposed “by means forbidden by regulation,”[4] and since the debtor proposed segregating, however persevering with to make use of, proceeds of his medical marijuana enterprise, which is property of his chapter property.[5] Equally, landlord debtors’ plans relying on dispensary revenue have been deemed unconfirmable,[6] and dismissed for “gross mismanagement” as a result of “prison exercise.”[7] A supplier of hydroponic and gardening provides for hashish was additionally denied aid.[8]
ALTERNATIVES TO BANKRUPTCY
Hashish firms face a difficult panorama: excessive taxes, oversupply, safety issues. Insolvency aid is accessible underneath state regulation treatments. Acquirers of hashish belongings can also want to purchase these belongings at state regulation foreclosures, for defense in opposition to fraudulent switch, successor legal responsibility and junior encumbrancer claims.
Commerce Creditor Agreements will be utilized the place there’s a viable enterprise, and the debtor can acquire the consent of a excessive share of its collectors to defer or cut back reimbursement. Usually, the debtor presents a plan for reimbursement to its collectors, and guarantees to consummate it upon receiving consent of a minimum of 85% of commerce collectors. Such agreements are voluntary, however will be efficient if the debtor has respectable prospects and a minimum of truthful relationships with its collectors.
Task for the good thing about collectors (“ABC”) is one other voluntary transaction the place the hashish debtor transfers its belongings to an “Assignee,” whose job is to liquidate the debtor’s belongings and distribute the proceeds of these belongings to collectors. If the Assignee is skilled and clear, most collectors are glad with a voluntary plan of motion for liquidation of belongings, and can stand down on assortment actions. As a result of most ABC’s aren’t court-supervised, some collectors is not going to deem it reliable. Moreover, points regarding transferring licenses come up each relating to the Assignee and any potential acquirer.
Foreclosures proceedings provide a statutory mannequin for conveying actual property and private property free and away from junior liens. Whereas efficient at transferring belongings, neither a mortgage foreclosures nor a personal or public disposition underneath the Uniform Industrial Code (“UCC”) can switch a license to promote or develop hashish. Mortgage foreclosures and UCC gross sales will be judicial or non-judicial, however most UCC gross sales are non-judicial.
State regulation receiverships are sometimes modeled after the chapter code, and include analogous protections and provisions. In hashish authorized states, a receivership may end up in a court docket order allowing the switch of belongings free and away from liens and encumbrances, and is an efficient software for “washing” the hashish belongings. The draw back of state regulation receiverships is that they hardly ever allow present administration to function the enterprise. Points usually come up relating to a receiver’s statutory authority to function a licensed hashish enterprise and not using a license, which is each an obstacle to receivership and alternative for the licensee to play a job within the receivership.
Till Congress joins the vast majority of states which have legalized hashish, trade gamers ought to look to a number of of the above state regulation treatments for insolvency aid.
[1] “Why Marijuana Belongings Could Not Be Administered in Chapter.” American Chapter Institute, 1 Dec. 2017, https://www.abi.org/abi-journal/why-marijuana-assets-may-not-be-administered-in-bankruptcy. [subscription required]
[2] Managed Substances Act, 21 U.S.C. §§ 801 et seq.
[3] In re Arenas, 535 B.R. 845 (10th Cir. B.A.P. 2015).
[4] In re Mom Earth’s Different Therapeutic Cooperative, Inc., case no 12-10223-LT11, Dkt no. 54 (Bankr. S.D. Cal October 23, 2012).
[5] In re Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015).
[6] Arm Ventures, LLC, 564 B.R. 77 (Bankr. S.D. Fla 2017).
[7] In re Hire-Ceremony Tremendous Kegs West Ltd, 484 B.R. 799 (Bankr. D. CO 2012).
[8] In re Method to Develop, Inc., 597 B.R. 111 (Bankr. D. CO 2018)
