On September 20, 2023, the U.S. Chapter Court docket for the Central District of California (“Court docket”) confirmed a plan for a cannabis-related enterprise (“Debtor”) to promote its fairness pursuits in a Canadian hashish firm, Lowell Farms, and distribute the proceeds to its collectors. In distinction with chapter courts that routinely dismiss cannabis-related enterprise filings primarily resulting from alleged Managed Substance Act (“CSA”) violations, the courtroom discovered that any CSA violations occurred earlier than the chapter, and that the “Debtor’s orderly liquidation of its inventory in Lowell Farms, and distribution of the proceeds to collectors is completely in step with the targets and functions of the Code.” (In re The Hacienda Company, LLC, __ B.R. __, 2023 WL 6143216 (Bankr. C.D.Cal., September 20, 2023)) The courtroom’s ruling could open a brand new path for cannabis-related companies to make the most of the U.S. Chapter Courts.
Previous to the chapter, the chapter 11 debtor, The Hacienda Firm, LLC (“Debtor”), offered its identify and property to Lowell Farms in alternate for shares of Lowell Farms. Debtor then filed for chapter, proposing to promote the shares or distribute them to its collectors. The USA Trustee (“UST”), a quasi-judicial entity charged with overseeing the chapter system, moved to dismiss, claiming that Debtor “is successfully conspiring to proceed carrying on its California hashish enterprise not directly, by means of its possession curiosity” in Lowell Farms, which operates beneath the Debtor’s former identify, or alternatively, was illegally taking advantage of the hashish enterprise, every a violation of the CSA. (In re The Hacienda Company, LLC, 647 B.R. 748, 753 (Bankr. C.D. Cal. 2023)) The Court docket discovered that the UST had not carried its burden, and that the “Debtor’s passive possession of inventory, with intent to liquidate that inventory to pay collectors, will terminate any reference to hashish”. (Id. at 754.) Furthermore, the Court docket discovered that there was no “per se” rule requiring dismissal for a violation of the CSA, analogizing CSA violations to different prepetition violations occurring in instances involving fraud, sexual abuse, tax violations, well being and wage violations. (Id. at 755.) The Court docket refused to search out trigger to dismiss the case, and that Debtor’s intent to liquidate and pay its collectors was in step with federal legislation and a profit to all collectors. (Id. at 756.)
These findings carried over to the Court docket’s approval of the Debtor’s plan of reorganization as “proposed in good religion and never by any means forbidden by legislation”:
Debtor’s momentary retention of [Lowell Farm] inventory, whereas divesting itself of that connection to hashish, doesn’t foster a single sale of any hashish merchandise, nor does it add a single greenback to any cannabis-related enterprise. Though Debtor’s funds to collectors could embody distribution of “in poor health gotten positive factors” (to the extent that proceeds from U.S. operations violate federal legislation), such distribution to collectors is what prison legislation itself supplies.
The Court docket declined to certify the UST’s request for a direct enchantment to the Ninth Circuit.
The Court docket’s reasoning may apply to debtors who’ve some relationship with hashish, however whose circumstance brings them to chapter courtroom. The owner with a cannabis-related tenant. The service supplier with cannabis-related purchasers. Placing previous violations of the CSA on a par with different prison violations and exercising discretion to not impose a per se rule towards cannabis-related companies places them on equal footing with equally located companies and opens the door to the a basic mission of the U.S. Chapter Code, maximizing return to collectors.