As those in the cannabis industry are fully aware, the option of bankruptcy has not been available to cannabis or many cannabis-adjacent businesses to date. The courts have consistently indicated debtors who work in the cannabis industry or derive meaningful income from cannabis activity (directly or indirectly) cannot use bankruptcy, a federal mechanism, so long as marijuana remains illegal under federal law. The seminal Arenas decision from 2014 observed that things get especially awkward when “granting [relief to the debtor] directly involves a federal court … administering the fruits and instrumentalities of federal criminal activity.”
This rationale has prevailed without exception for a decade now. Here and there, a bankruptcy court will break away in very limited and specific scenarios, like when the Ninth Circuit confirmed a plan of reorganization for a group of cannabis-adjacent real estate companies in 2019 (see that post here). A recent case highlights perhaps another specific scenario in which a distressed cannabis business was given the chance to pursue bankruptcy under federal law.
Facts of In re: The Hacienda Company, LLC
The Hacienda Company, LLC (“HC”) was in the business of wholesale manufacturing and packaging cannabis products under the “Lowel Herb Co.” brand, also known
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