While the banking challenge has been front and center for cannabis companies, bankruptcy court has been another. Due to the federal illegality of cannabis, access to traditional bankruptcy methods and courts has been off-limits. However, the tide may be turning for cannabis companies that find themselves unable to pay their debts.
Law360 reported that California’s U.S. Bankruptcy Judge Neil W. Bason rejected the Office of the U.S. Trustee’s second attempt to dismiss the Chapter 11 case of cannabis company The Hacienda Co. Law360 wrote that UST’s “claims that the case is a conspiracy to pay creditors using funds from criminal activity shouldn’t prevent Hacienda from using bankruptcy to liquidate assets.”
Bason filed an opinion on Wednesday writing, “It would be odd to read the Bankruptcy Code as implicitly barring any payments to legitimate creditors when that is what federal criminal law itself provides.”
Case Background
The judge’s opinion noted that Hacienda made and distributed cannabis products under the brand name Lowell Herb Co. Hacienda sold land in 2020 that it had intended to use as a cannabis cultivation center, and it used the money to pay certain creditors, according to court documents. The company closed down on Feb. 25, 2021.
After that, Hacienda transferred its assets to a publicly traded Canadian company, which changed its name to Lowell Farms Inc. (OTC: LOWLD). In return for the transfer of assets, Hacienda received roughly 9.4% share of Lowell Farms’ shares, valued at approximately $35 million at the time of sale.
Hacienda wanted to sell that stock in Chapter 11 to fund payouts to creditors, a plan the U.S. Trustee’s Office said would violate federal criminal laws and money laundering statutes.
The judge stated that UST’s arguments are about criminal activity and noted that bankruptcy courts don’t get involved in criminal proceedings. He noted that in other business bankruptcy cases, the companies didn’t stop what they were doing after filing for bankruptcy, citing the examples of Enron and PG&E, which could have been considered continuing criminal acts.
The judge referred to the creditors as innocent parties that would be the real victims if they didn’t have a chance to get paid back.
“Debtor is attempting to divest itself of its investment in a Canadian cannabis business that is legally traded on a Canadian stock exchange; nothing that debtor proposes to do postpetition will foster a single additional sale of cannabis products, nor will it add a single dollar to any cannabis-related enterprise; and Debtor’s proposed Plan provides for an orderly liquidation for the benefit of creditors, much as a receiver under the Money Laundering Statutes would do,” Bason concluded.
As more troubled cannabis companies find themselves in need of options, opinions like this could pave the way to use bankruptcy court as a solution to address lenders seeking payment for unpaid debts.
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