Cannabis Rescheduling Will Not Open Bankruptcy Doors

As previously discussed by Foley Hoag’s attorneys in its Cannabis practice, a rescheduling of cannabis from a Schedule I Controlled Substance to a Schedule III Controlled Substance will provide cannabis businesses with the ability to claim tax deductions and a host of other potential benefits, but it most likely will not open the courthouse doors for federal bankruptcy protection absent participation in other regulatory regimes like DEA registration.

Currently, courts have held that a bankruptcy case must be dismissed if the continuation of the case would require the court, trustee, or debtor-in-possession to administer assets that are illegal under the Controlled Substances Act (“CSA”) or that constitute proceeds of activity criminalized by the CSA, even if the assets were lawfully acquired under state law. As such, it is the United States Trustee Program’s policy as the watchdog of the bankruptcy system to move to dismiss marijuana-related bankruptcy filings to prevent the bankruptcy system from being used as an instrument in federally illegal activity and alleviate the possibility that estate fiduciaries be required to administer assets in a way that would violate federal criminal law.

Though a Schedule III classification means many things – including that cannabis products may be obtained via prescription from an authorized pharmacist – in order to manufacture, distribute, or dispense a Schedule III Controlled Substance, under federal law businesses must be properly registered with the Drug Enforcement Administration (“DEA”), complete certain training and/or certification, and be licensed or otherwise compliant under applicable state law.  Any business or person not registered with the DEA for a Scheduled III Controlled Substance will not be authorized to manufacture, distribute, or dispense it. Violations likely would constitute an unlawful act under the CSA.[1]  Should the non-complying business commence a voluntary petition seeking federal bankruptcy protection, the United States Trustee probably will move to dismiss the case and bankruptcy courts will continue their trend of dismissing cases involving cannabis even as a Schedule III controlled substance due to the criminality of the activity. Therefore, the proposed rescheduling will not change the existing lack of access to federal bankruptcy relief which would otherwise attract new debt financing opportunities if this remedy for distressed investments were available.

[1] 21 USC §§ 841, 846.


Originally published at JD Supra

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