Why Cannabis Companies Cannot File for Bankruptcy Protection

In an article published in early December 2017, the director of the Justice Department’s Executive Office for United States Trustees Clifford J. White III and trial attorney for the agency John Seaman released the following statement regarding the availability of bankruptcy protection for cannabis companies struggling with high levels of debt:

“Marijuana continues to be regulated by Congress as a dangerous drug, and as the Supreme Court has recognized, the federal prohibition of marijuana takes precedence over state laws to the contrary. First, the bankruptcy system may not be used as an instrument in the ongoing commission of a crime and reorganization plans that permit or require continued illegal activity may not be confirmed. Second, bankruptcy trustees and other estate fiduciaries should not be required to administer assets if doing so would cause them to violate federal criminal law.”

The Justice Department’s Trustee Program

This program exists to act as a watchdog group for the bankruptcy proceedings that are entered and closed in the United States each year. As such, it is tasked with investigating cases of alleged bankruptcy fraud and supervising the trustees who handle bankruptcy cases.

According to the officials quoted above, permitting cannabis companies to file for bankruptcy protection would be endorsing their continued violation of federal law. Chapter 11 bankruptcy is not for companies that close under their heavy debt loads, but those that plan to reorganize and become profitable once again after working through their debt.

Cannabis is a Financially Risky Business for Entrepreneurs

As legalization and social acceptance of cannabis for medical and recreational use increases throughout the country, many entrepreneurs capitalize on the opportunity to be part of the growing cannabis industry. Like any other type of business, operating a business in the cannabis industry has risks, and many fledgling companies face difficulty with debt and maintaining profitability. One key difference between cannabis companies and companies working in other industries is that cannabis companies are shut out of many forms of financial aid, such as conventional business loans and bankruptcy protection.

Maintaining relationships with traditional banks has also been difficult for many cannabis entrepreneurs, forcing them to pursue loans from private lenders. Each year, more funding startups enter the cannabis space, filling this niche and making it easier for cannabis companies to operate in a financially transparent manner. Previously, many companies had to operate as cash-only because of their lack of access to banks, loans, and accounting services.

Work with an Experienced Fox River Grove Bankruptcy Attorney

Learn more about bankruptcy and how it can help you manage your outstanding debt by scheduling your initial consultation with a member of Newland & Newland, LLP in our office. During your consultation, an experienced bankruptcy attorney will answer your questions and evaluate your case to guide you toward a productive solution for your debt problem, which might or might not include bankruptcy. We serve clients in the Arlington Heights, Palatine, Rolling Meadows, Libertyville, Mundelein, Buffalo Grove, Schaumburg, Elk Grove, and Itasca areas.

(image courtesy of Get Budding)

  • Newland & Newland LLP, Attorneys, Arlington Heights, IL
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