Federal judge approves cannabis MSO for Chapter 15 bankruptcy

In a move that could signal new options for troubled cannabis companies looking to secure assets against creditors, a U.S. Bankruptcy Court judge has signed off on marijuana multistate operator The Cannabist Co.’s request seeking Chapter 15 bankruptcy relief.

Incorporated in Canada like other publicly traded MSOs, The Cannabist Co. filed for bankruptcy in that country in March. In later filings in the U.S., it claimed to owe $270 million to creditors and the Internal Revenue Service.

After its Canadian filing, Cannabist filed for Chapter 15 protection in the U.S., which is available to debtors operating in more than one country.

And over objections filed by East West Bank, one of Cannabist’s creditors, U.S. Bankruptcy Court Judge Brandon Shannon on May 9 granted Chapter 15 protections to Cannabist.

Can cannabis companies file for bankruptcy in the US?

As Bloomberg Law reported, the Justice Department has usually objected to cannabis businesses’ bankruptcy filings on the basis that cannabis is a violation of the Controlled Substances Act (CSA). But in this case, the U.S. Trustee filed no objection.

That left East West Bank, which holds the mortgage on properties vertically integrated Cannabist operated out of in New York, Maryland and New Jersey, to object to the proceedings on the basis that The Cannabist’s business is federally illegal.

“Granting recognition of the Canadian Proceeding would be in violation of federal law, specifically the CSA, because the stated purpose of the Canadian Proceeding is to monetize cannabis-related assets and distribute the resulting proceeds,” East West Bank’s objection reads in part, according to court records.

“Recognizing a Chapter 15 proceeding that is in direct conflict with federal law is a violation of public policy.”

In reply, Cannabist said that it requires protection, in part, so it can continue shopping the Maryland and New Jersey operations to potential buyers to satisfy its debt to East West. Cannabist has already shut down its New York operation.

In his May 9 order rejecting East West’s arguments and granting Cannabist protections, Shannon did not address federal drug law or the ongoing conflict between adult-use cannabis legalization and the Controlled Substances Act.

Instead, he found that Cannabist’s Canadian bankruptcy filing was recognized as valid in that country and that proceedings and decisions there would be recognized in a U.S. court.

After rescheduling, marijuana MSO moves to be domiciled in Delaware, not Canada

The upshot – an avenue for bankruptcy protections previously withheld from cannabis companies – may be limited to other similar companies with footprints in both the U.S. and Canada.

For now, that’s most marijuana multistate operators.

However, in the wake of the April 23 final order recognizing medical cannabis as a Schedule 3 drug – and therefore legal under federal law, with some stipulations – at least one publicly traded company domiciled in Canada is seeking to move to the U.S.

On Wednesday, Tallahassee, Florida-based MSO Trulieve Cannabis Corp. announced it will seek shareholder approval that would see the company incorporated in Delaware rather than British Columbia.

Of the company’s 240 retail locations nationwide, 204 are medical cannabis dispensaries the company filed to register with the U.S. Drug Enforcement Administration, the company said.

Trulieve reported a profitable first quarter during its earnings call last week.