By Colin Davidson and Catherine Jun (Sheppard, Mullin, Richter & Hampton LLP)
Cannabis is now legal in 19 states and Washington D.C., driving the growth of a legal cannabis industry estimated to be valued at $33 billion this year—up 32% from 2021—and expected to reach $52 billion by 2026. This growth in the cannabis industry, of course, also means that operators and their investment partners face increased commercial risk, including insolvency. Cannabis companies have thus far been precluded from accessing federal bankruptcy protection—i.e., chapter 7 or chapter 11—largely due to the status of cannabis as an illegal substance under federal law. The legal framework used in the United States, where cannabis is illegal federally but has been legalized by many states, differs greatly from the framework in Canada. In Canada the federal Cannabis Act 2018 legalized cannabis nationwide, while the provinces maintain certain regulatory powers related to the distribution, sale and use of cannabis. This suggests that for cross-border operators one potential route to U.S. bankruptcy relief is for the company to first commence an insolvency proceeding in Canada and then seek recognition of that foreign proceeding in a U.S. bankruptcy court under chapter 15 of the Bankruptcy Code. We examine the viability of chapter 15 as an alternative avenue to the U.S. bankruptcy courts and the challenges that a cannabis company may face in an article originally published by Cannabis Business Executive.
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