Cannabis Bankruptcy Relief Broadens With Delaware Court Ruling

A US court’s recognition of Cannabist Co.'s Canadian insolvency proceedings is outlining a path for cannabis companies with a foreign presence seeking bankruptcy protection, a relief that has previously been denied because marijuana remains illegal under federal law.

While the legal cannabis industry has expanded over the years, businesses have faced steep losses from an oversaturated market, restricted access to traditional banking, and US tax rules that limit companies selling controlled substances deemed to have a high potential for abuse from deducting ordinary expenses.

Because marijuana remains illegal under federal law, certain bankruptcy courts have dealt with conflicts concerning cannabis-related cases. The US Trustee, the Justice Department’s bankruptcy watchdog, historically urged courts to dismiss Chapter 11 and 7 petitions filed by cannabis businesses, arguing that their operations violate the Controlled Substances Act. But for Cannabist, which in March became the first such company to file for Chapter 15 under the US bankruptcy code, the US Trustee didn’t seek a dismissal.

Chapter 15, which governs foreign proceedings, had been an untapped option for cannabis businesses until now, partly because companies were hesitant to pursue bankruptcy, said David J. Cohen, a partner at Weil, Gotshal & Manges LLP who serves as counsel for Cannabist’s foreign representative in the US case. Businesses also must qualify for foreign insolvency proceedings before seeking US recognition.

“Combined with some regulatory changes that probably provided enough impetus, at least in these circumstances, the facts made it make sense to pursue this path,” Cohen said. “It’s not going to be the right path for every company, but for those who have a cross-border element, it’s certainly a good alternative.”

The British Columbia-based company has nonbankrupt subsidiaries that operate marijuana retail businesses in the US. Delaware bankruptcy judge Brendan L. Shannon signed the recognition order May 9.

The US court recognition follows moves by Presidents Joe Biden and Donald Trump to reclassify marijuana from Schedule I to Schedule III, a category for drugs with a moderate to low risk of dependence. The Justice Department ordered the rescheduling of marijuana products approved by the Food and Drug Administration last month, following a mandate from Trump to pursue rescheduling.

Cannabist had the trifecta: Canadian holding companies, debt issued under Canadian law, and a Canadian insolvency proceeding that has been tested in the US.

“This has created a road map for other Canadian-based cannabis companies to use,” said Jason Rosell, leader of Pachulski Stang Ziehl & Jones’ cannabis restructuring group. “The problem is that it’s likely limited from a practical perspective to a few companies.”

Other companies, however, may try to pursue a creative plan to establish Canadian operations and then seek Chapter 15 recognition, he said.

The Objector

For some bankruptcy observers, the US Trustee’s lack of a firm position on the Cannabist case came as a surprise.

“We certainly understood that the US Trustee might object, but we also could foresee a situation in which they wouldn’t,” Cohen said.

East West Bank, a Cannabist creditor, was the only objector. The bank contended that recognition would violate public policy and endorse conduct expressly prohibited under federal law.

“My takeaway is that the trustee may be softening its position with respect to cannabis bankruptcies,” Rosell said. “Over the last year, it appears that they’re inclined to stay quiet and not take a position one way or another.”

Though cannabis businesses have typically not had much success in bankruptcy court, two California bankruptcy judges denied the US Trustee’s motions to dismiss such cases in 2023 and 2024. In Callaway, a court held that administering ownership interests in cannabis-related entities isn’t the same as directly administering marijuana assets.

Cannabist’s status as a holding company may have influenced the US Trustee’s decision not to object, said John Cannizzaro, a partner at Ice Miller. Additionally, past objections partly rested on concerns that a court-appointed trustee administering cannabis assets could violate federal law, but Shannon’s order only recognizes a Canadian proceeding in the US, he said.

“We have one bankruptcy court that has granted foreign recognition, so we should expect more companies to try it,” Cannizzaro said.

Although the ruling was fact‑specific and issued without a formal written opinion, it supports consideration of Chapter 15 as a viable tool for foreign cannabis‑related companies without automatically triggering an objection by the monitor, said Leah M. Eisenberg, a partner at Pashman Stein Walder Hayden PC.

“This is notable given the US Trustee’s longstanding practice of seeking dismissal of domestic bankruptcy cases involving cannabis,” she said.

The US Trustee declined to comment.

Rescheduling

The company’s recognition also coincided with Trump’s intent to seek a reschedule, said Jonathan Robbins, chair of Akerman’s cannabis practice.

“When that happened, the federal government had to acknowledge that there are accepted medical uses for marijuana,” he said.

Rescheduling cannabis would also remove the limitations under the Internal Revenue Code’s Section 280E that had prevented cannabis businesses from deducting ordinary expenses and resulted in significant tax liabilities even for loss-making companies.

In Cannabist’s case, the IRS asserted federal income tax claims of $51 million for the 2022 and 2023 tax years, according to court papers.

The DOJ’s order indicated that Section 280E would no longer apply under a reschedule. The order also directed the Treasury Department to consider retroactive relief.

The Drug Enforcement Administration will hold a rescheduling hearing in June.

Most cannabis companies don’t only have medical licenses—they typically also operate adult-use recreational businesses. Even with rescheduling, this dual structure would likely still face challenges in a bankruptcy setting, given that the policy concerns seem to stem from efforts to avoid administering cannabis assets.

“Until changes are made that would make operating or liquidating a cannabis business legal at the federal level, those businesses’ access to relief under Chapter 11 will be restricted,” Cannizzaro said.

Still, it won’t likely stop some companies from trying.

“We’re going to see some people testing the waters,” Robbins said.