Chapter 15 Bankruptcy Is Untapped Option for Cannabis Industry

A bankruptcy law provision for foreign insolvencies offers a potential solution for some US cannabis companies with cross-border affiliates looking to restructure or liquidate, even as they’re barred from using the traditional Chapter 11 tool.

Many multistate operators have affiliates in Canada, meaning they could restructure there, then seek recognition of that arrangement under Chapter 15 of the US bankruptcy code, attorneys said.

Regulatory changes to cannabis laws in Canada, like Germany and Switzerland, have given US-based businesses broader market opportunities abroad while unusual domestic financing and tax arrangements, combined with federal policy, put those companies at greater risk of needing to restructure.

State receiverships provide limited relief, since a state court’s jurisdiction doesn’t extend far. That means Chapter 15—which no US cannabis business has yet attempted to use—may eventually become an attractive alternative.

Financing for cannabis businesses has a complicated structure because they can’t access traditional banks, said Leah Eisenberg, a partner at Pashman Stein Walder Hayden PC who handles cross border representations and cannabis-related financing matters. Because these companies mostly operate on a cash-only basis, they are vulnerable to theft, embezzlement, and fraud, she said.

Additionally, tax laws prohibit deductions or credits for cannabis companies’ ordinary business expenses—creating higher tax burdens for them, attorneys said.

About 75% of cannabis operators reported that loans or lines of credit are important to operations, but many said they’re difficult to obtain, according to a February First Citizens Bank report.

Companies like StateHouse Holdings, MedMen Enterprises and Herbl—which have Canadian connections—could have qualified for Chapter 15, but instead used US receiverships combined with foreign proceedings to offload failing subsidiaries.

Restructuring and wind-down options—including assignments for the benefit of creditors, receiverships, and Article 9 foreclosures—don’t provide the same protection as bankruptcy. And ABCs are the least likely to help cannabis companies because creditors can still sue while the legal process plays out, attorneys said.

States have receivership statutes, but not all are robust or benefit cannabis businesses equally. Every state has different rules regarding the transfer of cannabis licenses—which, along with inventory, are often companies’ largest assets, Eisenberg said.

“Someone may try it out of desperation,” said Ken Leonetti, who co-chairs Foley Hoag LLP’s litigation department and bankruptcy practice.

Testing the System

Marijuana remains illegal under the Controlled Substances Act, providing few options to reorganize debt or wind down operations for entities that own cannabis assets or are actively engaged in the business.

Companies using Chapter 15 have no trustee or bankruptcy estate, giving them a chance to present a set of facts to set up a successful reorganization, attorneys said.

A company could seek limited relief under Chapter 15, which could be cost-effective and create safeguards to protect creditors if a US court recognizes the foreign restructuring, said Alison Bauer, co-chair of Foley Hoag LLP’s bankruptcy and reorganization practice.

“Companies might have to slice and dice the facts,” Bauer said.

To obtain recognition of a foreign reorganization or liquidation under Chapter 15 in a US court, the company must show that its plan isn’t “manifestly contrary to public policy.” That’s the biggest hurdle for cannabis companies, which is why they typically turn to other options, attorneys said.

The “manifestly contrary” issue becomes a question of first impression requiring a judge to determine whether a company should be kicked out of Chapter 15, said Jason Rosell, an attorney at Pachulski Stang Ziehl & Jones LLP who leads the firm’s cannabis restructuring group.

The majority of US states have legalized cannabis and the DOJ hasn’t forced companies to cease operations, he noted.

“I don’t think that is manifestly contrary to public policy,” he said.

Slow Changes

Unlike Chapter 11, Chapter 15 doesn’t involve a debtor’s estate, so the concept of violating the law by distributing federally illegal assets doesn’t exist in the same way, Rosell said.

Although the Drug Enforcement Administration has proposed reclassifying cannabis as a less-dangerous Schedule III substance, and President Donald Trump is considering it, marijuana would remain federally illegal and likely have additional regulations.

A group of bipartisan attorneys general recently urged lawmakers to revisit legislation that would provide marijuana businesses an avenue to obtain bank accounts—which cannabis companies currently can’t access because of their federally illegal inventory.

Large multistate operators—which tend to have licenses to cultivate, manufacture and sell marijuana in various states where it’s legal—continue to use out-of-court options to try to resolve debt issues, Eisenberg of Pashman said. Those options include extending or reducing payments or offering equity for debt, but it can be complicated and difficult, she added.

In the US courts, progress for cannabis companies has been slow. Hacienda Co., was a rare instance in which a court permitted the use Chapter 11 to wind down a cannabis estate in 2023, overruling objections from the DOJ’s bankruptcy watchdog.

Uniform Commercial Code Article 9, which is faster and cheaper than bankruptcy, has proven to be a popular option. Schwazze is the most recent example, looking at a lender takeover of the dispensary through Article 9.

Schwazze, Hacienda, MedMen, and Herbl have laid some groundwork for insolvency options, but the industry is still waiting for regulatory and policy changes. With Chapter 15, a company could broaden its options—including shedding a “dead business,” Leonetti of Foley said.

Ending active US operations would help, he added.

“The less that there is plant-touching, the less is at stake,” Leonetti said.