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US: Bankruptcy relief for cannabis-adjacent debtors? It gets hazy

You may have heard this before: As cannabis remains a Schedule I drug under the federal Controlled Substances Act ("CSA"), cannabis companies cannot seek bankruptcy relief under federal law. Not so fast. Access to bankruptcy can be highly fact-dependent.

When the debtor in question is adjacent to cannabis operations, the analysis often turns on the degree to which it is involved in operations that violate federal law and its dependence on such operations to reorganize or satisfy creditor claims. The more heavily the debtor is involved in cannabis operations or dependent on them to fund a plan of reorganization or administer a liquidation, the less likely it is the debtor will be allowed bankruptcy protection.

Courts will consider, among other factors, whether the debtor's assets are derived directly or indirectly from cannabis operations and the amount and relative contribution of such assets to the debtor's total earnings.

Cannabis-adjacent debtors have not fared well in their efforts to obtain bankruptcy relief. However, based on decisions out of the 9th U.S. Circuit Court of Appeals and a recent decision in Colorado, all hope for bankruptcy protection for such debtors may not be lost.


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