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Not So High on Bankruptcy – Limited Options for Medical Marijuana Companies Facing Insolvency

November 07, 2018

By: Jason Johnson & Tara Tedrow

It may be hard to believe, but it’s been 22 years since California became the first state to permit the legal use of medical marijuana. In the years since, it has been impossible to ignore the changing tide of public opinion on marijuana, or at least on the use of marijuana as a medicinal treatment. Since 1996, a total of 31 states—including Florida—have legalized the use of marijuana as a drug.

As a result of such state-level laws, an entire industry—from growers to dispensaries and every imaginable type of ancillary services—has sprouted and flourished nationwide. As a result of the industry’s widespread success, significant marijuana-related assets have been accumulated. From stock options, real estate, analytical and processing equipment, to patents and trademarks, marijuana companies own significant assets that could be at risk depending on their financing.

What happens, though, when businesses in this industry aren’t successful? One option a struggling business might normally consider is filing for bankruptcy protection. Bankruptcy is a tool used by millions of businesses and individuals each year to restructure and eliminate debt, jettison cumbersome contracts and leases, and otherwise operate as a financial pressure relief valve. It might not be available to a business or individual with marijuana assets, though.

All bankruptcy cases are heard in federal court, as our bankruptcy laws are codified under federal law (specifically, Title 11 of the United States Code). Believe it or not, bankruptcy cases make up a full two-thirds of all cases in the federal court's system. So why might a business or individual not be able to avail themselves of this process? Though there are many different ways to explain it, they all stem from one ultimate answer: the Controlled Substances Act, found at 21 U.S.C. § 801, et seq (“CSA”). Because the CSA still classifies marijuana as a Schedule I drug that is illegal to grow, process, distribute or prescribe, the bankruptcy system cannot be used to facilitate illegal activity and the Bankruptcy Code does not provide a means to administer assets that cannot legally be possessed or sold under federal law.

Unfortunately for those in the medical marijuana industry, state laws permitting the cultivation, distribution, and sale of medical marijuana run afoul of, and are therefore preempted by, the CSA. Accordingly, any assets obtained as a result of such activities are assets that cannot legally be possessed or sold, at least as far as federal law is concerned.

This ultimately means that any business or individual with marijuana assets filing for bankruptcy is subject to the almost-certain filing of a dismissal motion by the United States Trustee—the arm of the Department of Justice tasked with overseeing and protecting the integrity of the bankruptcy system. The basis of such motion is that allowing the debtor to stay in bankruptcy would require the trustee administering the case to violate federal law by having to dispose of assets that may not be legally possessed or sold under federal law, or that a business or individual would not be able to confirm a plan that would be funded from activities forbidden under federal law. The Director of the Executive Office for United States Trustee has instructed that such dismissal motions are to be filed in all bankruptcy cases involving marijuana assets, and such motions are almost always granted.

The lack of protection in bankruptcy for businesses and individuals involved in the medical marijuana industry is one of many obstacles the industry has to navigate, and it is perhaps the unintended impact most detrimental to those who would otherwise be able to deal with their creditors in an orderly manner. Since the current stance of the United States Trustee is unlikely to change (short of an overhaul to the CSA), businesses should carefully review the terms of their financing agreements. For those in considering their options for marijuana industry financing and protecting the assets of their business long-term, consulting with a lawyer knowledgeable in the field is always advised.


Tara

Tara Tedrow is a shareholder in the firm’s Land Use, Zoning & Environmental Group and serves as chair of the Cannabis & Controlled Substances Group. She brings years of experience handling an array of complex legal matters for multi-billion dollar valued companies and entrepreneurs alike.


With a significant portion of her practice devoted to land use and development, Tara regularly advises clients on entitling projects for commercial, residential, industrial, office and mixed uses. She works with local governments and regulatory agencies to address the needs of her clients related to environmental permitting and compliance, zoning, comprehensive plans, concurrency, site plan approval, variance and waiver requests, due diligence and property rights.

Often sought out for high-profile and high-stakes land development projects, Tara has delivered positive outcomes for clients ranging from large multi-national and U.S.-based companies to high-net worth individuals seeking land use entitlements. With over 15 years of competitive debate experience, she is uniquely suited to handle complex and controversial projects and public hearings that present a myriad of political and legal challenges.

Well-known for providing legal and lobbying representation for a wide range of cannabis clients, Tara and her team work with physicians, lenders, real estate developers, landlords, ancillary service providers, banks, licensed adult use and medical marijuana companies, cultivators, processors, retailers and license applicants, helping them to navigate the ever-changing regulatory landscape of marijuana and hemp regulations. She also assists clients in the national hemp industry in obtaining licensing and approvals for processing, retailing, cultivation and other forms of secondary byproduct monetization. Her deep knowledge of regulatory laws and understanding of operations and logistics for cannabis companies, along with her ability to make connections and build partnerships, bring strategic value to her clients. 

Tara is the only person in the state of Florida to be appointed by the Florida Department of Agriculture and Consumer Services to both the inaugural Industrial Hemp Advisory Council created under Senate Bill 1020 and to the state’s Hemp Advisory Committee, which she currently chairs. A prolific presenter and speaker at industry seminars and conferences, she has served as the keynote speaker on industry regulations at over 60 events in the past two years. In the fall of 2018, Tara became the first professor in the state of Florida to teach a law school course on marijuana law and policy at the University of Florida Levin College of Law, where she continues to teach today.

Prior to joining the firm, Tara worked as a legal extern for the University of Florida General Counsel and Office of the Vice President as well as for the Orlando Juvenile Public Defenders Office. For over a decade, she has also worked professionally as a private speech and debate coach and taught at multiple national debate institutes, including the National Debate Forum at Emerson University, the National Symposium for Debate at Grinnell College and Victory Briefs Institute at UCLA.

Tara is a contributing writer at the Orlando Sentinel and has spoken about various real estate topics on Fox News.


Jason

“It’s a phase.”

That was Jason’s dad’s response when Jason told his dad he was going to law school – a predictable reaction, since Jason’s undergraduate degree was in Animal Science (pre-veterinary medicine).  Even more startling to his dad: Jason had already studied for and taken the entrance exam, applied to law schools, and secured acceptance and student loans before ever telling his dad about his plan.  More than 20 years later, his dad has long-since come around to the idea that he was meant to do this.

Jason believes there are two types of litigators—problem creators and problem solvers—and Jason is a problem solver. For his clients, that means looking for ways to achieve their goals in the most efficient, cost-effective way. Recognizing that there is a bit of an inherent tension in being a litigator, as often, the better you are at your job, the better you are at taking work off your own plate, Jason often jokes with his clients that “While I am all about the ‘Jason Johnson Full-Employment Program,’ it may not be in your best interests to implement that program, and it is your interests that must control.”  It is the creativity required to be a problem solver that is one of the reasons he most enjoys litigation.  Opponents who mistake his professionalism and reasonableness for weakness, though, do so at their peril, as being a problem solver and a zealous advocate are not mutually exclusive traits.

Jason is Board Certified in Business Bankruptcy by the American Board of Certification. He is a commercial litigator and the senior member of the firm’s Bankruptcy & Restructuring and Creditors' Rights practices. Jason represents commercial lending institutions, REITs, hedge funds, equity groups, financial services corporations, equipment lessors, commercial landlords, real estate developers, asset purchasers, and other secured and unsecured creditors in federal and state court matters throughout the State of Florida. His extensive experience in all aspects of bankruptcy, commercial foreclosure and workout proceedings have ranged to cases involving client assets exceeding $50-billion-dollars and claims exceeding $1-billion-dollars.

Jason also handles “white collar” criminal matters which, not surprisingly, sometimes flow from creditors’ rights cases. Additionally, Jason is a Florida Supreme Court Certified Circuit Mediator, acting as a trusted and effective mediator to help warring parties resolve their complex commercial litigation and complex bankruptcy litigation matters.

With deep roots in Florida, Jason has developed longstanding relationships in Central Florida’s business and political circles. He began his law career as a judicial law clerk to the Honorable Arthur B. Briskman of the United States Bankruptcy Court for the Middle District of Florida. A former President and current Board member of the Central Florida Bankruptcy Law Association, Jason is a longstanding leader in the Central Florida bankruptcy bar.

When not practicing law, Jason enjoys road cycling, Gator athletics, drinking fine bourbon, and spending time with his wife and daughter. Though he grew up surfing the warm waters off the Florida coast, he is more likely to be found on any present-day vacation sliding down the snow-covered Alps than at the beach.  He is happy to discuss your legal issues, his shift from vet school to the law, or about some of his more “interesting” Animal Science experiences—just don’t ask about the latter over dinner.

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