Will Cannabis Rescheduling Ease Bankruptcy Woes? Legal Experts Weigh In

The rescheduling of cannabis from a Schedule I to a Schedule III substance under the Controlled Substances Act (CSA) presents a labyrinth of legal repercussions, particularly in the realm of bankruptcy law. While many celebrate this potential federal shift as a step towards normalization, the reality remains complex and fraught with legal intricacies that could significantly impact cannabis-related businesses across the nation.

Analyzing Legal Impacts Of Cannabis Rescheduling

This complex legal landscape is dissected in a detailed analysis by Joel Cohen of Stout Risius Ross LLC, and Heidi Urness of McGlinchey Stafford PLLC, published by Bloomberg Law in July. For the authors, despite the euphoria surrounding the rescheduling, it is critical to understand that this change does not equate to federal legalization. 

They emphasize that while rescheduling might reduce the tax burdens under IRS tax code section 280E—which prevents cannabis businesses from deducting typical business expenses—it does not equate to federal legalization. Most cannabis operations will still face legal challenges under federal law, impacting their financial stability and influencing their bankruptcy considerations.

Complexities Of Bankruptcy Law And Cannabis

However, bankruptcy law isn’t as straightforward as tax law when it comes to changes like rescheduling cannabis. Bankruptcy involves broader legal principles such as “good faith” and “unclean hands,” which are found in the laws governing bankruptcy. These rules aren’t black and white; they require a deeper understanding and are often interpreted differently by different courts based on the specific details of each case.

Read Also: Trump Says It’s ‘Hard To Have People All Over The Jails’ For Cannabis Offenses As He Hints At Legalization

The nuanced approach of bankruptcy courts, influenced by the evolving legal landscape, suggests a gradual shift towards a more open-minded stance regarding state-legal cannabis businesses. Recent cases, like In re Blumsack and In re The Hacienda Company, LLC, highlight this trend. These rulings suggest that previous involvement in federally illegal cannabis activities does not automatically preclude businesses from seeking bankruptcy protection, potentially setting a precedent for more lenient considerations in future cases.

Outside the federal framework, state court receiverships offer a viable alternative for distressed cannabis businesses, presenting unique challenges and opportunities within the tightly regulated cannabis industry. According to Cohen and Urness, each state’s distinct legal landscape further complicates the strategy for navigating these legal waters.

Bankruptcy Cases Impacting Cannabis Industry

Meanwhile, the bankruptcy scenario for cannabis-related businesses is underscored by high-profile cases, notably MedMen Enterprises Inc. and High Times. MedMen, once valued at $3 billion and hailed as the “Apple Store of weed,” cited an inability to pay its debts in its bankruptcy announcement. High Times, known for its legacy in cannabis culture, also succumbed to financial distress, entering receivership amidst a $5 million class action lawsuit by investors disillusioned over unmet stock transactions.

These developments illustrate the critical need for a more adaptable legal framework to support the financial life cycle of cannabis businesses.

Read Next:

• Hope For Those Going Up in Smoke: Cannabis Industry Eyes Bankruptcy Reform Amid Legal Limbo

Image created with AI tools.