In a previous article, we discussed some emerging trends in cannabis-related companies seeking bankruptcy protection (click here Check out the previous post). But first, the question is whether cannabis-related companies can file for bankruptcy relief?This article will review Arizona’s first decision under the following circumstances In re Medpoint Management, LLC, Case No. 2:14-bk-15234-DPC., published on April 6, 2015. Medical point The decision was made by the distinguished Daniel P. Collins, who was the Chief Judge of the Arizona District at the time of this decision.

this Medical point The case started with an involuntary request from three requesting creditors Medical pointOnce an involuntary petition is filed, the so-called debtor has the opportunity to answer the petition and seek to dismiss the case.This is exactly what happened Medical point case.

Background information

Medpoint is a limited liability company established under the laws of Arizona. Medpoint is a pharmacy management company operating under the Arizona Natural Health (“ANW”) pharmacy certificate. Medpoint previously managed ANW’s cannabis business, business relationships and cultivation operations. ANW has no employees, but Medpoint employs approximately 70 employees. Medpoint purchased an interest in another entity that had a management contract with ANW. In May 2014, ANW terminated its relationship with Medpoint because ANW was not satisfied with Medpoint’s performance under the management agreement. Medpoint violated various other agreements with requesting creditors.

problem

Although Medpoint has made several arguments on why its case should be dismissed, the main argument relates to whether the debtor can legally manage cannabis-related businesses without violating the Controlled Substances Act (21 USC §801) Wait.sequence.)

The operative part of the bankruptcy law that seeks to dismiss a case is 11 USC § 707(a), which stipulates in the relevant part,

Only after notification and hearings, the court can dismiss the case under this chapter, and can only have reasons, including: (1) The debtor’s unreasonable delay is detrimental to the creditor; (2) The failure to pay any fees required by Chapter 123 of Title 28 Or fees; (3) In voluntary cases, the debtor failed to submit the information required by Article 521(a)(1) within 15 days or within an additional time allowed by the court. ), but only on motions by American trustees.

Therefore, the question facing the court is whether there are reasons for dismissing Medpoint’s Chapter 7 case. Medpoint and the U.S. trustee argued that the rejection was justified, and the creditor who filed the application argued that the court should issue a relief order under the Bankruptcy Law.

In making a decision that the Medpoint case should be dismissed, the court solicited decisions from other regions to deal with similar issues. The following is the court’s discussion of the three cases on which it is based.

exist Arenas, The bankruptcy court found that there are reasons to dismiss the debtor’s case because the debtor’s assets include marijuana and marijuana-related assets. In Arenas, 514 BR 887, 892 (Bankr. D. Colo. 2014) (“It is impossible to legally manage the debtor’s bankruptcy estate under Chapter 7, which constitutes the reason for the rejection of the debtor’s case under 11 USC § 707(a).”). Arenas The court held that “the debtor’s Chapter 7 trustee… [could not] Without violating CSA §856(a)(2), control the debtor’s property” or, without violating CSA §841(a), “liquidate the inventory of cannabis plants owned by Mr. Arenas on the date of the petition.” ID891. Because the trustee was unable to perform his duties, the court found that the bankruptcy case was of no avail.

exist Will Rey, Chapter 7 The trustee wants to operate the debtor’s property to increase its sales value. In re Vel Rey Properties, Inc., 174 BR 859 (Bankr. DDC 1994). The trustee asked the bankruptcy court to relieve him of any responsibility for non-compliance with DC housing regulations while he was preparing to sell the property. ID. In 863. The court rejected the trustee’s request and pointed out that if the trustee or the US trustee was[] Regarding personal responsibility. .. The court can simply dismiss the case under section 707. ” ID. In 866 (Quoting Ohio v. Commercial Petroleum Services.company, 58 BR 311 (Bankr. ND Ohio 1986)).

In another bankruptcy in Colorado, the property debtor was a landlord who received approximately 25% of his income from a marijuana entity. In re Rent-Rite Super Kegs W. Ltd., 484 BR 799, 802–803 (Bankr. D. Colo. 2012). The bankruptcy court found that renting cannabis to a cannabis entity would impose criminal liability on the debtor and confiscate the real property. ID. At 809. Due to the risks associated with cannabis tenants, the bankruptcy court found that the debtor’s continued lease with the cannabis entity constituted a “serious mismanagement of the estate” and rejected it under Section 1112(b)(4)(B)). ID.

Based on the above situation, the court Medical point Persuaded by the reasoning of these cases, so dismissed Medical point Involuntary petition.

in conclusion

When the assumed debtor is directly involved in the cannabis business, some courts have determined that there are “reasons” for dismissing the bankruptcy case. At least for these types of businesses, the law is clear-companies directly involved in the cultivation, cultivation, manufacturing, or sale of cannabis will not be eligible for bankruptcy protection. Where the law is less clear is that the debtor’s relationship with the cannabis company is more relaxed.For these debtors, the only physical option may be State court takeover Or unsupervised liquidation. Case law in this area is constantly evolving.