Cannabis Activity Should Lead to Bankruptcy Dismissal, U.S. Trustee Says

In a filing Monday, the Office of the United States Trustee told a Colorado bankruptcy judge that a debtor’s filing should be dismissed because of its participation in the marijuana industry. While marijuana has been legalized in Colorado, it remains illegal under federal law.

Debtor United Cannabis Corporation filed its Chapter 11 bankruptcy petition on April 20. Two days later, Bankruptcy Judge Joseph G. Rosania Jr. filed an Order to Show Cause, noting that “Despite being legal under state law, activities associated with the marijuana industry are illgeal under federal law and cannot be condoned by the bankruptcy courts.” The judge cited case law, saying “‘[A] federal court cannot be asked to enforce the protections of the Bankruptcy Code in aid of a Debtor whose activites constiute a continuing federal crime.'”

In its response to the order advocating for dismissal of the case, the United States Trustee noted that United Cannabis Corproation disclosed its activiites in the marijuana industry in recent filings to the SEC. The debtor owns “distinct intellectual property relating to the legalized growth, production, manufacture, marketing, management, utilization and distribution of medical and recreational marijuana and marijuana infused products. The company licenses this intellectual property to other businesses. The Trustee cited to the Controlled Substances Act to show that the debtor’s activities are illegal under federal law.

The debtor’s response to the order argued that the company is not in the marijuana business. “[A]ll of the Debtors’ current operations relate to, and all revenues are solely derived from, the sale of legal CBD products that are made using CBD that is extracted from legal industrial hemp plants, which was legalized by the 2018 Agricultural Improvement Act.”

The judge has not yet ruled on the order. The debtors are repreesnted by Wadsworth Garber Warner Conrardy.