ANThe Kalamazoo cannabis company’s recent Chapter 11 bankruptcy filing will test some particularly murky legal waters and could set a legal precedent for other cannabis-related businesses facing insolvency.
Master Equity Group LLC on April 20, it was filed with the US Bankruptcy Court in the Western District of Michigan under subchapter V of the federal bankruptcy code, a relatively new but frequently used measure designed to speed up the bankruptcy process for small and medium businesses.
In court documents, Master Equity CEO Adam Tucker described Master Equity as a “holding and management company for various related companies operating in the cannabis industry.” In this role, Master Equity Group buys or rents properties to sublet to cannabis businesses in addition to providing centralized accounting, payroll, and other functions. Kalamazoo-based Cannamazoo Recreational Weed Dispensary is one such brand.
Represented by Southfield-based Mark Shapiro Steinberg Shapiro & Clark, Master Equity Group faces between $100,001 and $500,000 in total liabilities. The company owes its 18 largest creditors a total of $176,255, according to the filing.
Some of the largest unsecured claims are from Indiana-based Angola. Northern Industrial Floors for $26,109, Portage-based internet law firm legal review for $23,268 and based in Chicago Outdoor Advertising Adams for $21,340.
Shapiro and Tucker did not respond to requests for comment.
Federal and state laws collide
However, the case is far from an ordinary bankruptcy filing. Master Equity Group profits from its involvement, however indirect, in the production, marketing, sale and distribution of marijuana, which remains illegal at the federal level.
As part of the Controlled Substances Act, marijuana is listed as a Schedule I controlled substance, which is considered to have no accepted medical use in the United States, lacks accepted safety for use under medical supervision, and has a high potential of abuse.
The United States trustees, who are parties to all bankruptcy cases and act as guardians of the system, generally do not allow cannabis-affiliated businesses to seek protection in the bankruptcy process, leaving the fate of Master Equity Group’s case pending. . on balance.
“The U.S. Trustee’s office has taken the position for several years that it is illegal for bankruptcy courts to handle cases involving marijuana companies, even if they are legal under state law,” said Robert Hendricks, attorney main of Warner Norcross+Judd LLP, who is also co-chairman of the firm’s Cannabis Industry Group.
The scant legal precedent, coupled with the US Trustee’s vocal stance on the matter, would suggest that the trustees of the Western District of Michigan will likely file a lawsuit to dismiss the case, Hendricks said.
“They could have said, ‘We’re going to try to file for bankruptcy and argue that because we didn’t touch the plant, we have a right to propose a plan,’” Hendricks said. “Maybe they can convince a bankruptcy court to rule that way, maybe they can’t, who knows. Many other people have tried it and most of them have not been successful. But each cut is different.
However, the case could break new legal ground if it is allowed to move forward.
“It could be the first case in the nation, to my knowledge, that allows an entity that is legally licensed under state law to grow, process, or distribute cannabis to receive the same federal right of liquidation or reorganization as corporate entities in other states. industries,” said Steve Bylenga, co-founder of Grand Rapids CBH Attorneys and Counselorswho specializes in bankruptcy cases.
A spokesperson for the US Trustee Program wrote in a statement to MyBiz: “The enforcement actions of the US Trustee Program are based on the well-established legal principle that the provisions of the Bankruptcy Code may not be used to assist in the violation of federal criminal law. That said, enforcement action decisions are based on the particular facts of a case, even if the assets involved are held in violation of federal law.”
While the legal precedent for cannabis bankruptcies in Michigan may be limited, petitioners have asked the courts to consider their cases. Local lawyers pointed to a couple of previous cases where cannabis-related businesses were excluded from the bankruptcy process.
One case dates back to 2015 and involved West Michigan resident Jerry Johnson, who was a licensed grower and caretaker under the state’s medical marijuana law. Johnson filed for Chapter 13 bankruptcy in an attempt to avoid foreclosure on his home. Because approximately half of his income was generated through the cultivation and sale of marijuana, he was in direct violation of federal law.
The bankruptcy court did not dismiss the case, but allowed Johnson to go through bankruptcy if he gave up his marijuana business, which he did.
Another case unfolded in the Eastern District of Michigan involving Basrah Custom Design Inc., which filed for Chapter 11 bankruptcy protection in 2018. The cabinetmaking business operated out of two joined buildings, which it leased to a cannabis dispensary. Due to his entanglement with the dispensary, his Chapter 11 case was dismissed by a bankruptcy judge.
With bankruptcy essentially off the table, cannabis businesses must look to alternative routes when faced with financial insolvency.
Working with creditors out of court is one avenue that allows the cannabis company to try to reach a settlement without the legal shield of bankruptcy that prohibits creditors from taking individual legal action.
“You can try that, but that usually doesn’t work, especially the bigger the case and the more creditors are involved,” Hendricks said. “Every creditor wants to get a little more than his neighbor.”
Michigan also allows state court receiverships in which a state circuit judge appoints a trustee, giving them the powers to take control and liquidate a debtor’s assets before distributing the money to creditors. These state receiverships are permitted under both Michigan law and state Cannabis Regulatory Agency rules.
The fact that cannabis companies cannot benefit from bankruptcy structure or protection can be risky for parties looking to invest or work in the cannabis space.
“Bankruptcy doesn’t just protect debtors,” Bylenga said. “It also protects creditors and investors by providing a cost-effective, codified process for liquidating or reorganizing distressed corporate entities. Investors like predictability. They like to know in advance how their claim will be handled if a company goes bankrupt.”
While Hendricks echoed that sentiment, he also said some creditors are optimistic that if finances go bad for a cannabis company, they could come up with an even better settlement deal.
“In my experience, investors and lenders and those who sell on credit to companies in the cannabis space have already built into their prices and terms the understanding that bankruptcy is probably not available and that other means will have to be taken if the debtor does not. do it,” Hendricks said.