A recent decision by a federal appeals court appears to open the doors of United States Bankruptcy Courts nationwide… or does it? The Ninth Circuit’s decision from Garvin v. Cook Investments provides a helpful roadmap for understanding the challenges and opportunities for marijuana-related businesses considering their access to bankruptcy courts.
Marijuana Businesses Generally Violate Federal Law
Healthcare bankruptcies present unique challenges in addition to financial restructuring. An immediate concern that must be addressed in these cases is the ability of the debtor to provide, and continue to provide, adequate services to existing and future patients. Having been involved in numerous healthcare matters filed under both Chapter 7 and Chapter 11, I know first-hand how important this issue is. Debtors are generally required to employ, at their cost, a specialized professional, i.e., an ombudsman, who will monitor the quality of patient care being provided during the case.
The day any enterprise starts contemplating a bankruptcy filing never is a happy one. If the enterprise is in the health care industry, added anxiety can arise over whether it qualifies as a “health care business” under the United States Bankruptcy Code. Among other provisions applicable to a “health care business” in bankruptcy, the Bankruptcy Code requires the appointment of a patient care ombudsman (“PCO”) when a health care business becomes a debtor in a bankruptcy case.
The U.S. Justice Department (“DOJ”) has said that an Oregon woman who is employed by a marijuana staffing agency cannot use bankruptcy protection because of her firm’s ties to the cannabis industry. The U.S. Trustee—a DOJ bankruptcy administrator—objected to confirmation of the debtor’s Chapter 13 plan and moved to dismiss on the grounds that her income is earned in violation of the federal Controlled Substances Act (“CSA”).
Perhaps one thing we can agree on in discussing the healthcare industry: it is in a state of distress stemming from the challenges created by an ever-increasing regulatory burden, changes in reimbursement rates, uncertainty with the Affordable Care Act, mounting tort and employment litigation. The recent rampant growth of urgent care centers and retail clinics as well as technological advances and telemedicine have created a change in the manner in which healthcare services are delivered and consequently put pressure on providers to compete.
Since 2012, ten states and the District of Columbia have legalized marijuana for adult recreational use.
On January 9, 2019, California Attorney General Xavier Becerra filed a motion with the U.S.
In a recent decision, In re Orexigen Therapeutics, Inc., No. 18-10518 (KG) (Bankr. D. Del. Nov. 13, 2018), Judge Kevin Gross of the United States Bankruptcy Court for the District of Delaware held that the mutuality requirement of section 553 of the Bankruptcy Code must be strictly construed, declining to find mutuality in a triangular setoff between the debtor, a parent entity that owed the debtor money, and that entity’s subsidiary, which was a creditor.
In prior posts, we examined whether state-licensed marijuana businesses, and those doing business with marijuana businesses, can seek relief under the Bankruptcy Code. As we noted, the Office of the United States Trustee (the “UST”) has taken the position that a marijuana business cannot seek bankruptcy relief because the business itself violates the Controlled Substances Act 21, U.S.C.
Health care bankruptcies are more than a battle over money and control of a company, because they potentially place the health of a debtor’s patients in danger if handled incorrectly. Health care cases present a risk that people without representation in the bankruptcy case could be seriously injured or unnecessarily lose their lives. This risk is particularly acute when the patient group is vulnerable or has few alternative options for care, such as for nursing homes and rural hospitals. Because of this reality, health care bankruptcies impose a distinct calculus and burden on the U.S.