Typically, a UST will attempt to prevent a CRB from obtaining relief under the Bankruptcy Code by filing a motion to dismiss the debtor company’s or debtor individual’s bankruptcy filing. However, a new case may indicate a change in direction from the Executive Office of the United States Trustee Program (EOUST), or at least one local UST. The court in In re Callaway, No. 24-30082, 2024 WL 3191673 (Bankr. N.D. Cal. June 26, 2024), recently denied a UST motion to dismiss a chapter 7 liquidation case of an individual who owned substantial ownership interests in limited liability companies engaged in marijuana retail businesses. The reasoning of the decision was straightforward:
Based on the facts of this case and applicable law, the court holds that administering the ownership interests of LLCs that engage in marijuana business is not necessarily equivalent to administering marijuana assets. . . .
. . . .
In sum, possible sales of interests in LLCs, enforcement of LLCs’ contractual rights and sale of other intangibles related to marijuana, but not directly implicated by the language of the CSA, are not sufficient for this court to find cause to dismiss an otherwise eligible individual debtor’s chapter 7 case.
Id. at **2 and 7
Ultimately, the court in Callaway analyzed the body of previous case law dealing with the dismissal of CRB bankruptcy cases and concluded that, in the context of a Chapter 7 liquidation, there was no violation of the CSA that would prevent affording bankruptcy relief to this debtor. The Callaway case now stands as persuasive authority, at least in the Northern District of California, and possibly beyond, opening the bankruptcy door to similarly situated debtors.
While the holding of the case is not particularly remarkable in the context of the facts and the prior case law, what is remarkable is that the UST did not appeal Judge Montali’s decision. Does the failure to appeal indicate a change of position by the EOUST? Will USTs now allow other similarly situated debtors to remain in bankruptcy by no longer filing motions to dismiss their cases? For example, if a prospective debtor has assets that include passive interests in a CRB (such as stock in a Canadian publicly traded CRB or an LLC membership interest in a state-chartered CRB, etc.), will the bankruptcy doors (at least the ones for chapter 7) now be open to these individuals? Time will tell whether the UST’s failure to appeal the Callaway decision is a one-off or marks the beginning of an EOUST policy shift toward certain cannabis-related enterprises.
