Cannabis companies do not have access to US bankruptcy protection because bankruptcy is a federal jurisdiction. Mark Salzberg a bankruptcy attorney at DC based Squire, Patton, Boggs joins Larry Mishkin & Jim Marty to talk about the fate of cannabis businesses and owners in US bankruptcy courts and explores the idea of cross-border bankruptcy filings with Canadian companies. Produced by PodCONX https://podconx.com/guests/mark-salzberg https://podconx.com/guests/larry-mishkin https://podconx.com/guests/jim-marty https://podconx.com/guests/rob-hunt
Cannabis companies do not have access to US bankruptcy protection because bankruptcy is a federal jurisdiction. Mark Salzberg a bankruptcy attorney at DC based Squire, Patton, Boggs joins Jim Marty and Larry Mishkin to talk about the fate of cannabis businesses and owners in US bankruptcy courts and explores the idea of cross-border bankruptcy filings with Canadian companies.
https://podconx.com/guests/mark-salzberg
https://podconx.com/guests/larry-mishkin
https://podconx.com/guests/jim-marty
https://podconx.com/guests/rob-hunt
Jim Marty: [00:00:36] Hello, everybody, and welcome to the Deadhead Cannabis show.
Jim Marty: [00:00:39] Jim Marty here reporting from Denver, Colorado, where I'm attending the Endto Expo. Very, very large Hemp event. And I've got my partner on the line up in Chicago. Larry Mishkin of Hoban law.. How you doing, Larry?
Larry Mishkin: [00:00:53] Jim, I'm doing just fine. I wish I was still out in Denver. The weather back here sucks. That was beautiful out there, man. Sunny and warm.
Jim Marty: [00:00:59] Sunny and warm at 60 degrees and not a cloud in the sky.
Larry Mishkin: [00:01:02] Wow. OK.
Jim Marty: [00:01:03] I'm in the wrong city to pick up where you left off last time. How is the Tedeschi truck show last night in Chicago?
Larry Mishkin: [00:01:11] Well, the good news is I made it on time and it was probably one of the best trucks show I ever saw. I was there with a whole bunch of my buddies. My buddy Rob picked up some tickets. My great friends, Michael Lynn was from Minnesota. And, you know, everybody in the group is all huge fans of the band. And as we all walked out, there was an overwhelming consensus that that may have been the best show we ever saw, that for whatever reason. And you know this, Jim, right? Some nights you go in here, he's on fire. Other nights he's just trying to play. And Derek Trucks was on fire. They did a memory of Elizabeth Reed for about forty five minutes. That was just unbelievable. And they could have gone all night with it. It was it was great. David Bell, Bottom Blues. They did a cover of Elton John's The Border Song. And it was it was great with a lot of fun. Again, if you ever have kids, you go see Tedeschi trucks. That's a must see for anyone who likes that kind of music.
Jim Marty: [00:02:02] So that sounds great. I'll look forward to see him on the Red Rocks tour this summer. I did also notice this week that Fish announced their summer tour.
Larry Mishkin: [00:02:10] I noticed that and much, much to my dismay. Somehow or other, Chicago is not on the tour schedule. The closest they're going to come is here Creek in Indianapolis, which I was very disappointed about. No, Chicago shows that maybe they've got something special planned for Chicago later on, but that's pretty unusual. Normally we get them either up at Alpine Valley or one of the downtowns they use in the summer.
Jim Marty: [00:02:34] That is interesting. Well, I'm happy to just say that Denver and Dick's designed for Labor Day weekend three shows for the second year in a row. There's no camping, which puts a damper on the party because then you have to, you know, scatter after the show and not all hang out all night. I see also there doing a big West Coast swing.
Larry Mishkin: [00:02:52] Yep. I do a lot of the West Coast. I saw Dick pics, six picks. Dick at Denver there. My oldest son, he and his crew go there every year for that. But this year, my son is getting married on Labor Day weekend in Atlanta. So his crew is going to have to be in Atlanta. None of them are thrilled about it. But, you know, you got to do what you gotta do for love, I guess. So they're going to do without dicks this year. But, you know, camping again, that you're right. It does take the fun out of it.
Jim Marty: [00:03:17] Yeah, we have a wedding on in our group, too. And I just joke with my sons. They say, hey, cheer up, maybe they'll break up.
Larry Mishkin: [00:03:25] You never know. Right. I can't say that around my house, but I know it can be anyway.
Jim Marty: [00:03:30] Yeah. So the gorge, which I've never been to the gorge and I might make my way out there, then it come down to top.
Jim Marty: [00:03:37] And they are doing the L.A. forum, which I just saw Jen and co there.
Larry Mishkin: [00:03:41] Right. You were telling us how much how they really turned it into a great music palace.
Jim Marty: [00:03:44] It's wonderful. They spent millions renovating it. And the sound for debt and company was some of the best I've ever had. And I was in the second level. I wasn't down well. So. Well, that's what's going on musically. Yep. Spring has come in. Jazz Fest has come in debt and college jazz fest. So we've had lots and lots more to discuss. I did get a review of the Trey Anastasia's shows in Los Angeles. He did two nights there. Our older son Matt Jim Marty attended and said they were great fun shows. He got a VIP suite. He was at the soundboard on the second night. So that's what's going on musically. But we do have a special guest. And, Larry, you know that we have a fellow lawyer today, so I'm going to let you do the introductions.
Larry Mishkin: [00:04:28] Well, the real question that we have here is what do we do in this industry? If your business fails and here's why the question vacancy is a creature of federal law. Federal law doesn't recognize Cannabis because of its Schedule 1 status. So it does kind of beg the question of what do we do in this situation and this will lead. And Jim, let me ask you, what have you been advising your clients to date on what they should do if they reach that position?
Jim Marty: [00:04:56] Well, they're just getting there. The big issue is not necessarily creditors, because it's hard for Cannabis companies to get bank loans. Almost all their capital through the last 10 years has come from friends and family and internal growth. But they do tend to owe the IRS a lot of money than any other walk of life. If your taxes are over three years old from date of assessment, you can dismiss those income taxes in federal bankruptcy court. But there was an opinion a number of years ago, the first time the company went to the bankruptcy. It's. And they were denied. I don't recall the details, do you, Larry?
Larry Mishkin: [00:05:39] I do not know. That was before my time. That was when you guys were were kicking ass and we were we were just starting to get started in the business.
Jim Marty: [00:05:46] All right. Well, Larry, I should go ahead and introduce our guest so we can ask him these questions straight up.
Larry Mishkin: [00:05:51] Ok, Jim. Yes, you're right. We are very lucky today. We can get some answers to these questions. Our guest is Mark Saltzberg. Mark is a bankruptcy attorney. And he's very kind enough to come on our show today and discuss with us the answer to that very question. If there is any answer. What happens when a Cannabis business fails?
Mark Salzberg: [00:06:10] Well, first of all, it's a pleasure to be on the show with you guys today. And bankruptcy and Cannabis. It's an interesting topic. And unfortunately, right now at least is the way that the law now stands. Bankruptcy is off limits to a large extent to the Cannabis companies and to landlords, to Cannabis growers, providers of services and providers of products to Cannabis companies. So when you're talking about a Cannabis company, again, that could be anywhere in one between a grower, cultivator, distributor or a landlord or seller of products that are used in the growing or the cultivation. Bankruptcy is just not an option. What you're left with are state law remedies, which typically well from the the actual we'll call the debtor, not bankruptcy debtor standpoint. The company's standpoint would be a dissolution from a creditor standpoint. You're talking about a receivership or an assignment for the benefit creditors or an Article Nine foreclosure.
Larry Mishkin: [00:07:11] So this is fascinating, though. What you're saying is that access to the bankruptcy court is blocked. Even the businesses that are ancillary to the industry, even if they're not quants like these businesses themselves.
Mark Salzberg: [00:07:23] That's exactly right. And I the way that I look at this and just kind of pictorially, if you have a series of concentric circles, you have really at the center of the center circle would be the Groer or the cultivator. And then as you go out, you have, say, the landlord. After that, you have the provider of the services and then you keep going further and further out. And so the courts have been. It's not just the cultivators. It's not just the sellers. Courts have prevented, say, for instance, landlords from filing. The courts have prevented. There's a case. And we can go in the case specific for the seller of hydroponic equipment. District court in Colorado just the past year dismissed a bankruptcy case and they sold to both Cannabis growers. Cannabis customers, as well as on Cannabis customers. So it's really what the courts are doing. They're looking at the Controlled Substances Act and saying, are you in violation of the CSA? And that is we know can be can can be multiple. You could be in violation, the CSA multiple ways. You can be a cultivator. You give me an ancillary company providing, you know, hydroponics or landward. And you can also but very quickly, you can aid and abet violation of to CSA, which could by you know, by virtue of that of that violation, the aiding and abetting of a breach of federal law preclude yourself from bankruptcy protection.
Larry Mishkin: [00:08:49] I think Jim can really ask you this, because you've been doing this a lot longer than I have. And you're you're closer to the financial heart of people in your experience today. What is the failure rate of Cannabis businesses that you've dealt with?
Jim Marty: [00:09:03] Well, I guess it depends on your definition of fail. Now, many are just limping along. Many close their doors. And as I said, their creditors are usually their friends and family. So there's not usually a bankruptcy proceeding. However, we do have some clients who all over a million dollars of income taxes coming up on three years. So we may have a test case. I think Mike mentioned that or maybe we mentioned before the show started that if your taxes are over three years old, you get those dismissed in a federal bankruptcy court. But what Mark is saying, and I have another question for months, is those avenues are not open to people in this industry. Now, Mark, what about another illegal activity? Would bankruptcy courts be allowed to you if you were doing something illegal but not marijuana?
Mark Salzberg: [00:09:55] Well, it depends. I mean, the way that the courts look at it. For instance, we all know that there are multiple different types of bankruptcy, Chapter 7, Chapter 13, Chapter 11 and Chapter 15. And so you have to really break this up on a chapter by chapter basis when you think about what the courts are doing. So within, for instance, in Chapter 7, which is a liquidation chapter, a Chapter 7 trustee is appointed who then takes control, possession of all the assets of the debtor with the Cannabis company. That would include, for instance, the the actual the actual plant. What is the trustee going to do with that? Going to sell that? Well, the trustee can't do that. The banker. Court's mind, because that would be violating federal law. That's what chapter seven cases are then typically dismissed typically on the motion of the U.S. trustees office, which acts as kind of like a trap, a cop to make sure that procedures and policies are implemented. Chapter 11 and 13, which are generally speaking, both chapters provide for the confirmation of a plan. The question that is before the court and the Cannabis spaces. Does that plan rely upon the proceeds of illegal activity?
Mark Salzberg: [00:11:12] So, for instance, in the case of the hydroponic company that I mentioned before and the way to grow case, the court said, well, we can't confirm a plan because you were selling product. To a large extent of, although. I think that they thought there was a 90 percent of its customer base with the Cannabis industry. So you're violating federal law. You're we can't confirm a plan which itself is based upon violations of federal law. So that's really the construct that the bankruptcy courts have taken with Cannabis other illegal activity. You know, it's it would be a different ball process. The bankruptcy courts really would look at a different way.
Jim Marty: [00:11:53] Very interesting. Very interesting. But doesn't this that I'm not a lawyer. So I'll ask the two lawyers on the call.
Jim Marty: [00:11:59] Doesn't this come down, though, to a constitutional issue of equal access to the court system? How can one group of citizens be treated differently from everybody else? That's our argument in to eat that they're applying it, denying deductions to one group of taxpayers and not to others. With that, I went to the lawyers to opine on that promise from a bankruptcy standpoint.
Mark Salzberg: [00:12:26] I don't think it's really a constitutional issue, at least when you when you're talking about the Chapter 7, 11 or 13, it's really a question of, again, putting the bankruptcy robes on. Are you acting in violation of federal law? Because again, Cannabis is a Schedule 1 narcotic under the Controlled Substances Act. Constitutional issues come up in in a chapter fifteen context, which is the fourth chapter that I mentioned before. And that is a that's an interesting chapter which provides for cross-border bankruptcies. In other words, a insolvency proceeding that institute in another country where the debtor and the other country might have operations or assets in the United States. And they need the U.S. courts to recognize the foreign insolvency proceeding and to enforce the importance of secrecy. That's never been tested, as far as I'm aware, in the 80s, whether or not a Cannabis company, for instance, in Canada, which has operations or a lot, there are a number of them that are domiciled in Canada that are on the Canadian Stock Exchange or a Canadian fact stinks. The question there is, would the U.S. courts recognition of a foreign Cannabis insolvency proceeding? Would it qualify under what's known as the public policy exception, where the courts don't have to recognize a foreign proceeding if it violates the violate public policy and their constitutional issues would arise? What violate public policy? Typically speaking, you're talking about violating a constitutional issue, a constitutional interest, not just necessarily violation of the Controlled Rights Act.
Larry Mishkin: [00:14:09] Exactly. And you know, Jim, what the other thing that I would just, you know, immediately liken it to and I hate to argue against what you're saying, because I agree with the underlying premise, but, you know, in contract law. Right. We have the exact same problems as a lot of courts that are very reluctant to enforce marijuana contract because one of the underlying premises of French press law is a contract that has an illegal activity as the subject matter is not enforceable as a matter of public policy. Colorado, where you were the first state to pass state legislation that granted specific subject matter jurisdiction to the state judges, they could hear marijuana cases. But, you know, I suppose you could similarly argue, hey, you're going to enforce everybody else's Patrick. I think what it really goes to is the underlying premise and the problem with the due process argument there is. So we're consistent with everyone who's business is legal. You know, where you have a problem is if they were taking some. You know, illegal activity, but not others. Then you have more of a due process argument, I think, you know, I mean, having said that, I'm all for it. So we can find a way to make it happen. That's all the better, you know, for real industry. It's got real money and there are real failures involved. And people just need to have an up.
Mark Salzberg: [00:15:30] Yes, Larry. You know, I completely echo what you just said. And there are actually it's interesting when I talk about Cannabis of bankruptcy, sometimes people say, well, it really doesn't matter. You're just talking about bankruptcy. What what what do we care about bankruptcy cases? But the refusal of federal courts, bankruptcy courts to allow Cannabis companies to access the bankruptcy courts as they extended to the district courts. There are a number of district court decisions, ironically in there, at least two in district court cases coming out of the West Coast in Washington. And I believe my second one might be in Oregon or the district courts have refused to enforce contracts for a where there was gonna be a change of ownership of Cannabis companies. Again, the Cannabis companies were operating under state law. They were legal under state law. But the federal courts refused to enforce those contracts because to do so, where they were going to compel the transfer of ownership interest would violate federal law. So it's really it's not just limited to the bankruptcy courts. It's now extending into the district courts as well.
Jim Marty: [00:16:38] Interesting. Well, it's not a sliver of hope. I've been involved in arbitration and mediation in Colorado. And those contracts were enforced by the arbitrator. So a tip for the listeners was when you write your contract, she might want to put in there that you want to go to mediation or arbitration as opposed to just you could state what, state district court to enforce your contracts. But it's all a matter of time before all this changes. Unfortunately, she catch a lot of people unawares. This might seem counterintuitive, but because it is so hard to raise capital and it is so hard to, you know, grow your business and have the capital infusion, you need maps that many. But some of our clients have actually used the IRS as a lending source. So they'll ring up three, four or five hundred thousand of income taxes they owe, get into a payment plan and use the IRS as a source of capital. That's so crazy and counterintuitive.
Mark Salzberg: [00:17:42] This industry is what I would say. Is that the one issue? One interesting aspect of the financing side is that there are funds typically based in northeast New York, which are looking at the Cannabis industry thinking down the line for five years in the future. They're putting they're they're, you know, they're putting their money into funds, thinking in four or five years, we'll be able to lend into the space freely. The banking system will be open. Perhaps the wall will never Cannabis will no longer be on schedule to no longer be scheduled under the Controlled Substances Act. And so there is money out there that is that they're contemplating using in the Cannabis space. We're just not there yet.
Jim Marty: [00:18:30] Yes, I agree with that.
Mark Salzberg: [00:18:32] Me too. It's a process that'll happen over time. And eventually we will get right.
Jim Marty: [00:18:36] The huge curve ball that I'm speaking to you from the parking lot of the Endo Hemp Expo in Denver. Absolutely enormous. Hundreds and hundreds of people here, hundreds of exhibitors with all the heavy equipment for extraction and harvesting and trimming the plants. Just an amazing thing. And of course, we now know since the 2018 farm bill passed, Hemp is now legal and the definition of Hemp is generally 0.3 percent THC.
Jim Marty: [00:19:10] But in reality, any anything under 3.9, 9 percent THC is considered Hemp and is now legal. So the lines have totally blurred as to what's marijuana. And once Hemp lots of samples here, I have to say I enjoy the smokeable Hemp. It's very low THC. You still feel that a little bit, but unliked is high. The high tech stuff that we have on the market today, you can actually sit and smoke a half a joint and not be wasted.
Dan Humiston: [00:19:47] I want to take a quick break to thank you for listening to today's show and to invite you to listen to all the other great MJBulls Cannabis podcast like Raising Cannabis Capital, the show which features Cannabis at manures that are raising money to expand their organization. Tune in each week on Thursdays and Sundays to hear founders of awesome Cannabis companies talking about their business and their fundraising plans. Who knows? Maybe you'll discover the future Amazon or Apple of Cannabis on the Raising Cannabis Capital podcast.
Jim Marty: [00:20:23] Let's switch things over to a little more music to finish up. You know, I'll report more and more detail on the India India Indo exMo from Denver on our next show. Unfilial you some of the things I've learned. But back to music for a bit. It seems like everybody in a certain age group has a few memories of the Grateful Dead.
Jim Marty: [00:20:47] And I would like to ask Mark. They say, if you remember the Grateful Dead show, you probably weren't really there. But I remember all my Grateful Dead. She was in great detail because they were such wonderful and money changing experiences for me. But to Mark the Grateful Dead played a lot around Washington, D.C. in the 80s especially.
Jim Marty: [00:21:11] What is your recollection of the viewer first Grateful Dead show?
Mark Salzberg: [00:21:15] My first show, I went to college in outside of Philadelphia's small liberal arts college and it was 1985. Not to date myself. In 1985, we went to see Spectrum, which no longer exists. And we were picked up by a friend of a friend who was in a VW mini bus. A poor get what color? I just remember crowding into the back of a minibus with probably about 10 different people getting out to the parking lot of the spectrum for many hours beforehand, and I'd never seen anything like that. I thought the dad probably wouldn't probably fewer than 10 times the next time I saw them actually was in D.C. before I worked for a year before I went to law school. I saw them in the old cap center in Landover. But, you know, I remember just loved it and had a great experience. The show. Love the show. Saw them again a number of times. And since then, I've not seen. The one thing that's lacking is I haven't seen John Mayer play with them. I've seen John Mayer a number of times. He's one of my favorite unbelievable guitar player. And I definitely would love to see the current lineup where he is.
Jim Marty: [00:22:23] And he's doing it. He's doing a great job.
Jim Marty: [00:22:26] He's just playing that higher and higher levels. And it's interesting, you should say talk about his work on his own because, you know, he has a large following in his own right. And, you know, he wanted to come over to the Grateful Dead. I guess it started rather dead in company. It started when he and Bob we're we're both guests together on the late night shows. I think it might have been Jimmy Fallon. And that's what sparked the interest of those two working together. And, you know, John Mayer's doing a great job. Now, we talked on the last show on how he got to play Gerry's guitar last summer and how great it sounded. And. But, you know, John Mayer, we've adopted him. He's officially a deadhead now, one of us.
Mark Salzberg: [00:23:14] We just saw him in D.C. about six months ago. And he's not promoting an album. He was just playing music. But you could definitely tell that he's been playing with the dad because his guitar work just is morphing from where it used to be. It was absolutely amazing that you get that. The influence.
Jim Marty: [00:23:33] Yeah. When one John Mayer story, they heard him tell him, dad, the Grateful Dead channel.
Jim Marty: [00:23:42] He said, yeah. When he would first start playing with the Grateful Dead, he was a little bit unsure of himself. And Bob would give a nod of the head, which meant he got a 90 minute or two two minute solo. And it took him a while to get used to that. And all of a sudden the ball was handed to him and he could jam as long as he wanted.
Larry Mishkin: [00:24:00] It's funny, but good in his eyes. He's taking it brought with it a breach of ten mark.
Jim Marty: [00:24:07] If you if you want to see Dead and Cole, they're playing the second weekend of Jazz Fest in New Orleans, first weekend of May.
Mark Salzberg: [00:24:13] You know, I've I've never been to jazz. Jalbert in New Orleans and need to do it one these days. Need to do it.
Larry Mishkin: [00:24:20] You do need to go. It's Lollapalooza for adults. It's a lot of fun.
Jim Marty: [00:24:23] I'm working on getting there this year.
Larry Mishkin: [00:24:25] Yes, it's worth doing. There was one thing I mean, that to mix genres of music, there were a few things on my bucket list of music and I did cross one off this summer. I did see kids for the first and very last time.
Mark Salzberg: [00:24:39] That's funny. That's not exactly the same quality. That's OK. They're still around. It's great. That's Gene Simmons, right? Yes, sir. Gene Simmons and Paul Stanley.
Jim Marty: [00:24:47] Yeah. Gene Simmons. I talked to him recently at a cannabis event. He's investing heavily in some of the Canadian cannabis companies. What's interesting about Gene Simmons is he never has drank or smoked anything.
Larry Mishkin: [00:25:00] That's very true. There he is after all these years. Still crank it up.
Mark Salzberg: [00:25:04] It's actually like Springsteen as well.
Jim Marty: [00:25:06] So I think we're coming to the end of our time slot, Larry. Mark, do you have any. Do you want to get in before the end of the show?
Mark Salzberg: [00:25:13] I would just say that he mentioned the Canadian companies, I think, from a bankruptcy standpoint. That's really the area of interest. It's. Foreign non-U.S. based Cannabis companies and again, typically I think you're going to be tokamak Canadians looking to file because the Canadian market is saturated, there's a thriving black market where they're complete, the prices are completely undercutting the license legal Cannabis and there is a real, real, real alignment in Canada that's coming up at this point in the acetates insolvency. And the question is going to be those companies with US operations, Arafat can access the U.S. course through chapter fifteen. That's going to be from a legal standpoint.
Mark Salzberg: [00:26:02] But really interesting and I have a comment on that since we work in that space now that, yes, several of our clients, we've helped them go public. And the way they do it is they find a Canadian shell company that is all licensed and registered to be on the Canadian Stock Exchange. And they do a reverse merger into their Canadian company. But virtually all of their operations are U.S. based cultivation, extraction and dispensaries.
Mark Salzberg: [00:26:29] And that's going to be the one of the main blocking points for chapter fifteen, because then it gets into the question of is this a foreign main proceeding for Noname proceeding? His chapter fifteen. What relief would they even be entitled to? As a matter right in chapter fifteen. So it gets complicated, but it certainly is interesting.
Jim Marty: [00:26:50] Well, thank you so much for your insight. And we don't know if we mentioned it yet, but it was a very prestigious law firm of Patton Boggs. Know officers all over the world.
Mark Salzberg: [00:27:00] I believe it, actually. Why is it Squire Patton Boggs? Just sorry. The criteria used to be bad bugs. Well, we merged combined about five years ago with Squire Sanders. Yeah, we have offices in the United States and around in Europe and as well as in Asia.
Jim Marty: [00:27:16] Well, I will look forward to meeting you personally the next time in DC, which will be in May. Thank you very much, Mark salsburg, for being on our show.
Mark Salzberg: [00:27:26] Well, it's been a pleasure. And, you know, to great conversation and really appreciate the time. Interesting, interesting issues all round.
Jim Marty: [00:27:32] We appreciate your input. All right, everybody.
Larry Mishkin: [00:27:36] For Jim Marty, everybody, have a great week. Campbell, pleasure as always, Bart. Thank you.
Jim Marty: [00:27:41] And keep listening in on the Grateful Dead show. All right. Goodbye from the Grateful Dead Cannabis show.
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