As we wrote earlier, bankruptcy has not been a viable option for cannabis companies, including ancillary businesses that get some of their revenue from cannabis. That should change for hemp and CBD companies after the 2014 Farm Bill, especially after hemp was legalized as a commodity under the 2018 Farm Bill (and removed from the Controlled Substances Act). Despite a suggestion from the Ninth Circle that bankruptcy courts might now be more open to industry debtors, things didn’t change much. The actual number of bankruptcy plans actually confirmed in recent years is very small.
Last week, however, the Eastern District of Kentucky Bankruptcy Court approved and upheld hemp giant GenCanna Global / OGGUSA, Chapter 11 Liquidation Plan, and eventually closed one of the first bankruptcy cases for the hemp industry. GenCanna was a vertically integrated hemp producer and CBD maker. This case has been particularly tumultuous since its filing in February 2020. As early as October 2019, several contractors and suppliers had filed liens on property of around USD 13 million against GenCanna for non-payment. GenCanna has also faced pressure and allegations from farmers allegedly asking to expand their acreage to grow hemp, while GenCanna knew these agreements could not be honored. Its bankruptcy filing listed 81 companies and individuals spread across Kentucky, other states, and even Canada.
Ultimately, GenCanna sold the majority of its assets to its lender / creditor, MGG Investment Group. The $ 77 million sale enabled MGG Investment Group to recoup its original investments. The remaining assets will be distributed primarily to the remaining creditors.
The hemp industry has definitely cleared some hurdles since legalization – there are uncertainties about the regulatory framework, litigation against the DEA, persistent access problems to banks and other financial services and of course the impact of the pandemic. While no hemp entrepreneur would want to consider filing for bankruptcy, there seems to be at least a growing trend of cases across the country confirming that there are options beyond ingesting cannabis or simply being handled without judicial oversight.
One thing to keep in mind is that having bankruptcy as an available option can actually be beneficial as it inevitably puts off the calculus when business disputes arise. For those struggling to stay afloat but still intending to keep their contracts, bankruptcy as an option becomes a leverage for a discount or longer. In such cases, a prospective creditor really needs to consider whether it makes sense to work with the prospective debtor – if the due diligence shows that aggressive pressure on the debtor would result in bankruptcy proceedings with the creditor potentially only fifty cents on the Raising Dollars It might be worth working on a slower payment schedule with this debtor.
Of course, every situation is incredibly factual and knowledgeable lawyers should be consulted, but we anticipate that the growing number of confirmed bankruptcies in the industry will reduce the stigma and result in subtle but meaningful changes. We are pleased that everything is going in the right direction here.