Earlier today, the Ninth Circuit Court of Appeals issued its long-awaited ruling in the Garvin v. Cook Investments, NW, SPNYW case This opinion is certain to be of great interest to both companies operating in the cannabis space and those attorneys representing them.
In Garvin, the US Trustee appealed confirmation of a plan of reorganization under which one of the debtors leased property to a marijuana grower licensed under Washington law. The US Trustee argued that the plan should not have been confirmed because it was proposed by means forbidden by law in violation of section 1129(a)(3) of the Bankruptcy Code since the lease to the grower violated federal drug law, i.e., the Controlled Substances Act.
The Ninth Circuit rejected the US Trustee’s argument, holding that section 1129(a)(3) forbids confirmation of a plan that is proposed in an unlawful manner, but does not forbid confirmation of a plan that has substantive provisions that depend on illegality. In other words, section 1129(a)(3) requires the court only to look at the proposal of a plan and not the terms of the plan. Because there was nothing in the proposal of the plan at issue that was unlawful, the Ninth Circuit affirmed the orders of the District Court and Bankruptcy Court confirming the plan.
Nonetheless, the Court’s ruling is not a complete victory for the cannabis industry. Courts may still consider whether cannabis companies are engaged in “gross mismanagement” under section 1112(b) of the Bankruptcy Code by virtue of their cannabis-related work. In this case, the US Trustee had waived its argument under section 1112(b). Moreover, the Ninth Circuit made clear that confirmation of a plan does not insulate a debtor from prosecution for criminal activity, even if that criminal activity is part of the plan itself. Thus, while the Garvin opinion provides some comfort to cannabis companies and their insolvency counsel, it does not cure the tension that exists between state law legalizing cannabis and the Controlled Substances Act.