Idaho Constitutional Ban On Legal Cannabis Fails In Legislature

An attempt to prevent any cannabis reform in Idaho has fallen flat.

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Current Trends in Bankruptcy for Cannabis Companies

In a recent bankruptcy decision by the Ninth Circuit Bankruptcy Panel (“BAP”), the BAP had the occasion to explore some of the intricacies of how the Bankruptcy Code interacts with the cannabis industry. Burton v. Maney, 610 B.R. 633 (B.A.P. 9th Cir. 2020) (“In re Burton”). While, generally, a putative debtor cannot enjoy the protections afforded by the Bankruptcy Code if it grows, cultivates or sells marijuana, recent court decisions have started to define how far the boundaries can be stretched. One Court recently summarized the dilemma as follows:

If the uncertainty of outcomes in marijuana-related bankruptcy cases were an opera, Congress, not the judiciary, would be the fat lady. Whether, and under what circumstances, a federal bankruptcy case may proceed despite connections to the locally “legal” marijuana industry remains on the cutting-edge of federal bankruptcy law. Despite the extensive development of case law, significant gray areas remain. Unfortunately, the courts find themselves in a game of whack-a-mole; each time a case is published, another will arise with a novel issue dressed in a new shade of gray. This is precisely one such case. In re: Sandra Mulul, 614 B.R. 699, 701 (Bankr. D. Colo. 2020) (“In re Mulul”).

In re Burton

In re Burton involved a Chapter 13 case filed in Arizona. The Debtors, Kent and Carly Rae Burton, disclosed certain information on their bankruptcy schedules which indicated they owned a 65% interest in Agricann, LLC (“Agricann”). Agricann was an “entity that was engaged in cultivating and selling marijuana.” In re Burton, 610 B.R. at 634. While the sale of medical marijuana was legal in Arizona at the time the Debtors filed for bankruptcy protection (2018), it remained (and remains) illegal under federal law.

After the Debtors filed bankruptcy, Agricann (which apparently ceased operating in 2016) sued two other entities in state court for “damages for breach of contracts under which Agricann was to cultivate, grow, and sell medical marijuana.” Id. at 635. Both the Chapter 13 Trustee’s counsel and a creditor in the case sought dismissal of the case because of the “Burtons’ involvement in the medical marijuana industry.” Id. The Debtors contended that because Agricann was no longer operating, no income from that entity would be used to fund their Chapter 13 plan of reorganization. However, the Bankruptcy Court found that a recovery in the state court litigation “would be derived from conduct that is illegal under federal law.” Id. at 634. The Bankruptcy Court ultimately dismissed the case, and the Debtors appealed the decision to the BAP.

As the BAP noted, “…a bankruptcy filing by an individual or entity with ties to a marijuana business raises difficult issues regarding how involved the debtor may be in that business and still be permitted to seek under the [Bankruptcy] Code.” Id. at 673. The BAP went on to state that the case law continues to evolve in this area and there are very few bright line tests. But the BAP also noted that one principle was evident from the case law, “…the mere presence of marijuana near a bankruptcy case does not automatically prohibit a debtor from bankruptcy relief.” Id.

After the BAP canvassed some of the case law involving marijuana assets in bankruptcy proceedings, it held that the Bankruptcy Court did not err in dismissing the Debtors’ case. Dismissal under 11 U.S.C. §§ 105(a) and 1307(c) was appropriate “because the continuation of the case would likely require the trustee or the court to become involved in administering of the Agricann litigation, which the court implicitly found would be tainted as proceeds of an illegal business.” Id. at 639.

In re Mulul, In re Green Earth and In re Ginsburg Decisions

Subsequent to the In re Burton case, the In re Mulul decision was issued by the Bankruptcy Court in Colorado. Of particular interest was the Colorado Bankruptcy Court’s evaluation of two other bankruptcy decisions in rendering its decision. The In re Mulul decision helps to help further define when a debtor may be able to enjoy the protections of the Bankruptcy Code.

The first decision discussed by the In re Mulul court was Green Earth Wellness Ctr., LLC v. Atain Specialty Ins. Co., 163 F.Supp. 3d 821 (D. Colo. 2016) (“In re Green Earth”). In re Green Earth involved a lawsuit by a cannabis company against its insurer. The plaintiff sued the insurer for failing to compensate the company for marijuana plants and equipment destroyed in a fire. The insurer claimed it was excused from performing under the insurance contract because of the illegality of the business. The court in In re Green Earth did not declare the insurance policy void on public policy grounds. As the court in In re Mulul noted:

[T]he operative decision point in Green Earth Wellness was Judge Krieger’s careful distinction between ordering the insurer to pay for damages to specific items (i.e., marijuana plants) and merely ordering compliance with the contract, which could be accomplished without reference to the existence of any marijuana asset. Presumably, if the insurance contract specifically required [the insurer] to replace the marijuana plants rather than merely compensate Green Earth for their value, the result would have been different. In re Mulul, 614 B.R. at 707-708.

The second decision analyzed by the In re Mulul court was Ginsburg v. ICC Holdings, LLC, No. 3:16-CV-2311D, 2017 WL 5467688 (N.D. Tex. Nov. 13, 2017) (“In re Ginsburg”). In re Ginsburg involved a loan to a medical marijuana business. Ginsburg, who was the lender, ultimately sued ICC Holdings for, among other things, breach of contract due to defaults under the loan, violations of state and federal securities laws, and the federal Racketeering Influenced and Corrupt Organization Act.

ICC moved to dismiss the lawsuit “because the purpose of the [promissory notes] [was] to fund the cultivation, possession and sale of marijuana, in violation of federal law, [and] the [promissory notes] [were] void and unenforceable because they contravene public policy.” In re Ginsburg, 2017 WL at *3. As the In re Mulul court stated, “…the [Ginsburg] courted noted, due to the fungibility of currency, repayment of the notes would not require ICC Holdings to ‘manufacture, distribute, dispense, or possess marijuana.’” In re Mulul, 614 B.R. at 708 (internal citation omitted).

Where Do We Go From Here?

Given these decisions, is there a pattern emerging from the case law? The answer is yes, in part. The primary lesson learned is that if the debtor and its earnings are directly related to the marijuana industry (e.g., cultivating, selling, etc.) then in all likelihood, it cannot enjoy the protections of the Bankruptcy Code. However, as the connection between the cannabis earnings and the business become more attenuated, then there is a higher probability the debtor can move forward with a bankruptcy case.

There also is a hint of fairness and equity in these decisions, especially In re Ginsburg and In re Green Earth. It would be fundamentally unfair if a party knowingly engaged with a marijuana business, and then attempted to disavow its obligations because of “illegality” or the like. While the law is not always “fair”, at times, it can be.

The bankruptcy process is a very powerful tool that allows debtors to accomplish things it could never do outside of bankruptcy. When a party is deprived of this right, there is no other equivalent under the law. The sole remaining options are to liquidate without court supervision, or via state court receivership. Hopefully, in time, those in the cannabis industry will have the right to seek bankruptcy protection without the mental gymnastics that currently plague the industry. However, for that to occur, changes are needed in federal law.

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New York Cannabis Licensing, Part 2: The Application Process

Finally, the post that all prospective New York cannabis applicants have been waiting for: an explanation of the Marijuana Regulation and Taxation Act’s (MRTA) license application process.

We ask you to curb your enthusiasm: while the MRTA provides a framework for the license application process, the actual license application (including the license fee) will be created by the Cannabis Control Board (CCB). When? Hopefully in the next few months. The MRTA requires the CCB to deliver its first annual report by January 1, 2023, which means that the MRTA contemplates cannabis sales in 2022.

Instead of walking through the relevant provisions section by section, we thought it would be helpful to answer the questions every prospective applicant has already asked. Here they are:

Where can I obtain a license application?

From the Office of Cannabis Management (OCM). Eventually. As we have repeatedly stressed, the CCB will be creating the rules and regulations for adult use licenses, including the form of the license application. The OCM will be responsible for administering the application process.

What information will be required for a license application?

The MRTA requires the following information to be included as part of the application created by the CCB (as well as anything else the CCB comes up with):

• Information about the applicant’s identity, including racial and ethnic diversity. Although not expressly discussed, we assume this includes information about anyone who has an ownership interest in the applicant if the applicant is an entity (which we strongly recommend for just about any licensee).
• Ownership and investment information for entity applicants, including a detailed explanation of the applicant’s corporate structure.
• Evidence of good moral character, which we presume is clearing the criminal background check as required in the MRTA’s general provisions article.
• Fingerprints for the applicant (principals, officers, directors, etc. if an entity).
• Information about the premises that will be licensed.
• Financial statements for the applicant.

Is there a license fee?

The license application will require a check for the license fee, so it is safe to say that a license fee will be required. But we don’t know what the license fee will be across the different license types.

The license fee will be set by the CCB. Interestingly, the MRTA provides that the license fee may be based on cultivation and/or production volume, implicitly contemplating a sliding scale for license fees.

Another fun inclusion: the CCB also has the right to charge a biennial license fee (after the initial license is issued), which would be based on the amount of cannabis cultivated, processed, distributed and/or dispensed by the licensee (as applicable) or gross annual receipts of the licensee for the previous license period.

What are the selection criteria?

At a minimum, plus anything else the CCB adds as part of issuing the industry rules and regulations:

• Whether the applicant is a social and economic equity applicant.
• The applicant’s ability to demonstrate effective controls against the illegal diversion of cannabis.
• The applicant’s ability to comply with applicable state laws and regulations.
• The applicant’s and its officers’ ability to properly carry on the activities for which a license is sought, including with assistance from the social and economic equity and incubator program, if applicable.
• Whether the applicant possesses or has leased sufficient land, buildings, and equipment to carry on the activities described in the application or has a plan to do so if qualifying as a social and economic equity applicant.
• If a non-social and economic equity applicant, whether such applicant sets out a plan for benefiting communities and people disproportionately impacted by the enforcement of cannabis laws.
• Whether it is in the public interest that the applicant be granted a license.
• Whether the applicant and its managing officers are of good moral character and do not have ownership or controlling interests in more licenses or permits than allowed by the MRTA.
• Whether the applicant has entered into a collective bargaining agreement.
• The applicant’s plan for contributing to communities and people disproportionately harmed by enforcement of cannabis laws.
• For adult-use cultivator or processor applicants, the environmental and energy impact of the facility to be licensed.

Who evaluates license applications?

The OCM performs the initial evaluation of every application and submits its recommendation to the CCB. If the CCB is not satisfied with an application, the CCB’s executive director is required to notify the applicant of the specific reasons for the denial. An administrative appeal process has not been released, but the MRTA’s general provisions contemplate that a denied applicant can appeal through an Article 78 proceeding.

How long is the license term?

All initial licenses will be for 2 years.

Can a license be renewed?

It can, upon submitting a renewal application to the OCM and paying a renewal fee.  Renewal applications will be issued at least 90 days prior to the expiration of the existing license.

Beyond requiring information that we expect will be consistent with the initial license application, renewal applicants will also have to:

• Submit documentation of the racial, ethnic and gender diversity of the licensee’s owners and employees prior to a license being renewed.
• Provide evidence that the licensee has executed their plan for benefiting communities and people disproportionately impacted by cannabis law enforcement as detailed in the licensee’s initial application.
• Maintain a labor peace agreement with a bona-fide labor organization (maintaining such an agreement is a material condition of licensure).

Can a license be transferred?

Yes, but not without the CCB’s approval.  Transfers and any changes in the underlying license information, such as changes in ownership, substantial changes to the licensee’s corporate structure, and changing the licensed locations, require CCB approval. Changes without CCB approval constitute grounds for suspension, revocation or cancellation of a license.

The broad takeaway from the MRTA’s adult-use licensing provisions is that applicants will need to have a lot of bases covered prior to submitting an application. As we all eagerly await the CCB’s issuance of its rules and regulations, we here at the Canna Law Blog will continue our series on the MRTA and provide regular updates on developments in New York’s cannabis industry. Stay tuned!

The post New York Cannabis Licensing, Part 2: The Application Process appeared first on Harris Bricken.

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Hemp Trademarks and the Perils of Generic Terms: PanXchange v. New Leaf Data Services

Two companies that provide data to the hemp industry are embroiled in a trademark dispute. New Leaf Data Services (“New Leaf”) sued PanXchange in Connecticut federal court, alleging that PanXchange’s offer of services under marks such as PANXCHANGE® HEMP BENCHMARKS constitutes infringement of New Leaf’s supplemental trademark registration, HEMP BENCHMARKS (Reg. No. 5079914). The case was eventually been transferred to Colorado.

In its answer to New Leaf’s complaint, PanXchange stated that the HEMP BENCHMARKS trademark is generic. PanXchange noted that Merriam-Webster defines “benchmarks” as “something that serves as a standard by which others may be measured or judged.” As a result, PanXchange claims, “the phrase ‘hemp benchmarks’ is not capable of distinguishing New Leaf’s services.” Consequently, PanXchange is asking the court to cancel’s New Leaf’s registration.

The use of the term “capable” is important, as a supplemental registration only requires that a trademark be capable of distinguishing an applicant’s goods or services. It does not require that the trademark actually distinguish said goods or services.

At heart, this case is about trademark basics, with the hemp connection being largely incidental. Nonetheless, the holding could have implications for other companies in the hemp and cannabis space.

If the court agrees with PanXchange and finds that “hemp benchmarks” is a generic phrase, it could lead companies to push the envelope when it comes to marks following the same basic formula (such as CANNABIS BENCHMARKS, for which New Leaf also has a supplemental registration). By contrast, if the court upholds New Leaf’s claim, we could see an uptick in applications for such marks.

What do you think? Should “hemp benchmarks” be considered a generic term like “oranges” or “computers?” Give us your thoughts in the comments section. And if you are a new or growing cannabis business, give some serious thought to your branding. Aside from federal law issues, a generic or descriptive name will always be hard to protect and may create headaches for your cannabis business.

 

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The California pre-roll battle royale 2021

Nine joints entered, only one can be champion. The judges’ results are in.

The post The California pre-roll battle royale 2021 appeared first on Leafly.

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Wisconsin Senate Majority Leader Says Cannabis Legalization Will Not Happen In The State

Unfortunately, according to Senate Majority Leader Devin LeMahieu, cannabis legalization is unlikely to happen in Wisconsin.

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Must-have 420 accessories based on your stoner persona

All you have to do to take your 420 up a notch is know yourself. Check out these must-have 420 accessories based on your personality.

The post Must-have 420 accessories based on your stoner persona appeared first on Leafly.

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