Bankruptcy Court Doors Swing Open For Cannabis Companies, But Just Slightly

By Mark Salzberg on January 31, 2023 Posted in US

Are bankruptcy doors now opening for cannabis companies? A decision last week from a California bankruptcy court indicates perhaps so, at least for cannabis companies that are no longer operating.

Factual Background

The Hacienda Company, LLC (the “Debtor”) was in the business of wholesale manufacturing and packaging cannabis products. After it ceased operations in February 2021, the Debtor transferred its value, through the sale of intellectual property, to a publicly traded Canadian company, Lowell Farms, Inc. (“Lowell Farms”), receiving approximately 9% of Lowell Farms’ stock in consideration. Lowell Farms’ sole business is cannabis growth and sales.

The Debtor filed its chapter 11 petition on September 21, 2022. In response, the United States Trustee (the “UST”) filed a motion to dismiss the case for “cause” under section 1112(b) of the Bankruptcy Code, arguing that dismissal was required because: (a) the Debtor’s equity ownership in Lowell Farms violated the Controlled Substances Act (the “CSA”); (b) the Debtor is grossly mismanaging the estate because all of its assets are subject to forfeiture under the CSA; and (c) the Debtor filed its case in bad faith because any plan proposed by the Debtor would be funded from sources obtained in violation of the CSA.

The filing of the motion to dismiss could not have been a surprise to the Debtor given the general hostility of bankruptcy courts to cannabis debtors (see Cannabis and District Courts: Are Those Courthouse Doors Closed Too? | Restructuring GlobalView (restructuring-globalview.com, Cannabis and Bankruptcy: 2020 in Review | Restructuring GlobalView (restructuring-globalview.com, Up in Smoke: More Cannabis Companies Get Shut Out of Bankruptcy | Restructuring GlobalView (restructuring-globalview.com). However, and most likely to the shock of both the Debtor and the UST, on December 21, 2022, the bankruptcy court entered an order denying the UST’s motion to dismiss, and on January 20, 2023, the bankruptcy court issued its memorandum opinion.

Highland Capital Asks Supreme Court to Review Fifth Circuit Exculpation Excision Ruling

By Norman N. Kinel, Mark Salzberg and Michelle Saney on January 25, 2023 Posted in US

Last November we wrote about the Fifth Circuit Court of Appeals’ decision in Highland Capital Management, L.P., where the court reversed the bankruptcy court’s approval of a plan’s exculpation clause for non-debtors and limited the universe of parties covered by that provision. Relying on Bank of New York Trust Co., NA v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (2009), the Fifth Circuit held that the plan’s exculpation provision was overly broad and violated section 524(e) of the Bankruptcy Code.

Bankruptcy Court Allows Service of a Subpoena Via Twitter

By Kyle Arendsen on January 17, 2023 Posted in US

When a court-appointed trustee or liquidator is tasked with liquidating an entity, they need to gain possession of all of the entity’s assets. In crypto cases, this task can prove difficult when trying to identify and control all of the entity’s different digital assets and obtain cooperation from the entity’s former operators. Unfortunately, in the case of Three Arrows Capital (“3AC”), the two founders have refused to cooperate with recovery efforts and have absconded to unknown foreign countries. Without the founders’ voluntary cooperation, 3AC’s joint liquidators (the “JLs”) resorted to seeking relief from the Bankruptcy Court for the Southern District of New York in order to serve the founders and related entities with subpoenas outside of the United States. In an interesting and fairly unprecedented ruling, the bankruptcy court authorized service of a subpoena via social media and email.

Who Owns the Crypto, the Customer or the Debtor?

By Mark Salzberg on January 9, 2023 Posted in US

Whose crytpo is it? With the multiple cryptocurrency companies that have recently filed for bankruptcy (FTX, Voyager Digital, BlockFi), and more likely on the way, that simple sounding question is taking on huge significance. Last week, the Bankruptcy Court for the Southern District of New York (Chief Judge Martin Glenn) attempted to answer that question in the Celsius Network LLC bankruptcy case.

(UK) 2023: The Year of the Restructuring Plan?

By Rachael Markham and Charlotte Møller on January 9, 2023 Posted in UK

It is difficult to predict what 2023 might hold for businesses in the UK. Given the difficult economic environment, many will already be facing a challenging start to the year. Although the challenges of the pandemic (such as lock downs) have gone, others have materialised. Energy price hikes and inflation rises continue to make trading conditions tough.

At some point in 2023 affected businesses may have to restructure, and others may need to enter a formal process. We consider what the restructuring landscape might look like and whether 2023 will be the year that the restructuring plan (RP) comes into its own.

The Register of Overseas Entities From a Restructuring and Insolvency Perspective

By Rachael Markham on January 5, 2023 Posted in Cross Border, UK

The requirement for overseas entities to register or be registered on the UK Register of Overseas Entities (ROE) at Companies House could impact certain transactions that insolvency practitioners (IPs) and lenders are involved with.

Our latest quick guide highlights some of those areas and flags points for IPs and lenders to consider when dealing with property or land situated in England or Wales that is owned by, or where the intended purchaser is, an overseas entity.

Cross Border Recognition, 25 years on: the view from each side of the Pond

By Helena Clarke and Michelle Saney on December 13, 2022 Posted in UK, US

The recent decision in Re Astora Women’s Health LLC illustrates the importance of cross-border recognition of insolvency processes, highlighting the benefits of a joined-up global approach which recognises that modern business do not stop for international borders.

With Astora hot off the presses and the twenty-fifth anniversary of the UNCITRAL Model Law on the horizon the team at SPB have taken stock of the cross-border recognition framework from the perspective of the UK and the US.

Claims Agents Beware: Business Arrangement With Claims-Trading Platform Raises Court’s Concern

By Kyle Arendsen on November 28, 2022 Posted in US

Online claims-trading platform Xclaim Inc. came under scrutiny this past summer in the Madison Square Boys & Girls Club Inc. bankruptcy case pending in the United States Bankruptcy Court for the Southern District of New York. Since at least 2019, Xclaim has executed agreements with at least five notice and claims agent firms to synchronize their proofs of claim registers with Xclaim’s website where such claims are posted for sale. The purpose of the real-time synchronization is to permit third-parties to purchase and sell creditor claims on Xclaim’s claims-trading website using real-time data. In exchange for the claims agents’ cooperation, Xclaim pays the claims agents a small percentage of the commissions that Xclaim obtains for facilitating the trades on its website.

The private business relationships between court-approved claims agents and Xclaim has raised concerns in the Southern District of New York and requires claims agents to be fulsome and transparent in their disclosure to the bankruptcy courts. All bankruptcy professionals can take away important lessons from the Xclaim matter.

Is Your Appointor Entitled to Appoint? The Importance of Checking Whether There is Power to Appoint UK Administrators

By Megan Hoey on November 24, 2022 Posted in UK

The power to appoint an administrator is an important power for debenture holders when seeking to enforce their security. In order to exercise that power, the debenture has to be a qualifying floating charge (“QFC”) and it has to be enforceable.

The case of Borg-Olivier v Knowles & Ors [2022] EWHC 2579 (Ch) (“Borg-Olivier”), highlights the importance of the QFC being enforceable and the impact on the validity of the appointment of administrators if it is not.

In this case, the appointed administrators found themselves in the unfortunate position of not being validly appointed following the Court finding that the qualifying floating charge was not enforceable at the date of appointment.

Which Issues Affecting the Insolvencies of Failed Energy Companies has the Court Clarified?

By Devinder Singh on November 15, 2022 Posted in UK

On 11^th November 2022, Mr Justice Zacaroli handed down judgment on an application for directions made by the officeholders of ten different energy supply companies (“ESC” or “ESCs”) seeking clarification on issues arising in the insolvencies of the ESCs which had not previously been the subject of judicial consideration.

In terms of quantum, the issues were valued at in excess of a hundred million pounds across the ten insolvencies and potentially many more millions of pounds on other ESC insolvencies not before the court.

The outcome of the application was of particular interest not just to the officeholders of the relevant insolvencies but particularly to Ofgem; the suppliers of last resort (“SoLR” or SoLRs”) and other significant creditors in the insolvencies. All were represented at the hearing which took place over 4 days in early October 2022.