In April, Master Equity Group filed a Chapter 11 bankruptcy petition in federal court in the Western District of Michigan. The company lists $176,255 in debts to a spectrum of vendors and service providers, including a local lawn care specialist and a plumbing business.
The company’s profits, however, are at least in part derived from the cannabis industry. With financial records now in the hands of a federal judge, this frames the case in an uncertain light.
Master Equity Group “operates as a holding and management company for several related-entity businesses operating in the cannabis industry,” according to the company’s legal records. And while the company itself is not a plant-touching operation, it does lease property to licensed cannabis businesses—like Cannamazoo, a dispensary located in Kalamazoo. The company also provides various accounting and payroll services to licensed cannabis businesses.
In other words, Master Equity Group receives revenue from the operation of licensed cannabis businesses operating in Michigan. Now, as CEO Adam Tucker and his attorneys petition the federal court for bankruptcy protection and the chance to reorganize the company, those cannabis-related provisions might prove problematic.
Precedent and federal law are important. There is, however, a degree of discretion in these cases. It’s not unheard of for a company in Master Equity Group’s shoes to be granted relief. Like so much else in the cannabis space, however, nothing is guaranteed.
The attorneys acknowledge as much, writing that the Office of the U.S. Trustee (which oversees federal bankruptcy cases) has historically dismissed these matters. But political tailwinds out of Washington, D.C., suggest change is in the air.
“[Master Equity Group] filed this case … in hopes the Office of the U.S. Trustee would revise its position following the U.S. House of Representatives’ vote to decriminalize marijuana, but believes it is the current directive of the Office of the U.S. Trustee to seek dismissal of these cases,” according to the petition.
The Master Equity Group attorneys point to another case out of Washington, to the May 2, 2019, appellate decision in Garvin v. Cook Investments NW. That case involved five real estate companies. One of those companies leased property to a cannabis grower, foreshadowing Master Equity Group’s own standing.
The ruling in that case insisted that bankruptcy courts are to decide matters on the merits of a reorganization plan—rather than on the source of the debt problem. Garvin suggests that the court look to the future, not to the past. The cannabis business lease payments should not play a role in a decision such as that one, according to the court.
And yet: The ruling was not without its backlash.
In 2018, a similar bankruptcy petition landed in the Eastern District of Michigan. Basrah Custom Design, a local cabinet maker, filed for Chapter 11 bankruptcy protection. That case was tossed out of court, however, because Basrah was leasing property in Detroit to a business intent on operating as a licensed medical cannabis dispensary. Much like the Master Equity Group case, the revenue from that lease changed the tenor of Basrah’s bankruptcy petition.
“That business may well be legal under Michigan law, and the court will assume as much for purposes of deciding the dismissal motion,” according to the court. “But it is clear that such a marijuana dispensary business is illegal under federal law. Because of these federal statutes, several bankruptcy courts have found cause to dismiss a bankruptcy case filed by a debtor whose income was derived, directly or indirectly, at least in part, from the business of selling marijuana.”
Ultimately, the case was tossed out of court on May 21, 2019, just a few weeks after the Garvin decision.
In footnotes, Judge Thomas Tucker addressed the Garvin case.
“The court is aware of the May 2, 2019, decision by the Ninth Circuit Court of Appeals, in Garvin v. Cook Invs. NW,” he wrote. “In Garvin, the Court of Appeals for the Ninth Circuit affirmed a bankruptcy court’s confirmation of a Chapter 11 plan, over the objection of the [U.S. Trustee], even though one of the debtors had a tenant who was involved in a marijuana growing operation. But Garvin involved only a narrow issue of law that is not before this court. The issue was whether the debtors’ plan met the confirmation requirement … that the plan be ‘proposed … not by any means forbidden by law.’ The court of appeals held that this provision … applies only to the ‘means of a reorganization plan’s proposal, not its substantive provisions.
“The decision of the Ninth Circuit Court of Appeals in Garvin is not binding on this court, and with respect, this court does not necessarily agree with the Garvin court’s holding,” the judge continued. “And, respectfully, one might reasonably question whether the Garvin court should have refused to decide the dismissal issue. That refusal, on waiver grounds, arguably is questionable, because it allowed the affirmance, by a federal court, of the confirmation of a Chapter 11 plan under which a debtor would continue to violate federal criminal law under the [Controlled Substances Act].”
So, where does that leave Master Equity Group’s petition?
It’s difficult to say, but the court’s strong words in the Basrah case may very well ring in the judge’s ears. Cannabis companies would do well to tune in. The company’s bankruptcy case will continue on May 18 with a status conference hearing.
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