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`Case:20-12692-JGR Doc#:53 Filed:05/11/20 Entered:05/11/20 14:54:03 Page1 of 12
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`UNITED STATES BANKRUPTCY COURT
`FOR THE DISTRICT OF COLORADO
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`
`In re:
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`UC COLORADO CORPORATION,
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`
`In re:
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`UNITED CANNABIS CORPORATION,
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`Debtor.
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`Debtor.
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`) Case No. 20-12689 JGR
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`) Chapter 11
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`(Request for Joint Administration Pending)
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`) Case No. 20-12692 JGR
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`) Chapter 11
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`DEBTORS’ RESPONSE TO ORDERS TO SHOW CAUSE
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`UC Colorado Corporation (“UC Colorado”) and United Cannabis Corporation (“UCANN”
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`and together with UC Colorado, the “Debtors”), debtors-in-possession, by and through counsel
`Wadsworth Garber Warner Conrardy, P.C., respectfully respond to the Court’s Orders to Show
`Cause, and in support thereof state as follows:
`
`
`INTRODUCTION
`
`1.
`Courts that have weighed in on marijuana-related bankruptcy cases focus their
`inquiry on whether the debtor will be using marijuana-derived income to fund a plan of
`reorganization. That inquiry is straightforward in this case. Neither UC Colorado nor UCANN
`are in the marijuana business. To the contrary, all of the Debtors’ current operations relate to, and
`all revenues are solely derived from, the sale of legal CBD products that are made using CBD that
`is extracted from legal industrial hemp plants, which was legalized by the 2018 Agricultural
`Improvement Act, also known as the 2018 Farm Bill. No portion of the Debtors’ business violates
`the Controlled Substances Act, no portion of the Debtors’ current or future revenue is, or will be,
`derived from an illegal activity, and no portion of the Debtors’ plans of reorganization will rely in
`any way on income derived from criminal activity in violation of the Controlled Substances Act.
`
`
`2.
`UC Colorado and UCANN are dedicated to the development, production, and
`distribution of legal industrial hemp-based therapeutics that contain CBD and that are designed to
`increase the quality of life for patients. Each entity serves a separate and distinct purpose. UC
`Colorado’s sole business purpose is the operation of extraction facilities that convert components
`of the legal industrial hemp flower into finished CBD products. UC Colorado’s extraction, testing
`and refinement facilities are located in the Denver metropolitan area and in Mead, Colorado. UC
`Colorado is a wholly owned subsidiary of UCANN.
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`3.
`Unlike UC Colorado, UCANN does not engage in operations. UCANN’s assets
`consist of valid and enforceable patents under the patent laws of the United States that claim liquid
`cannabinoid formulations and licenses relating thereto that do not generate royalties. Additional
`assets of UCANN include a handful of subsidiaries that are currently not producing revenues, not
`operational or never have been operational, and shares in a publicly traded Canadian company.
`
`
`4.
`Debtors’ bankruptcy filings were precipitated by three significant events. First, a
`dramatic decline in the price of CBD in November 2019. Second, the spread of COVID-19 struck
`a major blow to the global economy resulting in reduced sales of CBD, industrial hemp and
`products made from industrial hemp. Third, in the week preceding the Debtors’ bankruptcy filings,
`a creditor, Miner’s Delight, LLC, commenced ex parte pre-judgment writ of attachment
`proceedings in the District Court for Jefferson County, Colorado, the execution of which would
`have resulted in the complete cessation of operations to the detriment of the creditor body and
`significant, if not complete, loss of jobs.
`
`5.
`The first two events resulted in significant job losses. Prior to November 2019, UC
`Colorado had 150 employees. By the end of November 2019, following the crash of CBD prices,
`it laid off 57 employees, bringing the total number to 93. The ongoing depressed CBD prices and
`COVID-19 led to further layoffs. UC Colorado currently employs 40 people.
`
`
`BACKGROUND
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`
`I.
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`Procedural History
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`6.
`On April 20, 2020 (the “Petition Date”), each of the Debtors filed a voluntary
`petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”).
`The Debtors are continuing in possession of their property and are operating and managing their
`business and affairs as debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy
`Code.
`
`
`7.
`No trustee, examiner or official committee of unsecured creditors has been
`appointed in these cases.
`
`8.
`Both cases were filed on an emergent basis to prevent creditor Miner’s Delight,
`LLC from executing an ex parte prejudgment writ of attachment, the execution of which would
`have resulted in the complete cessation of operations. Due to the emergent nature of the filings,
`the Debtors’ filings were deficient, and the deficiencies had to be cured on or before May 4, 2020.
`The deficient filings have been timely cured in both cases.
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`9.
`On April 22, 2020, the Court entered orders in both cases requiring each of the
`Debtors and the United States Trustee (the “UST”) to show cause in writing on or before May 4,
`2020 why their cases should not be dismissed because the Court believes the Debtors may be
`engaged in the marijuana industry.
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`10.
`On April 29, 2020, the Debtors filed Unopposed Motions to Extend Time to
`Respond to Order to Show Cause (the “Motions to Extend”), requesting a short extension of the
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`deadline to respond to the Court’s Orders to Show Cause to enable them to first focus on curing
`the deficiencies in their filings.
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`11.
`On April 29, 2020, Miner’s Delight, LLC, filed a Reservation of Rights with respect
`to the Motion, but did not oppose the relief sought therein.
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`12.
`On April 30, 2020, the Court entered an order granting the Motions to Extend,
`thereby extending the deadline for the Debtors, the UST, and Ambria Investors LP to file responses
`to the Orders to Show Cause from May 4, 2020 to May 11, 2020.
`
`
`II.
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`Debtors’ Operations
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`
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`A. Debtors’ Revenues and Operations Exclusively Relate to Legal Industrial
`Hemp
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`13.
`The Debtors’ primary business is the operation of extraction facilities that convert
`components of industrial hemp flower into finished cannabidiol (“CBD”) products. CBD, the
`second most prevalent of the active ingredients of cannabis, is derived directly from the hemp
`plant, which is a cousin of the marijuana plant. Peter Grinspoon, MD, Cannabidiol (CBD) — what
`we know and what we don’t, HARVARD HEALTH PUBLISHING, HARVARD MEDICAL SCHOOL, (Aug.
`24, 2018, 6:30 AM), https://www.health.harvard.edu/blog/cannabidiol-cbd-what-we-know-and-
`what-we-dont-2018082414476. The Debtors’ products are derived from legal industrial hemp
`with a delta-9 tetrahydrocannabinol (“THC”) concentration of not more than 0.3 percent on a dry
`weight basis. All of the Debtors’ current revenues are derived from the sale of legal CBD products
`that were made from legal industrial hemp plants.
`
`14.
`“Botanically, hemp and marijuana are from the same species of the plant, Cannabis
`sativa, but from different varieties or cultivars. However, hemp and marijuana are genetically
`distinct forms of cannabis that are distinguished by their use and chemical composition as well as
`by differing cultivation practices in their production.” RENÉE JOHNSON, CONG. RESEARCH SERV.,
`R44742, DEFINING HEMP: A FACT SHEET 1 (2019). The Debtors do not grow, distribute, sell or
`knowingly purchase any marijuana plants or products; their business is strictly dedicated to the
`development, production, and distribution of targeted legal industrial hemp-based therapeutics
`designed to improve the quality of life for patients that suffer from a number of conditions. The
`Debtors’ hemp-based products include therapeutics to supplement deficiencies related to the
`endocannabinoid system, including pain, neuropathy, arthritis, MS, IBS, autism, seizures, eczema,
`sleep, anxiety, head trauma, opioid dependency, and clinical endocannabinoid deficiencies, as well
`as products that provide targeted and large surface relief with combinations of aromatherapy. The
`Debtors also develop therapeutics for the management of the negative side effects of
`chemotherapy, management of rheumatoid arthritis, and treatment of brain cancer.1
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`
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`1 The Debtors are careful to abide by current FDA rules prohibiting product claims. Accordingly, these statements,
`and similar statements herein, are made solely for the exclusive use of the Court in resolving the Orders to Show
`Cause.
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`B. Debtors’ Assets and Corporate Structure
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`15.
`UC Colorado operates a state-of-the-art extraction facility, a testing facility, and a
`refinement lab, where components of industrial hemp flower are converted into finished CBD
`products. UC Colorado purchases industrial hemp flower from independent third-party farmers
`located throughout the continental United States.
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`16.
`UCANN has no substantive operations and is similar to a holding company.
`UCANN is the sole owner of UC Colorado. In addition to its ownership interest in UC Colorado,
`UCANN also has interests in the following subsidiaries:
`
`
`a. 95% interest in Prana Therapeutics, Inc. (“Prana”). Prana’s primary asset is the
`therapeutic supplement Epidiferphane. Importantly, Epidiferphane does not
`contain any cannabis at all–neither extracts from legal industrial hemp nor
`marijuana. Epidiferphane is a natural therapeutic supplement that consists of a
`turmeric extract, a tea extract and compounds from cruciferous vegetables.
`Epidiferphane is used for the management of the negative side effects of
`chemotherapy, management of rheumatoid arthritis, and treatment of brain
`cancer. Prana licensed the use of Epidiferphance to NutriMed, LLC and
`Advesa, Inc. The Advesa, Inc. license agreement was terminated effective
`January 1, 2019. No revenues are currently being generated from the NutriMed,
`LLC license. Prana does not currently generate revenues for UCANN.
`
`b. The following subsidiaries either have never conducted business or are inactive:
`
`
`i. 100% interest in UCANN California Corporation. UCANN
`California Corporation has not generated revenue since 2017 and
`has been inactive since 2019; and
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`ii. 100% interest in UC Oregon Corporation and 85% interest in
`Tennessee Extractions, LLC. Both of these entities were formed to
`perform hemp extraction in Oregon and Tennessee, respectively.
`However, neither have ever conducted business.
`
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`c. UCANN participates in three joint ventures, the purpose of each is to carry on
`the business of making CBD distillate and isolate from legal industrial hemp:
`
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`i. Joint venture with Blue Water Green Bridge for extraction of CBD
`from legal industrial hemp in South Carolina;
`
`ii. Joint venture with Slainte Operations, LLC for extraction of CBD
`from legal industrial hemp in Illinois; and
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`iii. Joint venture with Silver Point Holdings, LLC for extraction of CBD
`from legal industrial hemp in Tennessee.
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`17.
`Property of UCANN includes US Patent 9,730,911 B2 (“911 Patent”). The 911
`Patent is valid and enforceable under the patent laws of the United States, 35 U.S.C. § 1, et seq.
`The 911 Patent claims various liquid cannabinoid formulations that contain the non-psychoactive
`cannabinoid, CBD, among other cannabinoids. The formulations are useful in alleviating the
`symptoms of chronic pain, paralysis, neuropathy, Crohn’s Disease, IBS, glaucoma, PTSD, anxiety,
`seizures, epilepsy, autoimmune disorders, autism, tumors and cancer.
`
`18.
`The 911 Patent is subject to several licenses. All of the licensees are in default for
`failure to pay royalties. UCANN has not received any royalties since 2017 and will be filing a
`motion to reject the license agreements pursuant to 11 U.S.C. § 365(a). UCANN currently derives
`no revenues from the 911 Patent.
`
`19.
`UCANN owns 87,000 shares of WeedMD, Inc. (“WeedMD”). WeedMD is a
`Canadian company that produces medical marijuana in compliance with Canada’s Cannabis Act.
`WeedMD is publicly traded over the counter in the United States, ticker OTCMKTS: WDDMF.
`As of the date of this response, the value of these shares is approximately $25,230.00, which
`accounts for less than 0.6% of the total value of the Debtors’ assets assuming a value of at least
`$4,000,000. UCANN is a passive investor in WeedMD. It has never participated in operations or
`received dividends. UCANN’s WeedMD shares are not necessary to an effective plan of
`reorganization because they do not generate any revenue and thus no revenue from these shares
`will be used to fund the Debtors’ plans of reorganization.
`
`
`ARGUMENT AND AUTHORITIES
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`
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`20.
`The Court’s Order to Show Cause finds that “Debtor appears to be engaged in the
`marijuana industry,” which is illegal under federal law. The Court ordered that the Debtor and the
`UST show cause why this case should not be dismissed, since the Court “cannot be asked to
`enforce the protections of the Bankruptcy Code in aid of a Debtor whose activities constitute a
`continuing federal crime.” For the reasons discussed below, no cause exists to dismiss these cases
`because the Debtors are not engaged in business that violates the Controlled Substances Act, 28
`U.S.C. § 801, et seq (the “CSA”).
`
`
`I.
`
`Evolution of the Definition of Marijuana under The Controlled Substances Act
`and the De-Criminalization of Hemp
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`21.
`The CSA makes it a federal offense, punishable by fines and imprisonment, to
`manufacture, distribute, or dispense marijuana, or to possess marijuana with the intent to do the
`same. See 21 U.S.C. §§ 812, 841. As enacted, the CSA categorized all forms of cannabis,
`including marijuana and industrial hemp, as Schedule I drugs, including them in the same category
`as heroin. See 21 U.S.C. § 812. The CSA expressed a Congressional finding that Schedule I
`substances have a high potential for abuse and no current accepted medical use in treatment in the
`United States, and that there is a lack of accepted safety for their use under medical supervision.
`21 U.S.C. § 812(b)(1).
`
`22.
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`Restrictions on hemp production in the United States were first relaxed as a result
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`of changes enacted in the Agricultural Act of 2014, P.L. 113-79 (“2014 Farm Bill”). RENÉE
`JOHNSON, CONG. RESEARCH SERV., R44742, DEFINING HEMP: A FACT SHEET 1 (2019). The 2014
`Farm Bill provided the original definition of hemp, and defined industrial hemp to mean “the plant
`Cannabis sativa L. and any part of such plant, whether growing or not, with a delta-9
`tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis” Id. at 3,
`n. 5; 7 U.S.C. §5940(b)(2). Delta-9 tetrahydrocannabinol concentration, or delta-9 THC, is
`marijuana’s primary psychoactive chemical. RENÉE JOHNSON, CONG. RESEARCH SERV., R44742,
`DEFINING HEMP: A FACT SHEET 3 (2019). The 2014 Farm Bill’s definition of industrial hemp
`allowed for hemp cultivation “for research purposes by research institutions and state departments
`of agriculture in states with laws allowing for hemp production.” Id. at 4.
`
`23.
`In December 2018, the Agriculture Improvement Act of 2018, P.L. 115-334 (“2018
`Farm Bill”), further relaxed restrictions on hemp and expanded on the 2014 Farm Bill’s hemp
`policies. Id. at 1, 3-4. The 2018 Farm Bill removed industrial hemp from the CSA’s definition of
`marijuana and
`removed “tetrahydrocannabinols
`in hemp”
`from
`the definition of
`tetrahydrocannabinols, which, like marijuana, is classified as a Schedule I drug. 21 U.S.C.
`§ 802(16)(B)(i); 21 U.S.C. §812(c), Schedule I(c)(17). The 2018 Farm Bill amended the 2014
`Farm Bill’s definition of hemp to mean “the plant Cannabis sativa L. and any part of that plant,
`including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and
`salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not
`more than 0.3 percent on a dry weight basis.” 7 U.S.C. § 1639o(1) (emphasis added).
`
`24.
`“Removing hemp . . . from the CSA—and thus removing it from being considered
`a controlled substance—effectively permits the cultivation, processing, marketing, and sale of
`hemp and any cannabinoid derived from hemp that is produced by an authorized grower in
`accordance with the 2018 farm bill, associated federal USDA regulations, and applicable state
`regulations.” RENÉE JOHNSON, CONG. RESEARCH SERV., R44742, DEFINING HEMP: A FACT SHEET
`4 (2019).
`
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`Cannabis in the Courts
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`25.
`Although it remains illegal on the federal level, in recent years, various states have
`legalized medicinal and recreational marijuana. The growth of the marijuana industry on the state
`level has led to a corresponding increase in bankruptcy cases at the federal level involving
`companies and individuals engaged, to varying degrees, in the marijuana industry. As a result, the
`federal bankruptcy courts have had to consider the breadth of the CSA and to what extent the
`Bankruptcy Code applies, if at all, to individuals and entities with ties to the marijuana industry.
`As described by the Honorable Michael E. Romero:
`
`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.
`
`
`II.
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`In re Malul, 2020 WL 1486775, at *1 (Bankr. D. Colo. Mar. 24, 2020).
`
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`26.
`A survey of the limited case law that is available demonstrates that Courts routinely
`look to whether revenues or assets relating to marijuana will be used to fund the plan or otherwise
`administer the estate. In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (Bankr. D. Colo. 2012)
`and In re Arenas, 514 B.R. 887 (Bankr. D. Colo. 2014) set the stage in this District for which cases
`are eligible for bankruptcy relief. In In re Rent-Rite, the debtor admittedly derived roughly 25%
`of its revenues from leasing warehouse space to tenants who the debtor knew to be engaged in the
`business of growing marijuana, in direct violation of the CSA. 484 B.R. at 802. The Court found
`that the debtor had knowingly and intentionally engaged in conduct violating federal criminal law
`and did so with respect to its sole income producing asset. Id. at 807. The Court further found
`that “[b]ecause a significant portion of the debtor’s income is derived from an illegal activity,
`§ 1129(a)(3) forecloses any possibility of this debtor obtaining confirmation of a plan that relies
`in any part on income derived from criminal activity.” Id. at 809. The Court held that the debtor’s
`conduct provided cause to dismiss or convert the case based on gross mismanagement of the estate.
`Id. at 811.
`
`27.
`In In re Arenas, not only did one of the joint debtors lease a unit of his commercial
`building to a marijuana dispensary, he also cultivated and dispensed marijuana on his own out of
`the same building. 514 B.R. at 889. The court found that the administration of the chapter 7 case
`would be “impossible without inextricably involving the Court and the Trustee in [the debtor’s]
`ongoing criminal violations of the CSA.” Id. at 891. The Court further found that the debtors
`were not entitled to convert from chapter 7 to chapter 13 because any reorganization would be
`funded from profits of the debtor’s ongoing criminal activity. Id. at 892. The Court found cause
`to dismiss the case based on the debtors’ bad faith due to his inability to propose a confirmable
`chapter 13 plan that did not depend on income from sources that are illegal under the CSA. Id. at
`894.
`
`
`28.
`Numerous other cases have been dismissed due to debtors’ strong ties to the
`marijuana industry. See In re Way to Grow, Inc., 610 B.R. 338 (D. Colo. 2019) (finding cause to
`dismiss where debtor’s primary business consisted of selling supplies to marijuana growers while
`knowing that the supplies would be used to grow marijuana, and could not propose a confirmable
`plan that did not rely on knowingly profiting from the marijuana industry); In re Basrah Custom
`Design, Inc., 600 B.R. 368, 382 (Bankr. E.D. Mich. 2019) (finding cause to dismiss where debtor
`used the bankruptcy case to set aside his illegal contract to lease his property to a medical
`marijuana dispensary and where continuation of the case under chapter 7 or chapter 11 “would
`leave the Court and the parties stuck in the middle of a continuing tug-of-war between two parties
`with unclean hands”); In re Burton, 610 B.R. 633, 639 (9th Cir. BAP 2020) (finding cause to
`dismiss where, despite debtors’ assurances that an entity in which they held a majority interest and
`which engaged in cultivating and selling marijuana would no longer operate and would not be
`relied upon to fund their plan, the entity was involved in litigation and the continuation of the
`bankruptcy case would likely require the trustee or the court to become involved in administering
`proceeds of that litigation, which was tainted as proceeds of an illegal business).
`
`29.
`Prior involvement in marijuana is not a bar to obtaining bankruptcy relief. Courts
`analyze the cases prospectively. In other words, Courts have looked past debtor’s prior conduct
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`and allowed debtors to avail themselves of the protections of the bankruptcy code so long as a plan
`is not funded with marijuana-derived income. See In re McGinnis, 453 B.R. 770 (Bankr. D. Or.
`2011); In re Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015). For example, in In re Johnson, the
`court remarked:
`
`The Debtor’s business is patently incompatible with a bankruptcy proceeding, but
`his financial circumstances are not. In other words, if the Debtor were not engaged
`in post-petition criminal activity, there would likely be no controversy about his
`eligibility for relief under chapter 13. The problem, of course, is that he derives
`nearly half of his income from activity that Congress forbids as criminal. The
`Debtor, it seems, must choose between conducting his medical marijuana business
`and pursuing relief under the Bankruptcy Code. The court has ample authority to
`require him to make that choice, and given his obvious financial distress, the court
`concludes that this approach is preferable to dismissal.
`
`
`532 B.R. at 57-58.
`
`30.
`The court in In re Johnson concluded that debtor filed bankruptcy in good faith to
`save his home, truck and to prevent termination of his utility services. Id. at 59. To allow debtor
`to avail himself of the protections of the Bankruptcy Code, while simultaneously complying with
`the CSA, the court ordered the abandonment of the marijuana plants and any products or inventory
`derived therefrom, explaining that “[e]liminating the contraband from the estate by way of
`immediate abandonment, and ordering its destruction as a condition of the Debtor’s eligibility to
`proceed further will remove the shadow that the contraband casts on this proceeding, the Standing
`Trustee, and the court.” Id. at 59. This was a sensible approach that afforded the debtor his fresh
`start.
`
`
`31. While courts have had ample opportunity to consider the bankruptcy eligibility of
`debtors involved in the illegal marijuana industry, few courts have considered the bankruptcy
`eligibility of debtors, like the Debtors here, that are involved in the legal hemp industry. In fact,
`since the enactment of the 2018 Farm Bill, only two published opinions address the bankruptcy
`eligibility of a debtor involved at least in part in the legal hemp business: In re Royalty Properties,
`LLC, 604 B.R. 742, 749 (Bankr. N.D. Ill. 2019) and In re CWNevada, LLC, 602 B.R. 717 (Bankr.
`D. Nev. 2019). Neither case is particularly instructive due to dispositive issues that are not present
`in this case. In In re Royalty Properties, LLC, the court acknowledged that hemp and its derivative
`products are now legal due to the 2018 Farm Bill, but nevertheless found “cause” to convert
`debtor’s chapter 11 case to one under chapter 7 given that debtor had filed for bankruptcy relief
`not in an attempt to reorganize its existing business, but with the speculative plan of starting an
`entirely new hemp-growing business despite having no income and no existing business. 604 B.R.
`at 744, 748-49.
`
`
`32.
`In In re CWNevada, LLC, the debtor was in the business of cultivating, producing,
`and distributing medical and recreational marijuana. 602 B.R. at 723. The debtor was also in the
`business of producing and distributing products that contain CBD used to treat epilepsy. Id. The
`Court held that the portion of the Debtor’s operations devoted to the marijuana business appeared
`to violate the CSA, but the portion devoted to the CBD business might be excluded from the CSA
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`if the CBD products sold by the debtor are derived from the type of hemp permitted under federal
`law. Id. at 724-25. The court found that the marijuana business operated by the debtor appeared
`to be the “primary source of the Debtor’s revenue” and appeared to be in clear violation of the
`CSA, and distinguished the facts from cases where the marijuana proceeds would provide merely
`indirect support for a confirmed plan. Id. at 730. Discussing many of the cases cited above, the
`court found that “[t]he common theme of these voluntary Chapter 11 cases is the bankruptcy
`court’s consideration of whether the debtor in possession could propose a feasible plan that does
`not rely on income received through a violation of the [CSA].” Id. at 733-35. The debtor’s direct
`involvement in the marijuana industry, along with several other factors, provided the basis for the
`court’s determination that dismissal based on abstention under 11 U.S.C. § 305(a) was warranted.
`
`
`33.
`This case is easily distinguishable from In re Royalty Partners, LLC and In re
`CWNevada, LLC. The facts in In re Royalty Properties, LLC are not analogous to the case at hand
`because, unlike the debtor’s speculative hemp-growing business in In re Royalty Properties, LLC,
`in the instant case, Debtors are well established in the hemp and CBD industry and seek to
`reorganize their existing businesses to continue the same hemp and CBD operations. In re
`CWNevada, LLC is instructive insofar as the court remarked that CBD products that comply with
`federal law do not violate the CSA; it is otherwise distinguishable because these Debtors have no
`marijuana-related revenue.
`
`
`III. No Cause Exists to Dismiss Debtors’ Chapter 11 Cases
`
`34.
`In stark contrast to the cases discussed above, the Debtors do not grow, distribute,
`sell or knowingly purchase any marijuana plants or products in violation of the CSA. Rather, the
`Debtors are engaged in the legal industrial hemp and CBD industry, which was decriminalized as
`a result of the 2014 and 2018 Farm Bills, and which no longer constitutes a violation of the CSA.
`All revenues to fund a plan will derive from legal industrial hemp.
`
`35.
`In fact, Debtors have been able to locate four industrial hemp bankruptcy cases that
`have not faced, or are not currently facing, dismissals based upon the CSA. In re Elemental
`Processing, LLC, 20-50640 TNW (Bankr. E.D. Ky.) (motion to dismiss pending for
`mismanagement, lack of adequate protection for use of cash collateral and other reasons not related
`to CSA, Docket No. 146); In re GenCanna Global, Inc., 20-50133 GRS (Bankr. E.D. Ky.) (no
`motion to dismiss or order to show cause); In re Atalo Holdings, Inc., 20-50447 GRS (Bankr E.D.
`Ky.) (no motion to dismiss or order to show cause); In re William W. Riddle, III, 20-30026 THF
`(Bankr. W.D. Ky.) (no motion to dismiss or order to show cause).
`
`
`36.
`To the extent that UCANN’s ownership of WeedMD shares can be construed as
`indirectly involving UCANN in the manufacture, distribution, or dispensation of marijuana, such
`activity is limited to Canada, where it is legal. Moreover, the CSA is domestic in application and
`is not so expansive as to criminalize UCANN’s otherwise legal conduct in Canada. “It is a basic
`premise of our legal system that, in general, United States law governs domestically but does not
`rule the world” RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090, 2100 (2016) (internal
`quotations omitted). “This principle finds expression in a canon of statutory construction known
`as the presumption against extraterritoriality: Absent clearly expressed congressional intent to the
`contrary, federal laws will be construed to have only domestic application.” Id. “When a statute
`
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`gives no clear indication of an extraterritorial application, it has none.” Id. (internal quotations
`omitted). A review of the relevant authorities does not reveal any indication that the CSA was
`intended to apply to extraterritorial conduct. Because the CSA does not apply extraterritorially,
`UCANN’s ownership of shares in a Canadian company that engages in activity that is legal in
`Canada does not violate the CSA.
`
`37. Moreover, the mere presence of this limited connection to the marijuana industry
`does not prohibit UCANN from obtaining bankruptcy relief. See In re Burton, 610 B.R. at 637
`(acknowledging that although it remains unclear just how involved a debtor may be in a marijuana-
`related business and still be permitted to seek relief under the Bankruptcy Code, “[o]ne principle
`seems implicit in the case law . . . : the mere presence of marijuana does not automatically prohibit
`a debtor from bankruptcy relief.”); In re Olson, 2018 WL 989263, *7 (9th Cir. BAP Feb. 5, 2018)
`(“Although debtors connected to marijuana distribution cannot expect to violate federal law in
`their bankruptcy case, the mere presence of marijuana near the case should not cause mandatory
`dismissal.”) (Tighe, J. concurring).
`
`
`38.
`The WeedMD shares are a de minimis component of the Debtors’ $4 million
`bankruptcy estates. As noted above, the current value of UCANN’s shares in WeedMD is
`approximately $25,230.00, which accounts for less than 0.6% of the total value of the Debtors’
`assets. UCANN does not and will not realize any revenues as a result of its relationship with
`WeedMD that the Court will be required to administer, and the WeedMD shares will have no
`impact on the Debtors’ ability to propose a confirmable chapter 11 plan, as no portion of Debtors’
`plans of reorganization will rely, in any way, on income derived from the WeedMD shares. This
`passive investment in WeedMD will have no impact on the court’s ability to administer the
`Debtors’ bankruptcy estates. Similar to In re Johnson, where the Court ordered abandonment of
`the marijuana plants, the Court could order abandonment of the WeedMD shares.
`
`
`39. While at first blush these cases may appear to be “dressed in a new shade of gray”
`in the respect that the courts have yet to consider a case with similar facts, the issue here is black
`and white: the Debtors simply are not involved in the illegal marijuana industry, and unlike the
`concerns articulated by the courts in In re Rent-Rite, In re Arenas, et al., Debtors will be able to
`confirm a plan that is funded solely by revenues derived from the manufacture and sale of legal
`CBD products extracted from legal industrial hemp.
`
`40.
`Indeed, the circumstances presented in this case are precisely the type the
`Bankruptcy Code was designed to address. Both of the Debtors’ cases were filed in good faith on
`an emergent basis to prevent a creditor