Introduction
The cannabis industry has been undergoing a significant wave of defaults and receivership proceedings in recent years. Faced with price compression and increased competition including from the illicit market, limited access to traditional sources of debt and capital markets, and compressed margins, many cannabis companies have found themselves unable to service their debt obligations. The Cannabist Company Holdings Inc.’s (“CCHI”) restructuring is emblematic of these broader industry challenges and provides a potential new roadmap for other cannabis enterprises navigating similar financial distress.
On May 9, 2026, the United States Bankruptcy Court for the District of Delaware entered an order granting recognition of the Canadian insolvency proceeding of CCHI and The Cannabist Company Holdings (Canada) Inc. (collectively, the “Debtors”) as a foreign main proceeding under Chapter 15 of the Bankruptcy Code. This decision is the first time a U.S. bankruptcy court has recognized a foreign insolvency proceeding involving a cannabis-related business under Chapter 15, notwithstanding the continued federal prohibition of adult use cannabis under the Controlled Substances Act (“CSA”). Importantly, the entities that obtained recognition are not the “plant-touching” cannabis operating companies. The subsidiaries that hold state licenses and directly produce, sell, and handle cannabis are not debtors in either the Canadian proceeding or the Chapter 15 cases.
This recognition, coupled with the recent rescheduling of medical cannabis from a Schedule I to a Schedule III controlled substance under the CSA, marks a significant shift in the federal posture toward the cannabis industry. Together, these developments open the door to new forms of relief under the Bankruptcy Code for cannabis-related businesses, which have historically been denied access to federal bankruptcy protection.
Background: The Cannabist Company and Its Restructuring
The multi-state operator (“MSO”), CCHI is a Canadian holding company publicly traded on the Cboe Canada Inc. stock exchange, and the ultimate parent of non-debtor subsidiaries that operate a vertically integrated cannabis cultivation, manufacturing, and retail business in eight U.S. states where medical or adult-use cannabis is legal under state law. The debtors, along with their non-debtor’s subsidiaries (the “CC Group”) have a capital structure that included approximately $220 million in funded debt, primarily consisting of approximately $179 million in senior secured notes issued under a Canadian-law-governed indenture. The CC Group incurred net losses of $105.1 million for the 12 months ended December 31, 2024, and $124.2 million in net losses for the nine months ended September 30, 2025.
Following a default on the Senior Notes in January 2026, the CC Group entered into a forbearance agreement with a majority of senior noteholders and subsequently commenced a Companies’ Creditors Arrangement Act (“CCAA”) proceeding in the Ontario Superior Court of Justice (Commercial List) on March 24, 2026. On March 25, 2026, CCHI, acting as the duly appointed foreign representative, filed Chapter 15 petitions in Delaware, seeking recognition of the Canadian proceeding and enforcement of the Canadian court’s initial order.
The purpose of the Canadian proceeding was to facilitate the completion of a value-maximizing sale process and the orderly wind-down of the CC Group’s operations, with proceeds to be distributed to creditors through a CCAA Plan.
On March 26, 2026, the U.S. Bankruptcy Court granted provisional relief extending, pending recognition of the Canadian proceeding, the automatic stay under section 362 of the Bankruptcy to the Debtors and, among other things, enjoined all parties from commencing or continuing litigation against the Debtor or their subsidiaries.
The Public Policy Objection
A secured creditor holding approximately $40.4 million in mortgage debt against three non-debtor subsidiaries, which is guaranteed by CCHI, filed the sole objection to recognition. The secured creditor’s primary argument invoked Section 1506 of the Bankruptcy Code, which provides that a court may “refus[e] to take an action governed by [Chapter 15] if the action would be manifestly contrary to the public policy of the United States.” The secured creditor contended that recognition would violate federal law because the “stated purpose of the Canadian Proceeding is to monetize cannabis-related assets and distribute the resulting proceeds,” constituting a direct violation of federal law under the CSA. The secured creditor further argued that, while several states have legalized cannabis for both medicinal and recreational use, cannabis remains a Schedule I drug under the CSA.
Additionally, the secured creditor argued that while cases denying relief under the Bankruptcy Code have focused on other chapters of the Bankruptcy Code (such as Chapter 7 and Chapter 11) “nothing in Chapter 15 exempts bankruptcy courts from this rule” and that a court cannot be asked to enforce the protections of the Bankruptcy Code in aid of a debtor whose activities constitute a continuing federal crime.
The CC Group’s Response
Not surprisingly, the Foreign Representative contended that section 1506 was not implicated given the exceedingly high standard required to invoke a public policy exception. The Third Circuit has held that the public policy exception applies in only two circumstances: where “the procedural fairness of the foreign proceeding is in doubt” or where recognition “would impinge severely a U.S. constitutional or statutory right.” In re ABC Learning Centres Ltd., 728 F.3d 301, 309 (3d Cir. 2013). The word “manifestly” restricts the exception “to the most fundamental policies of the United States.” Id. (citation omitted). The Foreign Representative noted that in Chapter 15’s history (between January 1, 2008, and December 31, 2025), only six reported decisions have denied relief under Section 1506, representing approximately 0.2 percent of all Chapter 15 petitions filed. In none of these cases did the court deny relief because of the nature of the debtor’s business; rather, each involved procedural unfairness or infringement of an individual’s fundamental rights under U.S. law.
Here, recognition could not be manifestly contrary to a fundamental U.S. policy because, among other reasons:
- The Holding Company Distinction. Structurally, the foreign debtors are holding companies that do not themselves directly grow, sell, or handle cannabis. The entities that engage in cannabis cultivation and sales are not debtors either in the Chapter 15 case or in the Canadian Proceeding. For example, In re Callaway, a court explained that where a debtor is “separate from the entities that engage in the marijuana business” such that “the trustee is not in danger of having to administer the actual tangible marijuana assets,” there is no basis to deny bankruptcy relief. 663 B.R. 109, 116 (Bankr. N.D. Cal. 2024).
- Federal Courts Routinely Adjudicate Cannabis-Related Disputes. Federal courts already routinely enforce contracts and other legal obligations relating to cannabis businesses, including contracts for the sale of cannabis businesses, notes issued by cannabis businesses, contracts to insure marijuana products, and agreements transferring stock between cannabis companies. The mere fact that a case involves a cannabis company does not require a federal court to refuse to act.
- Bankruptcy Courts Have Recognized Insolvencies Related to Businesses that were Illegal under U.S. Law. In In re Betcorp Ltd., 400 B.R. 266 (Bankr. D. Nev. 2009), a bankruptcy court recognized a foreign proceeding under Chapter 15 that was used to facilitate the exit of an Australian online gambling company from a business that had become illegal in the United States following enactment of the Unlawful Internet Gambling Enforcement Act.
- Deregulation of Cannabis. The evolving federal policy toward cannabis precludes any finding that recognition is “manifestly contrary” to public policy. First, the federal government’s policy of non-enforcement is not merely customary; it has been enacted into law. Congress has barred the Department of Justice from using federal funds “to prevent” states “from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” See Consolidated Appropriations Act, 2024, Pub. L. No. 118-42, 138 Stat. 25, 174 (2024). Second, on December 18, 2025, the President of the United States issued an executive order directing the Attorney General to take all necessary steps to complete the rescheduling of cannabis from Schedule I to Schedule III under the CSA. On April 23, 2026, just weeks before the recognition, the Acting Attorney General issued a final order rescheduling medical cannabis products from Schedule I to Schedule III. That order expressly endorsed state-level cannabis licensing systems, explaining that they “demonstrate a sustained capacity to achieve the public-interest objectives that underlie the CSA’s registration framework.” 91 Fed. Reg. 22,714.
Recognition
On May 9, 2026, the Court entered an order granting recognition. The Foreign Representative resolved the secured creditor’s objection through additional language in the order granting recognition reserving the secured creditor’s rights to prosecute its objection to recognition if the parties are unable to reach an agreement by May 26 (or a date otherwise agreed to by the parties). If no agreement is reached, the secured creditor may elect to proceed with its objection, solely to the extent of the order’s application to the secured creditor, on an expedited basis.
Practical Takeaways
The Debtors’ successful Chapter 15 recognition offers several important lessons for practitioners advising cannabis-adjacent businesses and cross-border restructurings. The following takeaways highlight the structural choices, statutory mechanics, and strategic considerations that shaped the outcome and are most likely to inform future cases.
- The Holding Company Structure Matters. Recognition was sought for, and granted to, Canadian topco entities that do not themselves hold cannabis licenses, grow cannabis, or sell cannabis.[1] The cannabis operating subsidiaries remained outside the bankruptcy proceedings in both jurisdictions. This approach avoids the scenario that has troubled domestic bankruptcy courts—a trustee or court directly administering illegal assets and substantially weakens any public policy objection.
- Chapter 15’s Mandatory Recognition Framework Differs from Domestic Bankruptcy. The case illustrates that Chapter 15 is not Chapter 7, 11, or 13. Under Chapter 15, recognition is mandatory once the requirements of section 1517(a) are satisfied, and the sole escape valve is section 1506’s narrowly and rarely used “manifestly contrary to public policy” exception. There is no “for cause” dismissal mechanism and no “good faith” plan requirement.
- The Deregulation Trend as a Shield Against Public Policy Challenges. The ongoing federal movement toward cannabis normalization makes it difficult to argue that any judicial action touching the cannabis industry is “manifestly contrary” to United States public policy. This trend is likely to accelerate, further insulating cannabis-related insolvency proceedings from public policy challenges.
Implications for Future Cannabis Insolvencies: Relief Under the Bankruptcy Code vs. Ad Hoc Receiverships
Prior to this decision, cannabis companies facing financial distress in the United States have generally been relegated to a patchwork of ad hoc state-law remedies including receiverships and out-of-court workouts, because domestic bankruptcy courts have largely refused to administer cannabis estates especially operating plant-touching companies. These mechanisms, while functional in isolated single-state contexts, can be cumbersome in multi-state, vertically integrated operations of modern cannabis enterprises.
Recognition of Foreign Insolvencies: This case demonstrates that Chapter 15 may provide a new alternative. By commencing an insolvency proceeding in a foreign jurisdiction that permits cannabis operations, where cannabis is federally legal and provides robust restructuring tools, a cannabis enterprise can obtain the benefits of a centralized, court-supervised process with global reach. Recognition under Chapter 15 then imports the protections of the automatic stay into the United States, prevents creditor self-help, preserves going-concern value, and enables an orderly sale process without having to seek such relief in multiple state courts. While not all cannabis companies have a Canadian parent, this does offer another path for multiple MSOs looking at an almost insurmountable debt cliff that is on the horizon.
Domestic Insolvencies: It is noteworthy that the referenced recent rescheduling of medical cannabis from Schedule I to Schedule III under the CSA also alters the calculus for domestic insolvency relief under the Bankruptcy Code. That is because Schedule III substances are not per se illegal under federal law but rather are regulated pharmaceuticals subject to Drug Enforcement Administration registration and oversight. Courts that previously dismissed or refused to administer cannabis cases relied heavily on the Schedule I classification and the categorical federal prohibition. In those cases, courts have found that a debtor that derives revenue from cannabis operations cannot satisfy the “good faith” requirement for filing a bankruptcy petition and requiring a U.S. Trustee or a court to oversee a cannabis business would compel federal officials to aid and abet ongoing violations of federal drug law. However, now with the rescheduling and the Acting Attorney General’s order expressly endorsing state-level licensing systems as consistent with the CSA’s public-interest objectives, a medical-only operator could argue that its business no longer constitutes a “continuing federal crime” warranting exclusion from bankruptcy protection and opening a significant new avenue for cannabis industry restructurings that was previously foreclosed.
The Automatic Stay: Whether a cannabis company obtains access to the U.S. Bankruptcy Court through recognition of a foreign proceeding under Chapter 15 or through a plenary Chapter 11 case, one of the most significant benefits is the automatic stay provided by Section 362 of the Bankruptcy Code. The automatic stay immediately halts all collection efforts, litigation, foreclosure actions, and other creditor enforcement activities against the debtor and its assets. For cannabis companies, which often face multiple collection actions, the breathing room provided by the automatic stay is invaluable. It allows the debtor to preserve going-concern value, negotiate with creditors from a position of stability, and pursue a reorganization or orderly sale process. This protection, which is not available in state court receiverships or out-of-court workouts, represents a fundamental advantage of federal bankruptcy relief that cannabis companies can now potentially access.
[1] In the United States, cannabis companies do not have access to the U.S. public markets other than over-the-counter (“OTC”) markets. As a result, many of the MSOs have created Canadian holding companies to list on certain Canadian stock exchanges, given that cannabis is legal under Canadian law.
