How a Delaware court ruling cracked open the U.S. bankruptcy system for the cannabis industry
A judge in Delaware just did something nobody had ever done for a cannabis company. He let one walk through the door of the U.S. bankruptcy system.
For years, that door was locked. Marijuana is still illegal under federal law. And bankruptcy courts are federal courts. So when a weed company ran out of money and wanted to file for bankruptcy, judges kept saying no. The reason was pretty simple. You can’t ask a federal court to help run, sell off, or clean up a business that the federal government still treats as a crime.
That left cannabis companies in a rough spot. Every other industry in America has bankruptcy as a safety net. If a restaurant chain or a car maker hits the wall, it can file, hit pause on its debts, and try to fix things in an orderly way. Cannabis companies got none of that. If they failed, they failed hard, often with creditors grabbing whatever they could.
So what changed? On May 9, 2026, U.S. Bankruptcy Judge Brendan L. Shannon signed an order that gave The Cannabist Company the first real bankruptcy protection a cannabis multistate operator has ever gotten in this country. And honestly, that’s a big deal for the whole industry.
How did a cannabis company finally get in?
Here’s the thing. Cannabist didn’t try to file a normal bankruptcy case. It used a side door.
The company is set up across the border. Its parent holding companies are registered in Canada, and its debt is under Canadian law. Cannabis is fully legal up there. So back on March 24, 2026, Cannabist started an insolvency case in Canada under that country’s restructuring law. Think of insolvency as the legal process for a company that can’t pay its bills.
Then it came to the U.S. and asked for something called Chapter 15 recognition.
Chapter 15 is a part of the U.S. bankruptcy code that most people have never heard of. It doesn’t restructure or liquidate a company by itself. Instead, it lets a U.S. court recognize a bankruptcy case that’s already happening in another country, and then offer some backup protection here at home. Judge Shannon agreed that the Canadian case counted as what the law calls a “foreign main proceeding.” Once he signed off, the U.S. court could step in and help.
And the help is real. The order paused debt collection actions against the company in the U.S. It let Cannabist keep its American operations running. It backed up the Canadian court’s orders that protect company assets from creditors. It even extended that shield to the U.S. subsidiaries, which run dozens of stores and production sites. None of that was available before.
Why does Chapter 15 work when Chapter 11 didn’t?
This part is the key, and it’s actually kind of clever.
Regular bankruptcy chapters, like Chapter 7 and Chapter 11, give judges two tools that have been used to kick cannabis companies out. One lets a judge toss a case “for cause.” The other says any plan has to be made in good faith and can’t break the law. A business built on a federally illegal product trips both of those wires almost every time.
Chapter 15 has neither tool. Under the law, if a foreign case meets three basic requirements, the court is supposed to grant recognition. The judge doesn’t really get to say no just because they don’t like the type of business. There’s only one narrow escape hatch, and that’s where the fight in this case happened.
A lender called East West Bank was the only party that pushed back. It argued that helping a cannabis company would be, in legal terms, “manifestly contrary” to U.S. public policy. That’s a high bar on purpose. It’s meant for truly extreme situations. The court basically said no, the kind of business a company is in is not enough to slam the door. The bank’s rights were partly preserved through a deal, but the recognition still went through.
Maybe the most surprising part? The U.S. Trustee, the federal watchdog that almost always fights to dismiss cannabis bankruptcy cases, stayed quiet this time. When the office that usually leads the charge against you decides not to show up, that tells you something.
What this means for cannabis companies right now
For a long time, cannabis operators had basically no bankruptcy options. Now they have one path that clearly works, at least for the right company.
If a cannabis business has a cross-border setup, it now has a roadmap. Start the insolvency case in a country where cannabis is fully legal, like Canada. Then come to the U.S. and ask for Chapter 15 recognition. If it’s granted, the company gets a pause on collection actions, can keep operating, and gets its foreign court’s protections enforced here. That’s a structured way to wind down or reorganize instead of just collapsing.
But I want to be clear about the limits, because they matter. This ruling is not a magic key for everyone. The judge’s decision was specific to the facts, and it wasn’t a formal written opinion, so it doesn’t set binding precedent. A purely American cannabis company with no foreign parent still can’t do this. As one lawyer close to the case put it, this isn’t the right path for every company, but for those with a cross-border element, it’s a solid alternative.
Timing helped too. Just weeks before the ruling, the acting Attorney General signed a final order moving cannabis from Schedule I to Schedule III, which formally recognizes accepted medical uses. Add in the fact that most states have legalized some form of cannabis, and the ground under this issue is shifting.
So where does that leave the industry? In a better spot than it was a month ago, but not a finished one. Lawyers expect more companies to test this approach soon. Until federal law fully changes, the regular bankruptcy chapters will probably stay closed to plant-touching businesses. Chapter 15 isn’t a full fix. But it’s the first real crack in a wall that stood for years, and for cannabis companies in trouble, a cracked wall beats a locked one.
Need assistance with Bankruptcy or Restructuring? The team at High Rock Accounting has assisted many companies with bankruptcy, troubled restructuring, and turnaround plans. Reach out to our professionals; you don’t have to do it alone!
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Melissa Diaz
High Rock Accounting
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