UP IN SMOKE: BANKRUPTCY BY CONTRACT IN THE LEGAL CANNABIS INDUSTRY.

part 1 of 2 TABLE OF CONTENTS INTRODUCTION 241 I. MARIJUANA'S DISTINCTIVE LEGAL FRAMEWORK 250 A. Marijuana Businesses Grow Despite Legal Uncertainty 250 1. Dual Status: Illegal under Federal Law, [...]
Access to the federal Bankruptcy Code cannot be modified by contract. Its procedures are meant to preserve the value of a bankrupt's limited assets for all claimants, not just those who negotiate for protection. While critics of this inflexibility argue that many debtors and creditors would beneft from contractual modifications to the Code's one-size-fits-al approach, such agreements are rare because courts universaly reject them. However, the state-legal cannabis industry is different: since cannabis is federally ilegal, the protections of the Code, as well as its prohibitions on bankruptcy contracting, are entirely inapplicable to industry participants. This Article exploits this anomaly and leverages a novel, hand-colected data set--consisting of almost 75,000 pages from 1,167 publicly-filed documents disclosed by thirty-four publicly-listed cannabis companies--to discover whether, and how, companies use this unique chance to contract around insolvency. It concludes that parties largely ignore this opportunity, but that some classes of participants make advantageous bankruptcy contracts. This Article offers five key findings. First, industry participants are a ware, and largely publicly disclose, that they cannot access the Code. Second, despite this awareness, the data suggests cannabis companies are mostly unwiling or unable to include contract terms that might replace or improve upon correlated provisions in the Code. Only around 6.6% of cannabis industry contracts contain such provisions. Third, despite this overal rarity, bankruptcy contracting is present in around 29% of secured lending contracts for cannabis companies, meaning it is more than four times more likely in these contracts than overal. Fourth, companies more frequently rely on structural mechanisms to allow them (or their counterparties) to take advantage of the absence of bankruptcy protection for the industry. Around 44.8% of documents examined include provisions to tailor capital structures or business operations in this manner, though only around 6.5% employed marijuana-specific strategies. Finaly, despite predictions or suggestions by academics who support bankruptcy contracting, no company issues any form of exotic securities that would contractually automate parts of the insolvency process. Bankruptcy contracting could be more common in secured lending agreements because of lenders' heightened negotiating leverage and sophistication, greater financial stakes, and longer-term relationship with the borrower. However, for most parties, it may be that informational and transactional costs make bankruptcy contracting inefficient. Forms of bankruptcy structuring might serve as a cheaper alternative. By showing how legal cannabis companies use, or fail to use, their freedom of contract to tailor results in insolvency, this Article provides evidence of the limits and potential inequities of bankruptcy contracting.