The “loophole” that for years exempted intoxicating hemp from the prohibitions of the Controlled Substances Act (“CSA”) is set to close on November 13, 2026, following the federal ban enacted earlier this month. Companies that manufacture, distribute, sell, or purchase intoxicating hemp products (“IH Companies”) and are, or anticipate, experiencing financial distress have less than one year to take advantage of the full toolkit available under the U.S. Bankruptcy Code, which offers unique advantages over state insolvency processes and out-of-court workouts.
But IH Companies should not wait. Distressed IH Companies should consider filing for bankruptcy soon to maximize their chances of completing a court-supervised reorganization or liquidation before the ban takes effect. Waiting until the final months of the one-year “grace period” to commence a bankruptcy case increases the risk of dismissal, given that bankruptcy courts have routinely dismissed cases where the debtor’s assets include products that are illegal under the CSA, like cannabis, or their proceeds.1 A debtor need not be insolvent to file for bankruptcy, so long as the debtor files in good faith and for a legitimate bankruptcy purpose. Filing early will allow IH Companies to restructure, sell, or wind down lawfully using federal tools that are unavailable, or far weaker, under many state procedures or out-of-court workouts.
Key Advantages of Federal Bankruptcy Cases
Automatic stay and nationwide forum
One of the most powerful debtor protections in bankruptcy is the automatic stay. Effective from the moment a bankruptcy petition is filed, the automatic stay enjoins prepetition lawsuits and collection efforts by creditors, giving a debtor breathing room to stabilize its operations and address creditors’ claims in an orderly fashion. This is particularly important for IH Companies that operate in multiple jurisdictions, such as a hemp beverage distributor that transports its products across state lines. By filing for bankruptcy, the distributor creates a single federal forum for adjudicating claims and benefits from the automatic stay effective nationwide. By contrast, state restructuring or liquidation mechanisms, including assignments for the benefit of creditors (“ABCs”) and receiverships, provide no automatic stay, forcing debtors to seek localized injunctions and additional ancillary proceedings in other states. This increases cost and delay. Similarly, out‑of‑court workouts impose no stay at all, and stay relief depends on the voluntary forbearance of creditors, which is often hard to obtain.
DIP financing, cash collateral, and priming liens
For secured loans, collateral descriptions and valuations must address any legality issues tied to inventory or receivables, and may require excluding soon to be banned suspect collateral from the borrowing base. IH Companies facing the ban may need adjustments to their current financing schemes to fund payroll, stabilize supply chains, and run sale processes that maximize recovery. Under sections 363 and 364 of the Bankruptcy Code, a debtor can obtain court approval to use cash that is pledged to a lender (“cash collateral”) and receive new debtor-in-possession loans to be repaid first, with priority over existing loans (“DIP financing”). Debtors can structure DIP financing and cash collateral arrangements to avoid reliance on proceeds from any questionable activity, and to provide clear use‑of‑proceeds controls. By contrast, ABCs and receiverships depend on voluntary lender cooperation, often without priming authority. In workouts, distressed companies must persuade existing lenders to advance funds without the protections and controls that bankruptcy offers – a tall order when collateral values are uncertain.
Assumption, assignment, and rejection of contracts and leases
IH Companies should review contracts, leases, licenses, and approvals to determine how to comply with the ban where feasible. For example, landlords may invoke use restrictions; debtors should review lease covenants and cure strategies early. Distressed companies may seek to free themselves from non-compliant contracts, above‑market leases, and other onerous agreements that put a strain on the business. Debtors in federal bankruptcy cases have relatively broad rights under Section 365 of the Bankruptcy Code to assume, assume‑and‑assign, or reject certain burdensome contracts and unexpired leases, notwithstanding many anti‑assignment clauses. By contrast, ABCs, receiverships, and workouts provide no mechanism to bind non‑consenting counterparties to override anti‑assignment clauses; and obtaining dozens or hundreds of consents risks destroying value or derailing deals.
Sales that are free and clear of liens and maximize value
Sales of product lines or of substantially all assets may be conducted with speed and value maximization through a bankruptcy process. Section 363 of the Bankruptcy Code authorizes asset sales “free and clear” of liens and other interests if statutory conditions are met. Courts routinely approve sale procedures and auctions that generate the “highest and best” offers on expedited yet fair schedules. Buyers enjoy transparent auctions, clean title transfers, and limited successor liability risk, which supports higher bids and better recoveries. By contrast, receiverships offer varying but often limited “free and clear” sales, and ABCs cannot transfer assets “free and clear” without lienholder consent.
Claims adjudication process and avoidance powers
Bankruptcy provides a structured claims process with court oversight and a defined priority scheme. Trustees and debtors in possession can use their avoidance powers to pursue lawsuits against creditors that were paid prior to the bankruptcy case, recovering certain pre-petition expenditures and ensuring equality of distribution. These tools often enlarge estates and deter creditor “grab races.” By contrast, the remedies and reach-back periods available to ABC assignees lack the uniform power of federal avoidance provisions. Similarly, workouts afford no centralized claims adjudication and cannot compel equal treatment among similarly situated creditors.
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