“Simply Put, Chapter 15 Is Not Chapter 11” – U.S. Bankruptcy Court Cracks Open Door For Canadian Cannabis Restructurings

Cannabis companies had long been shut out of the U.S. bankruptcy system because federal courts refused to administer assets derived from or connected to federally prohibited activity. That meant distressed cannabis operators were left only with state-law options including receiverships, out-of-court restructuring or liquidating assets piecemeal—until now.

On May 9, 2026, the U.S. Bankruptcy Court for the District of Delaware did something no federal court had ever done before: It recognized a foreign insolvency proceeding involving a cannabis enterprise notwithstanding the continuing illegality of marijuana under federal law. The foreign companies were Canadian: the Cannabist Company Holdings Inc. and its affiliate, the Cannabist Company Holdings (Canada) Inc. (The Cannabist Company Holdings Inc. and The Cannabist Company Holdings Inc., 1:26-bk-10426, Delaware Bankruptcy Court)

Background

The Cannabist Company is a Canadian holding company that owns subsidiaries running cannabis businesses in certain U.S. states that have legalized such operations. The company and its affiliates owed about $179 million in secured notes. After defaulting in January 2026, the entities filed for protection under Canada’s restructuring law (CCAA). They then asked the U.S. Bankruptcy Court for the District of Delaware for Chapter 15 recognition to extend those protections to their American-based assets.

The Recognition Order

“Simply put, Chapter 15 is not Chapter 11,” Cannabist’s counsel argued in briefs—and that distinction proved decisive. Chapter 11 cases entail the U.S. court exercising jurisdiction over the debtor’s assets and supervising administration. The historical problem with cannabis cases is that in Chapter 11, the federal courts were constrained to refuse to become instruments of illegal activity under federal law (regardless of state-level legality). The Chapter 11 door would not open.

Chapter 15 is fundamentally different. Rather than administering assets directly, the U.S. Court simply recognizes that a foreign court is already supervising the restructuring, leaving administration of the assets to the foreign court as well. That distinction was enough to get Cannabist through the courthouse door.

Moreover, once the statutory requirements under Chapter 15 are met, recognition is effectively mandatory unless, running afoul of Section 1506 of the Bankruptcy Code, it would be “manifestly contrary” to U.S. public policy—a standard courts have routinely held is extremely high and invoked only under egregious circumstances.

In this case, a secured creditor initially objected to recognition under the public policy exception in Section 1506. The creditor argued that because cannabis remained a controlled substance under the Controlled Substances Act,¹ granting recognition would require the court to endorse and facilitate illegal conduct—specifically, the sale of cannabis assets and distribution of proceeds. However, this sole objection was ultimately resolved before the recognition hearing. In addition, the U.S. trustee did not take a formal position or file an objection.

In rendering its ruling on the now unopposed issue, the Bankruptcy Court’s finding turned on a critical structural distinction: The debtors were holding companies that did not directly grow, manufacture or sell cannabis—those operations remained in separate nondebtor subsidiaries. This allowed the court to grant recognition without directly administering an ongoing cannabis business.

What This Means for Cannabis Companies

This ruling may cause cannabis businesses—and their advisors—to think very deliberately about the insolvency implications of enterprise structures that many operators have already adopted for financing and capital market reasons. For structures that already include Canadian holding companies, this Cannabist decision transforms what was a theoretical restructuring option into a proven and viable one—though how durable remains an open question to some degree. The Section 1506 public policy objection, which was initially a legal barrier to recognition, was resolved and uncontested before it could be ruled upon on its merits, leaving the public policy question unanswered formally. A future case may present a more spirited dispute, a less comity-minded court, a U.S. trustee objection or an enterprise structure more exposed to direct plant-touching activities. Moreover, for those designing new enterprise structures, the availability of the CCAA/Chapter 15 pathway now belongs explicitly in the analysis—with the understanding that Cannabist opens a door without guaranteeing it stays open.

For More Information

If you have any questions about this Alert, please contact Timothy T. Brock, Paul P. Josephson, Drew S. McGehrin, any of the attorneys in our Business Reorganization and Financial Restructuring Practice Group, any of the attorneys in our Cannabis Industry Group or the attorney in the firm with whom you are regularly in contact.

Footnote

1. Acting through the U.S. Drug Enforcement Administration and pursuant to its authority under the Controlled Substance Act, the U.S. Department of Justice issued a final rule earlier in 2026 transferring certain—but not all—cannabis products from Schedule I to Schedule III. Cannabist’s recognition order notably is also the first bankruptcy outcome involving a cannabis enterprise following this Schedule III rulemaking. It remains to be seen whether this rescheduling will have downstream implications insofar as cracking the door open wider for bankruptcy court jurisdiction or relief under Chapters 7, 11 or 15.