Key Points

• Chapter 15 as a workaround. A cannabis holding company is using Chapter 15 of the U.S. Bankruptcy Code to bypass federal barriers that have traditionally blocked cannabis companies from filing under Chapter 11.
• The public policy question. The case turns on whether a U.S. bankruptcy court will find that recognizing a foreign proceeding involving a cannabis-related enterprise is "manifestly contrary" to U.S. public policy under Section 1506 of the Bankruptcy Code.
• Early signals from the bench. Just one day after filing, the Delaware Bankruptcy Court granted provisional relief, finding a "substantial likelihood" that recognition will be granted and extending automatic stay protections to both the debtors and their cannabis-operating subsidiaries.

A remarkable case is unfolding in Delaware that is testing whether a cannabis-related enterprise can access the protections of the United States bankruptcy system despite the drug's federal classification as a Schedule I controlled substance under the Controlled Substances Act (CSA).

What Judge Brendan L. Shannon of the U.S. Bankruptcy Court for the District of Delaware decides could have far-reaching implications.

The case at hand involves The Cannabist Company Holdings Inc. and its affiliate, The Cannabist Company Holdings (Canada) Inc. (collectively, Cannabist Holdings). The companies filed petitions on March 25, 2026, under Chapter 15 of the United States Bankruptcy Code (Case No. 26-10426 (BLS)). The filing was made ancillary to a Canadian insolvency proceeding commenced a day earlier — March 24, 2026 — in the Ontario Superior Court of Justice (Commercial List) under Canada's Companies’ Creditors Arrangement Act (the CCAA).

What Is The Cannabist Company?

The Cannabist Company Holdings Inc. is a Canadian holding company, publicly traded on the Canadian stock exchange, and an issuer of approximately $180 million in outstanding Canadian-law-governed secured debt. Cannabis Holdings is the ultimate parent of a corporate group (the CC Group) whose non-debtor subsidiaries operate a vertically integrated cannabis cultivation, manufacturing and retail business across eight U.S. states where medical or adult-use cannabis is legal under applicable state law. Notably, the Cannabist Chapter 15 filing attempts to structure the proceeding so that the debtors in the U.S. cases are Canadian holding companies, not the subsidiaries that actually operate cannabis businesses. It anchors the primary insolvency proceeding in Canada, where cannabis is legal and where the CCAA provides a robust restructuring framework.

The CC Group's capital structure includes approximately $220 million in funded debt. Its primary secured indebtedness consists of approximately $179 million in senior notes issued under an Amended and Restated Trust Indenture governed by Canadian law. The CC Group also carries approximately $40.4 million in mortgage debt owed to East West Bank. The CC Group incurred net losses of $105.1 million for the twelve months ended December 31, 2024, and net losses of $124.2 million for the nine months ended September 30, 2025.

Why Not Chapter 11?

The conventional route for a large U.S. operating company in financial distress — the filing for reorganization under Chapter 11 of the Bankruptcy Code — is effectively unavailable to cannabis companies. U.S. bankruptcy courts have reasoned that because cannabis is classified as a Schedule I controlled substance under the CSA, a debtor that derives revenue from cannabis operations cannot satisfy the “good faith” requirement for filing a bankruptcy petition and that 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.

This line of cases has left an entire industry — one that by 2024 represented an approximately $31 billion market in the United States and provided more than 440,000 full-time equivalent jobs — without access to the most fundamental tool of corporate financial restructuring.

The Chapter 15 Strategy: Cross-Border Recognition

Chapter 15 of the Bankruptcy Code is the United States' implementation of the UNCITRAL Model Law on Cross-Border Insolvency. Its purpose is to promote cooperation between courts of the U.S. and foreign courts, protect and maximize the value of a debtor's assets and facilitate the rehabilitation and reorganization of businesses in cross-border insolvency cases. Unlike Chapter 11, Chapter 15 does not create a full domestic bankruptcy estate. Instead, it provides a procedural framework for U.S. courts to recognize foreign insolvency proceedings and extend certain protections, including the automatic stay, to a debtor's property within the United States.

As we previewed in an article published in Law360 nearly two years ago, we identified Chapter 15 as a potential avenue for distressed cannabis companies to access the U.S. Bankruptcy Courts due to its less restrictive hurdles than those imposed under Chapter 11. A Chapter 15 filing would represent a creative, carefully structured legal strategy to navigate around the Schedule I barrier — where a cannabis-related company seeks recognition in the U.S. of a foreign insolvency proceeding.

That is what is now happening. The Foreign Representative — Cannabist Holdings itself, as authorized by the Canadian Court — filed the Chapter 15 petitions seeking recognition of the Canadian CCAA proceeding as a “foreign main proceeding” (or, in the alternative, a “foreign nonmain proceeding.”) The recognition motion argues that recognition is warranted because the Canadian Proceeding satisfies all seven elements of a “foreign proceeding” under Section 101(23) of the Bankruptcy Code: it is a judicial, collective proceeding in a foreign country, authorized under a law related to insolvency, in which the debtors’ assets and affairs are subject to the control or supervision of a foreign court, for the purpose of reorganization or liquidation.

The motion further argues that Canada is the center of the debtors' main interests (COMI), pointing to the Debtors' Canadian incorporation, Cannabist Holdings’ listing on a Canadian stock exchange, their registered offices in Vancouver, British Columbia and Toronto, Ontario, their history of raising hundreds of millions of dollars in the Canadian capital markets and the Canadian-law governance of its A&R Indenture. Approximately 37% of the Senior Noteholders are domiciled in Canada, and the Supporting Noteholders — holding about 60% of the Senior Notes — signed a Support Agreement governed by Ontario law expressly contemplating commencement of the Canadian Proceeding.

Section 1506 “Public Policy” Exception: The Elephant in the Courtroom

The most legally significant aspect of the Cannabist Chapter 15 filing is the implicit — and, in the motion, explicitly addressed — question of whether granting recognition to a proceeding involving a cannabis-related company would be “manifestly contrary to the public policy of the United States” under Section 1506 of the Bankruptcy Code.

The Foreign Representative’s motion devotes significant attention to this issue, arguing that Section 1506 provides an “exceedingly narrow exception” to Chapter 15’s general policy in favor of recognition, one that “should only be invoked under exceptional circumstances.” The recognition motion cites a robust body of appellate authority for this proposition, including In re ABC Learning Centres Ltd., 728 F.3d 301, 309 (3d Cir. 2013); Lavie v. Ran (In re Ran), 607 F.3d 1017, 1021 (5th Cir. 2010); and Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 139 (2d Cir. 2013).

The recognition motion argues that the few instances where bankruptcy courts have invoked Section 1506 to deny recognition involved situations where “the procedural fairness of the foreign proceeding is in doubt” or where recognition “would impinge severely a constitutional or statutory right,” such as cases involving due process violations or interception of private communications. Importantly, the motion asserts that “to the Debtors’ knowledge, no court has denied recognition of a Canadian proceeding based on section 1506.”

The recognition motion further argues that recognition would affirmatively advance U.S. public policy, not undermine it. The CCAA proceeding is a fair proceeding that does not violate any U.S. constitutional or statutory protections afforded to creditors and Canada “share[s] the same common law traditions and principles of law as the United States” and “afford[s] creditors a full and fair opportunity to be heard in a manner consistent with standards of U.S. due process,” (citing In re Metcalfe & Mansfield Alternative Invs., 421 B.R. 685, 698 (Bankr. S.D.N.Y. 2010)).

Why This Matters: The IRS, Section 280E and Rescheduling

A critical backdrop to the Cannabist filing is the intersection of federal cannabis enforcement, IRS tax policy and the ongoing federal rescheduling process. The IRS has taken the position that Section 280E of the Internal Revenue Code (IRC) prevents Cannabist Holdings from taking deductions or credits for any amounts paid or incurred in carrying on its cannabis business, resulting in the IRS asserting federal income tax claims of approximately $51 million for the 2022 and 2023 tax years. The CC Group disputes the IRS’s position and numerous publicly listed multi-state operators in the state-legal cannabis industry have similarly challenged the applicability of IRS § 280E, filing amended tax returns seeking refunds.

On December 18, 2025, President Trump issued Executive Order 14370 directing the Attorney General to take all necessary steps to complete the rescheduling of cannabis from Schedule I to Schedule III under the CSA. Once implemented, rescheduling would remove any basis for application of IRS § 280E, which by its terms applies only to substances “prohibited” by federal or state law — but both federal and state governments have permitted the state-legal cannabis industry to operate without enforcement under the CSA. The Department of Health and Human Services has already recommended rescheduling cannabis as a Schedule III drug, finding that cannabis has a “currently accepted medical use in treatment” and is not at risk of abuse consistent with Schedule I or Schedule II.

The IRS tax dispute is not merely background; it is a driving force behind the Chapter 15 filing. The IRS had filed a federal tax lien on Cannabist Holdings’ assets and agreed to release the tax lien only pursuant to a payment plan requiring $500,000 per month. This precipitated the Chapter 15 bankruptcy filing by the Foreign Representative, which expressed concern that absent the protections afforded by Chapter 15 recognition — particularly the automatic stay — the IRS could levy Cannabist Holdings or other CC Group members’ bank accounts.

The Bankruptcy Court’s Early Signals: Provisional Relief Granted

In a significant early indication, on March 26, 2026 — just one day after the filing — Judge Shannon entered an order granting provisional relief under Section 1519 of the Bankruptcy Code. The Bankruptcy Court found that there was “a substantial likelihood that the Foreign Representative will successfully demonstrate that the Canadian Proceeding constitutes a ‘foreign main proceeding’” and that “the commencement or continuation of any action or proceeding in the United States against the Stay Parties should be enjoined.” The Bankruptcy Court further found that there was “a material risk that the Debtors may suffer immediate and irreparable injury” absent the provisional relief and that “the interest of the public will be served by the Court’s entry of this Order.”

The provisional relief order extends the protections of Sections 362 and 365(e) of the Bankruptcy Code to the Debtors and, critically, to the non-debtor subsidiaries identified in the Canadian Court’s Initial Order (the Cannabilist Stay Parties), enjoining all persons and entities from commencing or continuing actions against the Cannabilist Stay Parties, from seizing, attaching, or enforcing liens or judgments against the Cannabalist Stay Parties’ property and from terminating leases or executory contracts. A recognition hearing is scheduled for May 12, 2026.

The Structural Firewall: Debtors vs. Cannabis Subsidiaries

A key feature of the Cannabist filing — and one that may prove crucial to its success — is the careful structural distinction between the Debtors and the non-debtor, cannabis-operating subsidiaries. Cannabist Holdings and The Cannabist Canada Company, the two Debtors, are holding companies. They do not themselves produce, sell, or handle cannabis or hold cannabis licenses. The entities that actually cultivate, manufacture and sell cannabis are non-debtor subsidiaries, many of which are organized as Delaware or other state-law entities. This structural firewall means the U.S. Bankruptcy Court is not being asked to supervise a cannabis business; it is being asked to recognize a foreign proceeding involving Canadian holding companies whose assets happen to include the equity of cannabis-operating subsidiaries.

This distinction is reinforced by the Canadian Court’s own Initial Order, which expressly provides that the Monitor (FTI Consulting Canada Inc.) shall not “take Possession of” or “exercise any control over” any property related to cannabis operations and that nothing in the Order shall be construed as resulting in the Monitor being an employer or successor employer within the meaning of any Cannabis Legislation.

The Sale Process: A Value-Maximizing Wind-Down

The CC Group's restructuring strategy is not a traditional reorganization. Rather, it is a value-maximizing sale of the CC Group's operating businesses on a state-by-state basis, followed by an orderly wind-down of remaining operations through a CCAA Plan of Compromise and Arrangement. According to the Debtors’ filings, the sales process, which began prior to the CCAA proceeding, has already produced results: a Virginia market sale for approximately $130 million, a Delaware market sale for approximately $16.5 million, an Ohio market sale for approximately $47 million, and additional closed transactions in California. The CC Group has also entered into a non-binding memorandum of understanding with respect to the sale of businesses in Colorado, Illinois, Maryland, Massachusetts, New Jersey and West Virginia.

The Foreign Representative argued that Chapter 15 recognition is essential to this process because, without the automatic stay and other protections, creditors in the United States could “race to the courthouse” and exercise self-help remedies that would destroy value and frustrate the orderly Canadian proceeding. The recognition motion emphasized the risk to approximately 100,000 patients who rely on the CC Group’s stores for access to medicinal cannabis products and to the CC Group’s approximately 1,200 employees.

Implications for the Cannabis Industry

The Cannabist Chapter 15 filing has potentially far-reaching implications for the cannabis industry’s relationship with the U.S. bankruptcy system. If the Delaware Bankruptcy Court grants recognition and enters the proposed order on a final basis, it will establish a precedent that cannabis-related companies — at least those structured as holding companies with a genuine Canadian COMI — can access the protections of the U.S. bankruptcy system through the side door of Chapter 15, even though their domestic Chapter 11 counterparts remain shut out.

This precedent could create a new model for cannabis company restructurings: structure the parent entity in Canada, issue debt under Canadian law, commence a CCAA proceeding and seek Chapter 15 recognition in the United States. If the Section 1506 public policy exception proves as narrow as the Foreign Representative contends (and as applicable case law suggests), the “cannabis exception” to bankruptcy may apply only to domestic Chapter 11 filings and not to cross-border recognitions under Chapter 15.

Conversely, the case may draw opposition from parties — particularly the U.S. Trustee, the IRS and/or other governmental actors — who are likely to argue that granting recognition to a proceeding whose ultimate purpose is to facilitate the orderly disposition of cannabis assets is, in fact, manifestly contrary to U.S. public policy so long as cannabis remains a Schedule I controlled substance. The outcome of the May 12, 2026, recognition hearing will be closely watched by cannabis operators, insolvency practitioners and policymakers alike.

Conclusion

The Cannabist Chapter 15 filing is a landmark moment in the evolution of U.S. cannabis insolvency law. By leveraging Canada’s legal framework — where cannabis is fully legal and the CCAA provides a well-established restructuring process — and the cross-border recognition provisions of Chapter 15, the Debtors have crafted a strategy that may finally provide cannabis companies with a viable pathway to the protections of the U.S. bankruptcy system. Whether the Bankruptcy Court ultimately embraces this approach will be an important development in both bankruptcy and cannabis law in 2026.

For more information, please contact Keith Owens at 424.285.7056 or kowens@foxrothschild.com, Brett Axelrod at 702.699.5901 or baxelrod@foxrothschild.com, or another member of Fox Rothschild’s Financial Restructuring & Bankruptcy Department.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the author(s) and not necessarily this law firm or its clients. Prior results do not guarantee a similar outcome.