UCann's CBD Health Claims Must End Ch. 11, Creditor Says
By Diana Novak Jones
Law360 (May 14, 2020, 8:11 PM EDT) -- One of United Cannabis Corp.'s creditors pushed a Colorado judge to toss the company's Chapter 11 filing Wednesday, arguing even if the company is only marketing hemp products it is still violating the Food, Drug, and Cosmetic Act by making unapproved health claims.
Miner's Delight LLC told U.S. District Judge Joseph Rosania Jr. United Cannabis' marketing of Prana Therapeutics-branded CBD products runs afoul of federal law because it promotes them as treatments for a variety of medical conditions — without U.S. Food and Drug Administration approval.
That's enough to throw out the bankruptcy filings from both United Cannabis Corp. and its primary subsidiary, UC Colorado, the creditor said.
"Because the debtors and Prana are unregistered with the FDA and introducing, delivering, manufacturing, preparing, propagating, compounding, and processing drugs that have not been approved by the FDA, their business violates the FD&C Act," Miner's Delight told the judge.
"As a result, even if the debtors are dealing in allegedly legal hemp under the [Controlled Substances Act], their business of selling drugs containing hemp in violation of the FD&C Act precludes the debtors from proposing a chapter 11 plan in good faith, and the Chapter 11 cases must be dismissed."
United Cannabis' bankruptcy attorneys and general counsel did not respond to requests for comment on Thursday. But the company has said in court filings that its products can serve as therapeutics, treating everything from pain to autism.
In a footnote, United Cannabis said it is "careful to abide by current FDA rules prohibiting product claims" and is only mentioning the medical conditions for the court.
United Cannabis has said it should be able to utilize the bankruptcy process because its business involves only legal hemp. But the suggestion that the way a company markets CBD products could be enough to get it thrown out of bankruptcy court presents another unanswered question about cannabis companies' ability to access bankruptcy.
Miner's Delight made a number of other striking allegations against United Cannabis in its 47-page brief, including claims United Cannabis has violated a state court order governing its assets, hid a $1 million Paycheck Protection Program loan from creditors and disinvested in a Jamaican marijuana research facility and grow the same day it filed for bankruptcy protection.
Colorado-based United Cannabis filed its petition on April 20, saying its filing was done to head off Miner's Delight as it sought a judgment against the company in state court.
Within days, Judge Rosania issued an order to show cause, telling United Cannabis and the U.S. Trustee's Office to explain why a bankruptcy case involving the cannabis industry shouldn't be thrown out.
While United Cannabis said it's not violating the Controlled Substances Act, the U.S. Trustee's Office said the petition should be tossed because the company's connection to marijuana is just too close. United Cannabis has a patent it has licensed to marijuana companies, and its website promotes products that contain illegal amounts of THC, the office said.
Another creditor, Ambria Investors, told Judge Rosania he should allow the case to move forward, in part because if it is dismissed, Miner's Delight's state court case will edge out other creditors.
Miner's Delight, which says it loaned United Cannabis about $2 million last year, filed an ex parte prejudgment writ of attachment in Colorado state court after United Cannabis stopped making its agreed payments, according to Wednesday's filing.
The judge granted it, giving Miner's Delight the go-ahead to take 65,000 pounds of hemp biomass and processed goods from United Cannabis. The Jefferson County, Colorado, Sheriff's Office was told to take possession of the materials, the filing said.
Sheriff's officers arrived on April 13 and began taking inventory of United Cannabis' products, warning the company before they left for the day that nothing could be removed from the premises. The officers returned the next day to finish, and noticed that four shipping totes of CBD isolate that were there the day before were now gone, according to Miner's Delight.
The totes were later returned, but Miner's Delight says they did not contain the same number of bags containing CBD isolate as they did when the sheriff first saw them. Miner's Delight believes $300,000 worth of CBD is missing.
Miner's Delight also claims United Cannabis received a $1,064,800 PPP loan, but transferred it to another entity held by a United Cannabis executive in an attempt to keep it out of Miner's Delight's reach.
United Cannabis has also had more involvement with marijuana than it has let on, Miner's Delight told the judge. The company had a 50% interest in a Jamaican marijuana company, an investment it transferred to its CEO the same day it filed its bankruptcy petition, Miner's Delight said.
That transfer will likely be challenged, setting up an impossible situation for the bankruptcy court. That and other assets involve illegal activity, Miner's Delight told Judge Rosania, adding that there is no way the bankruptcy can be discharged without addressing them.
United Cannabis Corp. is represented by Aaron Conrardy and Lindsay Riley of Wadsworth Garber Warner Conrardy PC.
Miner's Delight is represented by Adam L. Hirsch of Kutak Rock LLP.
The case is In re: United Cannabis Corporation, case number 20-12692, in the U.S. Bankruptcy Court for the District of Colorado.
--Additional reporting by Sarah Jarvis. Editing by John Campbell.
