Trustee Argues Bankruptcy Judge Cannot Reject Cannabis Patent Agreement

United States Trustee Patrick S. Layng objected to a motion from a bankrupt cannabis company to change patent agreements because the debtor “appear(s) to be engaged in the marijuana industry” and is doing business that is illegal under federal law.

The trustee says the marijuana business “cannot be condoned by the bankruptcy courts,” and said the company should instead show why the case should not be dismissed. He argued the company should not ask the court to “entangle itself” in debts of those who are violating federal laws. “This is not the type of issue that belongs in federal bankruptcy court,” the objection states.

The United Cannabis Corporation, represented by Wadsworth Garber Warner Conrardy, filed for Chapter 11 bankruptcy in April. The company later filed a Motion to Reject Patent License Agreements. The United Cannabis Corporation made an agreement with Lasco Manufacturing Unlimited and FLRish IP, LLC to allow the use of their patent for a cannabis mixture including THC, US Patent 9,730,911.

The United Cannabis Corporation claimed Lasco and FLRish are in default for failing to continue to pay for use of the patent and that it has not received royalties from the patent since 2017. The company asked that the patent not be considered in their assets.

“Grounds exist to reject the Patent License Agreements,” the motion stated, “Lasco and FLRish are each in default of their respective patent license agreements and Debtor has not received any royalties under the Patent License Agreements since 2017. The Patent License Agreements are therefore of no value to the bankruptcy estate. Accordingly, the Debtor has determined, in its business judgment, that rejection of the Patent License Agreements is in the best interest of the Debtor’s bankruptcy estate and creditors.”

Layng,l in the trustee’s objection, said the patent is one of United Cannabis Corporation’s “more significant assets,” although the company values the patent at $0.00. He claims this value is “inconsistent” with its decision to incur hundreds of thousands of dollars in legal fees related to the patent.

The objection said the license agreement and patent are connected with both marijuana and THC are considered Schedule I substances.  It argued the United Cannabis Corporation “should explain whether either of the License Agreements contemplate or allow the use of the 911 Patent to manufacture, sell, or distribute products containing THC.  If so, the Court should not provide a federal benefit to one party to a contract the purpose of which was the violation of federal criminal law.”