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Receiverships and Court-Ordered Sales: A Viable Alternative to Bankruptcy for Cannabis Companies

by Roger Tower on July 26, 2023
Receiverships and Court-Ordered Sales: A Viable Alternative to Bankruptcy for Cannabis Companies

The cannabis industry has seen remarkable growth and profit potential in recent years, attracting a diverse array of entrepreneurs eager to capitalize on this “green rush.” However, this burgeoning industry is not without its challenges, especially for plant-touching cannabis companies facing financial distress.

Bankruptcy, a common tool for distressed businesses, is not a viable option for cannabis companies working with high-THC cannabis or marijuana due to the complex regulatory environment.

In such cases, state court receivership emerges as a practical and equitable alternative, providing struggling businesses with an opportunity to stabilize, restructure, or liquidate under the guidance of a court-appointed receiver.

Understanding Receivership

Receivership is an equitable remedy often employed as a bankruptcy alternative.

It is particularly useful in cases of business insolvency or during legal disputes between business partners, where the control of the enterprise is at stake. In a receivership, the court appoints a receiver who assumes control of the business and carefully assesses its posture to determine the best path forward.

The receiver’s options range from maintaining the status quo, restructuring operations for maximum profit, to closing the business entirely and liquidating its assets, either as a whole or in pieces. The receiver holds a fiduciary responsibility to determine the option that best satisfies the business’s creditors, similar to the duties of a trustee in a bankruptcy case.

For distressed cannabis companies, receivership presents a valuable opportunity to stabilize the business during ongoing litigation or develop a restructuring plan.

In either case, the primary goal of receivership is to maximize the business’s value for the benefit of all its stakeholders.

Why Cannabis Companies are Prime Candidates for Receivership

While the cannabis industry offers tremendous growth potential, it also presents unique challenges that can lead to financial distress for businesses operating within it. The collision of business-minded individuals with little knowledge of marijuana and cannabis-savvy individuals with limited business experience can create chaotic conditions. The complexity of state laws and the regulatory drama surrounding the industry, combined with potential fraud risks due to its all-cash nature, can pave the way for insolvency or litigation.

In such scenarios, a receiver can significantly add value by stabilizing the business, allowing it to navigate through litigation or restructuring while preserving its value for stakeholders. Whether the receiver aims to continue operations, restructure for profitability, or oversee a smooth liquidation, their role is pivotal in safeguarding the interests of the business and its creditors.

How Does Receivership Work for Cannabis Licenses?

In the case of cannabis licenses, while the receivership process is ongoing, those licenses will be operated under a management agreement. This arrangement allows the appointed receiver to manage the licensed operations while working towards establishing new liability-free entities. Once the new entities are licensed by the city/state and separated from the original LLC’s liabilities, they can take over the cannabis licenses independently.

The Complex Regulatory Environment

One of the significant challenges of cannabis receiverships is navigating the intricate web of regulations governing the cannabis industry. For receivers unfamiliar with the cannabis sector, compliance can become a significant concern from day one. The regulations concerning daily business operations, including receiverships, vary from state to state, with some states having specific cannabis-specific receivership regulations.

For instance, the Colorado Marijuana Enforcement Division (MED) requires court appointees, including receivers, to register with the state licensing authority as temporary appointees within seven days. In Washington state, receivers or trustees can operate licensed cannabis businesses, but they must be qualified by the Washington State Liquor and Cannabis Board. However, not all states address cannabis receiverships in their laws, leading to additional complexities and uncertainties.

Furthermore, states that have legalized or decriminalized marijuana have instituted complex rules surrounding cultivation, manufacturing, wholesale, and retail sale of cannabis. Understanding the options available to liquidate a licensee’s assets becomes critical for receivers overseeing cannabis entities. Complying with local regulations is of utmost importance for the receiver to avoid any legal pitfalls during the receivership process.

Banking Hurdles in Cannabis Receiverships

Another significant challenge in cannabis receiverships is the issue of banking. A receiver’s crucial duty is to identify and secure the assets of the entity in receivership, including cash. This typically involves opening a bank account in the business entity’s name and transferring cash assets into the controlled account. However, this task is far from straightforward for plant-touching marijuana operations.

In 2014, the federal Financial Crimes Enforcement Network (FinCEN) issued guidance that allowed financial institutions to service cannabis businesses. However, this comes with a requirement for thorough customer due diligence reviews, leading to increased compliance costs for banks. These costs are often passed on to cannabis operators, resulting in expensive banking services.

Distressed cannabis companies may struggle to afford banking services, particularly at the outset of a receivership when cash flow is limited. Additionally, the limited availability of banks open to cannabis businesses can further restrict the receiver’s options. As a result, a receiver must be prepared to quickly secure all cash assets of the receivership entity and establish appropriate internal controls to manage cash effectively.

Conclusion on Court Ordered Sales and Receiverships

Receiverships and court-ordered sales have emerged as practical and equitable alternatives to bankruptcy for distressed cannabis companies. By appointing a court-approved receiver, struggling cannabis businesses can stabilize, restructure, or liquidate under the receiver’s guidance, with the primary goal of maximizing value for all stakeholders involved.

However, cannabis receiverships come with their share of challenges, primarily related to the complex regulatory environment and banking hurdles specific to the cannabis industry. Navigating the intricate web of regulations governing cannabis businesses requires an experienced receiver well-versed in the industry’s nuances. Additionally, securing and managing cash assets can prove challenging due to the limited availability and high costs of banking services for cannabis operators.

Despite these challenges, receiverships offer a viable alternative to bankruptcy for distressed cannabis companies, providing an opportunity to address financial troubles and safeguard the interests of creditors and stakeholders. As the cannabis industry continues to evolve, receiverships will likely play an increasingly important role in restructuring and preserving the value of struggling cannabis businesses.

Contact us for more information about receiverships and support of your cannabis business.

Receivers please also reach out to learn how our experience and resources allow us to get transactions completed quickly for the highest possible value.

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