Cannabis Receiverships Are (and Will Be) On the Rise | Cannabis Law Report | How to buy Skittles Moonrock online

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Based on a recent article in the Green Market Report (and corresponding public filings), “$1.83 billion of . . . debt is set to come due by 2026” for a number of publicly traded multi-state cannabis operators (“MSO”s). While this public cannabis company debt is not a pretty sight, it might be the tip of the iceberg given the unknown, but likely staggering amount of debt being carried by privately held cannabis companies. However, the MSOs are a sort of canary in the coal mine for the industry, and if their massive debt carry is potentially untenable, you can safely suspect that the same is happening with privately held cannabis companies.

What this looming debt wall may ultimately mean is that the cannabis insolvency matters we’ve seen this year are going to significantly increase in 2025 and 2026 unless cannabis companies can preemptively strategize around successfully paying their debts while continuing to source capital and expand. At the same time, no one can predict what another Trump presidency and conservative legislative body means for the cannabis industry, and certainly no one can say if and when the rescheduling of cannabis will actually occur. Both a new president and rescheduling create meaningful uncertainty in the industry.

In any event, if this debt wall is hit, unless there’s a major change to federal bankruptcy laws, cannabis companies will be left with only a few state law choices around cannabis insolvency. And one of those options is receivership.

Cannabis Insolvency is Risky Business

Bankruptcy is what most insolvent companies turn to in order to deal with their inability to pay their debts. The process gives the debtor a shot at a fresh start while creditors still have an opportunity for repayment. Bankruptcies are handled by federal courts and are governed by the U.S. Bankruptcy Code. However, bankruptcy is not available to cannabis companies due to the current federal illegality of cannabis (although the case of In re Hacienda Co., LLC is a notable exception for California bankruptcy courts). Namely, federal law bars bankruptcy trustees and federal courts from administering cannabis assets as such conduct violates the Controlled Substances Act. In other words, because cannabis remains federally illegal, cannabis companies cannot avail themselves of federal remedies, which includes bankruptcy.

In turn, cannabis companies and creditors must generally seek out bankruptcy alternatives in order to deal with insolvency and restructuring. Given that cannabis is highly regulated though at the state level, cannabis insolvency is inherently risky if debtors and creditors don’t intimately know the regulatory ins and outs of how a cannabis company’s  major assets, regulatory licenses, equity, and inventory, can be sold or restructured while dealing with state courts, specialized cannabis rules, and cannabis regulators.

Cannabis Receiverships

Receivership is a legal process in which a third-party individual or entity (the receiver) is appointed by a court or a creditor to take control of and manage a company’s assets or operations. This is typically done when a company is in financial distress or facing insolvency, and its existing management is unable or unwilling to effectively manage the business or repay its debts. Oftentimes, state law requires that there be an underlying dispute (e.g., a debtor defaulting on a loan and the creditor suing for payment) in order for a receiver to be appointed. The goal of receivership is to protect the interests of creditors, maximize the value of the company’s assets, and ultimately determine whether the company can be restructured and salvaged, or, in the alternative, whether the company’s assets should be sold off and the company wound down. The receiver ultimately acts as a neutral party, taking on the responsibility of overseeing the company’s affairs and making decisions to resolve the financial issues (as determined and permitted by the court).

Throughout 2024, cannabis receiverships have become increasingly common (see, for example, StateHouse, MedMen, Herbl, and Blue Arrow). In cannabis receiverships to date, a typical result has been the sale of the debtor’s assets rather than restructuring where the debtor wants to settle its debts and wind up and lenders/investors simply want to get back as much of their money as they can. However, restructuring is certainly possible, too (see the recent comeback of Eaze). Each debtor and the circumstances of its financial demise are going to be different, and the receiver’s main job is to add value to the underlying collateral and to ensure preservation of the business and its assets until there’s resolution between the parties or determinations made by the court.

State Cannabis Laws and Receiverships

State cannabis regulators have gotten wise to the issue of federal illegality and the lack of bankruptcy relief for cannabis companies. Increasingly then, state regulators are proposing and adopting cannabis-specific insolvency rules as part of their general licensing and compliance rules. If you’re contemplating a cannabis receivership, you must look at the laws and rules around both receivership and cannabis compliance in your state.

A good example of this hybrid cannabis receivership scenario is with the Department of Cannabis Control (“DCC”) in California. Pursuant to Cal. Code Regs. tit. 4 § 15024,

In the event of the death, incapacity, receivership, assignment for the benefit of creditors or other event rendering one or more owners incapable of performing the duties associated with the license, the owner or owners’ successor in interest (e.g., appointed guardian, executor, administrator, receiver, trustee, or assignee) shall notify the Department in writing, within 14 calendar days, by submitting the Licensee Notification and Request Form, Notifications and Requests to Modify a License, DCC-LIC-027 (Amended 2/22) . . .

In California, receivership warrants formal (and timely) notice to the DCC. More importantly for the “successor in interest”, it can (with the consent of the DCC) continue to run and operate the debtor cannabis business while applying for new state licenses at the same location. This is significant where the DCC does not otherwise allow for license transfers–only the equity of cannabis businesses in California can be bought and sold. This is obviously problematic for a cannabis debtor and its creditors in a cannabis receivership where buyers of the distressed assets of the cannabis company typically don’t want the equity of the failing business. The translation here is that California cannabis receivership regulations allow a failing operation to continue running while a new buyer seeks out its own state entitlements for the same location. This is specific to California, and anyone considering a cannabis receivership needs to realize that every state may (and likely does) treat cannabis receivership protocol and filings differently. Lastly, any “changes of ownership” or license transfers as a result of a cannabis receivership will also likely need to be approved by local governments, too.

Cannabis Receivers

It is incredibly important that a cannabis-competent receiver be appointed in the event of a receivership. Cannabis is highly specialized and complicated when it comes to compliance. Cannabis is also extremely regulated, and the right receiver will have a command of state cannabis laws and rules in order to navigate and run the cannabis business successfully and compliantly during the receivership (especially where the receiver is charged by the court with running the day-to-day operations of the business). Nowadays, finding a receiver familiar with state (and even local) cannabis laws and rules is not as difficult as it was even five years ago. Further, receivers do not have to be licensed attorneys; the most important considerations for appointment are going to be background, experience, and location. And for those of you reading this post that are seasoned receivers looking at cannabis, you’re going to need experienced insolvency legal counsel that also knows the ins and outs of cannabis compliance in order to help you manage the corresponding cannabis collateral regardless of whatever state you’re in. This goes double for any negotiation with potential buyers of cannabis assets in the receivership as there is an overwhelming regulatory compliance process in most states around cannabis M&A.

Contact us

If you have any questions about cannabis receiverships or compliance, contact Hilary Bricken, Michael Brandess, or your Husch Blackwell cannabis attorney or insolvency attorney.

Source https://www.cannabislawnow.com/2024/11/cannabis-receiverships-are-and-will-be-on-the-rise/?utm_source=Husch+Blackwell+-+Cannabis+Law+Now&utm_campaign=7017a8b7d5-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_6a9bb772e1-7017a8b7d5-73179133