Husch Blackwell – Cannabis Debts, Collections, and Lawsuits | Cannabis Law Report | How to buy Skittles Moonrock online

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Cannabis companies of all sizes have likely come across the issue of having to pursue badly behaved accounts receivable. What was once a time of prosperity has now turned into a business climate of pessimism and regret where the extension of terms and promises to pay have been more than abused by retailers and distributors, alike. What should cannabis companies do when their initial reach outs for payment on the sale of cannabis goods or on the backs of their distribution and sales agreements go unanswered? This post is dedicated to those steps necessary for cannabis companies to try to make good on their bad deals and collection efforts.

Read Your Contract

The can’s and can’ts of cannabis deals gone sideways are clearly laid out in the contract between the parties. All of these agreements should contain the basic terms around standards of performance, payments and fees, timing of payments, and the consequences of breach. Do not forget, too, that some contracts require that written notice of breach be submitted to the breaching party and they may also require a cure period for a given breach. In turn, you may not be able to take any action unless and until the other side misses the cure period. Once you get the lay of the land in your contract on establishing valid breach by the other side, then you move on to analyzing what you can do about that breach.

Do You Have to Keep Performing?

Nine times out of ten, the answer is no. If one side breaches an agreement, it usually relieves the non-breaching side from corresponding performance, but, again, read your contract to make sure. Additionally, some contracts are drafted such that a breach for non-payment allows the non-breaching side to terminate immediately while preserving all remedies at law and in equity. If you are able to terminate for non-payment, don’t skip over any “effects of termination” provision in your contract as that can add fuel to the fire on your ability to collect and seek damages against the other side.

What if there is no Written Contract?

Fear not. Depending on the circumstances and the actions or statements of the parties, there may still be an enforceable contract in play. A valid contract requires offer, acceptance, and consideration (i.e., an exchange of legal value between the parties). And if the parties were operating solely off of the issuance of invoices for a sale of goods, even better—the Uniform Commercial Code (UCC) may apply to fill in certain gaps in the contract. Obviously having the written agreement is better for clear enforceability and for bringing breach of contract claims (plus fee shifting in disputes), but it’s not always the end of the world if you don’t have one. And a footnote for those of you out there just living PO to PO, under the UCC, be mindful that additional terms can be de facto accepted by the parties in those situations depending on whether a party caught an additional, non-material term and affirmatively rejected it or not.

Dispute Provisions

Depending on the language in your agreement, you may or may not be able to go straight to court on breach of contract claims. Most agreements these days are going to have a customized dispute resolution provision that dictates whether the parties go to mediation, arbitration, or have some other dispute resolution (collectively, ADR). And there is sometimes a carve out from the ADR protocol to go to court if the subject breach is an “emergency” that will cause irreparable harm to the non-breaching party, but the bar is high for establishing such relief. In any event, if your A/R has gotten out of control and you want to attack the party in breach, you first have to check your agreement for 1) the existence of an ADR provision; and 2) take the required ADR steps dictated by the agreement. If there is no ADR provision, you may be able to just sue right off the bat.

Demand Letters

The typical process for addressing cannabis debt and collections is as follows:

• After understanding what you can and cannot do under your agreement, make an initial and informal appeal for payment yourself;
• If initial negotiations fail or go unanswered, now it’s time for a demand letter that lays out evidence of the breach or non-payment and what you plan to do about it;
• Demand letters in this instance will typically introduce a payment plan and a date by which the non-paying company must answer the demand; and
• These letters also usually threaten collections and/or eventually court, but sometimes they include going public in the industry about the amounts owed in the event a lawsuit is filed (reputational risk is still strong in the cannabis industry).

Important to note that while the demand letter is the first shot across the bow, flirting with legal action, it is not a court document and you’re not in court. Meaning, the other side is not legally obligated to respond to the demand letter, but it will at least inform you about how they view your potential claims, their intention to pay, and whether or not they feel threatened by the demand.

What about Collections?

A lot of cannabis companies find themselves in a situation where their individual A/R is small from account to account (although the aggregate is large). Even if an immediate lawsuit is an option, you’re likely looking at small claims court if the sum owed is $10,000 or under (in most states). And the cost of using attorneys to pursue those small amounts will likely exceed the amount owed. Logically then, using a collections firm is a viable option. The typical arrangement here is that the collections firm doesn’t get paid if it cannot collect. The inverse is that the collections firm will take some percentage of recovery for its efforts. Typical contingency fee here ranges from 20%-50%, and don’t be surprised if a there’s a premium percentage for trying to collect on super small or very old debt. Collections is also a great idea if you want to keep your matters private rather than taking them into court, which is a public forum.

Lawsuits

If demand letter and collections efforts fail and your agreement permits it (and the amount at stake is worth it), now you’re looking at going to court. For any breach of contract or failure to pay cause of action, you need to hire a lawyer that deals in commercial contract disputes. Your run of the mill “cannabis lawyer” probably cannot pull that off by themselves if they don’t routinely litigate such issues. Lawsuits here can be worth it for a number of reasons not the least of which include the ability to take advantage of fee shifting provisions in your agreement (i.e., prevailing party fees) as well as the possibility of piercing the corporate veil to get at that bad actors that caused non-payment in the first place. Piercing the veil is a high bar, but where there’s smoke there’s fire and there could be a chance that the individuals running the debtor company are using it as their personal piggybanks, disregarding the corporate form.

What About the Cannabis Regulators

There isn’t a state out there that has a cannabis regulation on the books where a failure to pay vendors constitutes a violation of cannabis laws or rules. Regulators on the whole see these as private disputes between licensee parties, and whatever beef they have over their agreements is between them. Unlike failing to pay taxes or other state fees, the state will not pick up the mantle on your behalf to help you pursue bad A/R.

Be Proactive!

The cannabis industry has been stagnant for several years, shifting from west to east, while cannabis debt and payment failures have been increasing significantly. If your A/R is in a tailspin, be proactive and be sure to: read your vendor agreements, learn your options for bringing a dispute, talk to collections firms, start talking to attorneys who deal with breach of contract or failure to pay commercial disputes, and start contemplating putting together a demand letter addressing the issues and a demand for payment. And going forward, really examine the business terms you’re willing to accept to ensure that, while being competitive, you’re not on the wrong end of a payment schedule with another cannabis business that isn’t answering your calls or emails.

For more information about legal planning for your cannabis or hemp business this year, contact Hilary Bricken or your Husch Blackwell cannabis attorney to help you navigate the changing legal landscape and its implications for cannabis and hemp businesses.