Cannabis Receiverships: A Creative Solution for Bankruptcy Protection

A Match Made in Heaven?

At first blush, cannabis and a legal practice like receivership might seem an unlikely match. Medical and recreational cannabis has steadily grown in acceptance and legalization over the past decade in the United States. However, there are times when cannabis businesses face insolvency and need a legal solution.

As of right now, cannabis companies are not eligible for bankruptcy protection. In many cases, the groups they make payments to are also not eligible. This affects not only the companies but also the employees and their funders. Fortunately for cannabis operations, receivership is an established and incredibly useful practice that is essential to fill the void.

Court Appointed Receiverships

A court-appointed receivership can become an important solution for problems that arise. Problems can include partnership disputes, insolvency proceedings, defaults on payments, and more. In a receivership, a state court judge is appointed in charge of the entity. In turn, the judge appoints a receiver to manage the entity with either limited or general powers.

Limited powers might include books and records, collections, or other oversight necessary to secure the interests of the Plaintiffs. A General Receiver, depending on jurisdiction and the receivership order, is essentially put in as both the Board of Directors and CEO of the entity. The General Receiver plays a powerful role, strictly following state statutes and receivership order guidelines. When necessary, the General Receiver also focuses on getting approvals from the courts for certain actions.

Beginning with the State of Washington in 2002, nearly 20 states have adopted new receivership statutes. Some states adopted them on their own like Washington, Minnesota, and Missouri. Some states have adopted them through the Uniform Commercial Real Estate Receivership Act (UCRERA) from the Uniform Law Commission. In addition, at least three other states have new legislation proposed for receivership statutes. State statutes on receivership can be found here.

Cannabis Receivership Variables

It’s important to understand the nuances of a cannabis receivership, including:

Time

A receiver, and those involved in a receivership, need to be prepared for an elongated process. In a typical receivership, a receiver must get approvals from the court to sell equipment, property, IP, licenses, etc., but in a cannabis receivership there are often approvals needed from the state as well. These approvals don’t normally come expeditiously.

Banking

Not every bank will allow for cannabis accounts. In fact, most have not been amenable to working within the cannabis space. While cannabis is usually a cash business, historically, only state-chartered banks and credit unions have offered services. That said, more and more banks are finding ways to work within the cannabis space. Over the past year(s), there has been a shift in the industry that created more and better options.

Accounting and Taxes

It is not atypical to come into a receivership with accounting that is disorganized. In some cases, taxes have not been filed in years. It is important to find someone qualified to go through the books and to find a qualified accountant with experience in cannabis to file the taxes.

Quality of Information

Along the same lines as accounting and taxes, all information needs to be verified. Whether it revolves around filings and reporting, accounting, documentation, etc., a receiver should apply an approach of ‘verify before trust’ rather than ‘trust but verify.’

Navigation of the ‘CannaBros’

This term is not official, especially in the insolvency space of cannabis. There are a fair number of companies founded by a few friends that, for lack of a better term, say, Bro, we should start a cannabis company, often under the influence of said product.

Number of Entities

Due to the IRS guidelines around cannabis, only the direct cost of goods sold is deductible. So, in an effort to find a workaround, companies often set up many entities to create tax deductions. They might include a payroll entity, a real estate entity, or an entity for each license. Types of licenses can include cultivation, manufacturing, and dispensary. The entities that ultimately become a part of the receivership might be a strength or a weakness to the receiver, depending on the case.

Brand Value

While many operators believe their brand has great value, the fact of the matter is that it is not always the case. Due to product being unable to cross state lines, there is a lack of consistent brand standards. There are some processes that allow for more regularity than others (i.e., vapes can be more consistent than pre-rolls), but there is still not a lot of brand uniformity.

With these issues in mind, sometimes the receiver is best positioned to liquidate or restructure. It’s important to understand the value of the business and how each state is different. One of the larger pieces in understanding the value of a business includes limited vs unlimited license states.

Limited License States

This approach is becoming more and more prevalent in the states later to the party in approving the licensing of cannabis. It might be helpful to think of this process like the old gold medallions for taxi drivers in New York City where the medallion was worth more than the taxi. In these states, it is not possible to just apply for a license. The states have restricted the number of licenses they will offer and must approve any transfer. The licenses then become a high-value ticket item. Therefore, for a small struggling business, it may be the most valuable item in the receivership.

Unlimited License States

Early in legalization, states like Colorado and California did not restrict the number of licenses available. The value of these businesses likely did not lie with the license, but instead were valued more like a traditional business would be and a receiver must look at accounts receivable, licensing agreements, proprietary information and processes, etc.

Building

In a receivership, the cannabis license might be able to be moved to another property, but with cultivation or manufacturing licenses, the buildout of the facility would be hard to pick up and move. Thus, the building’s highest and best value to the receivership is for future cannabis operation.

While the pieces can be sold separately, the building would most likely be valuable to another cannabis operation. If the building is for a dispensary, much like a restaurant, the phrase  ‘location, location, location’ rings true. If the dispensary is in a good location, its highest and best use will likely be a future dispensary.

Cannabis Receiverships by State

Every state has different restrictions, opportunities, and values. In one state, a cultivation license might be worth more, whereas in other states, a retail license might be worth more. Understanding the factors operating within the state becomes critical to understanding how to market and sell the licenses and create value within the receivership.

CannaVer In Missouri

In 2022, CannaVer, LLC became the first cannabis receivership in Missouri. The receivership was necessary, because of an inability of the company to continue operations. At the time, CannaVer, LLC held three medical manufacturing licenses. The receiver’s role focused on the liquidation of the assets of the company and ensuring financial oversight of the repayment of creditors.

Unique to most corporate receiverships, Missouri cannabis companies have often found that their largest asset is their license. Missouri is a limited license state, unlike states like Colorado, where new licenses are issued regularly. There is no way for a new entry to come into the market without purchasing a pre-existing license.

While the court approves the sale of assets, approval must also be sought from the Department of Health and Senior Services (DHSS) in Missouri. This process can take time. Operators in other states, however, have said that the DHSS team is easier to work with than other states.

SkyMint In Michigan

Cannabis receiverships are not unique to Missouri. One notable larger receivership in recent history was the 2023 filing of SkyMint in Michigan. SkyMint reported over $125 million in senior debt and another $130 million in lease obligations. SkyMint’s assets were then sold, and the company was restructured. The majority of operations continued to operate during the receivership and post-receivership process.

MedMen In California

More recently, MedMen was put into receivership in California while simultaneously being put into bankruptcy in Canada. MedMen was once a poster child for the cannabis community but filed for protection claiming $411 million in liabilities.

“The difficult decision to shut down operations and commence the Bankruptcy Proceedings and Receivership Proceedings was made after careful consideration of the current financial condition of the Company and its subsidiaries, their inability to pay their liabilities as they become due, and the anticipated enforcement actions of secured creditors,” the company’s press release reads.

These two large national cases show the need for more education around the receivership process, especially in the cannabis space. In the hands of experts, receivership promises tremendous value to stakeholders. Only through an effectively administered receivership can professionals secure the combination of transparency, preservation of assets and operations, speed, and efficiency.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Orders Appointing Receivers: Following the Script and Playing the Part
2. Cannabis Legal & Business Issues for Employers & Employees
3. Cannabis Investment: Successes, Failures, & Strategies for the Future

This article was first published on June 17, 2024.]

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