What are my options in cannabis when our company stumbles?

Even though over the last decade cannabis acceptance and legalization has taken the United States by storm, it like any other business, can stumble and fail. However, unlike their counterparts, cannabis companies are not eligible for bankruptcy protection. In fact, in many cases the groups they make payments to, their employees and their funders are also not eligible. Bankruptcy in the United States is a fairly understood concept, perhaps because there are individual bankruptcies similar to commercial bankruptcies. That said, there are many different types of bankruptcy in the United States with the two most common types being for business with Chapter 7 (liquidation) and with Chapter 11 (restructuring). In addition, there is a growing interest in and usage of Subchapter 5 (a small business version of chapter 11 restructuring). However, with no bankruptcy option available to the many groups funded through cannabis operations, an alternative is necessary. Fortunately for cannabis operations, receivership is an established and incredibly useful practice that is essential to filling the void.

A Court Appointed Receivership can become an essential solution for problems that arise including 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 follows state and receivership order guidelines, and where necessary, gets approvals from the courts for certain actions.

Each State brings their own nuances to the receivership practice, but some are seen as frontrunners in the space. Today, Missouri is consistently looked to as a benchmark for many states to develop and improve receivership practices thanks to the enactment of Missouri Commercial Receivership Act of 2016 – (“MCRA”), §§ 515.500 through 515.665. For more information https://www.commercialreceiver.org/missouri/. Missouri became the third state in the nation to adopt revised receivership statutes since 2000. Since these adoptions, 15 other states have enacted new receivership statutes with another three currently proposing new statutes as well.

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 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 licenses. With Missouri being a limited license state unlike states like Colorado and California, 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; however, larger operators in other states have noted the DHSS team has been easier to work with than other state processes and procedures.

Cannabis Receiverships are not unique to Missouri. In fact, some of the largest in the country have taken place over the past year. Notable larger receiverships in recent history include the 2023 filing ofSkyMint in Michigan in which SkyMint reported over $125 million in senior debt and another $130 million in lease obligations. SkyMint’s assets were sold and the company was restructured with the majority of operations continuing to operate during the receivership and post-receivership process. More recently, MedMen was put into receivership in California while simultaneously being put into bankruptcy in Canada. MedMen was once a posterchild for the cannabis community, butfiled for protections 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. After careful consideration of these factors and in the absence of other available alternatives, the board of directors of the Company determined that it was in the best interests of the Company to proceed with the commencement of the Bankruptcy Proceedings and Receivership Proceedings,” 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 administeredreceivership can professionals secure the combination of transparency, preservation of assets and operations, speed and efficiency.

Of note, Husch Blackwell recently hosted a webinar on cannabis receiverships. It offers an important, real-world look at cannabis insolvency and the receivership process. To learn more about receivership in general, more information can be found at www.commercialreceiver.org.

Eric Moraczewski is the CEO and Co-Founder of NMBL Strategies, a strategic advisory firm specializing in turnarounds, restructuring and receiverships. NMBL Strategies is also the receiver of CannaVer, LLC, the first cannabis receivership in Missouri. Learn more about NMBL Strategies at www.nmblstrategies.com. In addition, Eric is a Board Member of the Commercial Receivers Association, more information can be found on the Commercial Receivers Association at www.commercialreceiver.org.