When a business can no longer keep up with its debts, bankruptcy is usually the first word that comes up. Bankruptcy is just one way to restructure or wind down a failing business. Not every business can use it. Bankruptcy in the US is exclusively federal law. Because cannabis remains illegal under federal law, cannabis companies are disqualified from seeking bankruptcy relief. For a lot of smaller firms, the question is not if they should seek bankruptcy protection, but how else, if at all, they can legally wrap things up.
At Delancey Street we negotiate business debt with funders and lenders, so the owners we talk to ask some version of that question all the time. Below we rank six options, starting with the cheapest in terms of both cost and involvement from a court. The ranking is rough. You won’t find a “menu price” for any of these.
The first option is a voluntary deal: if it looks like the business, at least in theory, is still worth more than what it owes, then the parties may work out a voluntary arrangement amongst themselves. In practice, it’s a strategy where you attempt to collectively negotiate and settle with your creditors an agreement to lower your debt or pay off your debts over a period of time. That is our work: our senior advisors negotiate with funders and lenders for less than the full balance owed, and we do not sell you another loan. Since we deal with creditors all day, we will also tell you on the first call if a cheaper option exists or if your case cannot be won.
An Assignment for the Benefit of Creditors
The second option, and the cheaper of the two formal state-law routes we cover, is an assignment for the benefit of creditors, or ABC. An ABC is a voluntary assignment of rights (assets), by a company (the “assignor”) to a third-party (the “assignee”), for the purpose of liquidating the assignor’s assets in an orderly manner. Courts can step in on specific issues, but the process mostly runs without one. The debtor decides who is going to take control of its business and sell its stuff. This person is called the “assignee.” Even though the debtor picked him/her, the assignee has legal duties to the creditors. Usually those duties are fiduciary duties under state law, and the assignee holds the assets in the functional equivalent of a trust for them.
And if the relationship between the debtor and its creditors is reasonable, but your equity holders (i.e. you) don’t have a lot of value in your company, then you might want to consider an ABC. After the assignment, the assignee (not the borrower) does the bulk of the investigation into the debtor’s assets and debts, completes the assignment, and notifies the debtor’s creditors and other parties. The assignee generally oversees the business if it stays in business, and sells its assets by public auction or private negotiations (as in bankruptcy, the sale may involve a stalking horse bid).
An ABC typically costs less than a receivership, you can pick who takes over the company, and it’s usually smoother to sell things. There are catches. A third party might petition the court to put a company into receivership after an ABC is already in progress. Or the person taking over could demand way too much for their work; either scenario could make everything more expensive. Plus, selling assets in an ABC doesn’t automatically mean they’re sold free of other claims on them.
The Receiverships
Voluntary negotiation and ABC both require the owner to agree to start the process. Options three through five, the receiverships, do not. If you’re in trouble, a creditor can ask a court to put someone in charge of your business - called a receiver - to manage it. Even if you say no, the court can agree to do it. The receiver will be overseen by the court and might have wide authority over your business. The details depend on where you are - each state has its own laws. Because it is the creditor, not the debtor, who pulls the trigger for a receivership, and because the court supervises the process, it is the more formal route, and an ABC is generally the cheaper of the two. Below are three states with legal cannabis, starting with the one that adds the fewest cannabis-specific rules.
Third is Missouri. Missouri has a general receivership statute, but no specific cannabis law, so cannabis receiverships are governed by that general law. A receiver is appointed by the court under an order following an application by someone who has an interest in the assets. This can happen before any judgment, and the request can be made as its own case, not as part of another lawsuit. You can get a receiver over all of the company’s assets or just some of them. The main cannabis-specific rule is that the regulator must be notified within 5 days after the application is filed. Some argue this is unclear, but the courts and regulator seem to be applying the general rules. There is at least one receivership already nearly complete.
Fourth is Michigan. The general receivership statute allows a court to appoint a receiver in the exercise of its equitable powers, to the extent permitted by law. Michigan law was amended in 2020 to specifically allow receivers over cannabis companies. The regulator has to be given notice within 10 days after the appointment and the receiver can operate a cannabis facility only with the regulator’s approval. Anyone can apply to have a receiver appointed, even if they’ve got ties to the company, but not just for the heck of it: They have to tie it to another action on a separate claim. (The receiver has to have enough skills/education/experience to manage the company.) And, if appointed, the receiver has a broad range of powers: to run it, restructure it, liquidate it or sell it.
Fifth is Massachusetts. Receivership is governed by statutes and the specific statute depends on the industry and the type of entity. In general, receivers are appointed by the court after the application is made by a third party. Most commonly, a secured creditor. For cannabis companies, the state regulator has to be notified at least 5 days before a petition to appoint a receiver is filed. Once someone steps in to manage the company because it owes money (a receiver), that person generally needs to pass a background check, and have no criminal record. Local licensing is fairly restrictive, and a receivership involving a cannabis business must be coordinated with the local city or town where the business is located.
Federal Bankruptcy
The sixth option is the one most owners think of first: federal bankruptcy, through a Chapter 7 or a liquidating Chapter 11. An ABC is kind of like that at the state level. We have no price to put on it here. It’s last on the list because for some owners, it is not available at all. However, because cannabis is still illegal under federal law, even though it might be legal under your state law, a cannabis company doesn’t have access to federal bankruptcy protections and instead has to pursue state-level alternatives (such as a receivership, an ABC, or negotiation). Delancey Street is not a law firm. When bankruptcy is the better path, we refer owners to a vetted independent attorney.
Just because bankruptcy court isn’t available doesn’t mean there’s no way to restructure or shut down. You can. It just takes a different way of thinking, one that’s unfamiliar to people who are used to doing restructurings in bankruptcy, so you and your creditors should talk to a lawyer who knows your industry and knows these other options. And if you want to know whether a negotiated deal is still possible before you get there, a first consultation with us is free and confidential.
