How can a struggling cannabis company restructure or liquidate without federal bankruptcy?

This is part three of three in a series on what cannabis companies can do instead of bankruptcy. Because cannabis continues to be federally illegal, a cannabis business cannot file reorganization in federal court. Part one covered the alternatives and part two examined receiverships in several states.

Part three continues this series by covering more states. It then addresses what is known in many jurisdictions as an Assignment for the Benefit of Creditors (ABC), the last alternative to bankruptcy.

Receivership Rules in a Few More States

In Massachusetts, the rules for receivership depend on your business type and entity type. As a company in a regulated industry (and cannabis is very tightly regulated), the procedures for appointing a receiver are spread through several state codes. The court appoints the receiver once a third party, usually a secured creditor, files a complaint.

The regulator overseeing cannabis in the state has its own rules for receiverships for cannabis companies. A handful of them deserve special attention. The two big rules for filing are: tell the regulator at least five days before you file, and make sure the receiver has the right qualifications. Receivers must meet minimum standards, so the receiver must generally pass a background check and have no criminal record, much as in Nevada. Local licensing in Massachusetts is fairly restrictive, so the receiver should coordinate any action with the town.

Michigan has a general receivership statute based on the court’s traditional powers, as well as both an entity statute and an industry-based statute. An amendment in 2020 expressly adds cannabis companies. The court generally has the same equitable power to appoint receivers for a cannabis business. The receiver must tell the cannabis regulator within 10 days of appointment. The receiver also must be approved by the regulator before operating a cannabis facility.

In Michigan, anyone can ask for a receiver. That person can even be someone who is a part of or tied to the business. The complaint asking for the receiver must ride on another pending claim, so it is not enough just to file the request without also filing some other sort of lawsuit. The receiver should be competent and qualified, with enough experience to run the estate. But once appointed, the receiver has wide-ranging powers, whether to run, reorganize, wind down, or sell the business, subject to the court’s discretion.

Missouri has a basic receivership statute plus specialized statutes for certain situations, such as corporations, and no cannabis-specific rules, so the general statute governs cannabis cases.

The receiver in Missouri is appointed by court order if the person asking for the receiver has an interest in the business’s assets. The court order can come before judgment, and the request for a receiver can be its own claim rather than just part of a broader claim. A receiver can be a general receiver over all assets, like equity receivers, or can be limited to specific property.

Missouri cannabis regulations add little beyond telling the regulator within 5 days after filing. In a state like Missouri, the lack of specific rules for cannabis companies can make things uncertain. In practice, the receivership rules seem to be operating fine. There has even been one cannabis receivership case in Missouri, and it is nearly finished.

Short of a receivership, the business might be able to reach an informal agreement with creditors. If you know you can run, sell, or reorganize for enough to pay off your debts, you can just negotiate with creditors and save everyone a lot of trouble and expense. If creditors get upset about the pace of this voluntary approach, they can petition the court for a receiver, even over your objection. Another option, an ABC, lets you liquidate in an orderly way when relations with creditors are amicable and the equity is worth next to nothing. If your business is fighting its creditors, they are unlikely to go along with an ABC. This method is inexpensive compared to the cost of a receivership, and that leaves more money to pay the creditors, so some creditors will prefer it.

An ABC is created by state statute or common law. It is the rough cousin of a straight liquidation under Chapter 7 of the bankruptcy code, or a voluntary liquidation under Chapter 11. This process is started by the debtor, unlike a receivership, and there is little to no court supervision. The assignee holds and liquidates the assets and pays creditors. Usually there is just an assignment and possible hearings on specific issues, but no court appointment.

In an ABC, the debtor creates the relationship by selecting someone it trusts to liquidate or operate the business, and conveying everything in trust for creditors. The assignee has duties to all creditors, usually fiduciary duties under state law. The assignee owns the assets, and answers to the creditors, not to you. You may even lose control over business operations or the premises.

After the assignee is picked, the assignee must run a thorough investigation into the estate, its assets and its liabilities. Then comes notice to creditors and other third parties. The assignee operates the business in the meantime. Then the assignee has wide latitude to sell the estate, by auction or private deal. An auction can come with a stalking horse bid, the way bankruptcy sales sometimes do.

ABCs can be a welcome, fast, effective and cheap way to end a distressed company. You get to pick the assignee, and since the assignee does not need court approval to take action, the liquidation is usually faster. One downside of the ABC approach is that disgruntled creditors can still ask for a receiver despite the ABC. Finally, buyers may not be able to buy the assets free and clear of all liens.

The takeaway in this series is that, just because you cannot go to bankruptcy court for reorganization or liquidation, you still have options. People steeped in bankruptcy law do not always know about options like receiverships or assignments for the benefit of creditors. You should consult someone who knows receiverships and similar options, and someone who knows cannabis. When you get to this point, you need counsel who can guide you through the maze of state laws to find the right route for you.