Help for distressed cannabis businesses

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Financially distressed cannabis businesses do not qualify for federal bankruptcy protection, but the Michigan Legislature is opening a new remedy: receivership.

Under recent legislation signed by Gov. Gretchen Whitmer, the Michigan Marijuana Regulatory Agency now can authorize a cannabis business experiencing financial difficulties to be transferred to a state court-appointed receiver. This is an important step in normalizing the cannabis industry and making it easier for financial institutions to make loans to cannabis-related businesses.

Cannabis remains illegal under federal law, which means federal bankruptcy protection isn’t available to cannabis businesses or their creditors. The lack of bankruptcy court supervision and control of financially troubled cannabis businesses is one of many reasons lenders have been reluctant to lend to this industry.

Now, a state court-appointed receiver can help preserve and maximize the value of an operating cannabis business for the benefit of those who may have an interest in it. This follows established state law for other types of regulated industries, requiring the receiver to act for the benefit of those who may have an interest in the business and to hold assets for the court vs. the debtor or the creditor.

While a receiver doesn’t have all the rights and powers of a bankruptcy trustee, it can take control of a financially struggling cannabis business. The receiver can buy and sell assets, as well as sell the entire company. This is especially helpful if a creditor can’t own the business because of licensing restrictions — and it benefits all of the company’s creditors, making more assets available to pay them off. 

The receiver also can solicit claims from various creditors, and those creditors can participate in whatever distribution of assets is established. This keeps everything structured under one lawsuit in one court vs. multiple lawsuits in multiple courts. 

Financial institutions considering lending to cannabis businesses should consult with legal counsel to ensure lending documents allow them to fully leverage receivership in case the borrower defaults on the loan. Lenders also will want to ensure loan agreements include provisions that address the special nature of the business and enable them to confirm on an ongoing basis they are complying with state law and with federal enforcement priorities.

As stakeholders wait for the Marijuana Regulatory Agency to establish procedures and standards for approving a court-appointed receiver to operate a licensed cannabis business, they can be hopeful that some federal bankruptcy protections might soon be available. This undoubtedly will make it easier for banks to decide to get in the marijuana industry and move Michigan down the path toward treating the cannabis industry like all other industries in the country.

Elisabeth M. Von Eitzen is a partner and Robert A. Hendricks is a senior counsel in the law firm Warner Norcross + Judd LLP. Von Eitzen practices in banking, bankruptcy, restructuring and insolvency and real estate. Hendricks practices in business and corporate services, with a concentration in cannabis. They can be reached at evoneitzen@wnj.com and rhendricks@wnj.com.

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