Receivership: An Alternative for Creditors of Struggling Companies

Posted by Margolin & Lawrence on January 15, 2020

ReceivershipBlog

 

Currently, cannabis market growth is not as strong as many investors had hoped for. It has been reported that since March, cannabis stocks have lost two thirds of their value. While economic growth is never guaranteed for any business, remedies available to floundering cannabis businesses are more limited than those offered to non-cannabis businesses. When a business is struggling, and unable to pay creditors, one option is for that business to file or be forced by its creditors to file bankruptcy. As many know, bankruptcy is a remedy available to struggling businesses and individuals that helps with the reduction, restructuring or elimination of debts. Unfortunately, however, there is no bankruptcy option available to cannabis businesses since the rules and procedures for filing bankruptcy are governed by federal law. Because cannabis is federally illegal, cannabis businesses are not permitted to take advantage of debt restructuring in federal bankruptcy courts.

So what does this mean for creditors of struggling cannabis businesses? 

Despite the unavailability of bankruptcy to cannabis industry participants, creditors of those industry participants can rely on certain state remedies. For instance, when recreational cannabis was legalized in California, specific statutory provisions were included to give creditors some leeway in taking over business operations or selling off inventory. Section 5034 of the Bureau of Cannabis Control’s regulations outlines the remedies available in these circumstances. Namely, the statute provides “an owner’s successor in interest the opportunity to transition the owner’s operations and/or wind-down the licensed business’ affairs prior to expiration of the license while ensuring the Bureau is aware of the situation and that licensing rules are being followed.” 

What other state remedies are available?

California offers creditors two options to enable recovery of their financial lending. Creditors can either go through the receivership process or through wind down proceedings. 

Receivership Process 

Legal receivership proceedings are generally pursued with the goal of returning a business to being profitable. Under California law, a receiver is a court-appointed officer or representative who takes control to manage property that is the subject of litigation. The receiver’s goal is to preserve said property and ultimately dispose of it in accordance with the court’s final order. The receiver is the agent of the court and not of any party. Therefore, the receiver is a neutral party, acting for the benefit of all who may have an interest in the receivership property, and holds assets for the court and not for the plaintiff or the defendant. 

Since the receiver is a neutral, disinterested agent who owes fiduciary duties, the receiver needs to act in the best interest of the business. In many cases, a receiver has ultimate decision-making power over company assets. Whether this entails selling the company or its assets to another party or continuing to run the business, it is the receiver who holds control over the business while the court decides the best course of action for the business moving forward.  

While receivership is an extraordinary remedy, it can allow creditors to rest easy knowing that a neutral third party will control and manage a business to preserve and protect its remaining assets and property. If a creditor believes that the current owners of a cannabis business are mishandling company assets and/or mismanaging the business, that creditor, upon default by the borrowing business, can file suit against the business and petition the court to appoint a receiver pending the court’s final decision.

Wind Down Proceedings

Another state remedy available to creditors of defaulting cannabis businesses is to force the business to go through the wind down proceedings. When a business is unable to pay its creditors and those creditors file a successful lawsuit and win a money judgement against the business, if that business is unable to pay the judgement, a court can order that business wind-up and dissolve. The business will then be forced to go through wind down proceedings. During the winding down process, the business will continue to exist, but only for the purpose of paying all of the business’ debts and liabilities, and if necessary to pay those debts, sell off its assets. If any assets remain following satisfaction of business liabilities, the same will be distributed to the business’ equity owners and the dissolution will be complete. 

If you are a creditor of a cannabis business and are interested in knowing what your options are to recover your financial investment, or if your cannabis business is going through the receivership process and you want to determine what your options are, our attorneys at M&L provide advice on a full range of legal matters involving the receivership process. If you have any questions or would like to speak with our attorneys to further discuss our services, please feel free to reach us via email (info@margolinlawrence.com) or phone (323-653-9700). 

 

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This blog is not intended as legal advice and should not be taken as such. The possession, use, and/or sale of marijuana is illegal under federal law.