Marijuana Business Magazine August 2019

August 2019 | 97 W hen attorney Charles Ferrari works with licensed marijuana operators to help set up their businesses, he warns them that federal bankruptcy likely won’t be an option. “Candidly, if you’re involved in can- nabis even tangentially, you’re possibly operating without a parachute,” said Ferrari, senior counsel for the ADLI Law Group in Los Angeles. Thanks to the federal government’s mar- ijuana prohibition, financially distressed cannabis-related businesses are in a bind when they need relief from creditors. The U.S. Trustee Program, which is part of the Justice Department, has made it extremely difficult for even ancillary businesses to go through federal bank- ruptcy reorganization. The agency has, in fact, increased its efforts to enforce federal marijuana bans in personal and business bankruptcy cases in recent years, according to data from the U.S. Trustee Program. The data shows 88 enforcement actions since 2010, with 53 (or 60%) of those coming in 2017 and 2018 alone. More than half those actions were for cases in California, Colorado and Oregon. A recent federal appeals court opinion appeared to open the door for some ancillary businesses, but just by a crack. And most would find it hard to squeeze through. (See “Ancillary Firms Find a Sliver of Hope.”) “I think federal bankruptcy is mostly off the table,” said Laura Coordes, associate professor of law at Arizona State University. But there are other options, experts agreed, and one of the most common is to go through a process where a state court-appointed or privately appointed receiver or reorganization specialist man- ages operations on a temporary basis until the business gets back on firmer financial footing, or until its assets are sold. An even better option, especially for a small marijuana-related business, is if major creditors are willing to work through an informal restructuring out- side a court process. “There’s no reason why you can’t have an out-of-court restructuring,” Coordes said. “You don’t necessarily need to engage in a formal process.” RECEIVERSHIPS A POPULAR OPTION “State receiverships seem to be a big option for distressed operations,” Coordes said. That’s generally a person appointed by a state court who “more or less takes over the business” to protect and preserve its assets, she added. In that case, the creditor has sued to put the business into receivership. (Alternatively, a creditor and a canna- bis-related business could mutually agree to bring in a reorganization specialist outside the court process.) A receivership may lead to the liqui- dation of the business, Coordes said, but that is not always necessary. “In some instances, the process is flexible enough to allow the business to continue to run,” she said. Take the recent case of Guild San Jose, a licensed California cannabis business whose assets included a 23,500-square- foot facility with a medical and rec- reational dispensary and two indoor cultivation rooms. The multistate firm Receivership Specialists served as the court-appointed receiver to manage the company’s opera- tions and find buyers for the assets. The business had been placed in receivership after defaulting on a loan for more than $1 million, and a state court ordered the sale of the assets. Reflecting the effort to preserve value, Guild San Jose’s business continued to operate as buyers were sought, although auction documents show that total reve- nues declined from $695,208 in January 2018 to $416,593 in December 2018. An initial buyer backed out, but Re- ceivership Specialists was able to garner $8.25 million at an auction of the assets in June. The buyer was San Diego-based cannabis retailer Urbn Leaf. DOWNSIDES OF RECEIVERSHIP A receivership does have drawbacks, experts said. Creditors often initiate state receiverships, so they are protecting creditor interests rather than those of the troubled business. By contrast, a federal bankruptcy reorganization is initiated by a company to protect itself from creditors while it reorganizes. State receivership law also isn’t as well- developed as federal bankruptcy law, generally resulting in more uncertainties in the process. Seeking a court-appointed receiver involving cannabis is a novel concept in most states, Ferrari said. Transparency issues also often exist in state receiverships. In a federal Federal bankruptcy protection isn’t an option for plant-touching cannabis firms or even most ancillary businesses, given that marijuana remains illegal under federal law. But financially strapped cannabis companies have other options to revive their business or sell off the assets. Here’s what you need to know: • A state court-appointed receiver or a private reorganization specialist can manage a company’s opera- tions on a temporary basis until the assets are sold or a business gets on firmer financial footing. • Such a process can be expensive, however, running $25,000 a month or more. • For a small marijuana-related busi- ness, the best and less expensive option is to try to work with major creditors to informally restructure debt outside the court process. • Under federal bankruptcy law, one possible avenue for an ancillary company would be for the business to submit a viable reorganization plan that relies on revenues strictly from non-cannabis-related sources. An ancillary company that relies on sales to plant-touching businesses, such as retailers, wouldn’t qualify.