What Is a Cannabis Receivership?
Unlike the products sold by traditional business, cannabis is categorized as a Scheduled Drug by the DEA, hence cannabis businesses are prohibited from filing bankruptcy in any Federal Court to restructure lease terms, shed debt, put litigation on hold, or arrange to recapitalize the business. This designation leaves cannabis investors, creditors, and company founders without a way to methodically settle the disputes of a cannabis company nearing insolvency – except through lawsuits and counterclaims, which will likely destroy the business. Burdened with creditor claims, investor and founder disputes, and without access to working capital, even a licensed and compliant cannabis business may collapse. A state-level cannabis receivership – in those states that allow it, like California, Oregon, Washington, and Massachusetts – is a valuable tool for investors, creditors, and cannabis company founders to mitigate damage from protracted legal battles that will limit or negate a company’s profitability. The role of a cannabis receivership expert witness is (1) to help receiver settle all disputes and recapitalize the company, or (2) to help the receiver position the assets for auction to pay, creditors, investors, and the cannabis receiver’s fee under a court-approved distribution agreement. Rules vary from state to state.
The Three Scenarios of Cannabis Receiverships
- Investor Lawsuits. Michael Muse-Fisher, a receivership attorney with the Buchalter law firm in Sacramento, says, “Oftentimes the investors want to right the ship because they think current management is doing a poor job. However, merely doing a poor job by management may not be a sufficient reason for courts to grant the appointment of a receiver when sought by an investor. Often, evidence of malfeasance (such as theft or self-dealing) may be required.”
- Too Much Debt. Blake Alsbrook, a veteran cannabis receiver with Ervin Cohen & Jessup LLP in Beverly Hills, says, “Receiverships are sought by creditors because they’re trying to get their money back related to a default on an investment gone wrong.”
- Founder Infighting. Kevin Singer, president of Receivership Specialists in San Diego, indicates that he often sees “partners fighting over the control and management of the business.”
Sometimes all three of these types of disputes are happening simultaneously and frequently without written and/or signed governing documents, such as corporate bylaws, partnership, or LLC operating agreements. In many instances, it is unclear who owns what. A cannabis receivership expert witness can offer an opinion on the most likely reasons the business failed, including whether malfeasance had a role in its demise, or if the failure was simply based on a misguided business model or other reason.
The Cannabis Receivers Authority
Any authority given to a cannabis receivership expert witness is granted by the state court located in the appropriate jurisdiction.
The drafting of the petition by the cannabis receiver to create the receivership must be performed with care and an understanding of the specific needs of the cannabis business, the extent of the claims versus value and viability of the business, any cannabis licensing transfer issues, all local and state cannabis regulations, unpaid taxes, local or state compliance violations that must be addressed, any off-balance-sheet transactions, hidden debt or hidden investors, accuracy of cash levels and inventory control – just to name a few potential issues.
Once appointed, a cannabis receiver has the authority to hire an accountant or other professionals to sort out the books, count the cash, and verify inventory and other assets to provide financial reports to the court, the creditors, and all parties of interest – including an opinion of value. A cannabis receiver will often hire an operations manager and/or onsite managers to oversee the company’s day-to-day operations, thereby safeguarding all assets and protecting the business for the benefit of creditors. A cannabis receivership expert witness can work alongside the attorney to outline the operational and business needs to be drafted into the receivership petition and can also review financial statements, audit operations, and, if there is enough financial information, give an opinion of value of the cannabis enterprise.
Blake Alsbrook states, “A neutral receiver, directed by the court, can be a stabilizing force for a business to steady the ship while the individual creditors and owners settle their litigation.”
Practical Needs of the Cannabis Enterprise
For receivers or bankruptcy attorneys with no experience in cannabis, enlisting the help of a cannabis receivership expert witness supports the formation of a successful cannabis receivership. A cannabis receivership expert witness can highlight key economic, operational, and regulatory issues in drafting the cannabis receivership petition for the state court. Having all operational and financial issues reviewed and considered enhances the drafting of the language to secure a full scope of the authority needed to fulfill your obligations as a cannabis receiver.
A cannabis receivership expert witness can review operating agreements, leases, royalty, management and employment agreements, company organization structures, PPMs, and other documents associated with any capital raises and the formation of the business; and can render an opinion on whether the terms were or are reasonable and customary or whether they were or are flawed in some way.
Securing the Receiver’s Fee
Even though the cannabis receiver’s fee is senior to that of other lienholders, the economic viability of the cannabis company in question is very important.
With the court’s authority, a cannabis receiver can negotiate with creditors, landlords, investors, and founders to find workable solutions. Unlike in a bankruptcy proceeding, a cannabis receiver cannot force a settlement upon any of the parties, but rather acts as a clearinghouse to organize claims against the business and meditate among rival factions. If all attempts to reach an agreement fail, the only option is to auction the assets – assuming the assets still have any value. While a cannabis receiver cannot revive a dead company, he or she can often mitigate economic collapse and return a viable company to solid financial footing. A cannabis receivership expert witness can be utilized to create a recapitalization and reorganization plan to be implemented during receivership and continued after sale to maximize the value of the asset.
In summary, a receiver’s powers can be quite broad, depending on what authority the court grants. Armed with this authority, it is this cannabis receiver’s job is to balance the interests of the parties involved and reach a solution that will staunch the bleeding red ink and preserve the value of the business.
The Cannabis Receivership End Game
If the business is still viable, a receiver can help get the business back on track – sometimes in better shape than when the cannabis receivership appointment was approved by the court.
If the cannabis business cannot be saved — due to the inability of current management to strike an agreement with creditors or investors, or for any other reason — and the assets still have value, the next step is to sell the assets as quickly as possible for the highest price. This happens via a court-supervised auction to pay the creditors a portion of what they are owed, usually on a pro rata basis.
ABOUT THE AUTHOR
Peter Ingersoll is a cannabis real estate and investment thought leader. Managing director and cannabis product chair of the first national real estate firm to embrace cannabis as legitimate investment sector. Expertise in cannabis including financing, investments, 1031 exchanges, sale-leasebacks, partner disputes, receiverships, investor disputes, and unregistered securities litigation. Former Series 65 registered investment advisor. Graduate of Wharton School – University of Pennsylvania.
A big thank you to the following individuals for allowing me to interview them for this article.