Alternatives to Bankruptcy for Cannabis Investors

Can an investor in the marijuana industry file for bankruptcies? This article answers these questions by exploring the various alternatives to bankruptcy. You will learn about Court appointed receiverships, assignments to benefit creditors, and other alternatives. Even if your company is not yet in a position to file for bankruptcy, there are options available. Weigh your options carefully before deciding whether or not bankruptcy is the best option for you.

Can an investor in the marijuana industry file for bankruptcy?

While cannabis businesses may be a popular choice for investors, a lack of financial resources can put some companies at risk. Using bankruptcy may provide breathing room from creditors and an opportunity for restructured debt. It can also provide a relief from certain collection efforts and litigation. Additionally, cannabis businesses may be eligible for state-law relief, such as assignment for the benefit of creditors. However, cannabis businesses should consider the risks of bankruptcy before proceeding.

Cannabis businesses face many difficulties, including creditor defaults and ownership disputes. Unpaid creditors can sue to recoup their interest in the company’s assets, and local municipalities may file lawsuits to end illegal conditions. In these situations, investors in marijuana companies may consider filing for bankruptcy reorganization to eliminate the debt. However, filing for bankruptcy is not as straightforward as it sounds. The Federal Drug Control Act prohibits the sale of marijuana, making bankruptcy a risky move for cannabis businesses.

The federal government has also expressed concerns over cannabis-related bankruptcy filings. While the cannabis industry is growing in popularity across the United States, it is still illegal under federal law. Despite recent public support, bankruptcy courts have historically prevented cannabis companies from seeking bankruptcy protection. Even so, many marijuana companies operate within states where marijuana has been legalized. If a marijuana-related company is experiencing financial trouble, the United States Trustee Program may still be able to help.

Bankruptcy protection for investors in marijuana businesses is limited. As long as marijuana remains a Schedule I drug under federal law, it cannot benefit from bankruptcy protection. If a marijuana-related business is liquidated, it would violate federal law and the Bankruptcy Code. Therefore, a bankruptcy filing for marijuana-related companies is unlikely to help. In North Carolina, it would be illegal for the marijuana industry to rely on the Bankruptcy Code.

As a result, investors in the marijuana industry should know that if a marijuana-related business fails, bankruptcy protection for investors is not an option. While state-licensed marijuana businesses may not be subject to bankruptcy, many ancillary industries that depend on it can. Bankruptcy protection for marijuana businesses is also not available for downstream entities that provide goods and services to the marijuana industry. However, there are some state laws that can protect marijuana businesses from bankruptcy.

Court appointed receiverships

Cannabis businesses can sometimes reach a point of distress that requires the intervention of a Court appointed receiver. These cases typically occur when partners fail to protect their property rights, become insolvent, or experience a revenue stream that is not meeting expectations. Receivers can help these businesses get back on their feet by conducting a financial review and by examining the company’s operations and finances. They can also provide an opinion on the value of the cannabis enterprise.

A Court-appointed receiver can take on the role of a liquidator or a restructuring company, and they are typically independent third parties. A receiver can also administer a claims process. Under most circumstances, companies under a receivership are protected from new legal actions without the court’s permission. However, receiverships can be costly, and they typically bill by the hour. They may also retain outside financial services, counsel, and other professionals.

When filing a cannabis receiver petition, be sure to do your research. These businesses are unique and complicated. It is crucial to review local and federal laws. You also need to have support staff familiar with the operation of a cannabis dispensary. This is especially important if you are seeking to serve as receiver. A cannabis receiver must be licensed by the state in which they are operating. They also need to know the ins and outs of the industry and the laws governing it.

The process of filing for court-appointed receiverships can be a lengthy process. The courts appoint receivers and must make sure that they are legally qualified. Moreover, the court appointee must be pre-approved by the Cannabis Control Commission. These regulators are responsible for ensuring the safety of the cannabis industry. This is why Massachusetts has a special marijuana regulator that oversees these businesses.

Although there are numerous state markets for cannabis, the federal laws on cannabis still prevent the use of bankruptcy protections for these businesses. In such a case, alternatives such as a court-appointed receivership become critical. In a three-part discussion series, Clark Hill attorneys will explore the history of cannabis receiverships, discuss how they work, and share tips on how to bridge the gap between bankruptcy and a court-appointed receiver.

Assignments for the benefit of creditors

If a cannabis company can’t find a buyer for its assets, lenders can pursue legal remedies under state law. This process allows the distressed company to appoint a receiver to sell off its assets and distribute the proceeds to its creditors. Since marijuana businesses are not allowed to file for bankruptcy under federal law, these lenders may be able to use an assignment for the benefit of creditors in these cases.

While traditional businesses may file for bankruptcy, the process is not always appropriate for the cannabis industry. Moreover, bankruptcy courts are largely barred to the cannabis industry, so it is essential for struggling marijuana companies to explore state law options for dissolution. One such method is an Assignment for the Benefit of Creditors (AfBOC), a state law mechanism for an orderly liquidation of assets.

While it is unlikely that the federal government will make marijuana legal anytime soon, marijuana industry investors should consider taking measures to protect their interests. They should select the appropriate form of entity for their business. This can affect the control they have over it, and should be paired with a proper exit strategy. While drafting an assignment for the benefit of creditors, they should also consider the need for additional collateral, including real estate, personal guarantees, licenses, or ownership interests. Mortgagees should also consider the terms of setoff rights and termination rights, among others.

Non-bankruptcy alternatives

For those who want to avoid bankruptcy, there are several non-bankruptcy alternatives for cannabis investors. Because marijuana businesses are deemed illegal under federal law, they are not eligible for traditional banking or insurance options. Further, they are not eligible for certain programs administered by the Small Business Administration, which were created in response to the COVID-19 pandemic. Nevertheless, it is important to understand that there are non-bankruptcy options for marijuana investors.

Among the non-bankruptcy alternatives for marijuana investors are workouts and composition agreements. Both methods are geared toward helping cannabis businesses regain their financial stability. Workouts are a good choice for cannabis business owners because they allow both parties to communicate transparently about the financial obligations of each party. A successful workout will allow both parties to restructure the debt and give the company a reprieve.

Among the benefits of a non-bankruptcy alternative for marijuana investors is that it provides a safe and legal process to avoid foreclosure. This method also provides for a single court-supervised process for the administration of claims. However, cannabis businesses need to keep in mind that it is not suitable for every type of business. Bankruptcy may be the best option for some businesses. However, there are several factors that need to be considered before choosing a non-bankruptcy alternative.

As cannabis legalization spreads across the country, Congress is showing initiative to allow businesses in this industry to access similar opportunities as other industries. This may include SBA loans and banking opportunities. But if these industries are legalized, bankruptcy filings may increase, and courts may grant greater flexibility to debtors with indirect cannabis industry associations. So, it is essential to consider the non-bankruptcy alternatives for marijuana investors.

Although cannabis legislation provides much-needed aid to the industry, it does not provide immediate relief. The industry faces similar economic pressures as other industries. And without bankruptcy alternatives, cannabis operations may be forced to reevaluate their operations and their debts. So, while bankruptcy is a great relief for many industries, it may not be the best option for cannabis operations. Until that time, there will be many more financial hardships and obstacles for cannabis companies.