February 24, 2021

Hard-Hit, Stigmatized Cannabis Companies Precluded from Relief via Federal Bankruptcy. What Options Do They Have?

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Even as the global pandemic persists, cannabis businesses are precluded from various federal relief measures which are available to their non-cannabis counterparts. As we explained to our readers in our previous article, “I.R.C. §280E: A Buzzkill For Those Who Keep Poor Records,” federal law still considers marijuana to be an illegal Schedule 1 controlled substance.¹  Besides the negative tax implications we discussed therein, this stigma is also preventing cannabis businesses (which themselves remit millions of dollars in tax revenue every year to their respective states) from finding relief via federal bankruptcy tools, such as Chapter 11 restructurings. Remarkably, even businesses indirectly related to cannabis businesses (i.e., a real estate business leasing to marijuana growers) have had their bankruptcy cases dismissed.²  And with most banks still typically refusing to take cannabis businesses on as customers, these primarily cash-only companies are struggling to survive.

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So, what options may cannabis companies utilize outside of bankruptcy?

1. Receiverships

If a cannabis company (CC) is confronting a creditor in litigation, the CC operator may want to consider asking the state court to appoint a receiver (i.e., an appointed trustee) to run the CC. The receiver, wielding temporary control of the CC, may help stabilize the company by selling off assets to satisfy debts—offering a potential to turn it around so the business survives. On the other hand, the receiver may wind-down operations entirely, sell the entire company and recoup proceeds in excess of the debt owed by the CC.

2. Workout Negotiations

A Workout Negotiation is a process in which a CC negotiates with its creditors –preferably before litigation. Workout negotiations may also include mediation in the context of multi-party disputes. Success is wholly dependent upon the parties’ ability to reach a solution upon which all parties agree. Solutions can include items such as restructured repayment terms and repayment amounts. And considering today’s increased collection problems pervasive throughout the country, creditors may be more easily persuaded to engage in workout negotiations ending more favorably for CCs.

3. Assignments for Benefit of Creditors (ABC)

An ABC is often compared to a state court insolvency proceeding, wherein an assignee is appointed who facilitates liquidation of company assets and distributes them among a company’s creditors. However, depending on the state, a CC might have to seek approval from the court to assign its assets because of marijuana licensing requirements. Additionally, some ABCs do not prevent secured creditors from taking adverse action against the company.

While marijuana is still illegal under federal law, the House of Representatives recently passed the Marijuana Opportunity Reinvestment and Expungement Act, which among other things decriminalizes and removes marijuana from the schedules of controlled substances under the Controlled Substances Act.³ Until, marijuana is legalized under federal law cannabis companies will need to be creative with managing their debts.

If you are a cannabis business owner and would like to find out what federal relief is available to you, please contact our team by calling (410) 497-5947 or requesting a consult online.

Footnotes

  1. 21 U.S. Code §812(b). https://www.districtofcolumbiataxattorney.com/articles/i-r-c-280e-a-buzzkill-for-those-who-keep-poor-records/.
  2. KeithOwens, The Uncertain Future of Distressed Cannabis Bankruptcies and the 2020Elections, NCV Newswire(December 4, 2020), https://www.newcannabisventures.com/the-uncertain-future-of-distressed-cannabis-bankruptcies-and-the-2020-elections/.
  3. H.R.3884- MORE Act of 2020
    116th Congress(2019-2020)
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