California’s cannabis industry is a mess. Between the rampant illegal market, onerous taxation, unnecessarily complicated regulations, debt defaults, and a host of other factors, things have never been worse. Businesses big and small are imploding. Without federal bankruptcy protection, the best tool available to insolvent and nearly insolvent companies is gone. So we’re going to start to see a huge uptick in alternative methods of dealing with failing cannabis businesses: receiverships.
What is a receivership?
If you’re not familiar with receiverships, you’re about to learn a lot in the coming years. Here’s a blurb from a post of ours all the way back in 2020:
In California, a receiver is an officer appointed by the court to take possession of and to protect assets for the benefit of all persons who may have an interest in those assets. The receiver is a neutral agent of the court and holds assets for the court, not for the plaintiff or the defendant. A receivership is only a provisional remedy in an action that seeks some other relief by final judgment. In other words, you cannot file a lawsuit for the sole purpose of having a receiver appointed.
The court will outline the powers of the receiver in an order, which typically include temporarily managing the business until it gets back into better financial standing, selling off assets, employing employees and professionals, and entering into contracts or leases, among other powers.
Receivers are often appointed by creditors on a debtor’s default. For example, if a borrower defaults on a loan, the lender may seek to have a receiver appointed. And if a tenant fails to pay rent, the landlord may seek to have a receiver appointed. Good loan and lease agreements will generally have provisions detailing how the lender/landlord can do this.
Receiverships are not limited to debtor defaults though. Receivers can be appointed in a host of other situations, and I’ve seen receivership provisions in all kinds of agreements over the years.
How is a receiver appointed?
States that authorize receiverships have special statutes governing appointment. Here is California’s. As mentioned, a contract may also contain provisions that add additional detail to the appointment process. Once appointed, a receiver takes control of the cannabis business, subject to any court order. For example, let’s say a secured creditor wins a bid to have a receiver appointed to take over the business of the debtor. The receiver would manage the affairs of the debtor to the extent authorized by the court order. If one of the owners of the debtor did something that the receiver said not to do, the receiver could go back into court and get the court to order the person to cut it out.
One other potential nuance is that parties can also consent to a receivership out of court by a written contract. The person appointed to manage the business, if not appointed by a court, will have fewer rights than a court-appointed receiver. For example, the court wouldn’t be there to hold anyone to account if they stopped following the receiver’s orders. But the benefit of doing it this way is that it saves the cost and time of going to court. This isn’t something you should expect to see in contentious debtor disputes, but it can be a helpful way for people in a partnership dispute or who own a semi-insolvent company to get a neutral third-party in to clean house and get things back on track.
Two other things are worth mentioning here. First, California’s Department of Cannabis Control (DCC) has a specific rule in place for approval of a receiver. It goes without saying, but failure to follow that rule can lead to yet more problems for a cannabis business. Additionally, the appointment of a receiver may automatically trigger defaults under the subject company’s contracts. Commercial contracts often state that the appointment of a receiver is an automatic breach or default that may not be curable. A company that is considering whether to consent to the appointment of a receiver needs to think long and hard about how these provisions could affect it.
What we’ve seen in Oregon recently
California’s regulated cannabis market is not as mature as states like Oregon and Washington. We witnessed the first Washington receivership back in 2016 or so, forced by a landlord with respect to a cannabis business tenant. Our firm has also dealt with receiverships in Oregon for both cannabis and hemp. My colleague, Vince Sliwoski, helped facilitate the first secured creditor takeover of a cannabis business some years back. This was under the same rule which allows for the appointment of Oregon receivers in cannabis. Other lawyers in our firm such as Ethan Minkin, a seasoned bankruptcy lawyer, and litigators like Jesse Mondry have worked on similar matters.
Most recently, news broke that Chalice Brands Ltd. (CSA: CHAL), a big player in the Oregon cannabis industry, was going into a receivership. You can read our initial analysis of the Chalice receivership here, and a follow-up post here. We represent one creditor there with a judgment against Chalice, as well as one of four bidders in the sale, and unsecured parties to boot — including a landlord. The Chalice receivership is more complex than many the industry will see, in that it involves a Canadian parent. But this may prove to be the case with certain California cannabis receiverships, as well.
What to expect for California cannabis receiverships
Receiverships aren’t necessarily new to California’s cannabis industry. Back in 2021, for example, there was a widely publicized auction following a cannabis receivership. There undoubtedly have been other receiverships that just haven’t received as much press over the years. That’s all starting to change though, as it was recently announced that distribution giant, Herbl, was going into a receivership. I was interviewed by MJBizDaily in a story about the Herbl situation, so I won’t recount all of the facts here. I suggest you give that article a read though.
Herbl was not the first major cannabis company to collapse in California, nor will it be the last. Read some of my more recent posts linked above and you’ll see why the deck is stacked against the industry in a big way, with the DCC and local government doing little to meaningfully address the situation. While I can’t guarantee many things, I can firmly guarantee that more companies will fail. And due to hyper-leveraging that’s common-place in the industry due to mostly federal illegality, we expect that lenders and other creditors will rush into courts to seek the appointment of receivers.
While bankruptcy protection is off the table, companies still have a lot more options than they often think they have. I plan to write a post in the near future about ways we’ve helped cannabis companies in distress, or their creditors, in recent years – which have included everything from receiverships, to asset sales, to demand letters, to litigation. That said, we fully expect to see a flurry of contentious receiverships as businesses crash and burn. Stay tuned to the Canna Law Blog for updates on cannabis receiverships and all things related.
The post Cannabis Receiverships Are Coming to California appeared first on Harris Bricken Sliwoski LLP.
