Excluded from Bankruptcy, Cannabis Industry Looks to Receivership

By Neil Sheaffer

California has established itself as the world’s largest marijuana industry, with an estimated $3 billion in legal sales in 2019. Despite the large, robust legal market in California, the complex regulations, high state and local taxes, and competition (in both the legal and illegal markets) are challenges that many businesses find insurmountable. It is estimated that 80% of marijuana transactions still take place on the underground, illicit market.

Despite widespread adoption of legal cannabis at the state level – eleven states allow recreational use, while thirty-three more allow medical use – the federal government lags behind the trend. Federal law classifies cannabis as a Schedule I drug, the same as heroin, meaning that the federal government views cannabis as having a high potential for abuse and the potential to create severe psychological and/or physical dependence.

Many states, including California, have deemed cannabis businesses essential and allowed them to continue to operate despite stay-at-home orders issued as a result of the COVID-19 pandemic. Despite being allowed to operate, the cannabis industry is not immune to economic struggles, as American consumers change spending habits. To make matters worse, these businesses are not allowed to take advantage of any of the financial support offered by the CARES Act, because cannabis remains illegal at the federal level. Pro-cannabis legislators continue to push for federal funds to be made available to struggling cannabis businesses in subsequent legislative packages, but it is unlikely to find broad enough support.

While struggling businesses can normally reorganize and discharge debt through bankruptcy, the illegal status of cannabis at the federal level means that cannabis businesses are not allowed to avail themselves of the bankruptcy process, which is governed by federal law.

Without bankruptcy protection or federal small business loan support, struggling cannabis businesses have limited options. Receiverships are becoming increasingly commonplace, as creditors hope that receivers who are experienced at navigating the intricate and ever-evolving state and local cannabis regulations can stabilize failing businesses and protect creditor interests.

Griswold Law has substantial experience in California cannabis receiverships focused on business operations, local and state licensing, conditional use permits, banking and security, and has successfully obtained court approval to sell multiple cannabis businesses via receivership sale.

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