Cannabis Litigation/Bankruptcy Options: Assignment for the Benefit of Creditors

We recently hosted a webinar on alternative dispute resolution options for cannabis companies. In addition to the handful of questions we received on receivership, one topic of particular interest was the potential for cannabis companies to utilize different restructuring or bankruptcy options.

As you might know, a hefty percentage of the disputes we see in this industry has to do with business “divorces” between partners – which unfortunately, often lead to the business becoming insolvent or nearly so. While receiverships may be the best option for you (be sure appointing a receiver doesn’t conflict with your company’s agreements!), another option is an assignment for the benefit of creditors (nicknamed, “ABC”).

ABCs are state law creatures and ultimately result in liquidation of a debtor’s assets for its creditors’ benefit. This is potentially a really effective solution for cannabis companies that lack access to bankruptcy protection but wish to continue operating and avoid debt restructuring. The debtor will select an “assignee” to take legal and equitable title to the debtor’s assets, sell those assets, and then distribute those sale proceeds to any creditors in the order of priority established by state law. This process is often non-judicial and therefore has the advantage of speed and flexibility in the liquidation process absent litigation complications.

A high-level overview of the mechanics: the assignee is generally an individual selected by the troubled or insolvent company. The decision to initiate an ABC must be approved by the equity owners. Then, the debtor must turn over and assign all right, title, and interest in its assets to the assignee, as well a complete listing of all creditors, their addresses, and the amount of indebtedness. Thereafter, the assignee is not only charged with the responsibility of gathering all of the debtor’s assets and selling the debtor’s right, title, and interest in those assets – it also has a fiduciary duty to all creditors. The assignee must give notice of the ABC to all creditors and invite each creditor to file a claim.

The assignee will generally obtain at least one liquidation appraisal, and if the assignee can find a buyer for all the assets which exceeds the appraised value by a reasonable amount, the assignee may immediately sell to that buyer without initiating any advertising or auction. More commonly seen though, there is some type of auction sale. The assignee will assemble the debtor’s assets and have them liquidated in bulk or piecemeal, whichever will gain the debtor the highest price.

A word of caution though: you should always have a knowledgeable attorney ensure that this is the right option for you, depending on the applicable state’s law and practice. As we all know, each state has its own version of laws and regulations that govern state-legal marijuana businesses. There may be real limits to how inventory can be sold to pay off debts. Or, if your company is insolvent and your license needs to come into play, most states have stringent licensing requirements that hamper the ability to transfer those licenses without review and approval by the state (which could really undermine the coveted benefits of speed and flexibility).

As a final and semi-related note, all players in the cannabis industry should be aware of not only their potential options, but also the limitations of those options. In order to put yourself in the best position at the outset, talk with our transactional team about how to put protections in place – whether it’s making sure you’re selecting the appropriate entity form or planning a proper preemptive exit strategy. If you’re a creditor, maybe consider the need for additional collateral in your transactions. If you later find that your business is struggling to stay afloat or is no longer above water, having these types of protections in place will undoubtedly aid the restructuring or liquidation process.