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Prohibiting Recourse to Receivership or Bankruptcy for Cannabis Industry Can Perversely Assist Bad Actor’s Continuation of Bad Acts—A Real Life Analogy

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Prohibiting Recourse to Receivership or Bankruptcy for Cannabis Industry Can Perversely Assist Bad Actor’s Continuation of Bad Acts—A Real Life Analogy

Currently there are no clear laws specifically addressing the means for addressing insolvency issues for debtors and creditors involved in the Cannabis industry. Like the industry itself, the laws are evolving. Using a Cannabis grower business as an example, at this time the Federal Court system is not available to address such entities insolvency issues. Even if state courts are theoretically willing to consider a receivership proceeding, without statutory protections or clarity addressing the licensing issues, it would be a challenge to find a person with sufficient expertise in addressing financially troubled companies willing to undertake the risks associated with acting as the receiver and operating the highly regulated company.  

The problem is that even if the goal is to discourage the industry, the practical impact is that the failure to affirmatively address the situation through denying access to any court system oftentimes only serves to further empower “bad actors” and encourage bad behavior. And why is that? Without clear laws there are no means available to creditors to force a legitimate  restructuring or liquidation of the entity in a proper equitable manner leaving the owners of the insolvent entity the ability to abscond with assets and otherwise take advantage of a lack of recourse. Similarly, honest debtors that simply fell on hard times and for which restructuring would be in the best interest of both the company and creditors face a far greater challenge when there are no clear rules in which creditors can have confidence in fair and equitable treatment.  

I recently had occasion to witness a similar situation in an analogous context.

Currently the Federal Bankruptcy Code prohibits involuntary petitions against farmers. 11 USC 303(a). The legislative history to this section provides the reasoning: “Farmers [and ranchers} are excepted because of the cyclical nature of their business. One drought year or one year of low prices, as a result of which a farmer is temporarily unable to pay his creditors, should not subject him to involuntary bankruptcy.” This is certainly understandable, especially for hard working family farmers. However, in this case the farmer was operating in multiple states with lending and creditor claims in the hundreds of millions of dollars. By preventing bankruptcy and federal receivership, the farmer was able to avoid creditor oversight of restructuring or distribution of assets and in effect continue to set up new entities and operate without recourse to creditors. Moreover, because of the cycle nature of the business (plant in spring and harvest in fall) the farmer is able to set up new entities and maintain business before litigation could conclude against any “new” entity thereby continuing the charade. A clear unintended consequence of a statute designed to protect the honest farmer.

Similarly, in the Cannabis world, failure to provide a mechanism for debtors and creditors to accomplish a fair and honest restructuring or liquidation process can actually encourage and support the efforts of those without proper intentions. It is hard to imagine that this is the outcome any regulators are seeking by failing to establish a system for addressing debtor and creditor needs in the Cannabis industry.