Due diligence prior to becoming a receiver for a distressed cannabis business will increase the chance for a successful process
By Dotan Y. Melech
Cannabis receivers are often tasked with a daunting proposition. As officers of the court, they are expected to navigate through a host of unknowns and unexpected twists and turns in an industry that remains federally illegal and has inconsistent regulations across the country’s legal markets. The tools a potential receiver has developed in other lines of work will probably not be applicable in the unique cannabis industry. Before accepting the position, there are several things that should be done in order to best understand the role they are expected to play, and the ins and outs of the business in question.
An initial conflict check is a good way to begin. This is certainly common among lawyers, but it is important to make sure that there are no relationships or agreements that could compromise the independence of the receiver to do their job freely and without bias shown toward any involved parties. The potential receiver should also read the actual complaint in order to understand the nature of the dispute and what type of relief is expected by everyone involved.
Know the Regulations
Anyone anticipating acting as a receiver must thoroughly review the state and local ordinances that govern the operations of the distressed business. These regulations can vary greatly across legal markets and it is essential to be familiar with all of them. Often, the receiver is required to be licensed to operate the business, be it a dispensary, cultivation site or manufacturing facility. Fingerprinting and background checks are normal and anyone with a felony conviction will have trouble getting certified to access cannabis facilities. When applying for the necessary licensing, it is a good idea to communicate with regulators regarding the intent of the applications and begin to establish relationships that will facilitate the receivership.
The motion to appoint the receiver should also be carefully reviewed. Who is seeking the cannabis receivership appointment? Are all of the creditors involved? Is it an ownership dispute? Who are the stakeholders and managers? Take the time to understand the marketplace and (preliminary) value of the assets, keeping in mind that values are specific to each legal market and can vary widely.
The potential receiver can also oppose changes to the order if they are deemed to be restrictive. A stay is something that is very important to the work of any receiver and if it is not included in the order, it should be. The stay provides the time to analyze the business and figure out the best type of model to implement to address issues facing the company. A complete review of the entire estate, including the company’s records, can be performed without the pressure of outstanding claims, potential penalties and other regulatory enforcement issues. A stay is something that is not automatic, but it is essential.
Anyone considering a receivership should not be afraid to ask a lot of questions. Who is responsible for the financial shortfalls? Who was handling the budget and cost issues? The expectations of everyone involved, the assets and liabilities of the company, management responsibilities and directives, and company culture should all be assessed. Finally, how will the receiver be paid? What type of administrative fees will be necessary and how will they be covered? Most receiverships operate best when the receiver brings in experts in particular fields to address parts of the business with which the receiver might not be as familiar. How will those experts be paid? How will payments be prioritized? It is imperative to determine what expertise is needed and how they will be compensated, including gaining court approval for those fees, prior to having consultants or advisors begin any work on the receivership.
Contact United CMC today for expert guidance about what a cannabis receivership entails and how to best prepare.