MICHIGAN MARIJUANA RECEIVERSHIP AS A CREDITOR’S BEST RESPONSE TO CANNABIS FACILITIES INSOLVENCY.

Simon PLC Attorneys & Counselors – December 2024 Memorandum

MICHIGAN MARIJUANA RECEIVERSHIP AS A CREDITOR’S BEST RESPONSE TO CANNABIS FACILITIES INSOLVENCY.

Troy, MI. In 2016 Michigan authorized the development of new laws that hoped to establish Michigan as the national model for the state licensed cultivation and distribution of cannabis. (Medical Marihuana Facilities Licensing Act MCL 333.27101 through MCL 333.27801) Michigan’s 2018 legalization of marijuana for recreational use was designed with the goal to establish a regulatory program under the Cannabis Regulatory Agency that would stimulate business growth while preserving safe consumer access to cannabis while furthering the governance of marihuana establishments. (Medical Regulation and Taxation of Marihuana Act MCL 333.27951 through MCL 333.27967)

Business growth in Michigan’s marihuana sector required significant investment of capital. Traditional financial institutions were unable to overcome their own federal and regulatory frameworks to provide loan products to entrepreneurs in this space. As a result, many individuals, nontraditional money sources, and entities, stepped forward to fill this void and invest, contribute, and lend the financial resources that would finance the needs of the developing new industry.

The Debt Wall Approaches

While this influx of private capital fueled rapid expansion, it also set the stage for mounting debt pressures. According to a recent article in the Green Market Report and corresponding public filings, “$1.83 billion of . . . Debt is set to come due by 2026” for a number of publicly traded multi-state cannabis operators (“MSOs”). This public company debt paints only part of the picture, as the full magnitude of obligations carried by privately held cannabis businesses remains largely unknown—but likely substantial. The MSOs serve as a “canary in the coal mine”: their struggles suggest similar or greater distress among private operators in Michigan and beyond.

What does this looming debt wall mean for the industry? Unless cannabis companies can successfully strategize to pay down their debts while continuing to attract capital and grow, insolvency matters are likely to increase significantly in 2025 and 2026. Market conditions are further complicated by political uncertainty—a changing presidential administration or the rescheduling of cannabis at the federal level could drastically reshape the regulatory and economic landscape overnight.

Lending Challenges Unique to Michigan

The loan portfolios that these lenders had to underwrite had their own challenges. Licensure required approval on a city-by-city basis. Locations were limited geographically for zoning and land use restrictions. Hard asset infrastructure required significant renovations and upkeep. Creative lease buy back, and lend-lease contracts were drafted. Core systems from generators, purification, filters, HVAC, security, and cutting-edge agricultural technology bore significant up front investments. In many instances the borrowers themselves were first time risk takers and visionaries without an established credit history.

Similarly, lenders in the Michigan cannabis space face the same challenges encountered by their law-abiding borrowers, to wit: crime. “Michigan Cannabis Operator Charged With Importing Illegal THCA”. [Casacchia, C. (August 2, 2024). MJBizDaily.] “Michigan court rules marijuana dealers can face harsher sentences than illegal growers”. [Burns, G. (October 11, 2024). MLive.]

Predictable Outcomes Amid Market Volatility

The results of balancing volatile pricing and competition with criminals, on the one hand, against already stretched financial accommodations are predictable. “At least 5 Michigan marijuana companies in receivership, signaling industry in peril.” [Walsh. D. (March 10, 2023). Crain’s Detroit Business.] Coupling high interest loans backed with commodity pricing in a turbulent economy yields predictable results. “Michigan’s Plummeting Weed Prices Claim a large Grow Operation”. [Walsh. D. (November 19, 2024). Crain’s Detroit Business.] “Michigan’s Marijuana Market is Flooded with Product – But sales are down. Here’s Why”. [Walsh. D. (October 16, 2024). Crain’s Detroit Business.]

Industry observers are bracing for a wave of insolvency filings and distressed asset sales over the next two years unless operators and creditors can find innovative solutions. The uncertainty of federal policy and the potential for regulatory upheaval only add to the complexity facing Michigan’s cannabis market participants.

Debt Loads Loom Large

Amid these financial headwinds, public filings and recent analysis from Green Market Report indicate a looming storm for publicly traded multi-state cannabis operators (MSOs). By 2026, these firms are collectively facing the maturity of approximately $1.83 billion in outstanding debt—an amount that underscores just how much capital has been pumped into this still-maturing industry, and the breadth of obligations now hanging over its key players.

Solvency, in this context, is more than a matter of bolstering returns; it’s a question of whether operators will be able to refinance, restructure, or repay these debts in a challenging and highly regulated marketplace.

The United States federal courts have chimed in on Michigan’s marijuana marketplace in a manner valuable to the perspective of creditors and lenders. Federal law, of course, continues to recognize marijuana as illegal under 21 USC 841 which makes it a crime to knowingly or intentionally manufacture, distribute, or dispense a controlled substance including marijuana. Federal courts have declined to enforce the protections of the Bankruptcy Code in aid of debtors whose activities constitute a continuing federal crime. In an Opinion In Re: Basrah Custom Design, Inc, 18-568001, United States Bankruptcy Judge Hon Thomas J. Tucker summarized: “Borrowing from the words used by the UST in its motion, (Debtor) wants to use this bankruptcy case to set aside this illegal contract so that he can negotiate a better illegal contract.” Stating further, “(t)he actual purpose of filing and prosecuting this bankruptcy case is for the Debtor and its 100% shareholder to use this bankruptcy court, and the Bankruptcy Code, to assist them in obtaining a result that is contrary to federal criminal laws and therefore contrary to federal public policy.” A new Donald J. Trump administration may yield long awaited change to federal law, but that remains to be seen. “Michigan marijuana businesses await federal rules changes”. [McNichol. P. (June 17, 2024). The Oakland Press.]

The Debt Wall and Limited State Remedies

As a result, when cannabis companies in Michigan (and elsewhere) hit a financial wall, their options are starkly limited. Without meaningful access to federal bankruptcy protection, these companies are left to navigate a patchwork of state law remedies—most notably, receivership. Receivership, while offering some structure, lacks the comprehensive protections and fresh start that federal bankruptcy provides.

The looming debt crisis facing the cannabis industry is unlikely to abate in the near term. Unless there is a significant change to federal law, insolvency matters in the cannabis space are poised to increase in 2025 and 2026. Operators will need to be proactive, developing strategies to meet their debt obligations while continuing to source capital and attempt expansion in an already turbulent market.

Compounding this uncertainty, no one can predict how the outcome of the 2024 presidential election or the ongoing debate over federal rescheduling of cannabis will impact the industry. Both a new administration and the possibility of rescheduling introduce further unpredictability—factors that lenders and operators must carefully weigh as they look to the future.

Michigan’s public acceptance has also taken a toll on lenders. The November 2024 election ballot saw a number of measures reviewed by voters. “Michigan voters overwhelmingly rejected new marijuana business proposals”. [Burns. G. (November 7, 2024). Mlive.] “Detroit City Council proposes regulations on marijuana advertisements”. [Afana. D. (October 19, 2024). Detroit Free Press.].

Since their authorization, Michigan’s grow operations and dispensaries multiplied in a short period of time. Often they were run by entrepreneurs who had never run a business before and supported by lenders who were themselves taking on new challenges. Today the industry is captive to pricing, oversaturated with dispensaries, micromanaged by regulators, employing legions of budtenders and growers. All of which is backed against too much product and competition.

A lack of bankruptcy options, limited expectations or desire to foreclose challenging real property assets, location limitations, and undercapitalized guarantors leave creditors with really one strong option: Receivership. Lenders and secured creditors in Michigan can benefit from the availability of a court-appointed Receiver, and Michigan marijuana businesses can also benefit from a process that is similar in many ways to bankruptcy. When controlling a business, a Receiver can liquidate or reorganize, protect the collateral of secured creditors, and administer a claims process that may or may not pay out to unsecured creditors. Most orders appointing receivers also prohibit any new legal action against the subject of the receivership without court approval, making the result somewhat similar to the automatic stay of Section 362 of the Bankruptcy Code. A Receiver answers to and is an agent of the Judge that appoints him or her.

The Debt Wall Looms Large

Recent reporting in the Green Market Report, referencing public filings, points to a staggering $1.83 billion in debt set to come due by 2026 for publicly traded multi-state cannabis operators (MSOs). While this number is substantial, it may only scratch the surface—the full extent of debt carried by privately held cannabis companies is largely unknown but likely significant. MSOs serve as a canary in the coal mine for the broader industry: if their debt burdens are already becoming untenable, privately held operators are likely feeling even greater pressure.

This looming “debt wall” signals that insolvency matters in the cannabis sector are poised to surge in 2025 and 2026, unless companies can successfully strategize to pay down debts, secure new capital, and continue to grow. The uncertainty of federal law—especially with the potential for a new administration and ongoing debates about the rescheduling of cannabis—only adds to the complexity and urgency.

Receivership: The Practical State-Law Solution

In the absence of meaningful change to federal bankruptcy laws, cannabis businesses facing insolvency are left with a patchwork of state law remedies. Receivership stands out as a practical, court-supervised alternative. In Michigan, the receivership process can offer a controlled environment for restructuring or liquidating a distressed cannabis business, while providing some protections reminiscent of those in bankruptcy. The increasing financial strain across the industry makes receivership not just an option, but, for many, a necessity.

Receiverships: A Common Solution for Distressed Cannabis Businesses

Throughout 2024, cannabis receiverships have become increasingly common, with high-profile examples such as StateHouse, MedMen, Herbl, and Blue Arrow illustrating just how widespread financial distress has become in the industry. In practice, the majority of these receiverships result in the sale of the debtor’s assets rather than a true restructuring—lenders and investors are often focused on recouping as much of their investment as possible, while distressed businesses may simply seek an orderly wind-down. However, restructuring and even successful turnarounds are not out of reach, as seen recently with the comeback of Eaze. Each receivership is unique, shaped by the specific circumstances of the debtor and the underlying causes of its financial troubles.

The receiver’s main job is to add value to the underlying collateral and ensure preservation of the business and its assets until there’s a resolution between the parties or a determination by the court. This can mean keeping operations running, safeguarding licenses, and maintaining relationships with vendors and customers—all under the watchful eye of the court.

Legal Foundation and Practical Powers in Michigan

Michigan has passed the Commercial Real Estate Receivership Act, and Michigan law fully supports receivership and in particular recognizes them for marihuana establishments. MCL 333.27959a provides, “(1) The marijuana regulatory agency may approve the operation of a marihuana establishment by any of the following: … (b) A court-appointed receiver or trustee.” Indeed, a Receiver’s powers are not only valuable in securing control of licenses, but also rejecting leases, rejecting contracts, disallowing claims, all while operating, controlling, managing and protecting receivership property. Lenders know that accurate and detailed information regarding crop reports, harvest and sales are critical data relied upon for lending. Receiver’s control and access to such data quickly lifts the haze from years of borrower supplied information.

It’s important to note that Michigan’s approach to cannabis receiverships is part of a growing trend among state regulators to address the unique challenges facing marijuana businesses—particularly the absence of federal bankruptcy relief due to ongoing federal illegality. As seen in states like California, regulators have begun to implement cannabis-specific insolvency rules as part of their licensing and compliance frameworks. For example, in California, the Department of Cannabis Control requires formal and timely notification when a receivership is appointed, and allows the receiver—with regulator approval—to continue operations and apply for new licenses at the same location. While Michigan’s laws are distinct, the core principle remains: both receivership statutes and cannabis-specific regulations must be navigated in tandem.

In Michigan, a court-appointed Receiver is often tasked not only with preserving and maximizing the value of the business and its assets, but also with ensuring rigorous compliance with marijuana regulations at both the state and local levels. This can involve everything from maintaining accurate inventory tracking and reporting as required by the Marijuana Regulatory Agency, to securing local government approval for any operational changes or transfers. As with other states, any change in ownership or operational control as a result of receivership typically requires careful coordination and may be subject to additional regulatory scrutiny.

Ultimately, Michigan’s statutory framework gives Receivers the authority and tools necessary to manage marijuana businesses in distress, protecting the interests of creditors while ensuring compliance with the ever-evolving landscape of cannabis regulation.

Local Government Oversight in Ownership Changes

It’s important to recognize that a court-appointed Receiver’s ability to transfer ownership or assign licenses isn’t just a matter of satisfying the judge or the Marijuana Regulatory Agency. In nearly all cases, any proposed change in ownership or license transfer resulting from receivership will also cross the desk of the local municipality.

Local governments—think city councils, township boards, and zoning authorities—maintain their own oversight, approval processes, and often require formal notification or application before they’ll sign off on a new owner or operator. This local review can include public meetings, review of the proposed new ownership’s credentials, and even evaluations of compatibility with community standards or zoning ordinances. In some cases, a Receiver can face delays or extra compliance hurdles if the municipality has imposed its own moratoriums or operational requirements for marijuana businesses.

Bottom line: All the careful navigation through state and court proceedings also requires working hand-in-hand with city and township authorities, ensuring every “i” is dotted before a transfer is considered final.

The Hurdles of License Transfers and Ownership Changes in Cannabis Receiverships

Navigating license transfers and changes of ownership during a cannabis receivership is anything but straightforward. Both state and local regulations often turn what might seem like a simple process into a logistical maze. For instance, state agencies—like California’s Department of Cannabis Control—routinely require immediate, formal notification whenever an owner is rendered unable to operate due to a receivership or similar event. This typically involves submitting detailed documentation within tight deadlines, all of which must be carried out precisely or risk jeopardizing existing licenses.

But the paperwork is just the tip of the iceberg. The real challenge surfaces once a receiver steps in and attempts to keep the business afloat or finds a potential buyer. Unlike conventional business sales, where ownership can freely change hands, many states restrict or forbid direct license transfers. Instead, the incoming party (the “successor in interest,” perhaps a court-appointed receiver) often must apply for entirely new licenses—a process that can be both time-consuming and costly.

This adds considerable friction for lenders or receivers hoping to quickly realize value from a distressed asset. Buyers frequently hesitate to acquire a failing cannabis business precisely because the only transferable commodity is the business’s equity—not the actual operational license. Meanwhile, the clock ticks on regulatory approval, crop cycles, and revenue windows.

Further complicating things, local governments may have their own hoops to jump through, layering additional approvals or restrictions. So even with court approval and a willing buyer, state and local sign-off is usually required before any change in operational control becomes official.

In short, unlike more traditional industries, receiverships in cannabis are burdened by layers of regulatory uncertainty. The necessary coordination between courts, state agencies, and local authorities makes the process labor-intensive, highly specialized, and rarely swift.

Regulatory Pitfalls and M&A Complexities in Cannabis Receiverships

Given these realities, it’s essential that any appointed Receiver possesses a deep familiarity not just with traditional receivership duties, but with the unique, ever-shifting minefield of cannabis regulation. Running or selling a cannabis business isn’t at all like unloading a strip mall or liquidating a fleet of rental cars. Cannabis grows and dispensaries are bound by layers of rules, both state and often municipal, that demand nearly forensic attention to detail.

Receivers and their counsel should be prepared for the following hurdles when navigating regulatory compliance and prospective M&A in the cannabis field:

State and Local Licensing Requirements: Any operational action or transfer of assets during receivership will run up against stringent licensing controls. Receivers must ensure that neither operations nor ownership transfers inadvertently violate state laws or local ordinances—which can risk loss of valuable licenses entirely.
Meticulous Recordkeeping: Regulators expect complete, timely reporting of harvest yields, sales, and inventory. Lapses here can trigger investigations or suspend operations right when preservation of value is critical.
Complexity in Asset Transfers: Mergers, acquisitions, or even the sale of business assets often require regulatory pre-approval, background checks, and adherence to anti-diversion protocols—processes that routinely outlast those in traditional industries.
Coordination Across Agencies: While state marijuana regulatory agencies are the tip of the regulatory spear, receivers may need to interface with tax authorities, municipal governments, and zoning boards—each with its own set of compliance hoops.
Requirement for Cannabis-Savvy Counsel: Seasoned insolvency attorneys without cannabis experience may find themselves in deep water; having legal counsel who understands both receivership law and cannabis compliance is non-negotiable for keeping the process aboveboard and timely.
Due Diligence for Buyers: Potential buyers of cannabis assets must clear regulatory hurdles and demonstrate suitability, making every transaction more layered and time-sensitive.

Approaching these responsibilities with diligence and a clear command of marijuana regulations ensures value preservation and a smooth handoff of operations, both critical in a receiver’s mandate.

Frank R. Simon, Esq and the Team at Simon PLC Attorneys & Counselors have significant experience handling Michigan Marijuana Receiverships. Courts, creditors and borrowers alike need confidence that that their appointed Receiver has competence in compliance, regulation and a command of Michigan’s laws to manage operation successfully during the receivership. Frank’s hands-on actual experience working in business, his Firm’s legal successes, and a relentless “never give up” approach have earned him repeated referrals for such receiverships from the bench and Bar in Michigan.

For over two decades Frank has earned the confidence of Judges and counsel as their selection for court appointments as Receiver. Judges know that Frank will apply his common-sense actual business experience to their cases. Assets administered under his supervision include real and personal property, marijuana and liquor licenses, cannabis facilities, hotels, municipal demolitions, resorts and even private assets and individuals in divorce actions. The list of assets under management expands daily with each successful resolution. Frank’s Team is full service and provides litigation and property management services to ensure that the instructions of the Court are enforced.

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