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 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.
Nearly a decade has passed and there is universal agreement that the results of the recreational marijuana goals of Michigan’s are mixed. As with any commodity, a key component of success is the price. Michigan’s cannabis industry has had significant highs and lows in the pricing arena. Pricing also faces challenges from Michigan’s allowance for bulk cannabis sales, marketing and branding, and falling prices in other states. “Michigan marijuana prices hit new low after years of decreases”. [Nissen, J. (November 19, 2024). Fox 2 Detroit.]. “Michigan’s Marijuana Outlook: Cheaper pot, higher sales, $87M in taxes to cities and counties.” [Ellis, M. (April 19, 2024). Lansing State Journal.]. “Michigan marijuana border stores aren’t fretting over new competition from Ohio – at least not yet.” [Burns. G. (August 16, 2024). MLive.].
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.]
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.].
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 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.].
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
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.
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.
N.B. Not Legal Advice: Please contact us if you would like to discuss the facts and circumstances of your specific matter. Simon PLC Attorneys & Counselors expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this memorandum. The information contained herein may not reflect current legal developments and is provided without any knowledge as to the recipient’s location, industry, identity or specific circumstances. No recipients of this content, clients or otherwise, should act, or refrain from acting, on the basis of any content included in this memorandum without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the jurisdiction for which the recipient’s legal issue(s) involve. The application and impact of relevant laws varies from jurisdiction to jurisdiction, and our attorneys do not seek to practice law in states, territories and foreign countries where they are not properly authorized to do so.
