Options Available To Marijuana Businesses and Distressed Assets in Default in Michigan

Simon PLC Attorneys & Counselors – September 2022 Memorandum

Options Available To Marijuana Businesses and Distressed Assets in Default in Michigan

Troy, Michigan – Michigan’s cannabis industry continues to experience high growth and demand.  This has attracted a larger than ever number of grow facilities and product in the marketplace.  But all is not rosy, the increased supply has led to the average price of a recreational pound of cannabis dropping from $1,500.00 down to $700.00 to $800.00.  These values result in cultivators selling their inventory for little more than the cost of overhead.  Unless the number of grow licenses issued by regulatory agencies is capped, this downward trend in prices is expected to continue.

This sets the stage for disruptions in cash flow and difficulty in making payments to creditors.  Ordinarily a business experiencing financial distress would file bankruptcy.  However, federal law prohibits the manufacture, distribution and possession of marijuana.  As bankruptcy is a federal process, bankruptcy courts refuse to allow cannabis related businesses access to the bankruptcy process.

A distressed cannabis business does have state law remedies to deal with creditors, receivership and assignments for the benefit of creditors.

Michigan’s laws specifically allow for the appointment of a receiver of cannabis operations and provide for a streamlined process in transferring ownership of the licenses and business operations, all under supervision of the Court.

A receiver is a neutral third party that takes control of a debtor’s assets while acting under court supervision.  The case is usually commenced by the secured creditor filing a complaint in state court and requesting the appointment of a receiver.   The laws that authorize the appointment of a receiver are general in nature.

Therefore, the court order that appoints the Receiver is specific and spells out in detail the rights and duties of the Receiver, the debtor and third parties.   This allows for the receivership order to be tailor made for the needs of each case and provides flexibility.  During the case, the receiver reports to the court and carries out the terms of the order, this usually includes the management or liquidation of the assets.

An ABC (Assignment for the Benefit of Creditors) allows a debtor to efficiently liquidate its asset while at the same minimizing costs associated with multiple creditors attempting to either block a sale or seize an asset.  The assignee is empowered to operate a business as a going concern, terminate burdensome contracts and promptly liquidate assets (See e.g. MCL 600.5205 and MCL 600.5211.) This can maximize value and allow for efficient administration. Also, any sale of the assets can be approved by the court, thereby giving buyers the comfort that the sale will not be collaterally attacked at a later date.