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News & Knowledge

Cannabis Companies Can't File for Bankruptcy - So Now What?

May 29, 2020

By Tara Tedrow & Michael Provenzale

The government’s response to the COVID-19 pandemic has resulted in federal assistance to numerous industries and individual taxpayers, but notably has left the state legalized marijuana industry out in the cold

As we previously discussed here, business and individuals involved in the marijuana industry are likely ineligible for bankruptcy protection because marijuana remains illegal under federal law and the federal bankruptcy courts cannot be used to facilitate the possession or sale of illegal assets.

Even now-legal hemp businesses have faced pushback on bankruptcy protections, as recently evidenced in the case of United Cannabis Corp., which drew a still-pending attempt to dismiss from the United States Trustee disputing that the company deals solely in hemp based on its own prior SEC filings.

However, other options may be available for financially distressed marijuana businesses. 

Assignments for Benefit of Creditors

A close alternative to a Chapter 7 bankruptcy, an assignment for benefit of creditors (often referred to as an “ABC”), allows a business to assign all of its assets to a third party (the assignee) who then can wind down the company’s affairs in an orderly fashion. As ABCs are created under state law, an ABC may be a viable alternative for a business who is operating in a manner consistent with state law, even though still in violation of federal law and therefore ineligible for bankruptcy protection. 

Receiverships

Another alternative may be the consensual appointment of a receiver over the company. When faced with litigation from a creditor, one remedy available to the creditor may be requesting the court to appoint a third party (the receiver) to run the company.

While this process is often adversarial as the appointment of a receiver will divest control of the company from current management, if no better alternatives exist, the company may be able to negotiate for favorable provisions in the receivership order. Such favorable provisions could include permitting the receiver to sell the company’s assets or the whole company as a going concern, potentially realizing proceeds over and above the debt owed.

Workouts

Finally, the best alternative may be to engage in workout negotiations with the company’s creditors in advance of any litigation or ABC. Workouts are done outside the court system entirely and are dependent upon all parties reaching a mutually acceptable solution.

This process could involve simple negotiations between the parties or potentially the mediation of multi-party disputes. While bankruptcy may not be an option, the way a creditor’s claims would be treated in bankruptcy or in an ABC may be a useful starting point for these negotiations.

We would be glad to discuss these options with you. Please contact a member of our Cannabis & Controlled Substances or Banking & Finance practices if we can be of assistance.

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This article is informational only. You should consult an attorney before acting or failing to act. The law may change rapidly and no warranty is given. LOWNDES DISCLAIMS ALL IMPLIED WARRANTIES AND WITHOUT LIMITATION, ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. ALL ARTICLES ARE PROVIDED AS IS AND WITH ALL FAULTS. Consult a Lowndes attorney if you wish to establish an attorney/client relationship.
Tara
Tara Tedrow is a shareholder in the firm’s Land Use, Zoning & Environmental Group and serves as chair of the Cannabis & Controlled Substances Group. She brings years of experience handling an array of complex legal matters for multi-billion dollar valued companies and entrepreneurs alike.
With a significant portion of her practice devoted to land use and development, Tara regularly advises clients on entitling projects for commercial, residential, industrial, office and mixed uses. She works with local governments and regulatory agencies to address the needs of her clients related to environmental permitting and compliance, zoning, comprehensive plans, concurrency, site plan approval, variance and waiver requests, due diligence and property rights.

Often sought out for high-profile and high-stakes land development projects, Tara has delivered positive outcomes for clients ranging from large multi-national and U.S.-based companies to high-net worth individuals seeking land use entitlements. With over 15 years of competitive debate experience, she is uniquely suited to handle complex and controversial projects and public hearings that present a myriad of political and legal challenges.

Tara has provided developers and clients with legal counsel and representation in Section 70.51 mediations. Her experience in land use and environmental dispute resolutions offers a unique benefit to clients navigating the alternative dispute resolution process following denial of a development order, zoning approval and other land use matters around the state.

Well-known for providing legal and lobbying representation for a wide range of cannabis clients, Tara and her team work with physicians, lenders, real estate developers, landlords, ancillary service providers, banks, licensed adult use and medical marijuana companies, cultivators, processors, retailers and license applicants, helping them to navigate the ever-changing regulatory landscape of marijuana and hemp regulations. She also assists clients in the national hemp industry in obtaining licensing and approvals for processing, retailing, cultivation and other forms of secondary byproduct monetization. Her deep knowledge of regulatory laws and understanding of operations and logistics for cannabis companies, along with her ability to make connections and build partnerships, bring strategic value to her clients. 

Tara is the only person in the state of Florida to be appointed by the Florida Department of Agriculture and Consumer Services to both the inaugural Industrial Hemp Advisory Council created under Senate Bill 1020 and to the state’s Hemp Advisory Committee, which she currently chairs. A prolific presenter and speaker at industry seminars and conferences, she has served as the keynote speaker on industry regulations at over 60 events in the past two years. In the fall of 2018, Tara became the first professor in the state of Florida to teach a law school course on marijuana law and policy at the University of Florida Levin College of Law, where she continues to teach today.

Prior to joining the firm, Tara worked as a legal extern for the University of Florida General Counsel and Office of the Vice President as well as for the Orlando Juvenile Public Defenders Office. For over a decade, she has also worked professionally as a private speech and debate coach and taught at multiple national debate institutes, including the National Debate Forum at Emerson University, the National Symposium for Debate at Grinnell College and Victory Briefs Institute at UCLA.

Tara is a contributing writer at the Orlando Sentinel and has spoken about various real estate topics on Fox News.

To view Tara's information specific to Land Use or Cannabis, click the corresponding links below. 



Land Use
Cannabis
Michael

Mike Provenzale is a shareholder in the Creditors’ Rights Group, representing institutional and private lenders in commercial loan foreclosure and other collection lawsuits, receiverships, workouts, bankruptcies, and REO dispositions throughout the state. His litigation practice also includes business, real estate, and condominium litigation.

Additionally, Mike has experience in the area of Real Estate Transactions, Development and Finance, where he has represented a myriad of private and public clients in connection with the leasing, financing, acquisition, and disposition of commercial real estate, and has published several articles on current creditors’ rights and real estate issues.

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