Marijuana Business Magazine August 2019

Marijuana Business Magazine | August 2019 98 bankruptcy filing, by contrast, all documents are public. That’s generally not the case in a state receivership, Coordes said. “The infor- mation can be difficult to get even for other creditors.” Ferrari said another big issue with receiverships is the expense. It’s not un- usual, he said, for receivers to command $15,000-$25,000 per month for relatively simple cases, and $40,000-$50,000 per month for more complicated cases. “The reality is that if you’re not a big player, then that’s not a realistic option,” Ferrari said. RESTRUCTURING ANOTHER OPTION So, what possibilities are available for small businesses? Experts advise companies to try to work with their creditors in an informal setting, outside a court process. A cannabis-related business should start to think about that as soon as it runs into financial difficulties, Ferrari said, such as cash-flow problems or lower-than-expected revenue. Such a business should go to its major creditors and see if it can restructure its payments or get temporary forgiveness on the debt. That’s easiest to do, though, when a business has only one major creditor, Ferrari said. From a lender’s point of view, the process can be beneficial as well, said Mark Salzberg, a bankruptcy reorganiza- tion specialist for Squire Patton Boggs in Washington DC. “I also work with lenders, and lenders need to recognize that no one wants to see their borrower go into bankruptcy,” Salzberg said. Ferrari said a cannabis-related busi- ness will need to show to its creditors that it “has recognized why it’s not mak- ing money and has a plan that’s workable, that will pay back the creditor and make a profit for the business.” Creditors, he said, may seek additional collateral such as a personal guarantee by the business owner to repay a debt, which could put that owner in a precarious financial position. When a creditor takes the lead, often the agreements (including interest rates and late fees) can be so onerous that a business owner won’t be able to comply, will lose the business and, perhaps, even a portion of his or her personal assets, Ferrari said. He recommends hiring an attorney just for that transaction, to ensure the agreement with the creditor isn’t unrealistic. Chances are the creditor is doing the same. Salzberg, for example, advises lenders to cover their bases from the beginning when signing contracts with cannabis- related businesses. He said that should include negotiating security for the loan or other arrangement and detailing what the next step would be if certain adverse financial events occur. Such an agreement could spell out the creditor’s rights to put a company into receivership, he noted. “Lenders need to think how to protect their interests and build in those protections in the loan documents,” Salzberg said. However, in a financially bleak situa- tion, there are plenty of circumstances in which a lender might be willing to take an asset off its books, even if it isn’t getting the full value back on that asset, according to Salzberg. FEDERAL BANKRUPTCY AN OPTION? Is there any opportunity for a cannabis-related business to file for protection from its creditors under federal bankruptcy laws? “It’s pretty clear-cut that if you’re operating a marijuana business, you’re not going to get bankruptcy protection,” Ferrari said. “And if you supply things (to a marijuana business), then it’s likely you’re not going to be able to get bankruptcy relief, either.” Salzberg said that U.S. trustees typical- ly get rid of federal bankruptcy cases by arguing that they can’t administer mar- ijuana assets because that would violate the federal Controlled Substances Act. Ferrari cited Gonzales v. Raich, a 2005 U.S. Supreme Court decision that reaffirmed that federal law trumps state law regarding cannabis. Here’s the issue in a nutshell, according to Ferrari: It is a violation of federal law to knowingly or intentionally manufacture, distribute, export or import “any equipment, chemical, product or material which may be used to manufacture” cannabis. Ancillary businesses also can violate federal law and thus not qualify for federal bankruptcy simply by aiding a business that is processing, distributing or selling cannabis. Ferrari cited the 2018 federal bankruptcy filing by Way to Grow, a Colorado-based seller of indoor hydroponic gardening equipment. Way to Grow sold its equipment to cultivators of various crops, but many customers were marijuana growers, and any future growth of the company was dependent on those sales. The bankruptcy court ruled that Way to Grow couldn’t reorganize under federal bankruptcy laws. R b NK U TC P Y a Charles Ferrari Courtesy Photo