As the cannabis industry continues to expand, there will inevitably be businesses within the sector that encounter financial difficulty and may require insolvency assistance to either restructure or liquidate.
Unfortunately, due to the federally illicit status of cannabis, bankruptcy, which is governed by federal law, is inaccessible for cannabis businesses under present policy. Several federal courts have even extended the bar to bankruptcy access to companies with tangential ties to the cannabis industry, such as landlords that lease space to cannabis businesses or companies that produce equipment utilized in the cannabis industry (although, as discussed below, some flexibility may be emerging for companies with tangential ties to cannabis within the Ninth Circuit, which encompasses Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington).
Notwithstanding the current lack of access to bankruptcy, cannabis businesses may still have several non-bankruptcy options for addressing financial hardship:
Assignment for Benefit of Creditors
An Assignment for Benefit of Creditors (ABC) is in many respects akin to a state court insolvency proceeding through which a company’s assets are orderly liquidated. Presently, 38 states and the District of Columbia have ABC statutes, plus several other states have established ABC mechanisms under common law. (See a list of Jurisdictions with ABC Statutes). In an ABC, a company will transfer its assets to a trust administered by an “assignee” selected by the company. The assignee is charged with liquidating the assets and providing a distribution to the company’s creditors from the proceeds. Given that the company has divested all of its assets, unsecured creditor claims against the remaining shell of the company will be effectively worthless, and thus unsecured creditors’ only means to recovery will be through the ABC distribution, barring rights to collect against third parties such as guarantors or co-obligors. Secured creditors will continue to have their rights in their collateral.
Published: April 06, 2020