(Reuters) – A headline in Westlaw’s daily briefing for bankruptcy lawyers – “Business booted from Chapter 11 over medical marijuana ‘entanglement’” – caught my eye this morning. The story described a ruling from earlier this month in a Chapter 11 bankruptcy case in Detroit, granting a motion by the U.S. trustee to dismiss the case because the debtor’s sole shareholder had leased property to a marijuana dispensary.
What I learned from the ruling, written by U.S. Bankruptcy Judge Thomas Tucker of Detroit, is that there’s pretty solid precedent – with one big exception – backing the proposition that businesses in the marijuana industry are not entitled to federal bankruptcy protection, even if they’re operating in states where pot is legal and are involved only tangentially with marijuana. Judicial consensus, at the moment, is that as long as marijuana remains a controlled substance under federal law, businesses in the industry can’t avail themselves of the safe harbor of bankruptcy. (https://www.reuters.com/article/us-otc-marijuana/another-risk-for-marijuana-biz-no-bankruptcy-protection-even-for-tangential-players-idUSKCN1SZ2QB)
State court receivership is an equitable remedy that provides for the court appointment of a neutral and independent third party to act on behalf, and for the benefit, of all interested parties. A receivership action is typically initiated by a secured lender, although in some cases a borrower or its shareholders may seek the appointment of a receiver. The receivership order places the borrower’s property under the dominion and control of the receiver and delineates the receiver’s duties and responsibilities. The appointed receiver typically operates the business and conducts a sale in accordance with court authority and is responsible for distributing the proceeds.
The receiver is not an agent of the secured lender, but an officer of the court with a fiduciary duty to all the interested parties. But the petitioning creditor usually submits a proposed order appointing the receiver and establishing the scope of its duties and authority. Thus, receivership offers secured lenders a bit more control from the inception of the case.
Secured lenders and business owners should consider receivership as an inexpensive, but efficient, alternative to bankruptcy and consult with counsel on the advantages and disadvantages under the case-specific circumstances and jurisdictional issues.