Cannabis Litigation Options: The Benefits of a Receivership

cannabis receivershipThank you to everyone who joined us for the “The Top 12 Alternative Dispute Resolution Strategies” webinar last week. We received a ton of questions on a lot of really interesting topics, and we will be spending the next few weeks addressing those we couldn’t fully get to during the one-hour period.

We received a few questions on the topic of cannabis receiverships. As we discussed in the webinar, we’re seeing that a good amount of cannabis litigation has to do with “partnership” (technically, LLC member) disputes. You also might have or will find yourself in trouble because you chose a business partner you’re not happy with, and you want that partner to exit. While you evaluate your options (litigation or alternative dispute resolution) and proceed whichever way makes most sense for you, who will run the day-to-day of your business while you duke it out?

The best answer for some marijuana companies is a court-appointed receiver. These receivers are neutral third-parties that will take over a business’ operations while it’s involved in legal proceedings. A receiver’s sole purpose is to preserve and protect the business during this period – and, if you take care to ensure that your receiver is well-versed in the cannabis industry, he, she or it can typically handle everything from sales to personnel to accounting.

Some clients have viewed receivership as a “last resort” option as most don’t like to relinquish control of a business they’ve grown from the bottom up. This is a valid concern, as a receiver’s powers over a business is usually extremely broad – it can manage all funds, replace a management company, hire and fire employees, obtain new legal counsel, etc. However, especially in the case of a partnership dispute, there are definite upsides. If you’re concerned that funds are being commingled, misappropriated, or flat out stolen, putting in a receiver can safeguard against those concerns for the time-being. Similarly, if you suspect that your partner is unmotivated or may be sinking the ship intentionally, a receiver can step in and make sure that the business is being run optimally. In great cases, a receiver may make the business better than ever by implementing better business practices (think: actually setting up books and records) and stopping any unnecessary bleeding (think: reducing exorbitant salaries or theft of cash and inventory).

Also consult with your attorneys about whether modified receiverships make more sense – in circumstances where a total receivership is inappropriate, the court may consider a “limited purpose receiver” to take charge of a defined aspect of a business (hold the funds, collect the accounts, take charge of the accounting functions, prosecute and settle a lawsuit), leaving you and your partner to run the rest of the business. A receivership may also be used in combination with other remedies, such as injunctions, to accomplish your desired results.

Another thing to note is that any interested party can ask the court to appoint a receiver, like a creditor. This is especially useful as cannabis businesses can’t obtain bankruptcy protection. So, even if a lender can’t go to bankruptcy court, they can go to a state court and ask for a receiver to be appointed to give a distressed cannabis business a better chance of succeeding.

Receivers typically bill hourly (like attorneys and accountants), and they take their fees from the business unless another arrangement has made. Depending on the level of control, a receiver’s total compensation can really range – obviously, another important consideration to keep in mind. Despite the cost, we anticipate that receivers will become much more common in the cannabis industry as it continues to grow.

If you find yourself in a dispute, and particularly a partnership dispute, check your company agreements to make sure a receivership is allowed and consider whether a receiver might help alleviate a lot of your business concerns while your attorneys fight for your legal ones.