Cannabis companies currently face significant challenges regarding federal bankruptcy protections, often being locked out of court, which complicates their resolution options. Four primary alternatives are being tested: state-level receiverships in places like Washington and Oregon, UCC collection efforts similar to those used in other sectors, potential access to foreign bankruptcy courts through Chapter 15, and out-of-court workouts. With a recession looming, it is crucial for cannabis businesses and investors to proactively consider the possibility of insolvency when entering new business relationships. Despite hopes for reforms in federal cannabis laws and potential regulatory changes, the current landscape remains complex and precarious. Engaging as a debt holder rather than an equity holder could provide more security, as debt holders are prioritized in payments. Secured lenders could take advantage of state foreclosure laws, bypassing bankruptcy court challenges. If pursuing equity investments, it's essential to negotiate favorable liquidation preferences and incorporate covenants to limit the company's debt, which would help mitigate the risk of insolvency. Recognizing the importance of these considerations can aid in navigating the unpredictable financial landscape for cannabis businesses.
Cannabis companies can find themselves in financial distress but are generally locked out of the federal bankruptcy courts. What are their options? Perkins Coie Associate Tommy Tobin sits down with Billy Organek, program fellow at Harvard Law School’s Bankruptcy Project, to discuss the importance of bankruptcy law and options companies can seek outside of the federal bankruptcy process.