With rapid technological advances, expanded regulatory oversight, and constantly shifting market dynamics, owning and operating a business in the modern world has become an increasingly difficult challenge. Chief among the challenges that business owners face is the likelihood of financial distress, a daunting scenario that can arise from market downturns, management issues, or unexpected crises. When a business finds itself in financial turmoil, it is crucial that business owners and investors have viable options for navigating these challenges. Traditionally, bankruptcy is the primary avenue of relief for distressed businesses, offering a structured way to address financial woes and creditor claims.

An alternative to bankruptcy that has proven to be crucial, especially in certain industries, is the concept of receivership. Receiverships involve a court-appointed neutral third party tasked with assuming control of the business, a move often requested by investors and necessitated when a business’s survival is at stake. The receiver helps the business navigate the storm of financial uncertainty by developing a plan to settle current debts and maximize the value of the business for all stakeholders. Above all, the receiver follows the order of appointment by the pertinent court. A receivership is routinely a product of an underlying lawsuit, typically between owners, investors, or secured creditors, and is often utilized during litigation because it can offer much needed stability to the business throughout the course of the proceedings.

Receiverships stand out as a crucial lifeline for investors in distressed cannabis businesses, where the industry’s unique legal landscape precludes access to traditional bankruptcy proceedings.[1] It emerges not just as an option, but often as the only avenue for cannabis businesses facing financial distress, enabling them to restructure and potentially regain profitability. It is imperative, therefore, that cannabis business owners and their counsel have a fundamental understanding of this form of relief.

A recent case in California, involving the appointment of a receiver, serves as an illustrative example in understanding the nuanced role of receiverships in the cannabis industry. In PNPLXPRESS Inc. et al. v. Pineapple Ventures Inc. et al.,[2] the plaintiff, the majority equity owner of a dispensary, petitioned the court for the appointment of a receiver due to the dispensary management companies’ failure to pay taxes and rent, and their failure to allow the plaintiff to take operational control of the business. The court agreed with the plaintiff and appointed a receiver.

In defining the rights and obligations of the receiver, the court stated that the receiver was to immediately assume “the sole operation and control of the Business, to correct any and all operational deficiencies, ensure compliance with all local and state regulations, oversee the day-to-day business activities, and promptly address all financial obligations, . . . to preserve, safeguard and provide stability for the Business.”

This order highlights the principal role of receivers, as well as their primary allegiance: to the business estate, and to the law. Receivers operate independently from the parties and claimants, focused on acting in the best financial interests of the business itself, not the individual interests of owners or investors. After assuming control of the business, the receiver is responsible for evaluating operational deficiencies and developing a plan for administering the estate, including maintaining current operations, commencing any necessary litigation, negotiation with creditors, and the sale of any assets.[3] This process involves a stringent commitment to comply with state and local regulations, a task that can be particularly challenging in the cannabis industry due to its intricate legal landscape. In short, this role is not for the faint of heart.

The receiver’s obligation to protect the interests of the business estate, rather than the interests of the individual owners and investors, can create tension in the receiver’s relationship with business owners. Business owners often expect that they will be able to work with the receiver and maintain a certain degree of operational control over the business, when in fact, the receiver is granted sole operational control. Receivership orders typically include provisions enjoining the current owners from interfering with the decision making of the receiver, as was the case in Pineapple Express. Receivers, and receivers counsel, must carefully navigate this tension, balancing legal obligations with the interpersonal dynamics of the business environment. While the receiver is granted sole control of the business, cooperation with the owners is essential to the receiver’s successful administration of the estate.

Why It Matters

The role of a receiver is not merely intervention; a receiver stands as a beacon of stability and direction for a business during times of financial distress. Like a skilled captain steering a ship through uncharted waters, a receiver guides the direction of a struggling cannabis business while balancing the rigorous demands of legal compliance with the turbulent waves of market challenges. Their duty is to the estate and to the court, not the individual whims of business owners or investors. This commitment often means navigating complex interpersonal dynamics, requiring a delicate yet firm hand. As the cannabis industry continues to evolve within its unique legal framework, receiverships can offer a path to safe harbor for distressed cannabis businesses and their creditors. Understanding and properly utilizing the role of a receiver can be the difference between sinking and sailing toward a brighter future.

[1] See generally Smith-Gonnell et al, How Cannabis Cos. Are Adapting in Shifting Bankruptcy Arena, Troutman Pepper (Dec. 4, 2023), available at https://www.troutman.com/insights/how-cannabis-cos-are-adapting-in-shifting-bankruptcy-arena.html.

[2] 23STCV25038 (Ca. Supr. 2023), order available at https://www.law360.com/articles/1773693/attachments/0; See also Curley, Receiver Appointed in Calif. Dispensary Contract Dispute, Law360 (Dec. 6, 2023), available at https://www.law360.com/cannabis/articles/1773693/receiver-appointed-in-calif-dispensary-contract-dispute.

[3] See generally The Life Cycle of a Court Receivership, FedReceiver, Inc. (May 11, 2022), available at https://fedreceiver.com/resources/the-life-cycle-of-a-court-receivership/.