As a cannabis business operator, you already know the normal rules don’t apply to you. You pay a higher income-tax rate than any industry in the country. Opening and keeping a bank account is a fraught process. You have workarounds and compromises for simple things that every other business takes for granted. I know your pain; I’ve been there. I owned the world’s first licensed plant-touching products incubator. I bring insider insights to the dynamic interplay of cannabis operations and state regulations. This affords me unique insights into how that dynamic impacts a cannabusiness workout or bankruptcy.
With cannabis and bankruptcy, it is mostly “no.” In the best case, it’s a lot of “maybe, if...” But you probably already guessed that.
The first hurdle simply can’t be cleared. Cannabis business entities can’t benefit from federal bankruptcy protection, period. This is because of continued federal illegality. Bankruptcy courts won’t condone illegal activity. This prohibition isn’t just limited to plant-touching companies. Most ancillary companies have had the same problem. Numerous Colorado cannabis firms have tried and failed to use bankruptcy.
The federal prohibition on using the bankruptcy court forces struggling cannabis firms to consider one of several workarounds.
Although cannabis firms cannot successfully use bankruptcy for discharging debt and contracts, there can be situations where filing bankruptcy to buy time is good enough. We saw something to this effect in the recent United Cannabis filing. In United Cannabis we also see potential strategies for intelligently re-organizing the entity and altering, or divesting, its operations to move the cannabis operations away from the bankruptcy-filing entity. Many Colorado cannabis firms have a two-tier structure, a holding company and the state-licensed operating company. This bifurcation presents additional opportunities for maneuver.
There is an ancient form of court-based insolvency protection at the Colorado state court level, not the federal bankruptcy level. This protection is called receivership. A receivership is much less attractive than bankruptcy for two reasons. It doesn’t discharge debt. Also, the owner loses operational control. But, receivership is suitable in narrow circumstances that do come up in the cannabis industry. Disputes between co-owners that just can’t be mutually resolved, for example.
Even though cannabis firms cannot successfully declare and discharge in bankruptcy, the owners of the firms can file a personal bankruptcy. This is the third option that often applies if the facts make it suitable. The bankruptcy court will not touch the filer’s ownership interests in cannabis firms, leaving that outside the bankruptcy case. This necessitates additional planning and steps.
Business Bankruptcy Solutions helps Coloradoans lower their debts, renegotiate contracts and save their businesses. Call (720) 674-7311 or email now to schedule a free consultation. We will discuss the problems facing both your business and personal finances and the tools we can use to achieve your goals. We draw upon decades of legal and business experience, including direct cannabis operator experience, to provide you with actionable solutions. With BBS on board, we’ll help you weather this storm.