When High Times Get Low: Preparing for Minnesota’s Inevitable Cannabis Receivership Wave

On August 1, 2023, Minnesota’s hippies and flower children rejoiced as cannabis became fully decriminalized throughout the state. With the modernization of Minnesota’s drug laws came a flood of new business ventures ranging from storefronts to producers, new state and local regulators (including the Minnesota Office of Cannabis Management), and even college programs on cannabis education. However, with this cannabis boom an inevitable bust will come as the market becomes oversaturated, the initial excitement of legal cannabis dies down, and stringent local and state regulations put stress on these new businesses and their owners. When that bubble bursts, cannabis businesses will face limited formal tools to rebound or save their value due to legal limitations, including a general inability to file for federal bankruptcy protection (despite a potential changing in the guard with the Central District of California bankruptcy court’s recent denial of motions to dismiss and subsequent confirmation of a Chapter 11 bankruptcy plan for a cannabis business). This lack of alternatives will likely lead these businesses to rely on the Minnesota receivership law, which represents one of the strongest and most expansive receivership statutes in the United States—including in its clarity and breadth of a receiver’s powers. However, by recognizing these constraints early on and planning accordingly, cannabis receiverships can not only survive but exit their receiverships stronger or realize significant value.

First, a potential receiver and their advisers must begin planning before the receiver is appointed to ensure that the cannabis business, in whatever part of the stream it falls, transitions smoothly from its original management to the receiver. Most importantly, the receiver must be ready to obtain a license for the business as quickly as possible after being appointed. Pursuant to Article 1, § 12 of Minnesota’s cannabis law, when a cannabis business enters into a receivership, new licenses must be obtained. A receiver will therefore take over a business unable to actually operate until new licenses are obtained after appointment. Creating a plan to expedite this process as much as possible prior to appointment, and thus reducing the negative consequences for the business, is therefore crucial to maintaining the business’s value when the receivership has only just begun.

Second, a potential receiver must have a plan in place for handling its cash coming into the cannabis business over which they are appointed. Banks and credit unions may be unwilling to provide cannabis businesses with accounts where they can deposit their money due to potential consequences arising under federal law, including the potential loss of their charters. Unless a receiver wants to continuously guard a room with bags of cash, they need to identify beforehand what banks may be willing to deal with cannabis businesses. Otherwise, the receiver must consider what security measures need to be in place to protect the business’s cash.

Third, the receiver and the party moving to appoint them must heavily consider the form of the receivership order to assist the receiver in navigating the uncharted territory of cannabis receiverships in Minnesota. If the order provides only limited powers to the receiver, they could encounter difficulties in tackling the multitudes of unique problems facing a cannabis business, consequently requiring them to return to court for relief, all of which will take time increasing the likelihood of lost value for the business. Instead, the receivership order should be as broad as reasonably possible to allow the receiver to act expeditiously to maintain the business’s value in the face of new challenges not yet encountered in ordinary Minnesota receivership cases.

The full scope of nuances and issues inherent in Minnesota’s inevitable cannabis receiverships will not be known until this new bubble bursts. However, to best deal with this uncertainty, receivers and their advisers must prepare as early and broadly as possible. Only that way can they best ensure that their cannabis businesses continue riding high and not trip.

  • Samuel M. Andre
    Senior Associate

    Sam represents businesses, commercial lenders and individuals in the areas of debtor/creditor law, bankruptcy and complex commercial litigation. He works closely with clients to understand their specific financial and ...

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