5 Lessons Learned Representing Receivers in Michigan Cannabis Company Receiverships

As Michigan's cannabis industry continues to face profitability challenges despite booming sales, some businesses find themselves facing financial challenges that lead to receivership proceedings. While receiverships are complex in any industry, cannabis receiverships present unique hurdles that require specialized knowledge, creative problem-solving, and careful navigation of multiple regulatory frameworks.

Drawing from our experience as counsel to receivers in multiple significant Michigan cannabis receivership cases, including proceedings involving some of the state's largest cannabis operators, we've identified five key lessons learned in the process. These insights reflect both the practical challenges and innovative solutions we've encountered while helping receivers preserve asset value and protect creditor interests in this highly regulated industry.

Lesson 1: Navigate Multiple Regulatory Channels

Unlike traditional receiverships where court approval might be the primary regulatory hurdle, cannabis receiverships require orchestrating approvals from multiple regulatory bodies. Success requires effectively coordinating with the Michigan Cannabis Regulatory Agency (CRA), the Michigan Attorney General's office, and municipal authorities—each with their own requirements and timelines.

This multi-layered regulatory landscape means that actions that might be straightforward in other receiverships—such as selling assets or transferring licenses—require careful planning and sequencing. For example, while a court might approve a proposed sale of assets, the transaction cannot proceed without CRA approval of the buyer's licenses. Similarly, municipal authorities may need to approve zoning or licensing changes, adding another layer of complexity to the process.

We've found that proactive engagement with all regulatory stakeholders is crucial. This means establishing open lines of communication early in the proceedings and maintaining regular contact throughout the process. It also means understanding each agency's specific concerns and requirements, and developing strategies that address them while still advancing the receivership's objectives.

Lesson 2: Understand Non-Traditional Banking Dynamics

The cannabis industry's limited access to traditional banking services creates unique challenges in receivership proceedings. While most receiverships involve straightforward relationships with conventional banks, cannabis receiverships often feature a complex web of foreign lenders, credit unions, and alternative financing arrangements that require special handling.

Many cannabis companies rely on a patchwork of financial relationships to operate their businesses. We've encountered cases involving foreign lenders who may be unfamiliar with U.S. receivership proceedings, credit unions operating under specific regulatory constraints, and various alternative financing arrangements. Each of these relationships brings its own set of dynamics and sometimes requires creativity in developing solutions that work within both the constraints of cannabis banking and receivership law.

Lesson 3: Managing Licenses

License compliance and management present distinct challenges in cannabis receiverships, particularly when it comes to determining who should serve as the signatory on license renewals and applications.

The question of who should sign license-related documents might seem straightforward, but it requires careful consideration. When a receiver is appointed temporarily to facilitate a sale or reorganization, having them serve as the signatory on license renewals or new applications may not be the most practical approach. Instead, we've found that delegating this responsibility to appropriate company personnel who will remain with the business can often be more effective. The key is to balance immediate compliance needs with long-term operational considerations.

Lesson 4: Prioritize Day-to-Day Operations Management

Managing day-to-day operations in a cannabis receivership can significantly impact asset value preservation. Unlike some receiverships where operations might be suspended or minimized, cannabis businesses often need to maintain full operations to preserve their value and meet regulatory requirements.

Receivers and their advisors must quickly identify and retain key employees who understand both the cannabis industry and the specific business operations. Moreover, proper operations management extends beyond just maintaining current business activities. It requires careful attention to regulatory compliance, inventory tracking, security requirements, and quality control measures—all of which must continue seamlessly during the receivership period to maintain licenses and business value. Our experience has shown that prioritizing these operational aspects early in the proceedings leads to better outcomes.

Lesson 5: Adapt to Evolving Federal Regulations

One of the most dynamic challenges in cannabis receiverships is navigating an industry subject to significant regulatory flux, particularly at the federal level. The potential rescheduling of cannabis from Schedule I to Schedule III by the federal government, along with evolving IRS positions on taxation, creates both opportunities and uncertainties that receivers must carefully manage.

Recent developments illustrate this complexity. Despite discussions about rescheduling cannabis, the IRS issued a reminder in June 2024 that marijuana remains subject to Section 280E of the Internal Revenue Code—which disallows all deductions or credits for any amount paid or incurred in carrying on any trade or business that consists of illegally trafficking in a Schedule I or II controlled substance—until a final federal rule is published.

These evolving federal considerations can significantly impact receivership strategy. For instance, a receiver's decisions about asset disposition or business restructuring might need to account for potential changes in federal tax treatment or banking regulations. At the same time, receivers must continue operating within current constraints while remaining flexible enough to adapt to regulatory changes that could occur during the receivership period.

The key here is maintaining a balanced approach: making decisions based on current law while staying informed about potential changes that could affect the receivership.

Conclusion

Managing cannabis receiverships in Michigan requires a unique blend of industry knowledge, regulatory awareness, and strategic thinking. The lessons we've learned through our experience as counsel in multiple cannabis receivership proceedings highlight the importance of understanding both the distinct challenges of the cannabis industry and the specialized solutions needed to address them. Receivers and their advisors who understand the unique dynamics of this industry are better positioned to preserve asset value, protect creditor interests, and successfully navigate the challenges of cannabis receiverships.

If you have questions about cannabis receiverships in Michigan or would like to discuss these issues in more detail, please contact Amanda Vintevoghel.