Dear Pot Lawyer,
What happens when a pot business fails?
It depends on the type of business and where that business was in its life cycle, but generally speaking, it’s not pretty. The easiest cases tend to be businesses that fold pre-licensure, because less money has been spent and there is less to unwind. The hard ones are those with a slug of assets (including weed), employees, and debt. Because there is no such thing as bankruptcy for pot businesses, and because cannabis is a controlled substance, things can get messy.
As to bankruptcy, courts have ruled repeatedly that pot businesses are ineligible. Bankruptcy cases are handled exclusively in federal court, and the rationale is that it wouldn’t be possible for a US Trustee to control and administer a debtor’s assets (weed) without violating the federal Controlled Substances Act. That holding makes perfect sense given the state of the law, but it’s really a shame: Bankruptcy laws are designed to give a fresh start to honest but unfortunate debtors, while providing fair treatment to creditors. Without the bankruptcy process, everyone is sort of left hanging.
Because bankruptcy is not an option, a failing Oregon pot business is left with two lousy options: (1) liquidate (convert assets to cash) without court supervision, or (2) explore something called “receivership.” In option 1, the pot business tends to close up shop, pick the creditors it likes best, pay them whatever it can, and politely ask that nobody sue. If the business is doing things right, it will also reach out to the OLCC to determine what to do with any excess weed. With a dispensary, for example, the OLCC will allow transfer of product to a wholesaler, and ensure that the product is properly tracked. Sometimes the OLCC may also allow a secured creditor to liquidate the weed under agency supervision. I haven’t seen this happen yet, but the rules say it’s possible.
Option 2, the “receivership” model, is a bit more exotic. In Oregon, a receiver is the state-level equivalent of a bankruptcy trustee, more or less, in that the receiver is appointed by a court order to wrap up a failed business. If such an appointment is made, OLCC rules allow that receiver to sell the weed, like the secured creditor mentioned above. The big difference here is that the receiver is selling weed with judicial approval, and isn’t looking out for her own interest. If you think it’s strange that an Oregon court could order someone to sell weed, that is perfectly understandable.
One might argue that the lack of standard dissolution options, like bankruptcy, not only makes it messy when pot businesses fail, but makes them more likely to fail in the first place. Lenders understand that if a pot concern goes belly up, recoupment options are limited. Therefore, they charge higher interest as risk compensation. Higher interest leads to more defaults. Defaults lead to closed doors. And so on. And, after all of that, things can truly start to get messy.
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