Up in Smoke: Failed Cannabis Businesses in Michigan

Michigan is now accepting applications for the five licenses available under the Michigan Medical Marihuana Facilities Licensing Act (MMFLA), The state has made it an expensive and onerous process.

MMFLA regulations require extensive background checks that include significant financial data and the demonstration of ample financial backing of everyone involved in the cannabis business.

One purpose for such a stringent process and severe financial requirements is to ensure that cannabis-related businesses are financially stable, are able to operate profitability and reduce business failure rates. Inevitably, and notwithstanding the best of intentions and planning, like any business some of the cannabis-related businesses in Michigan will eventually fail.

The United States Trustee Program (USTP) is a component of the Department of Justice. The USTP serves as the watch dog over the bankruptcy process.  The program consistently seeks to dismiss any bankruptcy case related to a cannabis business, especially a Chapter 11 reorganization or a Chapter 13 wage earner plan. 

The USTP issued a response to cannabis related bankruptcy filings: “It is the policy of the United States Trustee Program that United States Trustees shall move to dismiss or object in all cases involving marijuana assets on grounds that such assets may not be administered under the Bankruptcy Code even if trustees or other parties object on the same or different grounds.”

The USTP has been vigilant in seeking to dismiss any cannabis related business from reorganizing. As such, federal bankruptcy at this point is not an option to restructure or discharge debts relating to a cannabis related business.

Cannabis remains a Schedule 1 drug under the federal Controlled Substances Act. As a result, many federally-established conventions available to non-cannabis businesses, like filing for bankruptcy or banking with a federally insured banking institution, are not available. A number of bankruptcy courts have dismissed cases finding that debtors engaged in cannabis related businesses are not eligible for bankruptcy relief.

The Bankruptcy Court for the Western District of Michigan in In Re: Johnson, ruled in favor of a motion filed by the United States Trustee, arguing that the debtor could not operate a cannabis-related business while in a Chapter 13 bankruptcy proceeding. The court gave the debtor the option of ceasing all cannabis-related business activities and remain in bankruptcy or, if the debtor would not cease his cannabis related business, then the debtor’s case would be dismissed. 

Among the other bankruptcy cases that have not allowed a debtor to remain in bankruptcy with a cannabis-related business include In re: McGinnis, In Re: Mother Earths Alternative Healing Cooperative, Inc., In Re: Rent-Rite Super Kegs and In Re:  Arm Ventures, LLC.

The unavailability of bankruptcy filings has even extended to landlords that have rented space to cannabis-related businesses. Bankruptcy courts have dismissed a landlord’s bankruptcy filing because the landlord derived income from renting space to a cannabis-related business. The illegality on a federal level forms the basis for the dismissals bankruptcy courts have taken the position that they cannot allow income from an illegal operation to fund a bankruptcy proceeding.

If bankruptcy is not an option for a failed cannabis- related business, what options are there? A business could just shut its doors and “go out of business.” However, this does not though provide any effective remedy for dealing with creditors’ claims. A company can go through a formal corporate dissolution proceeding, although such proceedings are rarely used.

A possible option may be to file a receivership action to have the cannabis-related business wound up by a state court-appointed receiver. Under current regulations, though, it is improbable that a state court appointed receiver could actually take control of the cannabis-related business assets and liquidate those assets under court supervision.

Oregon and Washington enacted laws allowing and regulating cannabis-related businesses and amended their state laws to allow receivers to be appointed to liquidate the assets of a failed cannabis-related business.  Unless Michigan amends its receivership laws, it is questionable whether a receiver appointed by a Michigan state court would have the requisite statutory authority to liquidate and sell cannabis-related business assets. This prohibition may even extend to receivership of landlords that rent space to cannabis-related businesses if some of the income derived is related to the tenant’s business.

In Michigan, many eagerly anticipate the establishment of cannabis-related businesses and the potential revenue and taxes that will be generated from such businesses. Unfortunately, like many new businesses, some cannabis-related businesses will fail. 

There is currently no clear path as to how a cannabis-related business can terminate its operations other than possibly proceeding through the corporate dissolution procedures. Michigan may amend its receivership law to allow receivers to liquidate cannabis-related businesses that may lead to a clearer path for such termination of operations. Otherwise, a cannabis-related business may just go up… well, in smoke.

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