Many cannabis and cannabis-ancillary businesses that have been navigating this newly legal industry have been financially hammered by the years-long delay in the completion of the New York State legal cannabis supply chain. While bankruptcy as a solution for cannabis and cannabis-ancillary businesses generally remains out of reach except in the rarest of fact scenarios (October 11, 2023 - In In re The Hacienda Company, LLC, No. 2:22-bk-15163, the U.S. Bankruptcy Court for the Central District of California (Judge Neil W. Bason)), New York offers a state-law based solution: receivership. State-law based receivership opens a doorway to financial restructuring and protections similar to those offered by bankruptcy for businesses in need of financial restructuring, rehabilitation or even dissolution.
New York court appointments, including receiverships, are governed by Part 36 of the Rules of the Chief Judge. Receiverships are an equitable remedy, meaning that judges, rather than juries, determine the appointment of a receiver. Businesses may file papers with the court, such as a petition and supporting authorities and/or declarations, requesting the appointment of a receiver and setting forth the reasoning as to why a receivership is necessary. N.Y. Cannabis Law § 124.7(a) states:
An individual may be appointed as receiver, representative, executor, administrator, guardian, conservator, trustee, or assignee, to temporarily operate the licensed business on the licenses premises for a period of time determined by the Office in cases of death, disability, bankruptcy, insolvency, receivership, assignment for the benefit of creditors, shareholder or LLC member disputes, or other exceptional circumstances rendering one or more owners incapable of performing the duties of a licensee.
By the addition of § 124.7 in the N.Y. Cannabis Law, cannabis and cannabis-ancillary businesses expressly have the remedy of receivership available to them. An appointed receiver is able to step into the role of business owner and take control of the situation by making business decisions, selling assets, and enjoining creditors in the hopes of saving the business from struggling, or even from failing.
Office of Cannabis Management and Courts Oversee Receiver
After a receiver is appointed by the court, the New York State Office of Cannabis Management (OCM) requires the appointed receiver to receive express authorization from OCM prior to conducting any cannabis-licensed activities. Cannabis-licensed businesses appointed receivers by the court must submit to OCM a formal request in writing for authority to temporarily conduct licensed activities. Further, any cannabis-licensed business filing for receivership must serve OCM an original notice of the action or proceeding commenced for the appointment of a receiver to allow OCM the opportunity to be heard by the court regarding the appointment.
The process of having a receiver appointed and approved for cannabis-licensed activities is a heavily discretionary process. The courts have vast discretion to decide whether or not to appoint a receiver , and OCM has vast discretion regarding whether or not to approve an appointed receiver to conduct licensed cannabis business activities . Even appointed receivers have large amounts of discretion when making decisions for the rehabilitation or restructuring of a struggling cannabis or cannabis-ancillary business. Appointed receivers have the same immunity as judicial officers, making it incredibly difficult to hold them accountable for poor decisions. As a way to combat this type of allowance from being utilized poorly, appointment requires a receiver to be properly qualified. Before a person can be included on the list of available applicants qualified to be appointed as a receiver, he or she must have received the proper education and training as decided by the chief administrator of the court. If a receiver provides unsatisfactory performance or any conduct deemed incompatible with their appointment, the chief administrator of the court can remove the person from the position of appointed receiver, or a request can be made to the court for the receiver to be disqualified from their appointment. It should be noted that removing or disqualifying a receiver is not an easy task.
Although a receiver’s authority to act is vast, the receiver’s actions are supervised by the court. Further, although similar relief is provided under receiverships as is in bankruptcies, receiverships do not receive the same entitlement to an automatic stay, which enjoins a creditor’s attempts to seize assets. While a stay in a receivership is not automatic, one may be requested and provided by the supervisory court. In a landscape where one of a businesses’ largest financial resolutions, bankruptcy, is, for the most part, inaccessible to an entire industry based on federal restrictions, creative solutions such as state-law based appointed receiverships are one of the few ways cannabis and cannabis-ancillary businesses are allowed to find financial resources and relief.
The process of receiving, or removing, an appointed receiver is an arduous process at the mercy of the court and the New York State Office of Cannabis Management. Cannabis and cannabis-ancillary businesses seeking the relief of financial restructuring or liquidation should seek legal counsel to ensure the proper application for a state-law based receivership appointment.
[1] Part 36 also covers guardians ad litem, Mental Hygiene Law, Art. 81 appointments, referees, and Supplemental Needs Trustees. See N.Y. Comp. Codes R. & Regs. tit. 22, 36 (2009).
[2] See Ryan C. Griffith, Cannabis Receiverships: The Alternative for State Legal Cannabis Businesses Seeking Financial Rehabilitation Locked Out of Bankruptcy Court by the Controlled Substances Act, 45 Seattle University Law Review 1107, 1122 (2022).
[3] See id.
[4] See id.
[5] See N.Y. Cannabis Law § 124.7(b).
[6] See id.
[7] See N.Y. Cannabis Law § 124.7(d).
[8] See N.Y. Comp. Codes R. & Regs. tit. 22, 36.0 (2009) (“The rules cannot be written in a way that foresees every situation in which then should be applied. Therefore, the appointment of trained and competent persons, and the avoidance of factors unrelated to the merit of the appointments of the value of the work performed, are fundamental objectives that should guide all appointments made, and orders issued, pursuant to this Part.”).
[9] See N.Y. Cannabis Law § 124.7(c) (“Authorization to conduct licensed activities by such appointee is conditioned on compliance with these regulations, including, but not limited to, restrictions on ownership, and other interests, approval by the Office, and such authorization shall not constitute a guarantee of license issuance or renewal by the Board.”).
[10] See New Alaska Dev. Corp. v. Guetschow, 869 F.2d 1298, 1303 (9th Cir. 1989).
[11] See N.Y. Comp. Codes R. & Regs. tit. 22, 36.3(b) (2009).
[12] See N.Y. Comp. Codes R. & Regs. tit. 22, 36.3(e) (2009).
[13] See Ryan C. Griffith, Cannabis Receiverships: The Alternative for State Legal Cannabis Businesses Seeking Financial Rehabilitation Locked Out of Bankruptcy Court by the Controlled Substances Act, 45 Seattle University Law Review 1107, 1123 (2022).
[14] See Joseph Cioffi, et al., NY Debt Enforcement Alternatives For Cannabis Lenders, Law360 (September 23, 2021).
