By John Schroyer
Say your cannabis company is in trouble because you chose the wrong business partner. You want to force that partner out. So you find a lawyer, file suit, have all your ducks in a row, and things are looking good.
Then you hit a snag: Who will run the day-to-day business operations while you and your partner duke it out in court over who gets what in terms of company assets?
The answer for at least four marijuana-related companies has been a court-appointed receiver. And it’s an option others in the industry may want to consider should they find themselves in a similar situation.
Court-appointed receivers essentially take over a business when it’s involved in legal action. Receivers manage everything from accounting to sales to even dealing with separate lawsuits against the company they’re running.
“We’re a neutral third party. So we don’t have a dog in anybody’s fight. Our purpose is to protect and preserve the asset as it’s going through the legal process,” said Scott Yahraus, a senior project manager at Receivership Specialists, which has offices in Arizona, California, Colorado and Nevada.
Since 2015, his firm has been appointed to temporarily manage the day-to-day operations of four marijuana-related companies in Arizona, including three dispensaries, as those businesses were embroiled in litigation.
Another course of action
Receivership is a niche business, and most companies in the cannabis trade likely won’t need one. It’s really a last resort for when things have fallen apart. Still, marijuana industry observers say, it’s a good backup.
However, Garfield said, there are definite upsides to having a receiver if a company is in crisis.
“During an ownership dispute, there’s always a concern that the business is not going to be run properly,” Garfield said. “They could be stealing, they could just be doing a crappy job. So if you put a receiver in, that business will be safeguarded for a period of time and it’ll keep operating. That’s to everyone’s benefit.”
A receiver can also be beneficial to embattled cannabis businesses because many can’t obtain bankruptcy protection, Garfield said.
“So if there’s a distressed marijuana company, and there’s a lender that’s afraid they’re not going to get paid, well, they can’t go into bankruptcy court,” Garfield said. “But they can go into state court and ask for a receiver to be appointed to keep the business running … and hopefully get paid. That gives a little more comfort to lenders.”
Ins and outs
Receivers like Yahraus may even be able to right a sinking ship, as it were.
He says two of the Arizona MMJ dispensaries overseen by Receivership Specialists have seen a major uptick in monthly sales, largely just through the implementation of basic business practices such as boosting inventory and stocking high-demand items. But it also often brings to a halt theft of inventory or cash.
“When we stepped in, they were doing about $100,000 a month in retail sales,” Yahraus said. “When that receivership ended, they were constantly clicking at about $180,000 a month in retail sales.”
According to court records, Receivership Specialists has temporarily managed three Arizona dispensaries and a cannabis business conference company, Southwest Event Group.
One dispensary Yahraus helped manage even made headlines in Arizona because of vicious infighting between the owners. And that’s not uncommon when court-appointed receivers are utilized, Yahraus said.
“That litigation is going to be very dirty … Partners dislike each other very, very much, and because of their (relationship), the business is not being run very well. In fact, it’s going the other way. It’s going downhill,” Yahraus said. “So receivership is a very good tool to help stabilize and calm the waters while the litigants resolve their issues.”
Receivers’ powers over a business are quite broad.
“We can manage all the money, we can buy new insurance, we can get legal counsel, we have the right to hire and fire, we can hire a management company if we want to, we keep track of all the books and records,” Yahraus said.
“Oftentimes, in all of our cannabis cases, we’ve gone in because there’ve been no books and records. And that’s typically part of the problem I’ve seen in this particular industry, which is one of the issues that’s why they file suit.”
What’s the benefit?
Kris Krane, managing partner of 4Front Advisors, said receivers like Yahraus can be valuable if a business reaches the end of its rope.
“If the business can’t function, then a court-appointed receiver makes sense until that fight’s been resolved, and that’s typically what happens,” said Krane, who worked briefly with Yahraus’ firm on a receivership case involving an Arizona dispensary. “It can also be helpful where businesses are provisionally licensed but weren’t operational and hadn’t received their final license, and the owners were suing each other.”
Receivers typically take their fees – usually billed hourly, similar to attorneys or accountants – from the business. Compensation can range from the low thousands to tens of thousands per month, depending on the case and if a receiver needs, for example, to hire lawyers to defend the business against lawsuits – as Receivership Specialists has done.
Receivers are likely to become more common in the marijuana industry as it continues to expand.
Yahraus said judges also may appoint Receivership Specialists to five pending marijuana-related business cases in California and Arizona, and Garfield said he knows of at least one receivership case in Colorado involving a marijuana retailer.
In the end, Krane and Garfield said, court-appointed receivers could make the best of a bad situation.
John Schroyer can be reached at [email protected]