What to Expect in a Michigan Cannabis Receivership

When a cannabis business is in financial distress, bankruptcy may not be available.

That is one of the unusual realities of the cannabis industry. Marijuana remains illegal under federal law, which means cannabis companies often cannot use Chapter 11 in the same way other distressed businesses can. In Michigan, one common alternative is a state-court receivership.

A receivership is not bankruptcy. It does not provide the same federal statutory framework. But it can provide a court-supervised process to stabilize a business, protect assets, address creditor issues, and, in some cases, sell the business or its assets.

How a Cannabis Receivership Begins

A receivership typically begins when a lender, creditor, or other interested party asks a court to appoint a receiver over some or all of a company’s assets.

If the court grants the request, the receiver becomes an officer of the court. The receiver’s authority comes from the court order and applicable Michigan law. The order defines which property is included, what the receiver may do, which approvals are required, and how much control the receiver has over business operations.

In a cannabis case, the order may need to address issues that do not exist in an ordinary commercial receivership, including regulatory compliance, licenses, inventory controls, cash management, leases, and authority to operate the business.

Stabilizing the Business

Once appointed, the receiver’s first task is usually to stabilize the business.

That may sound simple, but in a cannabis business, it can be complicated. The receiver needs to get up to speed on the company’s cash position, payroll obligations, tax issues, vendor relationships, leases, inventory, licenses, municipal approvals, insurance, and compliance status, among other issues.

The receiver also needs to determine whether the business can continue operating. Sometimes, continued operation preserves value. However, if the company is bleeding cash, licenses may be at risk, or operations may no longer be viable.

Early decisions are important because cannabis businesses can lose value quickly. A receiver often has to make consequential decisions before every issue is fully resolved.

How Cannabis Receiverships Are Different

Cannabis receiverships are more complicated than many commercial receiverships because the value of the business is rarely tied to one asset (such as a commercial building).

A store may depend on a state license, municipal approval, a specific lease, a costly buildout, trained employees, security protocols, inventory systems, and a customer base. A cultivation or processing facility may depend on specialized equipment, compliance procedures, supply relationships, and the ability to keep operating without interruption.

Those pieces are connected. A license may have limited value without the right location. A lease may have limited value if the licensed operator cannot continue using the property. Inventory may lose value if it cannot be handled, tracked, transferred, or sold in compliance with state law.

That is what makes cannabis receiverships different. The receiver is not simply preserving assets on a balance sheet. The receiver is often trying to preserve an operating platform in a highly regulated market, where business decisions, court authority, and regulatory compliance must all move in tandem.

What Happens to Leases and Contracts

One of the most important issues in a cannabis receivership is what happens to leases and contracts.

A distressed cannabis company may have some agreements that are valuable and others that are burdensome. A receiver may need to decide which leases or contracts to keep, reject, renegotiate, assign, or allow to expire.

This can create disputes. Landlords and contract counterparties may have negotiated protections, including anti-assignment clauses, cross-default provisions, guarantees, cure rights, and termination rights. The receiver, meanwhile, may be trying to preserve going-concern value by keeping the parts of the business that can be sold or operated profitably.

These issues are often case-specific. The answer depends on the receivership order, the Michigan Receivership Act, the contract language, and the facts before the court.

What Happens to the Business

Once the business is stabilized, the next step depends on the company's condition and the value of its assets. Some cases move toward a going-concern sale. Others involve the sale of selected assets, the rejection or renegotiation of burdensome obligations, the collection of receivables, and the resolution of creditor claims. In some situations, the receivership ends in an orderly wind-down rather than a sale.

In cannabis cases, any sale process must account for regulatory issues. A court can approve a sale, but the buyer still may need regulatory approval, licensing amendments, local approvals, or other steps before the transaction can close or operations can continue.

That timing can become a major part of the process. The receiver may be trying to preserve value while also navigating approvals that do not move at the pace of a distressed sale.

The Importance of Acting Early

By the time a cannabis receivership is filed, the business is often already under significant pressure. That is why timing is crucial.

A receivership can create a structured process, but it does not erase the problems that led to distress. The receiver still has to determine what can be preserved, what should be sold, what obligations need to be addressed, and whether the business can continue operating while those decisions are made.

Cannabis receiverships can be effective, but they are rarely simple. They involve an intersection of distressed business law, state cannabis regulation, real estate, secured lending, and court-supervised asset sales.

The earlier the key issues are identified, the better the chances of preserving value.