Private equity funds typically structure investments with the expectation that liability will be contained at the portfolio company level. When a business fails, the fund may lose its investment, but the fund itself is thought to remain insulated.
That boundary, however, is not absolute. In certain circumstances, courts have considered whether liability for pension obligations or workforce issues should extend upstream. A recent case highlights both the risks and the uncertainty.
Pension Liability and the “Trade or Business” Question
Under ERISA’s Multiemployer Pension Plan Amendments Act of 1974 (MPPAA), an employer that withdraws from a multiemployer pension plan may be liable for its share of underfunding. Importantly, the term “employer” includes not just the entity that ceases operations, but also any trades or businesses under common control.
The critical question is whether a private equity fund qualifies as a “trade or business.” Courts have applied different tests, including the “investment plus” framework developed in the Sun Capital litigation. Under this standard, a fund may be considered a trade or business if it goes beyond passive investment into active involvement in management.
The Longroad Case
In Longroad Asset Management v. Boilermaker-Blacksmith National Pension Trust (W.D. Mo. Aug. 19, 2025), the court addressed whether various PE entities could be held liable for nearly $1 million in pension withdrawal liability after a portfolio company entered bankruptcy.
The court concluded that:
The management company and general partner were not liable, emphasizing their limited activities.
The fund itself could qualify as a trade or business, and therefore potentially be liable, because its activities went beyond passive investment.
The decision underscores the fact-specific nature of the inquiry. The outcome turned on how the fund’s activities were characterized, and the court’s reasoning illustrates the uncertainty sponsors face when navigating a wind-down.
Beyond Pensions
Similar questions arise under other statutes. For example, under the WARN Act, courts have in some cases treated PE funds and portfolio companies as “single employers,” exposing funds to liability for layoffs without proper notice.
In addition, when portfolio companies fail, courts and creditors often scrutinize upstream payments such as management fees, dividends, or leveraged distributions to determine whether they contributed to insolvency or unfairly shifted value away from creditors.
Practical Considerations
While fund-level liability may not be common, it is a real risk. Here are some points to keep in mind:
Outcomes turn on specific facts and how courts apply unsettled legal standards.
Execution matters: governance, timing, and creditor communications in a wind-down can influence how courts view a relationship between fund and portfolio company.
Upstream payments may draw scrutiny, especially when they coincide with financial distress.
Conclusion
Private equity funds cannot assume that liability always stops at the portfolio company. Careful planning and disciplined execution in the management of portfolio company wind-downs is critical to reduce both financial and legal risk.
If you have any questions or require assistance, please contact David Dragich.
On August 26, 2025, the Michigan Court of Appeals issued a published opinion in the Skymint receivership, ruling in favor of the court-appointed receiver Gene Kohut—represented by The Dragich Law Firm—on two important issues of first impression under the Michigan Receivership Act.
The Court’s ruling affirmed:
That a receiver has authority under the Michigan Receivership Act to reject an executory contract, including a lease; and
That a receiver may reject one lease while assuming another lease with the same landlord, even if the leases contain cross-default provisions.
This is a meaningful step forward in consummating the sale process for Skymint—and a significant development in Michigan receivership law.
Because cannabis companies remain ineligible for federal bankruptcy protection, state court receiverships have become the primary vehicle for financial restructuring in the industry. Yet the legal framework is still evolving, with limited precedent. This ruling helps define and clarify the powers available to receivers navigating complex lease structures and distressed assets.
Over the past several years, Dragich Law Firm has served as counsel to the receiver in two of the largest cannabis receiverships in Michigan.
David Dragich and Amanda Vintevoghel-Backer spearheaded the firm’s work on the matter, guiding the legal strategy that led to this important appellate victory.
Not every business can be fixed or sold. When a portfolio company is no longer viable, private equity firms are often faced with a tough but necessary choice: shut it down.
In these situations, a well-executed wind-down—what we sometimes call an “honorable burial”—can be the best path forward. It’s a way to responsibly close the books, reduce risk, and protect the fund’s broader interests.
Bankruptcy is one option, but it’s not always the right one. A wind-down carried out under state law can often achieve the same goals with less cost, less complexity, and more control. Done right, it allows a fund to move on—cleanly, quickly, and with integrity.
Why not bankruptcy?
Chapter 7 and Chapter 11 are often viewed as the default paths for a distressed company. And there are cases where they make sense, particularly when litigation is active, stakeholders are at odds, or the business needs the tools of a court-supervised process.
But bankruptcy can also be expensive, slow, and very public. Once a company enters bankruptcy to liquidate, the process is out of management’s hands. A trustee will take over key decisions. Every action is subject to court oversight. And every filing is open to the public.
By contrast, a state-law wind-down is usually faster and more flexible. It allows for a more discreet resolution, and—critically—it keeps control with the owners or a trusted advisor. For many funds, it’s a better fit when the goal is to shut down a non-performing company in an orderly and professional way.
What a wind-down involves
Winding down a company under state law is not as simple as turning off the lights. It’s a structured process that requires planning, judgment, and coordination across legal, financial, and operational fronts.
Key steps include:
Corporate approvals. The board and shareholders (or managers and members, in the case of an LLC) must authorize the dissolution in accordance with governing documents and state law.
Notification and compliance. Most states require formal notice to creditors, tax authorities, and regulators. Final tax returns must be filed. Licenses must be closed out.
Creditor management. Debts need to be resolved, whether through full payment, negotiated settlements, or a court-approved process. If handled poorly, creditors may pursue litigation or raise claims against the fund or its principals.
Asset disposition. Remaining assets—cash, equipment, receivables, IP—must be identified, valued, and sold or distributed. In some cases, assets may be transferred to other portfolio companies.
Employee matters. WARN Act compliance, severance obligations, and benefit terminations must be managed carefully to avoid exposure.
Wind-down reserves and risk management. Reserves may need to be set aside for contingent liabilities. Tail insurance coverage may be appropriate for directors and officers.
Every wind-down is different, but these are the fundamentals. Missing any one of them can create headaches later on, especially if tax authorities, creditors, or former employees aren’t properly addressed.
Risks of doing nothing
In some cases, a portfolio company is no longer active, but no formal steps are taken to wind it down. The entity sits dormant—no revenue, no operations, but still legally alive.
This can create real problems. States may impose penalties for failing to file annual reports or pay franchise taxes. Former employees may assert claims. Vendors may sue. If a director or officer remains listed on public records, their personal exposure may increase. And if the company owns IP, lease rights, or other residual assets, those can quietly lose value or disappear.
Inactive companies still carry risk. That’s why a strategic wind-down is often far safer than letting a zombie company drift.
Why timing matters
A wind-down works best when it’s done early—before cash runs out, before creditors sue, and before reputational damage sets in. The longer a company stays in limbo, the fewer options remain.
When action is taken early, a fund can manage the process on its own terms, resolve obligations efficiently, and preserve value where it still exists. In short: the sooner the better.
A disciplined, respectful exit
Winding down a company isn’t a sign of failure. It’s part of the business cycle. Not every investment pans out. What matters is how a fund handles it, especially in today’s environment, where scrutiny is high and stakeholders are quick to assign blame.
Handled properly, a wind-down sends a different message. It shows discipline. It reflects strong governance. And it helps protect the brand, reputation, and relationships that matter for the long term.
An honorable burial may not be easy, but it’s often the right thing to do.
If you have any questions or require assistance, please contact David Dragich.
In an effort to keep you apprised of what’s happening in the realm of bankruptcy and restructuring, here are several recent developments to be aware of.
1. Corporate bankruptcy filings in April 2025 showed a notable decline, with commercial Chapter 11 filings dropping 20% year-over-year to 434, down from 542 in April 2024. This decrease follows a significant surge in the first quarter of 2025, where 188 large U.S. companies filed for bankruptcy—the highest Q1 total since 2010. The early-year spike was driven by persistent financial pressures, including elevated interest rates and tighter credit conditions.
2. While overall commercial filings declined in April, small businesses continued to face challenges. Subchapter V elections within Chapter 11 increased by 4% year-over-year, reaching 218 filings in April 2025 compared to 210 in April 2024.
3. The technology and consumer discretionary sectors have been particularly impacted in 2025. Notable tech companies such as Mitel Networks, DocuData Solutions, and Ligado Networks filed for bankruptcy in Q1, each with liabilities exceeding $1 billion. In the consumer discretionary space, brands like Forever 21 and Joann have also sought bankruptcy protection, highlighting the ongoing challenges in retail and related industries.
4. In March, the U.S. Supreme Court ruled in United States v. Miller that bankruptcy trustees cannot recover federal tax payments made by debtors if no actual creditor could have obtained relief under applicable state fraudulent-transfer laws outside of bankruptcy. This decision clarifies the limits of sovereign immunity waivers under the Bankruptcy Code and may impact future strategies employed by trustees in asset recovery efforts.
5. U.S. bankruptcy courts in Delaware and New York recently approved the enforcement of nonconsensual third-party releases granted in foreign insolvency cases under Chapter 15 of the Bankruptcy Code. In the Crédito Real case, the Delaware court recognized a Mexican court’s approval of a restructuring plan that included such releases, despite objections based on U.S. public policy. Similarly, the New York court upheld nonconsensual third-party releases in the Odebrecht Engenharia e Construção S.A. case, reinforcing the principle of comity in international insolvency matters. These cases are noteworthy because in Harrington v. Purdue Pharma, LP the U.S. Supreme Court ruled that nonconsensual third-party releases were impermissible in a Chapter 11 plan.
Amid the unpredictability and volatility of U.S. tariffs, businesses previously buoyed by easy credit and low interest rates now face tightening liquidity, higher borrowing costs, and strained supply chains due to global trade disruptions. These market dynamics are reminiscent of previous restructuring waves and suggest that many businesses may soon face significant financial distress. Companies that recognize warning signs and implement strategic measures quickly typically preserve more options and stakeholder value.
In a recent article published by leading industry publication CFO.com, David Dragich details five proactive steps that distinguish resilient businesses from those that struggle when markets turn.
The numbers tell a stark story. According to S&P Global Market Intelligence, among 38 loan liability management transactions executed by 35 companies between mid-2017 and August 2024, 37% of the companies ultimately filed for bankruptcy despite these efforts. For CFOs facing debt challenges, the question is: are liability management exercises a bridge to stability, or merely a costly detour to an inevitable restructuring?
In a recent article published by leading industry publication CFO.com, David Dragich and his coauthor Gene Kohut dive into the critical strategic decision of when and how to deploy liability management exercises effectively versus pursuing more comprehensive solutions.
A recent $32 million federal court verdict in favor of Michigan cannabis grower Hello Farms serves as a stark reminder of the challenges facing cannabis businesses operating in volatile market conditions. The case, which centered on a breached purchase agreement with Curaleaf, offers important lessons for industry participants about contract structuring and risk management.
Background
In 2020, Hello Farms entered into what appeared to be a promising agreement with Curaleaf, with Curaleaf committing to purchase 16,000 pounds of cannabis at $1,000 per pound in 2020 and $850 per pound in 2021. The agreement specified that Hello Farms’ product needed to achieve a minimum of 12% THC content to meet contract requirements.
After purchasing only 2,000 pounds of the contracted amount, Curaleaf demanded to renegotiate the agreement, citing the dramatic decline in Michigan’s cannabis market prices. Specifically, Curaleaf demanded a 60% price reduction for the 2020 harvest and sought to negotiate new terms for 2021. Between early 2020 and late 2021, recreational cannabis prices in Michigan had fallen by 64%, putting significant pressure on existing contract commitments.
Hello Farms filed suit in February 2021, alleging that Curaleaf’s breach forced them to seek new buyers in a rapidly declining market. They also claimed that, at Curaleaf’s urging, they had expanded their 2021 production capacity, leaving them with significant unsold inventory when Curaleaf failed to honor the agreement. Curaleaf countersued, claiming Hello Farms had failed to meet product specifications, but this countersuit was dismissed by a judge in 2021.
The dispute ultimately went to trial in federal court, where the jury sided with Hello Farms, awarding $31.9 million in damages.
Contract Risks in a Volatile Market
This case highlights a common challenge in the cannabis industry (as well as others, such as automotive): long-term purchase agreements that become financially untenable when market conditions shift dramatically. While such agreements can provide valuable certainty for both buyers and sellers, they can also create existential risks for companies when markets move against them.
Key Considerations for Industry Participants
When entering into long-term purchase agreements, cannabis businesses should consider:
1. Market volatility provisions that allow for some price adjustment based on significant market changes
2. Clear quality specifications and testing procedures to avoid disputes over product acceptance
3. Volume flexibility mechanisms that provide some adjustment rights while maintaining the core business arrangement
4. Regular review periods to assess contract performance and market alignment
The Broader Impact on Michigan Cannabis Companies
As the Hello Farms case demonstrates, when long-term contracts with fixed pricing terms get disrupted by market volatility, the financial impact can be severe. In Michigan’s cannabis market, these types of disruptions have contributed to broader financial distress across the industry. Given that federal bankruptcy protection isn’t available to cannabis companies, many distressed operations have turned to state court receivership proceedings to address their financial challenges and restructure their obligations.
The Dragich Law Firm has significant experience providing legal counsel in such proceedings. Whether you’re facing potential financial distress or considering entering into significant long-term agreements, early consultation with experienced counsel can help protect your interests and avoid costly disputes down the road.
In an effort to keep you apprised of what’s happening in the realm of bankruptcy and restructuring, here are several recent developments to be aware of.
1. Corporate bankruptcy filings in the US have hit a 14-year high, reaching the largest total since the aftermath of the Great Recession. S&P Global Market Intelligence reports there were 694 bankruptcies by certain public and private companies in 2024, far surpassing the 2023 total of 635 filings and extending a trend that had been growing for months.
2. Consumer discretionary, particularly the retail and restaurant industries, was the most significant sector driving this trend. Big Lots, Express, Joann, Red Lobster, TGI Fridays, and TrueValue were among the biggest household names that filed for bankruptcy last year. The S&P’s data shows the industrial and healthcare sectors had the second- and third-highest bankruptcy totals, respectively. One hurdle common for many companies in these top sectors is a large number of commercial real estate leases dragging down profitability. Since Chapter 11 allows a company to reject undesirable leases, filing for bankruptcy can be an attractive solution.
3. Liability management exercises (a transaction or series of transactions designed to modify a company’s debt obligations outside of a formal court-supervised restructuring) have become increasingly common in recent years. However, their effectiveness at helping companies turn things around isn’t clear. According to S&P Global Intelligence, among 38 loan liability management transactions executed by 35 companies between mid-2017 and August 2024, 37% of the companies ultimately filed for bankruptcy despite these efforts. Of the remaining companies that avoided bankruptcy, only five (14%) successfully staved off a subsequent default and maintained ratings above CCC+.
4. Speaking of LMEs, the Fifth Circuit Court of Appeals recent ruling in the Serta Simmons case may significantly impact leveraged market exchanges (LMEs). The court invalidated Serta’s 2020 uptier exchange, which had given certain lenders the opportunity to swap their existing debt for new debt with higher priority, while excluding other lenders from participating. Notably, the court determined that the credit agreement’s “open market purchase” provisions required genuine open market transactions, rather than selective private arrangements with specific lenders.
The record-breaking wave of PE (and VC) backed bankruptcies in 2024 – 110 filings, according to S&P Global Market Intelligence – highlights an important challenge for private equity sponsors: navigating their fiduciary duties when portfolio companies face financial distress.
The Dual Role Dilemma
PE sponsors typically wear multiple hats in their portfolio companies – as controlling shareholders, board members, and sometimes even creditors. This creates inherent tensions when a portfolio company approaches insolvency. While directors traditionally owe fiduciary duties to the corporation and its shareholders, the approach of insolvency triggers a fundamental shift: directors must consider the interests of creditors, who become the primary economic stakeholders.
The Zone of Insolvency: When Does the Shift Occur?
Courts have wrestled with precisely when this duty shift occurs. The “zone of insolvency” concept suggests that as a company approaches insolvency, directors’ duties expand to include creditor interests. However, recent Delaware decisions have clarified that while directors may consider creditor interests when a company is in financial distress, their fiduciary duties don’t formally shift until actual insolvency occurs.
Key Practices for PE Sponsors to Consider in Times of Portfolio Company Distress
1. Board Composition
Independent Directors: The presence of truly independent directors on the board becomes even more critical when a portfolio company is facing distress. These directors, without any ties to the PE sponsor or other interested parties, can provide objective oversight and ensure that decisions are made in the best interests of the company. Independent directors should play a leading role in any decisions where there’s a potential conflict of interest between the sponsor and the company.
Special Committees: For particularly significant transactions, such as major asset sales, mergers, or restructuring, the board should consider establishing special committees composed primarily or entirely of independent directors. These committees can provide focused attention and expertise to these complex matters.
2. Decision Documentation
Detailed Records: It’s essential to maintain thorough records of all board deliberations and decision-making processes, especially during times of distress. These records should document the various options considered, the rationale for the chosen course of action, and how the decision aligns with the company’s fiduciary duties.
Stakeholder Considerations: The records should also reflect that the board has considered the interests of all relevant stakeholders, including creditors, employees, and other investors.
Independent Advisors: Engaging independent financial and legal advisors can provide valuable support to the board and enhance the credibility of the decision-making process. The advisors can provide objective analysis and advice, and their involvement can demonstrate that the board has taken appropriate steps to inform itself.
3. Conflict Management
Early Identification: Potential conflicts of interest should be identified and addressed as early as possible. This may involve disclosing the conflict to the board, recusing conflicted directors from certain discussions or decisions, or seeking independent advice.
The surge in PE-backed bankruptcies serves as a reminder that understanding and properly managing fiduciary duties isn’t just a legal nicety – it’s essential for protecting both the portfolio company and the sponsor’s interests in challenging times.
In an effort to keep you apprised of what’s happening in the realm of bankruptcy and restructuring, here are several recent developments to be aware of.
1. The 2024 corporate bankruptcy total could reach a 14-year high. New data from S&P’s Global Market Intelligence showed that November’s 69 bankruptcy filings from public and certain private companies were the second-highest monthly total since early 2021 and pushed the year-to-date total to 634, nearly exceeding last year’s 636 total filings. If December continues at the same rate we’ve seen all year, 2024 will end with the highest total number of bankruptcies since the peak of the Great Recession in 2010.
2. In November, four notable Chapter 11 filings exceeded $1 billion in liabilities: H-Food Holdings LLC, Spirit Airlines Inc., Wellpath Holdings Inc., and Franchise Group Inc. S&P’s data also shows that the consumer discretionary, industrials, healthcare, consumer staples, and information technology sectors saw the most bankruptcy filings in 2024, mainly because inflation, high interest rates, and changing consumer spending habits are more acutely impacting those industries.
3. More restructuring taking place through receivership proceedings may be coming to the cannabis industry due to heavy debt loads. While it’s hard to know how much debt is being held by private companies in the industry, we know from reporting in the Green Market Report that four publicly traded, multi-state cannabis operators have more than $1.8 billion in debt maturing in 2026 alone.
4. In a decision that grappled with the challenges of providing notice to parties involved in cryptocurrency-related disputes, the U.S. Bankruptcy Court for the Southern District of New York authorized the use of NFTs to serve legal documents on anonymous defendants in three adversary proceedings related to the Celsius Network bankruptcy proceedings. The October 2024 ruling allows for “airdropping” NFTs to cryptocurrency wallet addresses when traditional methods of service are not feasible due to unknown defendant identities and locations.
