How Secure Are Cannabis Creditors?

• Published in: American Bankruptcy Institute journal Vol. 43; no. 9; pp. 34 - 59
• Main Author: Whitley, L Alexis
• Format: Journal Article
• Language: English
• Published: Alexandria American Bankruptcy Institute 01.09.2024
• Subjects: Collateral; Licenses; Licensing; Medical marijuana; Personal property; Receivership; Regulatory approval; Securitization; State laws; Uniform Commercial Code-US; Oregon; United States > US; Colorado; California
• ISSN: 1931-7522

Section 9-102(a)(42) defines "general intangibles" as "any personal property" other than certain enumerated collateral types (e.g., chattel paper, instruments and letter-of-credit rights),7 and includes licenses such as intellectualproperty licenses and liquor licenses.8 Although Article 9 permits perfecting security interests in licenses, states might have specific prohibitions on taking security interests in cannabis licenses because of the associated suitability and licensing requirements that are unique to these assets.9 Although marijuana is federally illegal, the DOJ has previously announced that states legalizing marijuana must maintain "strong, state-based enforcement efforts" surrounding marijuana.10 This has led states to create and enforce stringent requirements for obtaining marijuana-related licenses, such as cultivation, registration, inspections, zoning approval and facility diagrams. Because the specific requirements for marijuana businesses are contained in state laws regulating the substance, these laws must be read in conjunction with Article 9 when analyzing how to attach and perfect in cannabis company licenses. The California Department of Cannabis Control rules require licensees to disclose "financial interest-holders," but parties "whose only financial interest is a security interest, lien, or encumbrance on property that will be used by the commercial cannabis business" are not considered financial interest-holders.15 This is the only mention of security interests in its rules.16 Although California's statutes do not expressly provide for taking security interests in cannabis licenses, the Superior Court for Santa Clara County has held that a secured creditor with a blanket security interest in a cannabis company's collateral included without limitation all cash, accounts, inventory, rights to payment, goods, equipment, furnishings, and general intangibles, together with the business operations, marijuana dispensary registration certificates, and all other permits and licenses pertaining to the operation of the business, both tangible and intangible, of whatever kind and description and wherever situated and the revenues, payments, proceeds, and profits derived from the Business, as defined herein, (collectively, the "Collateral"), wherever located.17 This holding is important because, in its motion to appoint a receiver, the court indirectly recognized a security interest in the cannabis company's license without considering the suitability requirements for obtaining the operational license ex ante. [...]secured creditors seeking to collateralize cannabis licenses in Colorado should consider the possibility that the licenses cannot be collateralized or should be committed toward devoting significant resources to complying with licensing requirements in preparing for a potential approved license transfer. [...]Oregon law provides that the OLCC may provide for the manner in which securitized marijuana collateral (other than licenses) can be foreclosed.30 This law gives the OLCC broad authority to dispose of cannabis assets as it sees fit for the situation or the operation by secured parties of licensed cannabis companies for a reasonable time after a debtor's default to protect their interests.31 While cannabis licenses are not transferable from entity to entity nor subject to securitization per statute, Oregon has implemented a change-of-ownership process.32 This process permits parties to purchase a cannabis company's license rights but also requires the purchaser to meet all applicable licensee requirements.33 Although Oregon's change-of-ownership process appears to transfer the license, the process requires buyers to submit their own applications and independently meet suitability requirements, essentially allowing qualified buyers to purchase outstanding licenses rather than apply for new licenses.34 As a result, Oregon's change-ofownership process provides secured lenders with an alternative for recognizing the inherent value in a cannabis license.