Michigan Regulators Propose Stripping Licenses from Companies that Don’t Pay Vendors

Industry experts believe the rule could create havoc in an industry already under financial pressure.

This story was republished with permission from Crain’s Detroit and written by Dustin Walsh

Michigan regulators are looking to remove businesses that don’t pay their bills from the state’s marijuana industry.

In proposed rules released this month, the Cannabis Regulatory Agency is seeking authority to deny licenses to businesses found in court to have not paid vendors. It’s a move that would set the industry apart from nearly every other industry in the state. Experts in the industry, however, believe the rule could create havoc in an industry already under financial pressure due to low prices.

The proposed changes to the rule would “allow the CRA to deny a license or license renewal based on civil judgments (and) court orders resulting from unpaid debt for work, services, products, or equipment provided solely in the cannabis industry.”

While the CRA declined to comment on the proposed rule change, a document released by the agency states the ability to deny licenses to delinquent businesses would address “a concern that has been raised by many in the industry.”

It’s true that the recent industry shakeout caused by low prices is leaving many bills past due or unpaid altogether. Michigan’s marijuana industry has suffered an epic price collapse due to product oversupply — recreational marijuana retail prices have plummeted from $512.05 per ounce of flower in January 2020 to just $87.76 per ounce in April — effectively eliminating profit margins for businesses across the state.

Earlier this year, for example, Troy-based integrated cannabis firm Trucenta LLC sued marijuana processor TAS Asset Holdings LLC over more than $250,000 in past-due payments. The licenses of TAS, however, are already suspended by the state over the alleged use of illegally-grown marijuana in licensed Fwaygo-branded products.

Lansing’s Skymint, one of the state’s largest marijuana growers, is in a court-ordered receivership for its inability to pay back more than $120 million in loans. Whether or not the company pays certain creditors is currently up to the receiver.

Lance Boldrey, partner at Detroit-based law firm Dykema Gossett PLLC, said that while the proposed rule is more of a trial balloon, enactment of it would be an overreach by the CRA.

No other regulated industry has such a rule, though banking, insurance, and gaming industries do have rules around financial solvency.

“While there are a lot of receivables out there, a simple policy that a judgment jeopardizes licensure, particularly in an industry that cannot use the bankruptcy courts, seems extreme,” Boldrey wrote in an email to Crain’s.

Marijuana remains a Schedule 1 drug at the federal level, which bars cannabis companies from being able to use the federal bankruptcy courts to settle debts, leaving receivership in state circuit courts as the only means for financial protection.

Doug Mains, partner and cannabis attorney for Detroit law firm Honigman LLP, said while the rule change seems good in theory, it would cause an increase in litigation that could complicate an already complicated industry.

“I get from an industry standpoint this could be a good concept; owing money could cost your license and therefore it might stop you from not paying,” Mains said. “But how do you define the rules? Do you put some sort of monetary threshold on it? But, really, what you’d see is this being used as a strong-arm tactic where companies say, ‘Settle with us and pay or we’re going to file a civil lawsuit and see if the CRA will not renew your license.”

The rule could also put a roadblock on the legal process and bottleneck industry supply chains, said Michelle Donovan, senior counsel at Detroit law firm Clark Hill PLC.

“What if the parties are in the middle of continued litigation, such as an appeal and this judgment is ultimately overturned,” Donovan said in an email. “Post-judgment litigation could take many months before a final disposition. As a general rule, parties are free to contract but the assurance of payment should be left up to the parties not as a deterrent for a new license or license renewal if the other party fails to pay. If anything, this proposal would stymie parties from contracting with others for the risk of losing a license if there was a failure of nonpayment, thus a potential clog in the supply chain.”

In total, the CRA is proposing a total of 95 rule changes. Other proposed rule changes include: Requiring applicants to notify the CRA of doing-business-as names; providing the CRA with up-to-date contact information; requiring licensees to provide proof of insurance within 60 days; requiring licensees to report harvest schedules; requiring compliance testing to be done in front of a camera; and requiring standard terpene profile testing.

These proposed rules will enter the public hearing phase later this summer and a permanent set of rules would not likely go into effect until early next year, said David Harns, spokesperson for the CRA.

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