Corporate Reorganization for Cannabis: Structuring for Resilience

The cannabis industry faces a $6 billion debt wall maturing by the end of 2026, with $1.83 billion from major multi-state operators alone coming due within the next twelve months. 

Federal bankruptcy protection remains unavailable due to marijuana's Schedule I status, leaving distressed operators without access to the automatic stay, cramdown provisions, or discharge mechanisms that most other American businesses can use.

Only 27% of cannabis operators reported profitability in 2024, down from 42% in 2022. Debt now comprises over 80% of all new capital raised in the sector. 

The December 2025 executive order directing expedited Schedule III rescheduling offers potential 280E tax relief, but timing remains uncertain, and rescheduling would not restore bankruptcy access.

This guide examines both reactive strategies for companies already facing distress and proactive structures that maximize resilience before problems emerge. The companies surviving the current consolidation wave share common structural characteristics that can be replicated.

Why Federal Bankruptcy Remains Unavailable

Cannabis companies cannot access Chapter 11 reorganization or Chapter 7 liquidation because federal bankruptcy trustees and courts are prohibited from administering assets connected to Schedule I controlled substances. 

This prohibition stems from the Controlled Substances Act's classification of marijuana, which bankruptcy courts have consistently held bars them from facilitating ongoing cannabis operations.

The practical consequences are severe. Without the automatic stay, creditors can pursue collection actions, foreclosure, and litigation simultaneously during any restructuring attempt. Without cramdown provisions, a single holdout creditor can derail consensual deals. Without discharge, debt burdens cannot be eliminated through a court order.

Even Schedule III rescheduling would not fully resolve this constraint. Marijuana would remain a federally controlled substance, and bankruptcy trustees would still face potential liability for administering cannabis-related assets. Recent bankruptcy court decisions show gradual flexibility (the In re Callaway decision in June 2024 allowed a Chapter 7 case involving cannabis dispensary ownership interests to proceed), but these represent narrow exceptions rather than fundamental shifts.

Cannabis operators must master state-law alternatives while building corporate structures that provide workout flexibility without federal court protection.

State-Law Restructuring Mechanisms

Four primary state-law mechanisms have emerged as alternatives to federal bankruptcy, each with distinct advantages and limitations depending on the company's circumstances, creditor composition, and state of operation.

State court receivership has become the dominant restructuring tool for cannabis companies. A court appoints a neutral receiver to take control of an insolvent company, manage assets, and determine whether restructuring or liquidation maximizes creditor value. 

The receiver operates as a fiduciary with authority defined by the court order, displacing existing management and gaining control over business operations, finances, and strategic decisions.

States including California, Massachusetts, Michigan, Colorado, Oregon, Washington, Illinois, Maine, and Rhode Island have developed cannabis-specific receivership frameworks. 

• California's Department of Cannabis Control regulations require receivers to notify the DCC within 14 calendar days of appointment and permit continued operations while a buyer applies for new licenses at the same location. 

• Michigan's Cannabis Regulatory Agency explicitly authorizes court-appointed receivers to operate licensed facilities under amendments enacted in 2020. 

• Colorado requires receivers to register with the Marijuana Enforcement Division as temporary appointees within 7 days.

Assignments for Benefit of Creditors provide a faster, cheaper alternative when circumstances align. In an ABC, the distressed company voluntarily transfers all assets to an independent assignee who liquidates them and distributes proceeds to creditors according to statutory priority. 

ABCs typically complete sales within 30-40 days, cost less than receivership, and allow the debtor to choose the assignee rather than having one court-appointed.

Critical limitations apply. There is no automatic stay against creditor collection actions during the ABC process. Assets cannot be sold "free and clear" of liens without secured creditor consent, unlike bankruptcy Section 363 sales. Contracts cannot be assigned without counterparty approval. California's DCC regulations specifically address ABCs, permitting the assignee to continue operating while seeking new licenses, but other states lack cannabis-specific ABC frameworks.

The Uniform Law Commission approved the Uniform Assignment for Benefit of Creditors Act in October 2025, potentially standardizing ABC procedures across states and providing assignees with "lien creditor status" to avoid unperfected liens. States are now considering adoption.

UCC Article 9 foreclosure allows secured creditors to enforce security interests through public or private sale of collateral after default. The process can complete within 30-40 days through a "commercially reasonable" disposition, making it attractive when speed matters and secured lenders hold controlling positions.

However, most states prohibit security interests in cannabis licenses or cannabis products, severely limiting this mechanism's utility. 

Only Oregon and Maryland have limited provisions allowing security interests in licenses. In practice, lenders take security interests in the equity of license-holding entities rather than the licenses themselves, then foreclose on that equity. This workaround requires full regulatory approval and ownership change processes, extending timelines significantly beyond the standard UCC foreclosure.

The Eaze restructuring demonstrates this mechanism's potential when conditions align. After defaulting on a $36.9 million loan, James Clark (Netscape co-founder) foreclosed via UCC Article 9 process, purchased all assets at auction for $54-56 million, injected $10 million in fresh capital, and reopened 70 locations. Vireo Growth agreed to acquire Eaze for $47 million in December 2025.

Out-of-court workouts remain the preferred option when business viability permits and creditor cooperation exists. Direct negotiation with creditors can preserve owner equity, minimize legal fees, and maintain privacy. Workouts avoid the costs and publicity of court proceedings while allowing customized solutions.

 A key limitation is the lack of a court-imposed cramdown and automatic stay. Depending on the instrument and the terms at issue, some amendments may be approved by majority or ‘required lender’ thresholds, but holdouts can still materially impair execution, especially across different creditor classes.

License Transfer Rules & Restructuring Viability

Cannabis licenses generally cannot be transferred directly to new owners. 

This fundamental constraint means all restructuring must work through ownership change procedures or receivership/ABC successor provisions, with state regulatory requirements often determining which strategies are viable.

California illustrates the complexity. Cannabis licenses cannot be transferred or assigned to another person or premises under DCC regulations. All restructuring must be carried out through ownership change procedures rather than direct license transfers. Partial ownership changes (where at least one original owner remains) allow operations to continue during DCC review. Complete ownership changes (all owners transferring) require cessation of operations until a new license is approved.

The DCC's receivership and ABC provisions create crucial exceptions. Successors in interest can continue operating while applying for new licenses at the same location, avoiding the complete-change cessation requirement. This makes receivership significantly more valuable for California cannabis restructurings than in states without similar provisions. The January 1, 2026 deadline when all provisional licenses become ineffective (except equity retailers) adds urgency to California restructuring timelines.

Colorado's "Court Appointee" provisions, enacted in 201,8 explicitly address cannabis receiverships. Receivers must register with the Marijuana Enforcement Division within 7 days as temporary appointees and apply for a suitability finding. The SLANG Worldwide receivership in November 2024 demonstrated this framework's functionality when Highline Financial Group was appointed receiver for SLANG's Colorado subsidiaries after the company defaulted on $17.3 million in loans.

Michigan uses strict "Applicant" definitions requiring supplemental disclosure for any person or entity holding direct or indirect ownership interest exceeding 10% or anyone who can control or direct business affairs. The SkyMint receivership's 2.5-year duration reflected both the complexity of the assets involved and the time required for regulatory processes.

New York's regulatory chaos creates particular challenges. Due to OCM staffing issues (65+ vacancies), the agency issued interim guidance stating that amendment requests for ownership changes "are not being accepted at this time" and that OCM "will not take any adverse action against a licensee for not having notified or not having requested approval for a change." Changes proceed at licensee's own risk.

Background check timelines create transaction delays across all jurisdictions. New owner background checks typically require 30-90 days, with complex cases extending to four to six months or longer. FBI processing takes 2 to 4 weeks; state processing adds another 2 to 8 weeks. 

All owners, principals, officers, and financial interest holders above stated thresholds must complete fingerprinting and disclosure.

Section 280E

IRC Section 280E prohibits cannabis businesses from deducting ordinary business expenses, with only Cost of Goods Sold available as a deduction. 

This creates effective tax rates often exceeding 70% versus approximately 21-30% for traditional businesses, fundamentally changing how restructuring economics work in the cannabis sector.

The cash flow consequences impair workout feasibility in ways that don't affect other industries. Companies may show GAAP losses while owing significant federal taxes, draining capital that would otherwise fund restructuring efforts. Major MSOs maintain substantial tax reserves: Ascend Wellness held $38 million for 2024 alone.

Interest expense non-deductibility represents the most significant restructuring constraint. Unlike every other distressed industry, interest payments provide no tax benefit under 280E. This makes debt restructuring economics significantly worse than in traditional sectors. A company negotiating extended maturities or increased rates cannot offset those costs against taxable income. The after-tax cost of debt service is dramatically higher, which explains why equity-heavy capital structures make more sense in cannabis than in other industries with similar risk profiles.

Cancellation of debt income requires careful planning. Debt forgiveness creates taxable COD income under general tax principles. The insolvency exception under IRC Section 108(a)(1)(B) may permit an exclusion to the extent of insolvency, but cannabis companies typically have limited tax attributes to reduce because 280E prevents the generation of deductible NOLs and credits. This can result in "black hole" COD income that may be excluded under Section 108 (e.g., to the extent of insolvency), but that exclusion generally comes with tax-attribute reductions (and other knock-on effects) that must be modeled carefully.

State decoupling provides partial relief. As of December 2025, 23 states have decoupled from IRC 280E for state income tax purposes, including California, Colorado, Illinois, Massachusetts, Michigan, New York, and New Jersey. Companies operating in decoupled states can deduct ordinary expenses at the state level even while federal 280E applies, improving effective tax rates and cash flow.

The December 2025 executive order directing expedited Schedule III rescheduling could eliminate 280E's application entirely. Section 280E only covers Schedule I and II substances; Schedule III classification would remove cannabis from its scope. Industry analysis suggests typical dispensaries could save approximately $268,000 per year, with higher-volume stores seeing relief approaching $800,000 annually. The industry-wide impact could unlock $1.6-2.2 billion in incremental after-tax cash flow annually.

However, timing uncertainty persists. The IRS has not clarified when relief would apply: upon publication of the final rule, retroactively to the tax year beginning, or only prospectively. Restructuring models should include multiple rescheduling scenarios rather than assuming a particular outcome or timeline.

Corporate Structures

Thoughtful corporate structure planning is critical given the unavailability of federal bankruptcy protection. 

The optimal structure isolates valuable assets from operational risk, enables partial sales, and provides flexibility for both workouts and growth.

The holding company model has become standard among sophisticated cannabis operators. A C-corporation holding company (often incorporated in Delaware or Canada) owns intellectual property, branding, and management services contracts. Separate state-level LLC subsidiaries hold cannabis licenses and conduct plant-touching operations. This creates liability isolation: problems in one operating subsidiary don't cascade to the entire enterprise. Holding company assets remain protected from operational creditors.

Empirical research shows that approximately 44.8% of cannabis company financing documents include provisions using separate legal entities for each license or property to limit unpredictable consequences. 

This has become industry best practice for companies that engage experienced counsel during formation.

Single-purpose entities for each license provide the foundation for distressed flexibility. Cultivation entities hold grow licenses, manufacturing entities handle processing, and retail entities operate dispensaries. This structure enables individual license divestiture without affecting others, isolates regulatory violations to specific locations, and allows "slicing" of operations during workouts. A company facing distress in one market can divest those specific licenses while retaining healthy operations elsewhere.

Real estate in separate entities creates distinct collateral pools. Regardless of whether a company owns or leases its facilities, real estate should be held separately from operating companies. This enables separate financing, prevents operational liabilities from encumbering property assets, and provides lenders with cleaner collateral packages.

Leasing is generally preferred for restructuring flexibility because there are no mortgage encumbrances, leases can be rejected in insolvency proceedings, and balance sheet leverage is reduced. However, ownership provides valuable collateral for secured lending and can be monetized through sale-leaseback transactions for liquidity. 

Major MSOs have used sale-leasebacks extensively: 

• Cresco Labs executed a $50 million transaction with GreenAcreage Real Estate REIT, 

• Green Thumb completed $39.6 million for a Pennsylvania cultivation facility, 

• Acreage Holdings raised $72 million through sale-leasebacks. 

Typical structures include 10-15 year terms with renewal options, triple-net leases, and cap rates of 12-15% for cannabis properties.

IP holding companies preserve brand value while providing tax efficiency. A separate IP holding company that owns all trademarks, trade secrets, recipes, and formulations can license them back to operating entities for royalties. The IP company is not subject to 280E restrictions because it doesn't traffic in controlled substances, making royalty payments potentially deductible through COGS allocation. In distressed scenarios, IP is shielded from operational liabilities and can be sold independently or retained while selling operating assets.

Debt Structuring for Workout Flexibility

The cannabis lending market faces its most challenging period with $6 billion maturing by end of 2026. Structuring debt for workout flexibility from the outset is essential.

Private credit dominates cannabis lending, with debt comprising over 80% of all capital raised in 2024-2025. 

Interest rates for senior secured loans range from 12-18%, mezzanine debt commands 18-25%+, and loan-to-value ratios remain conservative at 50-60% versus 80% for traditional commercial real estate lending. 

Major lenders include Chicago Atlantic (approximately 20% market share with $2.8+ billion closed), Advanced Flower Capital (~$800 million originated), NewLake Capital Partners ($425+ million committed), and Pelorus Capital Group ($545+ million deployed).

Pre-negotiated workout provisions provide crucial protection since the federal bankruptcy's automatic stay is unavailable. Cannabis loan documents should include springing receivership provisions that allow lenders to trigger receivership upon default, with pre-approved receivers. Washington State's Liquor and Cannabis Board maintains a pre-approved receiver list for expedited appointments; Massachusetts allows pre-approval of receivers; California's DCC has specific receiver approval rules. Other critical provisions include forbearance triggers (typically 30-90 day standstill periods), equity cure rights allowing capital injection to cure covenant defaults, and restructuring cooperation covenants requiring debtor assistance with potential UCC sales.

License-related covenants address the unique regulatory environment. Affirmative obligations to maintain all cannabis licenses in good standing, notice requirements for any regulatory actions, and restrictions on license transfers without lender consent are standard. Borrowers generally cannot grant security interests in licenses directly due to regulatory restrictions. Instead, lenders take interests in the equity of license-holding entities, then foreclose on that equity if enforcement becomes necessary.

Intercreditor arrangements define enforcement rights in multi-tranche structures. The standard priority runs: receiver/workout costs, senior secured debt, second lien debt, subordinated debt, mezzanine/convertible debt, unsecured creditors, then equity. Enforcement standstill periods typically run 90-180 days for junior creditors before they can take independent action.

Case Studies: What Works and What Fails

The cannabis restructuring cases of 2024-2025 illustrate which approaches preserve value and which accelerate destruction.

MedMen demonstrates how overleveraging and governance failures destroy enterprise value. Once valued at $3 billion and dubbed the "Apple Store of Weed," MedMen collapsed with CA$561 million (~$410 million USD) in liabilities. 

The company's California subsidiary entered receivership in April 2024; the Canadian parent filed bankruptcy under the Bankruptcy and Insolvency Act. Contributing factors included excessive debt from rapid expansion, failed M&A (the $682 million PharmaCann merger collapse left the company unable to repay creditors), and management turmoil (7 CFOs in 5 years). The trustee's preliminary report anticipated "no assets available to creditors."

StateHouse Holdings (formerly Harborside) illustrates how debt-fueled acquisitions can prove unsustainable. StateHouse accumulated $77.3 million in Pelorus financing for the Urbn Leaf and Loudpack deals at 10.25% interest. 

After falling behind on payments, Pelorus filed for receivership in September 2024. The company's assets represent potentially the largest receivership deal in U.S. cannabis history at over $120 million combined. The lesson: debt-fueled acquisitions require a margin of safety that StateHouse lacked when California market conditions deteriorated.

Eaze demonstrates that restructuring can preserve going-concern value when conditions align. After defaulting on a $36.9 million loan, a single controlling creditor made unilateral decisions enabling faster restructuring than would be possible with a fragmented creditor base. 

Fresh capital injection ($10 million Series B funding) and workforce cooperation (UFCW negotiated new labor agreement) enabled restart of 70 locations. The December 2025 agreement to sell to Vireo Growth for $47 million validated the restructuring approach.

MSO positioning diverges widely. Green Thumb Industries maintains industry-best positioning with $226 million in cash against $247 million in debt and the landmark bank-only facility. 

Trulieve successfully paid off $368 million in 8% notes due 2026 using $373 million in cash, replacing them with $140 million at 10.5% maturing 2030. Cresco Labs refinanced $360 million to $325 million at 12.5%, extended to 2030.

At the other end, Curaleaf faces an elevated risk having failed to refinance $457 million due in December 2026. The Cannabist Company carries "substantial doubt about ability to continue as going concern" language with $1.31 billion accumulated deficit. AYR Wellness entered court-supervised liquidation after executing a Restructuring Support Agreement giving senior noteholders 100% of NewCo equity.

The pattern is clear: companies that engaged lenders 12-18 months before maturity achieved better terms than those approaching deadlines under duress. Conservative balance sheets and early refinancing engagement determine outcomes.

Conclusion

The cannabis industry's restructuring wave is accelerating, and the $6 billion debt wall, compressed profitability, and continued federal illegality create an environment where preparation separates survivors from casualties. Companies structured with isolated license-holding entities, work out flexible debt, and maintained compliance possess options unavailable to those that deferred planning.

Federal reform, whether through rescheduling or eventual legalization, will transform industry economics but will not eliminate restructuring challenges. The skills and structures developed now remain valuable regardless of federal policy evolution. Companies building resilience proactively position themselves for acquisition opportunities as weaker competitors fail.

The most important insight from the 2024-2025 restructuring cases is that distress was predictable and preventable in most instances. Excessive leverage, governance failures, and compliance lapses destroyed value. The companies thriving through consolidation (GTI, Trulieve, and selected regional operators) maintained conservative balance sheets, strong compliance cultures, and flexible corporate structures. Their example provides the roadmap for cannabis operators seeking to build enterprises that survive the current crisis and emerge stronger.

If you need assistance with cannabis restructuring, state-court receivership proceedings, license transfer strategies, or proactive corporate structuring to maximize resilience, please contact Brightpoint to schedule a consultation.

Sources

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