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Receivership Law in Colorado as Applied to the Cannabis Business

The law of receivership in Colorado has it’s quirks when applied to the setting of retail cannabis sales.

Background on Receivership in Colorado

Under Colorado law (and the law of most states), a court can order appointment of a receiver if certain factors are established and instill in her a wide array of powers including, generally, the right to take possession of the property of a business and to manage, operate, maintain, repair, and otherwise control the business so as to preserve its value.

The appointment of a receiver, however, is not without disadvantages. First, the process in a contested proceeding can be lengthy and costly, and the standard for obtaining a receiver is difficult. Further, if the court appoints a receiver, all owners lose control of the business and the party who procured appointment may later disagree with the receiver’s actions. Once the receiver is appointed, the receiver will stay in place until her authority expires under the order appointing her or until the court orders otherwise. Receivers can be expensive, particularly if the appointing order is broad enough to encompass complete operation of the business. If a business is distressed enough to require a receiver, and such distress has also caused the business to become financially weak, the appointment of a receiver may cause business insolvency, rather than business protection.

These issues are compounded by the additional layer of regulatory scrutiny imposed on marijuana businesses. The primary point of contention has been the conflict between the court’s authority to order appointment of a receiver and take possession of the business’s assets and the rules promulgated by Colorado’s Marijuana’s Enforcement Division (MED, a division of the Colorado Department of Revenue) which provide, in pertinent part, that anyone taking possession of salable marijuana or operating a marijuana business be vetted and licensed by the MED.

At least one Colorado District Court wrestled with the issue, and the Colorado Court of Appeals held that, under appropriate circumstances, a court can appoint a receiver in connection with a marijuana business. This article examines the law and policy that led to this decision and articulates the current state of Colorado law with respect to appoint of receivers in connection with marijuana businesses.

Trial Court Proceedings—Garcia v. Botica Del Sol

In Garcia v. BoticaDel Sol LLC, et al., District Court, City and County of Denver, Case No. 2016CV30777 (Mar. 7, 2016), Rico Garcia was a secured creditor of Botica del Sol, which was a marijuana business engaged in the cultivation and retail sale of medical marijuana. Subsequently, Garcia filed a lawsuit against Botica del Sol and numerous of its owners and operators, alleging that they were committing waste with respect to the collateral securing Garcia’s note (the collateral included marijuana, marijuana licenses, and marijuana-related products). Garcia further alleged that, as a result thereof, the collateral securing his note was being impaired. Garcia thus moved the court for a receiver pursuant to Colorado Rule of Civil Procedure 66 and Colorado Revised Statute § 7-80-812(2). Rule 66 provides, in pertinent part, that a court may appoint a receiver when the applying party:

“. . .establishes a prima facieright to the property, or to an interest therein which … is in the possession of the an adverse party and [is] in danger of being … materially injured or impaired.” (See also, Colo. Rev. Stat. § 7-80-812(2) (same)).

Subsequently, the Executive Director of the Colorado Department of Revenue, as the State Licensing Authority for medical marijuana licensure and regulation (SLA) successfully moved to intervene and then filed a substantive motion opposing Garcia’s motion for a receiver arguing, in the main, that appointment of a receiver (under the terms proposed by plaintiff Garcia): 1) would violate the Separation of Powers provision contained in Article III of the Colorado Constitution; 2) would contravene the Colorado Medical Marijuana Code, Colo. Rev. Stat. § 12-43.3-101, et seq.; and 3) would contravene other provisions of Colorado law, including certain criminal provisions.

The trial court agreed with the SLA and denied Garcia’s motion for a receiver, holding that:

“The Court agrees with Intervenor that the Court does not have authority, under the separation of powers doctrine, over the State Licensing Authority.”

The court noted that Garcia’s proposed order appointing a receiver had been narrowed since his application but was still overbroad. In this connection, the court noted:

“Plaintiff requests that the court order that the receiver ‘take immediate control of the property, of Botica del Sol, and to ‘manage, operate and protect the property’ subject to the supervision and exclusive control of this Court. … As defined, because ‘property’ includes [marijuana licenses], again the Court is without authority to grant this request … [as] only a licensed person may operate, manage or control a medical marijuana business” (citing Colo. Rev. Stat. § 12-43.3-310(8)).

Notably, the court did not hold that it was without power to grant a receiver with respect to a marijuana business. It held that the power that would be vested in the receiver, in this case, under Garcia’s motion and proposed order, exceeded the court’s authority. Garcia appealed the denial, however, the appeal was dismissed before it proceeded to briefing.

The Colorado Court of Appeals Weighs in—Yates v. Hartmann

As of the issuance of the Botica del Sol order, there were no published Colorado appellate opinions providing guidance on this subject. That changed recently with the published Colorado Court of Appeals decision in Yates v. Hartman, 2018 COA 31 (Colo. App. 2018). In Yates, the court considered, as a matter of first impression:

” . .whether a court may appoint a receiver for a marijuana business if that receiver does not possess the licenses required by Colorado’s marijuana licensing laws.” Id. at *2.

The court held that:

“. . .although courts have the equitable power to appoint receivers, they must make such appointments in compliance with the marijuana licensing laws enacted by the General Assembly.”

Background

In that case, the petitioner and appellee Kelsey Yates (Ms. Yates) filed a petition to dissolve her marriage to respondent-appellant Kiri Humphrey. In connection with this filing, Ms. Yates requested the appointment of a receiver over the marital property which included a group of marijuana businesses. The trial court granted the request for a receiver and issued an order authorizing the receiver to:

“. . . ‘take immediate control of the [businesses] and operate the [businesses] on the Court’s behalf in custodia legis.’ The Receiver had the ‘powers and duties’ to ‘manage, operate, maintain, repair, and otherwise control the [businesses] as necessary to preserve [them].’” Id. at *2-*3.

It was undisputed that, when the trial court entered this order, neither the proposed receiver not his employees held the licenses required under Colorado law to “own, operate, manage, control, or work in a licensed marijuana business Id. at *3.

The SLA intervened and moved to modify the trial court’s receivership order by removing the putative receiver until he and his employees obtained the requisite licenses. The trial court denied this motion and the SLA appealed.

Defining the Scope of the Review on Appeal

The Colorado Court of Appeals first defined the scope of the case, noting that:

“. . .the SLA does not challenge the district court’s authority to appoint receivers for marijuana businesses. Instead, the SLA only challenges the court’s authority to appoint receivers who are not licensed to operate marijuana businesses.” Id. at *4.

The court then began its analysis by noting that “[c]ourts of equity have the inherent power to appoint receivers.” Id. (citations and quotations omitted). The court further clarified, however, that:

“. . .[c]ourts of equity can no more disregard statutory and constitutional requirements and provisions than can courts of law. The courts of a jurisdiction cannot authorize violation of that jurisdiction’s laws …. It is fundamental tenet of [the] separation-of-powers doctrine that a court’s enforcement powers are restricted by the dictates of the legislature.” Id. (citations and quotations omitted).

State Regulatory Authority over Professions and Businesses

The Court of Appeals then explicated the history of the Colorado legislature’s regulatory authority over professions and other business up to the point when:

“. . .[t]he General Assembly exercised this authority when it prohibited the operation of both medical and recreational marijuana businesses unless the businesses’ owners and employees hold the licenses prescribed by statute” (citing Colo. Rev. Stat. §§ 12-43.3-103(2)(e), 12-43.4-104(4)).

The court then detailed the regulation of marijuana in Colorado, concluding that “under both the Colorado Medical Marijuana Code and the Colorado Retail Marijuana Code, no person may operate a marijuana establishment without the required licenses” (citing Colo. Rev. Stat. §§ 12-43.3-313(3), 12-43.4-312(2)). Id. at *6. “To operate these businesses without these licenses is a criminal offense” (citing Colo. Rev. Stat. §§ 12-43.3-901(2), 12-43.4-901(2)(a)).

Appointment of a Receiver was in Error

Based upon this historical exegesis of marijuana regulation in Colorado, the Court of Appeals held that the trial court’s appointment of a receiver was erroneous. The Court of Appeals first rejected the trial court’s holding that “its power to appoint a receiver trumped the laws requiring persons operating marijuana businesses to be licensed.” Id. at *7. The Court of Appeals rejected this argument, holding that:

“. . .[b]ecause the court’s powers to appoint receivers for marijuana businesses is not in conflict with the licensing laws … [and] ‘it is not an appropriate function of the court to act as a licensing agency … and undertake the agency’s role in determining who may operate marijuana businesses.” Id. at *8 (citation and quotation omitted).

The Court of Appeals determined “that the district court may only appoint a receiver who complies with Colorado’s marijuana licensing laws.” Id. at *9. The Court of Appeals reversed the trial court’s order appointing the receiver and further concluded that:

“The district court, in the exercise of its discretion, may appoint a substitute receiver who complies with the licensing requirements of the Colorado Medical Marijuana and Retail Marijuana Codes.” Id.

Conclusion and Implications

The Colorado Court of Appeals issued its mandate in Yateson November 20, 2018, and no party thereto appealed. Yates, and the guidance it provides, is thus the current state of Colorado law on receivers for marijuana businesses. Yates does provide helpful guidance as it draws certain clear conclusions, to wit: A court may appoint a receiver in connection with a marijuana business, provided that the appointing order requires that the receiver complies with all Colorado marijuana licensing and other laws, regulations, and rules.

However, given the constant state of flux of these laws, regulations, and rules, the careful practitioner is also counseled to keep constantly abreast of these strictures and ensure her knowledge is consummately current in the event she is seeking or opposing a receiver for a marijuana business. A party seeking a receiver is well-advised to then apply this current state of the law to the motion for and proposed order appointing a receiver to ensure that the motion and order strictly comply with all then-applicable Colorado laws, regulations, and rules pertaining to marijuana.

Finally, this legal framework raises issues to be considered for potential receivers. For example, the requirement that a receiver obtain state licensure in order to function may raise issues for the many receivers who are licensed professionals (often Certified Public Accountants and/or attorneys) whose licensure might be impacted by the fact that marijuana is currently illegal under federal law. Additionally, once a receiver is appointed, that person will likely have the independent obligation to keep abreast of all Colorado laws, regulations, and rules pertaining to marijuana, which can be a daunting task.

Practitioners and potential receivers are advised, both during the process of seeking a receiver and if one is appointed, to carefully craft and understand any order appointing a receiver and to monitor the state of Colorado law on this point so as to ensure continued compliance with any such order.

(Eric Liebman)

 

 

 

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