Enforcing a mortgage against a property that contains cannabis has additional difficulties
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You lend money to a cannabis start-up to buy a property. The borrower builds out a facility with plants and processing equipment and a vault to store cannabis.
The borrower is suffering financially and isn’t paying your mortgage and you need to enforce.
Under normal circumstances, we know the procedure – serve a power of sale notice or appoint a receiver to sell the property. But what do you do if there is cannabis in the property? Can you take possession? Can a receiver take possession?
How do you enforce a mortgage if there is cannabis in the property?
This issue came up recently in the Pure Global Cannabis Inc. CCAA proceedings where we acted as the lawyers for one of the mortgage lenders.
Pure Global and its subsidiaries were in the business of producing and selling cannabis. One subsidiary, PureSinse Inc., was in the business of developing and producing cannabis products.
PureSinse operated out of a building owned by another subsidiary of Pure Global, 237B Advance Inc. 237B Advance Inc. bought its building with a loan from our client.
As a start-up, Pure Global and its subsidiaries didn’t generate any real revenues. The companies raised funds by issuing shares or debentures. Pure Global required additional financing to further develop its business but was unsuccessful. This led to a liquidity crisis.
To deal with its liquidity crisis, Pure Global sought protection pursuant to the Companies’ Creditors Arrangement Act (“CCAA”) and debtor in possession (“DIP”) financing. If Pure Global succeeded the DIP financing would rank ahead of its existing mortgage lenders, including our client.
Pure Global’s position was that it was on the cusp of profitability and this additional financing would allow it to become successful and to pay all of its creditors in full.
Pure Global’s creditors, including our client, objected to the plan. The creditors’ position was that the only real value in Pure Global was its real estate holdings and that those holdings should be sold as quickly as possible without incurring any additional debt.
The creditors wanted to appoint a receiver to sell the real estate and to use the funds to repay the creditors.
The court agreed with our client that Pure Global should not be permitted to borrow more or to continue operating. However, we faced a problem.
The building financed by our client contained PureSinse’s cannabis plants, flowers and oil. Cannabis is a controlled substance. PureSinse had a license to possess and deal with cannabis and had employees with the required security clearance.
Any receiver appointed to take possession of the property that PureSinse operated out of would not have the license or security clearance. The receiver would not be able to take possession of the cannabis or the building that the cannabis was in.
How could we remove the cannabis from the building without a licence or security clearance?
The solution was to agree to a much more limited CCAA order that required the company to shut down its operations and dispose of the cannabis.
The company had the required licence and its employees had security clearance to dispose of the cannabis. Once the cannabis was disposed of, our client would be free to appoint a receiver and the receiver would be able to take possession of the (now empty of cannabis) building.
We combined our understanding of insolvency law and our understanding of our client’s need to enforce its mortgage to obtain a result that allowed our client to enforce in the quickest and most cost-effective manner possible in the circumstances.
If you have any questions about enforcing a mortgage against a cannabis company, restructuring a cannabis company, or any other insolvency issues contact Wojtek Jaskiewicz at wjaskiewicz@kmblaw.com or visit our website at www.kmblaw.com.
The borrower is suffering financially and isn’t paying your mortgage and you need to enforce.
Under normal circumstances, we know the procedure – serve a power of sale notice or appoint a receiver to sell the property. But what do you do if there is cannabis in the property? Can you take possession? Can a receiver take possession?
How do you enforce a mortgage if there is cannabis in the property?
This issue came up recently in the Pure Global Cannabis Inc. CCAA proceedings where we acted as the lawyers for one of the mortgage lenders.
Pure Global and its subsidiaries were in the business of producing and selling cannabis. One subsidiary, PureSinse Inc., was in the business of developing and producing cannabis products.
PureSinse operated out of a building owned by another subsidiary of Pure Global, 237B Advance Inc. 237B Advance Inc. bought its building with a loan from our client.
As a start-up, Pure Global and its subsidiaries didn’t generate any real revenues. The companies raised funds by issuing shares or debentures. Pure Global required additional financing to further develop its business but was unsuccessful. This led to a liquidity crisis.
To deal with its liquidity crisis, Pure Global sought protection pursuant to the Companies’ Creditors Arrangement Act (“CCAA”) and debtor in possession (“DIP”) financing. If Pure Global succeeded the DIP financing would rank ahead of its existing mortgage lenders, including our client.
Pure Global’s position was that it was on the cusp of profitability and this additional financing would allow it to become successful and to pay all of its creditors in full.
Pure Global’s creditors, including our client, objected to the plan. The creditors’ position was that the only real value in Pure Global was its real estate holdings and that those holdings should be sold as quickly as possible without incurring any additional debt.
The creditors wanted to appoint a receiver to sell the real estate and to use the funds to repay the creditors.
The court agreed with our client that Pure Global should not be permitted to borrow more or to continue operating. However, we faced a problem.
The building financed by our client contained PureSinse’s cannabis plants, flowers and oil. Cannabis is a controlled substance. PureSinse had a license to possess and deal with cannabis and had employees with the required security clearance.
Any receiver appointed to take possession of the property that PureSinse operated out of would not have the license or security clearance. The receiver would not be able to take possession of the cannabis or the building that the cannabis was in.
How could we remove the cannabis from the building without a licence or security clearance?
The solution was to agree to a much more limited CCAA order that required the company to shut down its operations and dispose of the cannabis.
The company had the required licence and its employees had security clearance to dispose of the cannabis. Once the cannabis was disposed of, our client would be free to appoint a receiver and the receiver would be able to take possession of the (now empty of cannabis) building.
We combined our understanding of insolvency law and our understanding of our client’s need to enforce its mortgage to obtain a result that allowed our client to enforce in the quickest and most cost-effective manner possible in the circumstances.
If you have any questions about enforcing a mortgage against a cannabis company, restructuring a cannabis company, or any other insolvency issues contact Wojtek Jaskiewicz at wjaskiewicz@kmblaw.com or visit our website at www.kmblaw.com.
This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice based on their specific situations.