This transcript has been auto generated
00;00;00;00 - 00;00;38;18
Hilary Bricken
Welcome. I'm your host, Hilary Bricken, and this is the Cannabis Law Now podcast, where we regularly discuss issues related to the cannabis industry, including investment. Day to day operational issues and potential reform on the horizon that will impact all cannabis businesses and investors in the United States. Hey, everybody. Welcome back to the Cannabis Law Now podcast. And today, I am so happy to say that we have the highly sought after Richard Ormond as our guest.
00;00;38;18 - 00;00;56;01
Hilary Bricken
And Richard is a partner at Buchalter in its LA office. But maybe more importantly, he's the founder of Stone Blossom, an advisory and receivership company specializing in alternatives to bankruptcy, which is an incredibly hot topic in the cannabis industry today, for better or worse. Welcome, Richard.
00;00;56;03 - 00;00;58;27
Richard Ormond
Thanks for having me. I really appreciate you giving me a call.
00;00;59;03 - 00;01;17;01
Hilary Bricken
Yes, we are so glad you're here because this topic is complicated. It's obtuse. We were just discussing kind of in pre-show how a lot of people know about bankruptcy, but not a lot of people really understand what receivership is. And you're here to talk about that today. And before we get there, why don't you give our listeners a little bit about your background?
00;01;17;01 - 00;01;36;25
Richard Ormond
So I've been a lawyer for 25 years, and I've been in restructuring and, what I would call insolvency circumstances for longer than that for about 28 years. One of the things that motivated but motivated me to go to law school was a personal issue that I dealt with dealing with insolvency and restructuring and actually a receivership.
00;01;36;26 - 00;01;55;04
Richard Ormond
And originally I thought I was going to go to law school to be an entertainment lawyer, and I ended up going to law school instead to become an expert at restructuring and helping businesses. And it went very well with the white knight complex that I that I have in dealing with with really bad situations for folks and trying to get them into a better place.
00;01;55;09 - 00;02;11;07
Hilary Bricken
And if you're in California and just kind of to paint the picture for everybody, and I know enough to be dangerous, but not more than that. Receivership is a state by state process. There is a federal receivership process, is my understanding. But in California, and maybe you can tell us about other jurisdictions because I know you're working nationally.
00;02;11;11 - 00;02;13;23
Hilary Bricken
How does receivership work generally?
00;02;13;25 - 00;02;44;26
Richard Ormond
So a receiver can be put in a different circumstance. And a lot of people are kind of familiar with, you know, the media cases where they say we're putting in a receiver or referee and it really doesn't make sense to people. But what it really is is this it's what courts consider an extreme remedy for extreme circumstances. And in essence, what the court does is they take a neutral person such as myself, and they put them in charge of a business or of certain assets, or even sometimes in rare circumstances, in charge of people themselves where they take over.
00;02;44;26 - 00;03;16;15
Richard Ormond
In essence, all the assets and, and ownership and act and like their house, their home, their cars, everything else, particularly in like major fraud cases and things like that. It's a very powerful tool. But it also has an aspect of giving people some sort of oxygen or release in, in circumstances where businesses are not doing well. So, for example, there are circumstances where you have a deadlock between, you know, siding owners of a company and because of that deadlock or that site, that company is not doing well.
00;03;16;17 - 00;03;37;10
Richard Ormond
And so the court decides to save the value of the business, that they're going to take it out of the hands of the warring parties and put it into the hands of a receiver to actually just run and operate that business and protect it. And they call harboring the business so that it protects it from the fight that's going on so that it doesn't lose value so that other shareholders, creditors or whomever are not hurt by the battle between the two owners.
00;03;37;10 - 00;04;03;19
Richard Ormond
So that's a really, typical situation when a receiver gets put into place. The other typical situation is where a lender, usually a bank, but could be a private lender or anything, sees that the value of their collateral for their loan could be diminished because of some action by the person in control of their borrower. And so a lot of times they'll take buildings or businesses or even, you know, inventory and put it in the hands of a receiver to protect that value.
00;04;03;21 - 00;04;25;00
Richard Ormond
I just finished a receivership in Pasadena, which was a building complex. It had six high rises, and the lender just could not deal with their borrower anymore. They were in default, the property was languishing, and they put me in as receiver, and we ended up selling the property for like $270 million. And it was my job to make sure that tenants paid rent.
00;04;25;03 - 00;04;41;08
Richard Ormond
That office space was filled, that the management company was doing its job. Repairs were being handled on time, until such time that we could get it up on the market and sold to the new buyer. So there's a lot of things that a receiver can do, and a court can either limit a receiver's role or can expand a receiver as well.
00;04;41;08 - 00;04;57;05
Richard Ormond
Sometimes it's just a what we call a babysitting job. The receiver takes control of inventory and just holds it until the court tells them to either sell it or give it back to somebody. And other times, you take over an entire operating business where you have to, in essence, step into the shoes of the CEO and run that business.
00;04;57;05 - 00;05;07;27
Richard Ormond
And my receiverships are usually those types of receiverships. The more complicated ones are the ones that require real business knowledge, on top of the legal knowledge that goes with that.
00;05;08;00 - 00;05;16;16
Hilary Bricken
Understood. And, two technical questions. The first one is does the receiver owe fiduciary duties if it steps into the role of the CEO.
00;05;16;23 - 00;05;36;03
Richard Ormond
So the answer is yes. And the fiduciary duties are different than what people think of like for an officer or director of a company, your fiduciary obligations are really first to the court that appointed you. Your boss is the judge. You only answer to the judge and you have to use your best business judgment as if you are just an extension of the court.
00;05;36;04 - 00;05;57;05
Richard Ormond
In essence, you're the arm of the court in that regard, and your fiduciary obligations actually goes to all of the stakeholders in this in the circumstances. So the stakeholders being people that are owed money, employees, equity holders, etc. And, you know, there's statutory requirements about how people get paid out in a liquidation or an insolvency situation. So you have to follow that statutory requirements.
00;05;57;05 - 00;06;07;07
Richard Ormond
But your job when you take over an operating business or a going concern is really to make sure that you can protect as many of those stakeholders as possible and do so within the confines of the law.
00;06;07;10 - 00;06;21;06
Hilary Bricken
And I've never quite been clear on this, maybe because it's kind of a 50 state patchwork quilt of statutes and common law mixed in. Do you have to have an underlying cause of action to enter into receivership and have a receiver appointed?
00;06;21;08 - 00;06;42;17
Richard Ormond
So the short answer is yes, but not in the way you think of, of of a cause of action as a, as a dispute. So there are where somebody is suing somebody else or there's a breach of contract or there's a loan that that's in trouble or whatever. Those are the most typical. But there's also receiverships where a business can put itself into receivership.
00;06;42;19 - 00;06;59;26
Richard Ormond
And that's called, a receiver in aid of dissolution. And I actually did a memo just last week. All 50 states have a variation of this. Some are more robust than others. Some are based on actual statutory law, some are actually based in common law. And there's probably a handful of states that have done it through the courts.
00;06;59;26 - 00;07;22;12
Richard Ormond
But they don't have any real precedent, and they don't have any statutory law at all. But they just have kind of a makeshift way of, of making it happen. And of course, the states that you would think of as having the most robust laws are the states that have most the most activity states like New York, California, Texas, Delaware, etc., and then the states that have the least or the states that probably are have less active businesses in that regard.
00;07;22;12 - 00;07;44;19
Richard Ormond
So but in dealing with that patchwork, you really have to be careful, because even though there are certain things that are common to all receiverships like a fiduciary duty and having, you know, the judge as your boss in essence, and all those things go across all 50 states and across the federal government. But states have different rules about how receivers have to act, how they have to report if they can engage counsel.
00;07;44;24 - 00;08;06;22
Richard Ormond
So you really have to make sure that you have either really good local counsel representing the receiver when they come in or that you're very well aware of what those requirements are. And so I am always very, very disciplined in making sure that if I'm appointed in a state that I have not been appointed, and before that I have really good local counsel to assist me in that regard.
00;08;06;24 - 00;08;35;22
Richard Ormond
With cannabis, you have another layer of regulatory issues and control issues and and the state and local government issues. I jokingly tell people that the tail that wags the dog in the cannabis receiverships really is, is the local government and the state government. And then of course, you have the federal mosaic of laws that exist where you have, you know, the Treasury and since and allowing certain activities and the DOJ with a call memo that was active and then rescinded and all these different things that exist.
00;08;35;24 - 00;08;52;12
Richard Ormond
And if you don't know that as a cannabis receiver, you're going to get yourself in a lot of trouble very, very quickly. I'll give you a quick example. There's a case that I'm involved with in Illinois. As a matter of fact, you're involved in that case as well. And their regulatory approvals are much different than in other states.
00;08;52;12 - 00;09;14;16
Richard Ormond
And they take a lot longer. And you have to be very, very patient and understand how that works. And in Illinois, they have never done a cannabis receivership. And so one of the strategic decisions we had to make in a very complicated case was to decide whether we do an ancillary receiver or receivership in Illinois, and realizing that it would be a case of first impression.
00;09;14;18 - 00;09;28;24
Richard Ormond
We decided against it. And that's one of those boots on the ground. Having local knowledge and having local counsel really makes a difference, because they can advise you as to what the landscape looks like and what the pitfalls are going to be, particularly in a highly regulated industry.
00;09;28;26 - 00;09;48;23
Hilary Bricken
And I think people forget or they just don't know that the receiver is not always an attorney. And even if they are an attorney, they need their own counsel to guide them in their own decision making before the court and setting the table with how complicated receivership can be in its own right. It's its own animal, obviously. Is it hard to be a receiver on these cannabis cases?
00;09;48;25 - 00;10;09;09
Richard Ormond
It can be. There are some cases that are easier than others, but they all have their own. I like to say every receivership has its own story and it has its own cast of characters. And remember, this is an industry that went from being highly illegal to being quasi illegal, to now being illegal in some respects and illegal in others.
00;10;09;11 - 00;10;31;05
Richard Ormond
And so you have what I call a lot of legacy folks that started when it was very illegal and are very used to doing things in an unorthodox manner, and they have a hard time transition. I make the joke transitioning from backpacks to briefcases, because nowadays cannabis is really a sophisticated business with sophisticated finance and corporate law and everything else, and you need to have a little bit of both.
00;10;31;05 - 00;10;53;23
Richard Ormond
You have to have the legacy guys that had the big vision and the big the big ideas. But you also have to have the briefcase guys, the accountants and the lawyers come in and make sure that you fit squarely within the law. As a receiver, I work for the court and I have to answer to the court. So everything has to be buttoned up to the furthest degree, because if I slip up, I'm actually making the court look bad and making the process look bad.
00;10;53;23 - 00;11;22;07
Richard Ormond
So I have to be extremely conservative when it comes to compliance with with cannabis laws, particularly when you have the federal illegality issue. So all the things that are listed in the full memo, the eight deadly sins, I mean, I have those printed and sitting on my desk to make sure that those never happen. And then you have within each state you have a lot of deadly sins as well, you know, like paying your taxes, making sure that's a state that requires union employees making sure that the union is kept up, reported to.
00;11;22;07 - 00;11;49;20
Richard Ormond
And so I deal with many masters, I deal with the investors, I deal with the lenders, I deal with the courts, I deal with the regulators, I deal with the unions, so on and so forth. To the point where, I have checklists that I go through to make sure that everybody's up to speed. And then, of course, throw in the mix that you have vendors that are unpaid, landlords that are on unpaid evictions, that are going out, and it's a juggling knives that are on fire, quite frankly.
00;11;49;20 - 00;11;52;12
Richard Ormond
But I'm really good at juggling. I enjoy the challenge.
00;11;52;16 - 00;12;08;27
Hilary Bricken
Yeah. I can't believe you haven't gotten a tattoo yet of the Cole memo because you're looking at it all the time. So having said all that, what do you think the most challenging receivership you've handled so far is? You don't have to name names, but just the fact patterns and what you had to go through.
00;12;09;00 - 00;12;43;03
Richard Ormond
So I've had a few challenging receiverships and surprisingly, they are all in cannabis. And I say that sarcastically. What happens is, is this, is that because you have an industry and it's gotten better with the banking situation, but because you have an industry that was so cash heavy, it is very hard to ensure that all cash is where it's supposed to be, that all product is where it's supposed to be, that all data that goes into metric or into trees and all the different systems that we have to use is up to date that spot check inventories are actually being done properly.
00;12;43;06 - 00;13;02;20
Richard Ormond
I mean, there are just all these granular details of things that have to go on today. Today, I have actually have a team of about 18 people going out to all the gold throw locations just to do spot check inventory. So because as a receiver, I actually have to to file an inventory with the court of all the assets that I've taken over.
00;13;02;22 - 00;13;19;12
Richard Ormond
And I need to be very, very accurate in that count because it's cannabis. If I'm missing however many pounds or tons of cannabis, I'm going to be in a lot of trouble, as it happens under my watch. And if it's missing from before my watch, I have to figure out where it went and report it as fast if need be.
00;13;19;16 - 00;13;46;27
Richard Ormond
So I need to be very disciplined in that regard. So there are so many granular details, and I would say that the worst scenario is when people are not truthful and then you discover the truth. And that happens quite a bit because like I said, you have people that are legacy, people that have done things a certain way, and they're so used to obfuscating to the authorities or to the law about how they they're doing things that when a receiver comes in, a receiver is under extreme scrutiny.
00;13;46;27 - 00;14;07;08
Richard Ormond
We're under a magnifying glass and everything has to be, you know, turned over and done. The worst thing I've had happen is, is that I've had insiders come in and actually try to steal product or steal cash from locations after the receiver has been appointed. And you've had insiders then manipulate video systems and things like that. This is just early on especially.
00;14;07;08 - 00;14;30;18
Richard Ormond
It was par for the course. And now with, with with technology being what it is, it's a little bit better to figure out, you know, what's going on and to see what's going on. But there are some folks that just think they know better and they have interfered with the ability for a receiver to do their job. Now, one of the things that a receiver has is the receiver has the ability, if you violate the order that appoints the receiver to seek contempt against those folks.
00;14;30;20 - 00;14;46;22
Richard Ormond
I have done that before, and I have put people in jail for contempt until they comply with the court orders. And I've had people that have been in jail for four months because of it. So it's been quite the experience when when you have to go and prosecute someone. The problem is, is that you as receiver has to prosecute them.
00;14;46;22 - 00;15;09;08
Richard Ormond
And so it's a lot of work and it's a lot of time and a lot of cost to the estate. So you have to do a cost benefit analysis. If they stole $5,000 worth of goods from, from from from the inventory, you're better off just filing a police report and giving it over to the to the authorities if they withheld vertical records and documents and absconded with with with lots of cash, well, then you better get the courts powers to hold them in contempt.
00;15;09;14 - 00;15;43;21
Richard Ormond
The other thing that I've done in my court orders is a lot of times I've sought the assistance of police power where I actually can go to local law enforcement and get them, in essence, working with me to take over a location or to seize computers or to seize records or to seize cash. And so many times when I first get appointed, my appointment order will have an entire section directed just to the county sheriff and the local police department instructing them that with a certified copy of my order, they can take my direction in doing what I need to do to take over the business or to take over records or whatever.
00;15;43;21 - 00;16;08;10
Richard Ormond
And that's it's a little scary when you show up with ten armed policemen and at a business that probably has armed guards and armed security and everything else, I've definitely hidden around corners in some of my cases, you know, just in case. So.
00;16;08;12 - 00;16;31;26
Richard Ormond
Now, cannabis is a unique animal. And it's it's exciting in some ways, but it's also has some nerve wracking aspects. But I've seen some pretty crazy things in some big Ponzi scheme cases and fraud cases. I mean, I have seen people flee the country with, you know, gold coins in a duffel bag. I have seen people hide rolls of cash in the mayonnaise jars in their refrigerators.
00;16;31;26 - 00;16;55;20
Richard Ormond
I mean, I've seen quite a few things. I've been on a dozen raids with U.S. marshals. I've been on raids with sheriffs from different departments in Utah, California, other states. It's there are some really interesting aspects. It's, it's not for the faint of heart, that's for sure. But not all cases are like that. Most cases have really smart business people that just got themselves into a into a bind.
00;16;55;20 - 00;17;17;16
Richard Ormond
Right. And you need to help them get out of that bind. They're not all those terrible situations where you need to get in to get law enforcement involved, but even in those circumstances, you have to be buttoned up. And I try to do this. I try to give people the benefit of the doubt. If you've founded a business and you're running a business or you're an officer of a business, there's a reason why you're there.
00;17;17;19 - 00;17;39;01
Richard Ormond
And if you're not part of the problem, I'd rather keep you on board and helping the receivership than create another disgruntled person that that's going to hate the process. So I try to work with the people that are involved with the businesses that are already there. And, you know, one of the hardest things for me to do is what we call force reduction, you know, which is in essence, firing people.
00;17;39;06 - 00;18;02;10
Richard Ormond
It's an awful part of my job, and it's the part that keeps me up at night because I have to make terrible decisions that are going to impact families and people's income and everything else. And so I try to be as egalitarian as possible in those decisions. I try to be as smart as possible in those decisions. But when a company is is in my universe already, it means that tough decisions have to be made and work made.
00;18;02;10 - 00;18;21;00
Richard Ormond
And so I have to come in and do that. And a recent receivership that I, I just took over. I had to do almost a 20% force reduction and one across the board from low level employees, which live paycheck to paycheck all the way to the C-suite. And none of them feel good. No feel good, but you just have to do it as part of part of your job and streamlining the business.
00;18;21;02 - 00;18;44;16
Richard Ormond
And one of the things that a receivership does is it kind of gives a business an opportunity to ring fence itself and figure out what's fair to its business and still retains value at the end. And what's sad is, is sometimes you ring fence the business and realize there is no value in the core. And that's a tough situation because that's where you have to just either abandoned assets or sell them for, you know, pennies on the dollar.
00;18;44;18 - 00;19;03;24
Richard Ormond
And people, you know, creditors don't get much out of those situations, if anything at all. But then there are businesses that really need assistance and that you need to stop the hemorrhaging. And so one of the biggest issues in cannabis is this. And this is something that we should definitely touch on. And this might be the most important part of what we're discussing.
00;19;03;26 - 00;19;25;15
Richard Ormond
Cannabis businesses can't file bankruptcy because bankruptcy is a central process, and cannabis remains illegal at the federal level. So they don't have the alternatives that most businesses have, which is to get relief through the bankruptcy court. They have to find an alternative. And there alternatives are very limited. There are alternatives are a receivership which has its own costs and drawbacks.
00;19;25;16 - 00;19;47;15
Richard Ormond
It also has some benefits, but it definitely takes time and it costs money. You have what's called an assignment for benefit of predators, which is like an insolvency process without the courts, but it doesn't have an automatic stay. So it doesn't stop the lawsuits. It doesn't stop the personal, claims against individuals. Those continue and could lead to judgments against folks.
00;19;47;17 - 00;20;11;05
Richard Ormond
You have corporate dissolution underneath the corporations Code, which is a statute in most I think all 50 states have some sort of dissolution statute that allows a business to to orally dissolve, but that also opens you up to lawsuits and doesn't have a stay. And then you have what we mentioned earlier, the receivership and of dissolution, which is kind of I wouldn't say it's novel because it's been around a long time in the context of cannabis.
00;20;11;05 - 00;20;33;02
Richard Ormond
It's extremely novel, and it's a tool where you can actually do almost like a bankruptcy, but in state court rather than in federal court. And that's what I did for Medmen. We put it into a receivership in aid of dissolution, and it was one of the ways that we were able to protect the remaining assets from all the I mean, there were 110 pending lawsuits against Medmen when I took over Medmen.
00;20;33;04 - 00;20;51;29
Richard Ormond
I mean, it was just unbelievable of the things that we had to manage and it still had of that time, you know, more than 16 or 17 operating stores and five different states, and that I had 5 or 6 other stores that were, you know, supposed to come online or going offline. It had a lot of moving parts, and there was no bankruptcy to give us relief.
00;20;52;02 - 00;21;10;01
Richard Ormond
And so we came up with using the California state statute of putting it into receivership in aid of dissolution. And we've just done that again with our ghost law. We've put it into an overseer ship in aid of dissolution and go for actually, as a going concern, has a lot of potential. It's got some great stores that are doing really, really well.
00;21;10;04 - 00;21;29;13
Richard Ormond
The problem is, is that it was also suffering from a lot of lawsuits and, loans that were or, you know, secured against certain assets that that were in trouble. And it's now at least got some breathing room to be able to figure out how to orally dissolve the company and pay off those creditor. And we're just in the beginning of that.
00;21;29;13 - 00;21;53;17
Richard Ormond
So we'll see how that goes. But that is what's keeping me busy at this stage is as managing that process. So for cannabis businesses in particular, I think that the while their alternatives are limited, we're really pushing the envelope and finding ways to make them get the release that they need or give them the best possible release they can get within the the the parameters that we're dealing with, with the law right now.
00;21;53;22 - 00;22;08;29
Richard Ormond
And, you know, the conflict with federal and state laws is going to continue, I think, for another decade before it gets sorted out. I'm not one of those people that's optimistic that anything's going to happen quickly. And I think if anything happens, it's going to happen in very small steps, very small stages. You'll have the FDA make a decision here.
00;22;09;04 - 00;22;25;21
Richard Ormond
You have the Treasury expand it and send there. You'll have maybe some safe harbor for banking for, you know, institutions that qualify in a certain little box. Right. You're just going to have piece by piece by piece. You may have a change in the scheduling at some point in the future, but none of it's going to be decriminalization.
00;22;25;21 - 00;22;48;06
Richard Ormond
None of it's going to be like full legality, and it's going to be a while before those eight deadly sins in the Commonwealth really go away. Well, some of them will never go away, like selling by schools and things like that, but but like crossing state lines. And I'll tell you something really interesting. I had a conversation with a governor of a state that will remain unnamed, but I asked them, I said, why isn't your state lobbying for federal decriminalization?
00;22;48;06 - 00;23;07;14
Richard Ormond
And he said, because if it becomes federally legal, because we won't be able to collect the taxes we're collecting from our cultivators and retailers, because what's going to happen is all of the growth is going to shift to California, and they're going to supply the entire country with California cannabis. And all our local growers are going to go out of business, and all that cultivation tax is going to go away.
00;23;07;17 - 00;23;19;09
Richard Ormond
He's like, so I'd rather keep it the way it is. So that we can collect more taxes within my state. And I thought that was a really interesting thing, that they want it legal at their state, but not early. And so there are a lot of powers that want to keep it the way it is.
00;23;19;12 - 00;23;38;12
Hilary Bricken
Yeah, I think that's right. I think in the industry there are a lot of stakeholders that don't quite mind the current status quo, as long as they have the biggest place at the table, although I'm sure they love interstate commerce too. Have you seen an uptick in cannabis insolvency work lately? I imagine you have. It feels very it's been very flat.
00;23;38;15 - 00;24;05;04
Richard Ormond
I wouldn't even call it an uptick. I think we're now what I'm going to coin is the grand shakeout or the big shakeout, most cannabis businesses. And this reminds me of when I first started practicing law in the.com bust.com businesses were, if you looked at their balance sheet and their PNL, they were insolvent before they ever started putting out a product or starting their website or anything else because of the leverage that they had and the capital that they had infused and the money they spent, cannabis is no different.
00;24;05;04 - 00;24;30;24
Richard Ormond
So if you're in an industry where locally you're spending 10% on taxes, at the state, you're paying 20% in taxes, and then the federal government is to 80. You're spending 30 to 40% on taxes. 70% of your revenue is going to taxes before you've paid rent for computers, for labor product, for inventory. So you're already bankrupt. The only way cannabis businesses really survive is by infusing it with new capital or taking out new debt.
00;24;30;26 - 00;24;55;06
Richard Ormond
And so the goal was to do that until the laws changed and then things would normalize. But things haven't normalized. So unless you are just an amazing operator, which there are some amazing operators out there, your profits are going to be eked out if any. Right? Just breaking even as a child. So most businesses don't break even. Most businesses are losing money and constantly need to search out for new capital and capital.
00;24;55;06 - 00;25;11;06
Richard Ormond
Now it's dried up. There are not a lot of people out there putting money into cannabis, and rightfully so from their perspective, because the returns are not there. They're looking for a return on investment, their ROI, and it's just not materializing. So why are they going to throw more good money at bad? And so we're going to have it.
00;25;11;07 - 00;25;32;11
Richard Ormond
We're having this grand shakeout. You're going to end up just like in every other industry with 2 or 3 giant MSOs, and they're going to control most of the industry, and then you're going to have some local boutique brands. It happened in alcohol. It happened in television, happened in radio. It's happening right now with streaming. It's a grand consolidation, but there's going to be a lot of people that fall by the wayside.
00;25;32;18 - 00;25;52;09
Richard Ormond
I mean, when automobiles first started becoming a consumer product, there were 850 automobile companies all making customized car. Now they're three in the United States, right. And barely that cannabis will be no different. And right now we're seeing the beginnings of that. And if you look at tech, just 25 years ago, we were baby lawyers. It was no different.
00;25;52;09 - 00;26;09;03
Richard Ormond
Now you have what think the things the big five you know. And even they're looking at consolidating in some respects. You know we might end up with a big three at some point. And that industry as well, cannabis is not going to be any different. The other thing that people forget and this is really important, this is an agricultural product.
00;26;09;07 - 00;26;30;09
Richard Ormond
This is a commodity. And they have to look at it differently. So for example, it always surprises me when I deal with cultivators that haven't been exercising what their grower lean. Right. Because like growers in California and other states get natural leads on their agriculture that follows their product from the time they grow it till it gets to the retail shelves.
00;26;30;16 - 00;26;53;06
Richard Ormond
And that protects them in some respects. But because they don't even know that they have these rights under the agricultural laws, they kind of just don't focus on it. And in the end, the people that are going to make a fortune in this are going to be the ones that treat it like a true commodity, just like corn, wheat or oranges or like in trading places, you know, all all that, all those types of commodities that we deal with on a regular basis.
00;26;53;08 - 00;26;58;18
Richard Ormond
Those are the people that, if they can unlock that aspect of it, are the ones that are going to have true success in this business.
00;26;58;23 - 00;27;01;04
Hilary Bricken
Richard, you're making too much sense. You have to stop.
00;27;01;05 - 00;27;02;13
Richard Ormond
Sorry.
00;27;02;16 - 00;27;19;06
Hilary Bricken
You're killing. Killing the excitement and preaching to the choir. We're here with me, and I got Libby, you know, couple a couple more questions while I have you. What? Maybe two pieces of advice would you give to a cannabis company that's thinking of pursuing receivership?
00;27;19;14 - 00;27;38;06
Richard Ormond
If you're looking if you're in trouble and you have a company that is on the verge of insolvency or or is insolvent at this point, it can't meet the demands of its creditors or stakeholders. There's a couple things you have to be careful of. First, a receivership or even a bankruptcy if it was available, is not going to be a silver bullet.
00;27;38;08 - 00;27;56;27
Richard Ormond
And you have to be really prepared for the fact that your business may not exist after the receivership, or it may be owned by somebody else, and that you may not be a part of it anymore. A lot of people have, you know, this, this founder pride, and I respect it and I love it. And people have done some innovative things in this industry.
00;27;56;27 - 00;28;19;00
Richard Ormond
But when once you get to the point where you're talking to me, all that pride has to go away and we have to figure out the best way to shield your business and its directors and officers and its employees and its shareholders and everything from having those assets diminish further and creating personal liability for those folks or creating, you know, more tragedy along the line.
00;28;19;01 - 00;28;38;22
Richard Ormond
So you have to really set ego aside and pride aside and figure out what's best for all the creditors and claimants that you're going to have against that receivership, a state that's created what you put it into receivership. If you are in a place where you feel like you just can no longer operate your business in a way that makes sense, you're probably at that stage.
00;28;38;25 - 00;29;01;26
Richard Ormond
There's a moment and an excuse expression. I see where people just get to a point where they say, oh shit, and that's where I get involved, is at that moment is trying to kind of harbor everything and create as much value as possible to, to, to, to protect those claimants. The other thing people need to realize is this is that as an officer or director, you have a fiduciary duty to your shareholders, your equity holders, until you're insolvent.
00;29;01;26 - 00;29;22;22
Richard Ormond
Once you're on the edge of insolvency, your fiduciary duty actually changes to all stakeholders, meaning your creditors. And so a lot of people will make decisions that are not rational after the point of insolvency because they're trying to protect their shareholders or their equity holders, when in reality they should be protecting everybody, including their creditors. So they have to be really careful in that regard.
00;29;22;22 - 00;29;48;15
Richard Ormond
And I see a lot of people really get themselves in a pickle because of the fact that they're not looking at their fiduciary obligations correctly. It's great to protect your your investors, I understand that, but once you pass that threshold of insolvency, your duty, your legal duty changes and you have to be really cognizant of that. The other thing is this is that once you have a receiver in place, you are divested of your business or of your assets.
00;29;48;18 - 00;30;05;20
Richard Ormond
You are no longer in charge. The receiver is in charge. And so a lot of times, I mean, this happened with Medmen. I met with the chairman of the board of Medmen. It was a public company in Canada, and it had a board of directors and the chairman and I decided it was best for the chairman to step down and resigned in that position.
00;30;05;22 - 00;30;22;08
Richard Ormond
I also had the CFO resign and I had most of the C-suite resign at that point because I felt that keeping them on board, it's on the wrong message and it would be ineffective. And a lot of people had different interests that weren't aligned with the receivership at that time. And so I had to make the tough decision.
00;30;22;15 - 00;30;43;28
Richard Ormond
And ultimately, within a few months, the entire board was dissolved. And then we went into full liquidation mode, selling assets or shutting down locations and terminating employees. And going through that whole process, you will likely lose control at some point if you have a receiver in place, and if your assets have value, they will be sold to someone else who will take control.
00;30;44;00 - 00;31;07;26
Richard Ormond
So you just need to be ready for that. A lot of owners and founders think, well, I'm going to set up a group that's going to buy these assets and restart the whole process. Again, that happens a lot. If you can raise the capital to do it, and it's all transparent and disclosed to the court rate, but the receiver is not there to make any secret deals, the receiver is not there to give you a leg up because you have knowledge of the business.
00;31;08;03 - 00;31;27;25
Richard Ormond
The receiver is there to get the best possible price and to bring in the most cash to the receiver ship estate to pay off the debts at the company. And that's that. And people need to understand that it's not a lifeline in that regard. It's not going to save them and their business. It's just going to protect the creditors.
00;31;27;28 - 00;31;42;28
Hilary Bricken
Will love hard truth. Okay, last question, but relatively the same question. Kind of moving the needle a little bit. What's the number one piece of advice for those brave individuals, lawyers or lay people that want to become cannabis oriented receivers?
00;31;43;01 - 00;32;13;20
Richard Ormond
I think that you need to have a few bolts in your quiver. One is you have to expect the unexpected, because in cannabis there's always something unexpected. But the reality is, is that you have many masters and you have to realize who those masters are taxing authorities. Because if you mess up the tax payments, you could have personal liability as a receiver, and that's the last thing you want to put your family through as a tax obligation that you didn't even incur, that you become personally responsible for.
00;32;13;24 - 00;32;33;16
Richard Ormond
That is something. So that's one master regulatory controls, whether they're local at the municipal level or at the state level. And then you have to understand the subtle mosaic of laws, because you're going to have to deal with banks, you're going to have to deal with wire transfers. You're going to have to deal with possibly credit card or debit card transactions.
00;32;33;21 - 00;32;57;10
Richard Ormond
You're going to have to understand labor and employment, because cannabis businesses, whether they're cultivators or they're retailers or their distributors, have a ton of employees, whether they're the people trimming flower all the way up to the people, you know, writing paychecks, you have HR considerations. And if you don't have a decent knowledge of that or really good legal help in that regard, you will get yourself in trouble.
00;32;57;13 - 00;33;14;08
Richard Ormond
You have Warren Act issues, which is something that I don't even handle myself. I have to get an expert at Warren Act issues, because each state has its own variation of the Warnock, and then the federal government has its own variation of the law. Now. So rather than try to guess as to what's proper, you really need someone that is an expert at that.
00;33;14;10 - 00;33;42;00
Richard Ormond
Taxes. The tax landscape is insane in cannabis, local taxes, excise taxes, state taxes. 280 e at the federal level. Now you have people taking all the Trulieve deductions, which I think are are probably going to be the worst decision that a company can make at this point, because I have a feeling that the IRS is going to be clawing back a lot of those dollars, and it's going to put a lot of people in a lot of trouble, and it's going to put them in personal jeopardy.
00;33;42;02 - 00;34;06;18
Richard Ormond
And so I highly recommend not taking these radical deductions and refunds on your taxes, because I think it's just going to get you in trouble in a couple of years when audits start coming down the pike. And there's not going to be any retroactive 280 eve release, if 280 it goes away, it will be going forward only. So I think a lot of people are taking a lot of risks that they shouldn't take, and receiver should definitely not take those risks.
00;34;06;24 - 00;34;26;15
Richard Ormond
And then you have regulatory compliance. I have a retail location right now that is part of the Medmen family of companies that is in West Hollywood. West Hollywood has its own very strict scheme as to how you manage a cannabis business in West Hollywood, and it's a city that has its own laws and passed its own rules, and it's allowed to do that.
00;34;26;18 - 00;34;45;15
Richard Ormond
And you have to make sure you're compliant, and it's not easy to make sure you're compliant there. And then I have another store in downtown L.A. same company, but totally different rule. And if you don't know those local local rules and requirements from like some like in downtown L.A., you can put speakers outside your store and have music outside on the sidewalk in West Hollywood.
00;34;45;18 - 00;35;00;03
Richard Ormond
You cannot. I mean, silly little things like that. If you're not aware of them, you could get yourself in trouble and the license board. And if you pull the license of a productive store, you have failed as your job as receiver because you're not preserving the value of that asset. So you really need to be buttoned up on those things.
00;35;00;04 - 00;35;20;07
Richard Ormond
And that's just California. Now in Massachusetts, a totally different set of rules and schemes and everything else then licenses. Some of them run with the land because they're part of the entitlement process. Some of them are issued by the cities, and in some states are issued by the states themselves. And so you need to know who actually issues you the right to sell cannabis within the state.
00;35;20;09 - 00;35;41;17
Richard Ormond
And then if you have a state that has a farm bill, 2018, farm bill requirements versus non farm bill requirements, you have to know the difference and know where what scheme you fall under and whether that state's Department of Agriculture has its own rules and regulations for everything. Some Delta eight, Delta nine, Delta ten and all the other things that fall under the CBD farm bill kind of scheme.
00;35;41;17 - 00;36;07;01
Richard Ormond
And so there are a lot of things you have to know before you become a receiver of cannabis. And there are some people that really know it well. I mean, I have some friends in the receivership world that do this, and they do it really, really well. I'd like to think I'm one of them as well, but there are things that I'm learning every single day, and if anyone tells you that they've done a perfect job, they're not telling you the truth because there's always something that you'll miss or that you need to fix or you need to catch up on.
00;36;07;01 - 00;36;11;01
Richard Ormond
And that's part of why I love this job, is because I'm always learning something new.
00;36;11;03 - 00;36;33;17
Hilary Bricken
I feel you. And why do I get the feeling that intoxicating hemp companies will be calling you in a year or two? I just don't know. It's not like we've been there before. All right ladies and gentlemen, Richard Ormond, partner at Buchalter in LA, Founder at Stone Blossom, all around receiver, ace and expert. Thank you so much, Richard, for answering my questions and speaking with me.
00;36;33;17 - 00;36;36;29
Hilary Bricken
I really think you just helped educate a ton of people, right?
00;36;36;29 - 00;36;41;16
Richard Ormond
I appreciate it. And, I'm really honored that you asked me to be here. Thanks, Hilary.
00;36;41;19 - 00;37;04;26
Hilary Bricken
And that concludes today's episode of the Cannabis Law Now podcast. Until next time, stay alert. Stay alive.