A new lawsuit recently commenced within the Onondaga County Supreme Court alleges the New York State Office of Cannabis Management (“OCM”) and the New York State Cannabis Control Board (“CCB”) have allegedly handled New York State’s recreational cannabis rollout in such a way that has left the plaintiff in financial ruin. Plaintiff, the Cannabis Farmers Alliance, Inc. (“CFA”), filed suit in early November this year alleging New York’s rollout of the adult-use cannabis licensing program “has had a devastating impact on industry participants at all levels.”[1]
Cannabis Farmers Alliance, Inc. v. New York State Office of Cannabis Management and New York State Cannabis Control Board
The CFA alleges 97% of small cannabis farmers in New York are operating at a financial loss, nearly two-thirds are under a 1% profit margin, and over 90% need operating funds to maintain solvency.1 The CFA attributes its member’s financial distress to OCM’s failure to monitor the New York cannabis market. Allegedly, OCM is currently granting licenses without evaluating the market needs whatsoever. On Oct. 10, 2024, OCM issued Resolution 2024-99, which granted more than 100 applicants licenses, including dozens of entities with the same license class as the CFA’s members, creating risks of financial insolvency for CFA’s members to compete against these newly licensed entities. Additional reasons supporting the argument that OCM has caused members of the CFA financial hardship include the failed rollout of the adult-use cannabis licensing program, and OCM’s failure to keep New Yorkers safe from illicit products.
Legally, OCM and CCB are alleged to have violated the State Administrative Procedure Act (“SAPA”) by failing to evaluate the impact on small businesses, failing to address economic feasibility and flexibility, failing to analyze regulatory impact on competition, and more. It is also alleged OCM and CCB have violated the New York State Constitution by failing to provide equal protection under the law. The CFA’s members allege direct financial loss in the form of “(a) diminished value of their cannabis licenses, (b) lost market share due to the inability to compete fairly with untracked products, (c) increased operational costs resulting from market instability, [and] reduced revenue potential and stranded capital investments.” The CFA asks the Onondaga County Supreme Court to issue a declaration that OCM has failed to adhere to the statutory mandates of the Cannabis Law, SAPA, and the New York State Constitution, as well as an injunction requiring OCM to fulfill its statutory obligations and implement an affordable seed-to-sale system.
Lawsuit’s Allegations Impact Businesses Industrywide
The allegations raised in Cannabis Farmers Alliance, Inc. vs. New York State Office of Cannabis Management and New York State Cannabis Control Board (Onondaga County Supreme Court)1 not only effect the members of the CFA; but cannabis applicants, licensees and ancillary-businesses state-wide. New York’s troubled rollout of the adult-use cannabis licensing program impacts licensees and applicants of all license classes, as well as cannabis-ancillary businesses that rely upon the successful operation of licensees. All participants in the New York adult-use cannabis market rely on the proper administration of licensing and enforcement procedures to be successful within the market, just as all New York cannabis businesses and consumers rely on New York to protect them from illicit and contaminated cannabis products.
In support of their arguments, the CFA relied upon the results of a mental health survey of New York cannabis industry participants published in August of 2023 that revealed the psychological toll caused by OCM’s missteps.[2] The study was taken in response to the injunction issued by Judge Kevin Bryant in early 2023 that halted the state’s CAURD program, where responses from nearly 70 participants showed “a notable decline in mental health, with these professionals saying their stress has increased tremendously as their business outlook looks increasingly dire.” The CFA also relied on the report published by Investigator Jeanette M. Moy of the New York State Office of General Services on May 8, 2024, which iterates dozens of failures on the part of OCM and CCB and its effects on all participants of the adult-use cannabis industry.[3]
Options for Cannabis Businesses Approaching Financial Hardship
While bankruptcy is not an option for most cannabis businesses, as cannabis is still illegal at the federal level, there are some viable state law alternatives, including receivership, assignments for the benefit of creditors (ABCs) and workout agreements. Receivership is an equitable remedy – meaning granted by a judge, not a jury – available to cannabis businesses through New York court processes. Receiverships are discussed in more depth here.
For cannabis and cannabis-ancillary businesses that desire an orderly liquidation, ABCs are an alternative to receivership and are generally handled outside of court. An ABC is strictly a liquidation process, not a restructuring process, and therefore cannot help a business that wishes to continue operations. In an ABC, a cannabis business assigns its assets to a trust company administered by an assignee selected by the company to oversee the liquidation of the assets, pursue claims and make distributions to the company’s creditors. An ABC process, if negotiated with a buyer prior to the sale of a business, may allow a debtor to be involved in the business in some capacity after the business’s assets are sold.[4]
A third option for distressed cannabis companies is to pursue a "workout" of their debt, which is handled outside of court, similar to an ABC. This approach allows the company to negotiate directly with creditors to restructure the amount owed or the repayment terms of the debt. Negotiating with creditors can be beneficial, as it may lead to longer maturities on debt instruments, amendments to burdensome covenants in agreements and more favorable payment terms. This option typically requires good-faith dealings between the debtor and creditors, as it does not involve hiring or appointing a third party. While it may be a cost-effective solution, cannabis companies should be aware that they are unable to leverage the threat of filing bankruptcy – and the leverage the “automatic stay” of all actions that bankruptcy provides – or even a receivership, as a state court may also impose an injunction of actions attempting to dismember the debtor.
The CFA lawsuit highlights the importance of proper industry regulation, especially in relation to seed-to-sale tracking,[5] and its outcome could have significant implications, such as opening the door for suits by cannabis businesses experiencing similar challenges and harm. In the meantime, cannabis and cannabis-ancillary businesses seeking the relief of financial restructuring or liquidation, among other relief, should seek legal counsel to explore their options and ensure the proper application of a state-law based receivership, an ABC appointment or an out of court workout.
[1] See Cannabis Farmers Alliance, Inc. v. New York State Office of Cannabis Management and New York State Cannabis Control Board, Verified Complaint, Onondaga County Supreme Court, Index No. 011636/2024, filed on November 11, 2024.
[2] See NY Cannabis Insider Staff Survey: New York cannabis entrepreneurs see decline in mental health. SYRACUSE.COM (Aug. 23, 2023); https://www.syracuse.com/marijuana/2023/08/survey-new-york-cannabis-entrepreneurs-see-decline-in-mental-health.html.
[3] See Letter and Report from Jeanette M. Moy, Commissioner, New York State Office of General Services, to Governor Kathy Hochul (May 8, 2024).
[4] Edward S. Adams, When Cannabis Businesses Fail: Assignment for the Benefit of Creditors as an Alternative to Bankruptcy, 2022 UTAH L. REV. 967, 1000, 1003 (2022)
[5] Product inversion – cannabis coming in and being sold in NY dispensaries was referred to as the dirty secret at the Dec 10, 2024 CCB meeting and should be mitigated once BioTrack’s seed to sale tracking system is fully implemented (more than 2 years after the state launched adult-use sales).
