Adam Jackson
An upcoming deadline for cannabis brands distributor Herbl’s accounts receivable is the latest development in the unfolding saga of the company’s receivership. Interested parties have until Oct. 13 to submit offers for the company’s ledger, after which it may be turned over to a collection agency.
Herbl officially entered into receivership over the summer due to continued financial headwinds in the troubled California market.
Central to the asset sale will be its proprietary software, Athena, alongside operations related to its logistics outfit, Blackbird. Notably, a lawsuit between Herbl and distributor Nabis has been included in the auction.
Despite efforts to foster cooperation between Herbl and various California brands it distributed, a recent round table meeting saw the receivership’s proposals largely rejected.
The meeting “intended to present a solution that would provide a benefit to the Receivership Estate while allowing brands to collect money owed to them by retailers, rather than collecting nothing,” according to a statement.
In response, the receiver intends to open up the entire ledger for third-party purchase. There is a suggestion that several brands could combine their efforts to purchase the ledger in question.
Additionally, by Oct. 31, compelling offers must be submitted for the lawsuit. Information regarding the lawsuit, involving claims valued in the tens of millions against Central Coast Agriculture and Nabis, is now publicly available. The lawsuit alleges breach of contract and interference, claiming a conspiracy against Herbl which resulted in significant business losses.
“While the Receiver cannot make any warranties or representations regarding the potential success of the lawsuit or any guarantees regarding recovery, his counsel feels that there is a strong case for liability against both CCA/Raw Garden and Nabis, and that potential liability ranges into the tens of millions for both entities, based on what appears to have been a blatant conspiracy to strip an exclusive contract away from HERBL, which had the purpose and effect of destroying the business,” the asset broker, WeCann, wrote in the listing.
In other developments, any sale of the Herbl Nevada/Blackbird assets will require a 90-day approval window. The stipulation allows for offers that can include cooperation to improve operations during the approval period.
Background
Once the powerhouse in California’s cannabis distribution scene, Goleta-based Herbl entered receivership after reporting a whopping $200 million in sales just a year before.
The company, which used to be the state’s largest cannabis distributor, has now rested its laurels and laid off most of its workforce. The receivership’s last auction was held on Sept. 7, at which point several assets were sold.
Unlike many businesses that face financial challenges, Herbl cannot file for federal bankruptcy protection because cannabis remains illegal at the federal level, despite its legal status in California. Instead, companies like Herbl opt for receivership, a process in which a neutral third party takes over to ensure creditors are repaid.
Herbl’s predicament stems largely from a big issue in the cannabis industry: retailers not making timely payments, if at all.
Unlike the alcohol industry where unpaid distributors can report and potentially suspend the licenses of defaulting retailers, the cannabis sector lacks such regulatory safeguards. Some retailers have exploited this gap, opting not to pay one distributor and moving on to the next with little consequence.
This issue, coupled with the limited number of licensed cannabis retailers in California, has compounded Herbl’s challenges. While there are thousands of licensed alcohol retailers in the state, fewer than 1,000 are licensed to sell cannabis.
According to court records, East West Bank, one of the main creditors, lodged a complaint against Herbl after several payment defaults. The bank claims it is owed at least $2.5 million. Additionally, California’s state tax department has filed a lien seeking $17 million.
To manage the ongoing situation, founder and president of Receivership Specialists, Kevin Singer, who specializes in the cannabis sector, was appointed as the receiver. Singer aims to auction off Herbl and its assets for a proposed $9 million.
He wrote in a June 26 filing: “I have served as a Court Receiver over nineteen marijuana businesses including fourteen retail dispensaries, eleven cannabis grow operations, thirteen distribution centers, two cannabis kitchens and three oil extraction facilities. Most of these businesses are/were based in California and subject to California’s cannabis rules and regulations. As a result, my team and I are well versed in the requirements for operating a cannabis business in California, as well as the necessary steps for winding down the affairs of such a business, liquidating its assets, and paying all net assets to creditors.”
According to David Feldman, managing partner of Feldman Legal Advisors, legal battles often come with substantial challenges, from covering attorney fees to enduring prolonged court processes, plus the uncertainty of outcomes and concerns over defendants’ ability to pay post-judgment. Despite a case appearing strong, unpredictable verdicts by juries or judges can derail anticipated results, he said.
“It seems that in order to close out their receivership, they want to monetize this lawsuit now to eliminate these risks,” he Feldman told Green Market Report. “This is not dissimilar to the increasing role of so-called litigation funders, who help plaintiffs with their legal fees in exchange for a piece of any recovery.”
