Cannabis Receiverships: Litigation, Missing Taxes, and Incompetence Paired With Large Professional Service Fees

Cannabis receiverships have cycled in and out of favor almost as often as the mullet, which is another phenomenon that somehow keeps coming back. Both can look like business in the front and a party in the back. Behind the jokes, however, the same serious themes recur in legalized cannabis: wildly optimistic projections for investors, loosely documented deals, inexperienced operators, and a surprising amount of litigation and tax trouble for relatively young companies. The puzzle for a receiver is why this chaos is so often paired with very large professional fees for lawyers and accountants.

Litigation

It is not unusual to see a cannabis company in receivership to have gone through 90–100 cases in a state court docket, some or many still active, despite being only three to five years old. For most businesses, that volume alone would be fatal, yet many cannabis companies limp along until a receiver is finally appointed. The most common categories of litigation include:

• Mechanics liens
• Breach of contract and unpaid vendor claims
• Partnership and ownership disputes
• Loan defaults

What is unusual is not that these claims exist, but that all of them so frequently exist at once when the receivership is commenced. That pattern suggests common structural weaknesses. One recurring issue is that companies raise millions of dollars but try to save money on legal drafting, either by using generic online templates, relying on a solo practitioner without the relevant experience, or attempting to draft agreements themselves. Saving $10,000–$50,000 on the front end often leads to hundreds of thousands of dollars in litigation costs later.

A frequent decision point for a receiver is whether to retain existing litigation counsel. It’s important to remember that by engaging them as the receiver, they represent you now. This fact alone may be hard for the counsel to comprehend, as they have a pre-existing relationship with prior management. It’s critical to remember that these costs for counsel will now be borne in the receivership, and you’ll need to be able to justify why they should be a cost of the receivership.

One area where a receiver should seriously consider retaining counsel that was already in place is when there are ongoing negotiations with the state regarding licensing or regulatory violations; replacing counsel may be disruptive or counterproductive. If existing counsel is competent and has credibility with regulators, leaving that attorney in place may be the best course.

A good example of this came in a recent cannabis receivership, 231 Partners LLC v CannaVer, LLC (Case #22SL-CC03247) in St. Louis County, MO courts. The receiver continued the engagement of counsel negotiating with the state on appeal rights for new licenses. The receiver’s information pointed to the fact that these appeals should result in at least one or more new licenses, however, as these appeals were going on, new rights appeal cases were being heard. As the other cases continued, new data points were provided, and it was determined that a win was no longer likely. However, that counsel represented several other clients and was well known and well respected; ultimately, counsel was approached about selling the appeal rights. By keeping this attorney engaged, the receiver generated an additional $1.1 million for the receivership, even though it was ultimately likely to lose their appeal as the case progressed.

Employment Disputes and Direct State Enforcement Actions

Other litigation common in cannabis receiverships includes employment disputes and direct state enforcement actions. These may not be as numerous as vendor or lender suits, but they can have an outsized impact because compliance failures often trigger loan defaults, enforcement activity, or even license risk, which in turn drive the company into receivership or, if already in receivership, can yield a negative result for the receivership.

A receiver must quickly inventory these matters, understand their status, and assess the role and quality of existing counsel. At the same time, many of the attorneys appearing in the cases are unpaid and are now seeking compensation through the receivership estate. The receiver must decide whether particular cases should continue, be stayed (where state law permits), or be resolved on a parallel track while the receivership proceeds. Those decisions will shape the cost and trajectory of the case.

Unpaid and Unfiled Taxes

Cannabis businesses face a uniquely punitive tax regime because cannabis remains illegal under federal law. Section 280E of the Internal Revenue Code generally allows deductions only for the cost of goods sold, disallowing most ordinary business expenses and creating elevated effective tax rates.​

In theory, this complexity should lead operators to seek highly specialized tax and accounting advice. In practice, receivers often discover a different picture, including:

• Substantial fees paid to accounting firms that lack cannabis expertise
• Late, incomplete, or entirely unfiled tax returns
• Accounting firms billing as though they had prepared and filed returns annually, while compliance remains badly deficient

As with counsel, the receiver must evaluate whether the problem lies primarily with management, with the accountants, or with both. There are competent cannabis accounting firms in the market, but many operators lack the sophistication to vet them or benchmark pricing.

If the accounting firm has the requisite experience and the breakdown stems from poor information flow or lack of cooperation by management, it may be possible to course-correct and use the existing firm to restore compliance. If the firm is not qualified, the receiver should move quickly to engage a more experienced provider. That search is complicated by the fact that many accounting firms still refuse to work with cannabis businesses at all.  Making matters equally difficult is that an incompetent firm may file claims for unpaid bills. The receiver will then ultimately need to make a decision as to whether to fight these claims or not.

A practical approach is to identify the better-run cannabis businesses in the jurisdiction and determine which accounting firms they use. While not foolproof, repeated references to the same firm or small group of firms can help a receiver quickly narrow the field of capable providers.

Incompetence and Management Profiles

The management of distressed cannabis companies tends to fall, broadly, into three categories (with the caveat that not everyone fits neatly into one box):

• Private equity and institutional capital. This group often includes individuals who have had success in other industries and have entered cannabis seeking growth and yield. They tend to have more robust business processes, including reporting and controls. The trade-off is that the capital structure may be overleveraged, with substantial secured debt that constrains the receiver’s options.
• Former illegal operators turned legal. These individuals frequently understand the plant and day-to-day operations but may struggle with building scalable, compliant businesses with appropriate documentation, governance, and capital structure.
• ‘CannaBros.’ This group is often the most problematic and most commonly encountered in receivership. They may lack basic business and management skills, yet find themselves running a highly regulated, capital-intensive enterprise. In these cases, the receiver may need to review not only the finances and legal issues but also the quality of the product, operational efficiency, and even basic compliance with standard operating procedures.

Layered on top of management, receivers often see a cast of business professionals—interim managers, consultants, ‘turnaround experts,’ or early successful operators from the first waves of legalization in states like Colorado, California, and Washington. Some bring genuine value. Others succeeded once, largely due to timing and market conditions, and may be miscast as strategic advisors.

For the receiver, a threshold task is to map who is involved, what role they play, and why they were engaged. Many high-profile advisors were brought in primarily as part of the capital-raise marketing package, adding credibility and a recognizable name to investor decks. The question in receivership is whether that value still exists, or whether those relationships now merely add cost and complexity.

Evaluating and Deploying Professional Talent

Ultimately, the receiver stands in the shoes of the court and serves as a neutral fiduciary charged with preserving and maximizing the value of the estate. In that role, the receiver must make disciplined decisions about which professionals, existing or new, should be part of the go-forward plan.

If a sale is contemplated, certain incumbents may enhance value. A well-connected management consultant who previously sold a cannabis operation may be well placed to identify and cultivate bidders or be seen as a value add to current bidders. The litigator negotiating with state regulators over licensing, violations, or operational issues may be the key to clearing regulatory landmines before closing. An accounting firm that struggled under prior ownership due to incomplete records or a lack of transparency may be able to bring the company into tax compliance once the receiver imposes order and discipline.

On the other hand, some or all of these professionals may need to be replaced. A receiver who conducts a structured initial assessment of each key professional, including scope of engagement, track record, competence, conflicts, cost, and alignment with receivership objectives, will be better positioned to decide who stays, who goes, and who needs to be added. That early assessment can make the difference between a receivership that stabilizes the business and preserves value and one that simply inherits years of embedded dysfunction.

[Editors’ Note: To learn more about this subject watch Operating and Selling a Cannabis Company in Receivership, a free on-demand webinar. 

This article was originally published on February 9, 2026.]

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