Receivers For Marijuana-Related Businesses

February 10, 2017

Author: John M. Tanner

Introduction

Colorado has now gone “all in” on marijuana, legalizing it both for medical and recreational purposes.  Despite this, the State of Colorado Medical Enforcement Division (“MED”) has taken the position that licensed marijuana businesses (“LMB”) are different than every other kind of licensed business in Colorado and cannot be put into receivership unless the receiver obtains a license issued by the MED.  The MED’s position is based solely on statutory interpretation:  pursuant to C.R.S. §§ 12-43.3 -101 and 12-43.4-101 et al. anyone that has even indirect “control” over an LMB must be licensed.  In the MED’s view, a court appointment of an unlicensed receiver is a violation of the legislature’s power to set the terms under which marijuana may be sold.

Colorado law and two hundred years of Anglo-American jurisprudence before that, however, hold that a court sitting in equity has the inherent authority to appoint a receiver to preserve assets pending a dispute regarding them.  This power is not given by the legislature, but one that springs organically from the existence of a court of equity itself.  Even if a legislature can affect such an inherent power, it can only do so expressly and under narrow circumstances.  There is no reason to believe that the legislature of the State of Colorado either intended to, or actually did, limit the equitable powers of a court regarding LMBs.

Finally, the MED’s position would be terrible public policy, depriving a billion-dollar industry of one of the judiciary’s most powerful remedies.  Simply put, the MED’s position is incorrect, creates serious separation of powers problems, and is bad public policy.1

General Receivership Law

A Brief History of Receiverships

The appointment of equity receivers2 by an English Chancery court goes back at least to the 1600s.3  Essentially, Chancellors (the “judge” in a Chancery court) would not sit idly by and let assets go to waste while disputes regarding them worked their way through courts, or when the party with custody of the property could not be trusted properly to apply the rents and profits generated by it.4  Thus, Chancellors would appoint a special court officer (the receiver) to have legal custody of the assets to make sure they did not go to waste and to make sure that the proper party (as determined by the Chancellor) got the rents and profits.

Equity practice in the United States goes back to the early 1700s, and the first receivers in America were appointed at or around the time of the American Revolution.5 Due to the “marriage of law and equity” in many American courts, judges (not chancellors) often had the authority to exercise the powers of equity, including appointing receivers and issuing injunctions.  Typically these powers were not to be exercised unless there was no adequate legal remedy.6 More than 50 years ago, Professor Clark wrote:

Chancery state courts sitting as such exercise the power of appointing receivers, federal courts sitting in equity exercise this power and state courts which have equitable jurisdiction exercise this power. … Such courts when appointing receivers under their inherent powers must be guided by the usages and rules of equity pertaining to the appointment of receivers.  The inherent power in the above-described courts to appoint receivers pendente lite is not or should not be affected by the character of the parties before it. …

The jurisdiction exercised by courts of equity in administering relief by the drastic remedy of a receiver pendente lite7 is a branch of their general jurisdiction, being intended to prevent injury to the thing in controversy and to preserve it for the security of all parties in interest, to be disposed of if the court may finally direct. …8

Modern Receivership Practice

Colorado courts have been referencing this inherent power since at least 1887.9 This is consistent with current C.R.C.P. 66(a), which provides (emphases added):

A receiver may be appointed by the court in which the action is pending at any time:

(1) Before judgment, provisionally, on application of either party, when he establishes a prima facie right to the property, or to an interest therein, which is the subject of the action and is in possession of an adverse party and such property, or its rents, issues, and profits are in danger of being lost, removed beyond the jurisdiction of the court, or materially injured or impaired; or ...

(3) In other cases where proper and in accordance with established principles of equity.

Thus, per Rule and common law, a Colorado district court has the ability to appoint a receiver pendente lite over a property in dispute.  Instances where a receiver might be appointed are innumerable, but a few include:  when there is a deadlock among equity owners of a company so that it cannot operate effectively; during a dissolution of a company; when a secured creditor is being oppressed and usual legal recourse is not efficient or effective; during the pendency of a divorce, when marital property is in danger of waste; when a trustee is in defalcation of his fiduciary duties; when there is a dispute as to the proper identity of  a trustee; when there is a dispute as who proper management of a company is; and when a creditor has a judgment and usual collection methods have not worked.10

Pendente lite receivers are an extension of the court’s power to take assets into its possession and deal with them appropriately until the litigation is resolved.  While disputed cash can be put into the registry of the court, operating businesses cannot.  A receiver can be viewed as the registry of the court for illiquid assets.  The receiver works for the appointing court to avoid waste of the assets.  Indeed, a receiver is technically not even a party to the case in which it is appointed.

Modifying the Court’s Inherent Power to Appoint a Receiver

Implicit in the court’s inherent power to appoint a receiver is that the court gets to decide the qualifications of that receiver, and that the other branches of government do not.  Otherwise, the other branches could so restrict the qualifications of a receiver as to make the court’s inherent power to appoint a receiver meaningless.

Many cases have held that a legislature cannot modify a court’s inherent powers.  E.g. Board of Educ. v. Asbury Park Educ. Ass’n,11 (legislature lacked jurisdiction to affect court’s inherent authority to issue injunctions, “It is clear beyond peradventure that the powers of a court of chancery, it being a constitutional court of original general jurisdiction . . . may not be impaired by the Legislature.”);  Gray v. Commissioner of Revenue,12 (holding that legislature could not modify inherent power of court, but determining that changing the laws regarding garnishment was not a change to its inherent powers).

Other courts have held the legislative branch may modify inherent powers of judicial branch, but it must do so plainly and narrowly.  E.g., New York Title & Mort. Co. v. Polk Arms, Inc.13 There, the depression-era New York state legislature had enacted statute stating a receiver could not be appointed in a foreclosure action unless the note had been in default at least 30 days.  Nevertheless, the court held that this was not sufficiently “plain” language to affect the court’s inherent power to appoint a receiver pendente lite pursuant to a mortgage:

We have one kind of receiver of the property of the corporation appointed in insolvency and another kind in mortgage foreclosures who is a mere receiver of rents and profits, appointed by the court by or without the consent of parties.  The former is appointed only as the court has been given jurisdiction over corporate bodies.  The latter is appointed without authority from statute.  The provisions of section 150 of the General Corporation Law can logically be related only to the former type.  We shall not imply an attempt on the part of the Legislature to affect the inherent power of the court over the appointment of the latter type when acting upon the consent of a corporation mortgagor. …”

The Legislature may classify litigation and adopt one type of procedure for one class and a different type for another.  It is at least doubtful whether it may put holders of corporate mortgage securities in one class and holders of individual mortgage securities in another so as to discriminate against the enforcement of contract rights by the former, without denying the equal protection of the laws.  We rest our decision on the reasonable construction to be given to the loose and inconsistent language of the statute and on the inherent power of the court to appoint receivers pendente lite in all mortgage foreclosures and enforce the lawful contracts of parties in that regard.14

Other courts are in agreement that to modify an inherent power of the judicial branch, the legislation must be clear and unambiguous.  E.g., Paul M.J. v. Dorene A.G.15 (“If the legislature intends to limit the court’s inherent power to control its calendar, it must do so clearly and unambiguously by explicit language and not by implication.”); Kaiser-Fraizer Corp. v. Eaton16 (declining to interpret legislation as modifying inherent power of court “in absence of clear evidence” that it intended to do so).17

The Marijuana Issue

The MED’s First Argument:  The Statutory “Requirement” of a License

The term “receiver” does not appear in the marijuana licensing statutes at all, and this is the primary basis for the MED’s argument that a receiver cannot be appointed for one.  Such an omission is certainly not a “plain” indication by the Legislature that a receiver cannot be appointed for an MED.  In New York Mortgage the statute specifically said that a receiver could not be appointed until a default had gone on for 30 days, but that language was held insufficiently clear to interfere with the inherent power of a court in equity to appoint a receiver pendente lite.  There must be plain and unequivocal language to modify or limit the inherent powers of the court, if it can be done at all.  It was not done in Colorado.

Indeed, Title 12 (the Occupations Code) in the Colorado Revised Statute lists 71 occupations, and only five of them expressly reference receivers being appointed.18 Under the MED’s analysis, an unlicensed receiver could not be appointed for any of the remaining 66 occupations, either, and that simply cannot be correct.

There are many industries today that are regulated, and many that require licenses to operate.  Not surprisingly, the State of Colorado has not taken the position in those cases that a receiver cannot be appointed because the legislature required licenses to operate those businesses.  For example, in State of Colorado v. Colorado Humane Society19, a receiver was appointed at the request of the Colorado Attorney General over the Colorado Humane Society.  Just like the requirement that an LMB must be licensed, pet animal facilities such as the Colorado Humane Society are required to be licensed under the Pet Animal Care and Facilities Act.20 Furthermore, the Pet Animal Care and Facilities Act provides that “Licenses issued pursuant to this article shall not be transferable.”21 Despite this restriction,  no claim was ever made by the Colorado Attorney General that the receiver had to be separately licensed.

Further, Colorado law requires that an organization must be registered with the Colorado Secretary of State under the Colorado Charitable Solicitations Act to collect charitable donations.22 As it was with the license, there was never any suggestion by the Attorney General in Colorado Humane Society that, in order to continue accepting charitable donations (which the receiver did), the receiver had to register with the Colorado Secretary of State (which the receiver did not).

A receiver was appointed over a pre-need funeral insurance company in Jump v. United Memorial Service Corp.23 Without objection from the Colorado Division of Insurance or the Attorney General, the receiver continued the operations of UMS under the preexisting license for three years.  Notably, when the receiver sold the company to a third party, the appointing court and the Division of Insurance required the new operator to obtain a license, but all the time the company was in custodia legis there was never any hint that the receiver needed its own license.24

Since those statutes are similar to the current marijuana statutes, and in those cases the executive branch sought the appointment of a receiver, whereas the MED opposes the appointment for LMBs, the dispute is not really between the legislative branch and the judicial branch at all.  Rather, the executive branch is claiming it has the right to determine a court’s inherent powers through selectively claiming when an equity receiver requires a license and when one does not.

Whether the executive branch can effectively infringe on the inherent powers of the judicial branch is such a dubious proposition that there is virtually no authority on it.  In State of Ohio v. Costilla25, the court held that the warden of a penitentiary could not release a prisoner earlier than the sentence imposed by the court:  “Moreover, a decision allowing the issuance of the certificate to terminate Mr. Costilla’s sentence would permit an executive officer [the warden] to modify a judicially imposed sentence by fiat, in direct violation of the separation of powers inherent in the Ohio Constitution.”

The MED’s Second Argument:  Unlicensed Indirect Control is a Crime

A second claim by the MED is that it is actually a “crime” for a receiver to supervise an LMB without having a license and that a court in equity cannot use its inherent powers to authorize the commission of a crime.26 The cases containing that language, however, do not deal with the “crime” of the receiver simply being unlicensed; rather, they deal with the issue of the underlying business acting in violation of substantive law.

For example, a court could not appoint a receiver over an illegal gambling operation or a prostitution ring and continue to operate those criminal enterprises.  Further, as discussed above, courts routinely appoint unlicensed receivers over other businesses that require licenses, indeed, sometimes at the request of the State of Colorado.  If the current argument by the MED is correct, then all those prior appointments were void.

The Real Issue:  Fear of Federal Involvement

The theoretical justification for the MED’s position is the “Cole Memo,” a Department of Justice memo that says, essentially, the Department of Justice is unlikely to use its scarce resources to prosecute LMBs where they are acting in conformity with well-regulated state law.27 But if all LMBs in Colorado are licensed except the handful under control of a district court via a receivership, it seems very unlikely this will trigger federal intervention.

Indeed, it is not clear that the federal government could interfere with property in custodia legis in a state court receivership.  The general rule is that once property is in the custody of a court of equity, no one else may interfere with it.28 The 10th Amendment to the United States Constitution (powers not expressly given the federal government are reserved to the States) and the federal Anti-Injunction Act (28 U.S.C. 2283) (prohibiting federal courts from enjoining state court proceedings) may also limit federal authority to interfere with a state court receiver.29

Must the Court Also be Licensed?

A receiver, as an arm of the court,30 has neither ownership, possession, nor custody of any the LMB.  The appointing court itself has legal custody, but neither ownership nor possession.  Analytically, a receiver is more akin to the court’s law clerk than to the owner of the LMB subject to dispute.

Accordingly, if the MED’s position is correct, then it is not just the receiver that must be licensed, but the appointing court itself and all appellate judges and justices that might sit in review of the appointing court.  Not even the MED is arguing for this point, but it is the logical result of the statutory “requirement” that all those involved “directly or indirectly” in the operation of a LMB be licensed.

Collateral Damage of the MED’s Position

In 2010, the people of the state of Colorado voted to pass Amendment 20 to the Constitution of the State of Colorado to legalize the medicinal LMB.  In 2012, the people of the state of Colorado voted to pass Amendment 64 to the Constitution of the State of Colorado to legalize the recreational LMB.  There is no suggestion that the people of the State of Colorado intended that the courts would not have their usual powers, including the ability to appoint receivers, regarding those businesses.  Indeed, Amendment 64 became Colo. Const. Art. XVIII, Section 16 provided (emphasis added):

In the interest of the health and public safety of our citizenry, the people of the state of Colorado further find and declare that marijuana should be regulated in a manner similar to alcohol.

Selling alcohol is one of the few occupations that expressly provide for receivers in the Colorado Occupations Code.31 Unlicensed receivers over alcohol-related businesses, however, are common.

While LMB is legal in Colorado, it is still a violation of federal law under the Controlled Substances Act.32 As a result, bankruptcy courts do not have jurisdiction over LMBs:

Unless and until Congress changes that law, the Debtor’s operations constitute a continuing criminal violation of the [Controlled Substances Act] and a federal court cannot be asked to enforce the protections of the Bankruptcy Code in aid of a Debtor whose activities constitute a continuing federal crime.33

Repairing a distressed company is a common function of receivers.  There is no reason to believe that the people of the State of Colorado or the Colorado State Legislature intended to exclude receivers from the available remedies to LMBs.  As bankruptcy courts do not have jurisdiction to repair a distressed LMB, and if the MED is correct, then LMBs, their creditors, their owners, and their customers would all be without recourse to the courts in instances of distress.  This would leave a billion-dollar industry of the Colorado economy without one of the judicial branch’s most powerful remedies.

Conclusion

Appointing a receiver is an inherent authority of a court of equity.  The legislature did not intend to change that regarding LMBs by the current legislation.  Even if the legislature did intend that, it lacked the requisite authority to do so.  Reading such intention in where none exists would be dreadful public policy.

________________________

1 This article is directed solely to the issue of whether a Colorado court has the power to appoint a receiver over a marijuana business.  There are numerous other issues raised in any circumstance where a receiver might be appointed, especially given the change in presidential administration from President Obama to President Trump.  Those are outside the scope of this article.

2 There are several types of receivers, including those who care take property during a foreclosure (the most common type) and those created by statute (such as the Resolution Trust Corporation of the 1980s).  As used in this article a “receiver” means an “equity receiver,” i.e. a receiver appointed to preserve and asset and avoid waste pending litigation.

3 1 Ralph Ewing Clark, Clark on Receivers, § 4 [3d ed. 1959] (“Clark on Receivers”).

4 Id.

5 Id. at § 7.

6Id.

7 Pendente lite” means “pending litigation.”

8 1 Clark on Receivers, §149 (emphases added; footnotes and citations omitted).

9 E.g., Johnson v. El Paso Cattle Co., 725 P.2d 1180 (Colo. App. 1986) (appointing a receiver in equity inherent power of district court); Melville v. Weybrew, 106 Colo. 121 (1940) (where court in equity had subject matter jurisdiction over matter before it, it had inherent authority to appoint receiver to displace trustees over trust); Roll v. Davis, 85 Colo. 594 (1929) (courts have inherent power to appoint receivers to preserve property in litigation); Jones v. Bank of Leadville, 17 P. 272, 277 (Colo. 1887) (referring to a court of equity’s inherent power to appoint a receiver pending dissolution of a corporation).

10 For a more thorough discussion on circumstances that may warrant the appointment of an equity receiver see Jack Tanner “Equitable Receivership as an Alternative to Bankruptcy,” 40 The Colorado Lawyer 41 (Dec. 2011).

11 Board of Education 368 A.2d 396, 404 (N.J. Sup. 1976).

12 Gray  665 N.E.2d 665 (Mass. 1996).

13 New York Title and Mortgage 186 N.E. 35, 37 (N.Y. App. 1933).

14 Id. (emphases added; internal citations omitted).  While there are scores of cases nationwide holding appointment of a receiver is an inherent power of an equity court, and hundreds of cases nationwide discussing legislatures’ attempts to modify various inherent powers of the judicial branch, New York Mortgage is perhaps the only case where a legislature’s improper attempt to interfere with the power to appoint an equity receiver was squarely addressed.

15 Paul M.J. 510 N.W. 2d 775, 778 (Wis. App. 1993).

16 Kaiser-Frazier Corp. 101 A.2d 345, 351 (Del. Sup. 1953).

17 The closest case in Colorado may be People v. Shell, 148 P.3d 162, 175 (Colo. 2006), where the respondent was held in contempt of court for practicing law without a license. The respondent argued that she was entitled to a jury trial per statute.  The Colorado Supreme Court ruled that that legislature, by requiring a jury trial for all crimes, did not intend to, and indeed could not, affect the Court’s inherent power to hold parties in criminal contempt:  “Contempt, of course, is not a statutory offense, but instead is ‘an inherent and indispensable power of the court and exists independently of legislative authorization.’”

18 See C.R.S. § 12-6-01(Automobiles); C.R.S. § 12-14-135(Fair Debt Collection Practices Act); C.R.S. §12-16-216(Farm Products and Farm Commodity Warehouses); C.R.S. § 12-7-03(Alcohol); C.R.S. § 12-61-406(Rea1 Estate).

19 State of Colorado v. Colorado Humane Society, Arapahoe County District Court Case No. 2008cv2659.

20 Pet Animal Care and Facilities Act, C.R.S. §35-80-104.

21 Id. at C.R.S. §35-80-105 (7).

22 Colorado Charitable Solicitations Act, C.R.S. §6-16-104.

23 Jump v. United Memorial Service, Civil Action No. 90 CV 6368, District Court, County of Denver, State of Colorado.

24 Colorado Humane Society and Jump are mentioned because the author was the lawyer for the receivers in both those cases; they are not unique.

25 Ohio v. Costilla,2001 Oh. App. LEXIS 2032, *11.

26 E.g., Armstrong v. Exceptional Child Ctr., Inc., 135 S. Ct. 1378, 1385 (2015); Armstrong v. Driscoll Constr. Co., 110 P.2d 651, 653 (Colo. 1941); In re Bauman, 535 B.R. 289, 299 (Bankr. C.D. Ill. 2015); Rubins v. Plummer, 813 P.2d 778, 779 (Colo. App. 1990); and Louisville Trust Co. v. Cincinnati Inclined Plane Ry. Co., 78 F. 307, 371 (S.D. Ohio 1897).

27 Memo of August 29, 2013 from James M. Cole, Deputy Attorney General of the United States, entitled “Guidance Regarding Marijuana Enforcement.”

28 See 1 Clark on Receivers at §71 (appointing courts routinely enjoin “all persons whomsoever” from interfering with property in custodia legis); 2 Clark on Receivers at §627 (if a person has a claim regarding the res, then proper procedure is to intervene in receivership).

29 Rule 66 does not raise a separation of powers issue because rules are adopted by the Supreme Court, which directs the judicial branch.  Any statutes adopted regarding receivers may be in addition to the court’s inherent authority, but the legislature likely cannot limit it.  This was the point of New York Mortgage; while the legislature passed a law that receivers could only be appointed when a note had been in default for over 30 days, the court held that such a statute was not intended to interfere with its inherent ability to appoint a receiver.

30 Professor Clark states that a receiver not a mere agent or officer of the Court, but an actual arm of the Court.  1 Clark on Receivers § 36.

31 C.R.S. §12-47-303.

32 21 U.S.C.S. § 801 et seq.

33 E.g., In re Rent-Rite Super Kegs W. Ltd., 484 B.R. 799, 805 (Bankr. D. Colo. 2012); In re Medpoint Mgmt., 528 B.R. 178 (Bankr. D. Ariz. 2015); In re McTiernan, 519 B.R. 860 (Bankr. D. Wyo. 2014); and In re Sunnyland Farms, Inc., 517 B.R. 263, 2014 (Bankr. M.D. Fla. 2014).