Chalice Goes Down

24 May Chalice Goes Down

News broke yesterday which will affect quite a few people in the Oregon cannabis industry. Chalice Brands Ltd. (CSA: CHAL) obtained a court order in Ontario, Canada (“Initial Order”) which grants the company and its affiliates protection (a “stay”) from creditors. At least temporarily. The Initial Order is here and the Chalice press release is here. Chalice also filed an Oregon Circuit Court complaint on May 22 (“Complaint”), where it sued five of its own subsidiaries (the “Subsidiaries”) to drive them into receivership locally. If you’d like a copy of the Complaint, email me here.

I’m not an insolvency lawyer, so I won’t delve into issues of how the Initial Order from a Canadian court could be binding with respect to the Subsidiaries, which are Oregon companies. My guess is the Complaint was filed to address concern that Oregon creditors won’t respect the Ontario court’s rulings– including the stay. Appointing a local receiver could also expedite the disposition of all these local creditor claims.

I will note that the Initial Order, underlying pleadings, and Complaint make for interesting reading. The Complaint for example alleges that:

• the Subsidiaries owe Chalice over $35 million in intercompany debt (while admitting “these numbers may not be up to date”);
• the Subsidiaries owe $3.7 million in trade payables and “over $1,014,489.90 in missed rent [which] includes deferred rent”;
• the Subsidiaries also “have significant amounts of indebtedness due to third parties”;
• the Subsidiaries have been threatened by “certain creditors [with] self-help actions, including nonjudicial foreclosure actions…”; and
• the Subsidiaries have been sued and dragged in front of OLCC by certain individuals “seeking temporary authority to operate certain OLCC licenses belonging to [the Subsidiaries].”

None of this should surprise anyone close to the Oregon cannabis industry. Chalice has been in the the news here for not paying its bills. Our firm represents many vendors to Chalice and at least one landlord. We recently sued Chalice, in fact, on behalf of one OLCC licensee and won a judgment– including for Chalice to pay our client’s attorneys’ fees–because Chalice failed to pay for products. Up in Canada, the parent company stock has been on trading suspension for over a year due to lack of financial reporting.

As to Chalice’s messaging around this, the press release is somewhat muddled. That’s typical of Canadian cannabis pubcos, particularly around financial matters. For example, the communiqué claims that the “Receivership Order, if granted, will approve the appointment of Kenneth Eiler as receiver over the businesses, assets and property of the Receivership Entities.” We’re not so sure. Mr. Eiler, who is a former Chapter 7 Trustee known to our firm, isn’t requested at all in the Complaint. The press release also states that “the Company hopes to exit [creditor] protection well-positioned to rebuild its stakeholders’ trust and deliver high-quality, farm-to-table products to its Customers.” If you’re inclined to hope along with them, I’ve got a bridge to sell you.

Chalice has 16 stores and nearly 300 employees. The Subsidiaries bought a bunch of things during COVID they probably wishes they hadn’t. According to yesterday’s story in the Portland Business Journal (paywalled here), Chalice CEO Jeff Yapp “said the company is soliciting opportunities and finding a buyer is a better outcome than shutting down and selling off assets.” And the press release contemplates a “coordinated restructuring effort” rather than a liquidation. Unfortunately, there aren’t many buyers poking around Oregon cannabis these days, particularly at this scale.

The Chalice strategy does mean many of the stores could remain open for the time being. The near term question is whether they can break even while shielded from creditors. Related questions are how many employees will be willing to stay, and what the courts will actually do here in Portland, Oregon and Ontario, Canada.

Finally, the OLCC piece of all of this will also be interesting. OLCC does have a rule on “Standards of Authority to Operate a Licensed Business as a Trustee, a Receiver, a Personal Representative or a Secured Party.” OAR 845-025-1260. I helped walk the first set of parties through that protocol with OLCC some years back. I’m not sure if it’s been tested since, but the process was anything but straightforward. My hope is the Commission will be more prepared this time around.

For now, anyone who hasn’t already buttoned up dealings with Chalice should watch this process closely. The fallout here could get pretty bad.