By: Heather L. Burke
Many of California’s licensed cannabis farmers recently transferred their cannabis to distributors on terms the distributors did not meet. As if the licensing game wasn’t hard enough, many of the 2019 cultivation licensees were in year 1 or 2 of a three-year plan to recoup costs and get out of the red. Failure to get paid not only hurts the family farm’s ability to survive, but when farms can’t afford to invest in their businesses, it hurts their ability to thrive.
I’ll be honest. Due to the volatility in California’s cannabis market, some of those farmers ain’t never gettin’ paid. The farmer can take the most aggressive measures legally available and sometimes ya just can’t squeeze blood out of a turnip. The only way to guarantee payment is to get paid up front, cash on delivery (“COD”), or in most cases, upon pickup from a licensed transport distributor. But holding out for a COD sale means waiting to get paid, and that’s risky too, as the market ebbs may bring an earlier round of light deprivations (deps) next spring, keeping prices lower than usual in the spring and early summer. It’s the California cannabis market, so anything can–and usually will–happen.
Due to the risk inherent in holding out, many farms front their product to distributors or manufacturers with an agreement, whether written or oral, that the farmer will be paid at some point, usually within 30, 60 or 90 days. I’ve blogged extensively about what should be in those contracts (here , here, and here) so I won’t reiterate it here, but it’s important to note that oral agreements are binding in California. While a written (and signed) contract is advisable, a farmer can legally collect on an oral agreement.
Here’s a few things to think about when a distro (or other licensee) hasn’t paid up:
- Seeking an Attorney’s Advice Sooner, Rather than Later
Unless you are an experienced business person with a comprehensive understanding of causes of action and statutes of limitations (and many farmers are), those farmers who haven’t gotten paid should see an attorney as soon as you know the distro isn’t paying up. And not just any attorney, but a civil litigator with experience in litigating contract disputes.
In our law firm, I write the contracts to keep our clients out of disputes and our civil litigator, Sarah, tags in if a dispute arises. Sarah knows those rules better than I do, and it is critical that my clients meet with someone who has the depth of experience in litigation to properly analyze the facts and potential claims.
An attorney doesn’t necessarily need to be retained to fight the case, as many lawyers will consult with a farmer to go over their rights. In any case, when a farmer leaves the attorney’s office, they should know (1) the basic procedure for going after the money, (2) the potential causes of action against the party that didn’t pay up, and (3) the important statutes of limitations (i.e. how much time someone can take to decide whether to go after the party for the unpaid money or not, which is shorter for oral agreements).
Importantly, seeing an attorney can also help properly document the dispute, which could become critical evidence in the future. That way, if the farmer take six months or a year to see if the market changes and the distro can pay the full balance of what they owe, the farmer doesn’t lose the right to collect in the future.
- Demand For Payment Letters
The first step in moving towards litigation is usually talking to the other party and seeing what’s up. Sometimes they can’t pay and sometimes they won’t pay. There is a difference and that difference must be part of the strategy for how aggressively the farmer goes after the money.
If informal conversations go nowhere, the next step is to send a formal demand for payment, aka a “demand letter.”
Demand letters are all about strategy. Before sending one off, there should be a game plan based on the unique facts of each situation. For instance, some distributors have enough money to keep a few of their connections happy, yet let their other accounts go unpaid. There, the farmer may want to send a “we-want-to-continue-to-work-together” style of demand letter designed to maintain the relationship. A more aggressive demand letter might be the strategy where the distro is likely never going to pay, such as those cases where the distro makes an affirmative statement declining to pay, or where the distro is shutting their doors and may soon be “judgment proof.” In unusual cases, the strategy may be to skip the demand letter entirely and go right to litigation. It all depends on the particular facts of the situation.
However, before tossing out some hastily-drafted demand letters in fake legalese cobbled together by a friend who claims to have “paralegal experience,” farmers should know the weaknesses and strengths of their case, and they should tailor a letter with an eye towards a thoughtful plan. Sending a crappy demand letter can make the sender look like they aren’t taking it seriously, a tactic more likely to be ignored than be rushed into the debtor’s attorney’s office in a state of panic (which may be the goal in many instances).
Since a formal demand can tee up a potential legal challenge, invest in the letter. The initial legal research and strategy should happen before one starts making demands, rather than waste money fighting a losing challenge or defending an unforeseen counterclaim.
- Alternative Dispute Resolution
In written agreements, clauses requiring a party seek mediation or arbitration are often included as a mandatory component. This process is called “Alternative Dispute Resolution,” and it can be a powerful tool for farmers who are not getting paid per the terms of a written agreement.
For oral agreements, the parties have to agree to engage in ADR, which may be tough for a distro that is close to going out of business themselves (and is already planning on taking your money to the grave with their business losses).
However, they may be more (or less) willing to negotiate after a demand letter, so the strategy can change again with regards to negotiating or mediating a debt after sending a demand letter.
- Commencing Litigation
To be clear, going to court to recover an unpaid debt is usually the worst case scenario. Getting that far often means the distro didn’t keep their word to pay the farmer, and that is disappointing for a variety of reasons. Litigating (i.e. suing) can be stressful and the farmer has to spend money for the chance of getting paid.
Some companies keep attorneys on payroll to defend against these kinds of cases and will litigate the farmer to death as part of their strategy to bleed out the small guy. Additionally, the smaller (more often more values-based) law firms can’t cushion the litigation by taking the case on contingency, so litigating can be an expensive and time consuming loss, even when the farmer ultimately wins.
Unfortunately, understanding the cruel realities of Big Business’ greedy practices is part of the educational experience here, and the pain of a few lost accounts may increase a farmer’s willingness to hold out for COD next time.
In conclusion, knowing what to do when an account doesn’t pay up on time is part of doing business in the no-holds-barred style of aggressive capitalism we practice in the United States. While I’d love for it to be different, its not. At least not right now. That is why its beyond critical our state’s small and mid-sized farms maintain their valuable position in the regulated marketplace, so being aggressive about getting paid may be the difference in staying in business for those teetering on the brink of extinction. Please stay strong. We need you.
With your success in mind,
Heather L. Burke
*Sorry we haven’t blogged in a while. I got carried away with the busy harvest season and have been spending a lot of time researching and writing about cannabis appellations, my current passion project. If you want to hear more about appellations, I’ll be giving an in-depth talk on California’s Cannabis Appellations Program (and related business issues for appellation farmers) for the Nevada County Law Library on January 21, 2020, from 12:00 noon to 1:00 p.m., at the Nevada City courthouse. (More about that HERE.)