INTERSECTION of MARIJUANA and Bankruptcy

INTERSECTION OF

ARIZONA INN OF MARIJUANA AND COURT – HOUSE BANKRUPTCY OF PAIN

February 12, 2020 ✎AO 153 (Rev. 6/96) NAME: (LAST, FIRST, MI) SOCIAL SECURITY NO. I OATH ON ADMISSION I, , DO SOLEMNLY SWEAR (OR AFFIRM) THAT AS AN ATTORNEY AND AS A COUNSELOR OF THIS COURT I WILL CONDUCT MYSELF UPRIGHTLY AND ACCORD- ING TO LAW, AND THAT I WILL SUPPORT THE CONSTITUTION OF THE UNITED STATES.

DATE: SIGNATURE: BAR I.D. NO.

COMPLETE REVERSE SIDE

✎AO 153 (Rev. 6/96) FIRM NAME TEL. NO. I FIRM ADDRESS

CITY STATE ZIP CODE I BELOW FOR OFFICE USE ONLY SWORN AND SUBSCRIBED BEFORE ME, DATE

ADMITTED ON MOTION OF: (Movant) U.S. Department of Justice

Executive Office for United States Trustees

Office of the Director Washington, DC 20530

April 26, 2017

Dear Chapter 7 and Chapter 13 Trustees:

Your role in administering bankruptcy estates is indispensable to the effective and lawful functioning of the entire bankruptcy system. I know that in the past few years, the United States Trustees have reached out to you to ensure that we are informed about all cases assigned to you that involve marijuana assets, which are proscribed under federal law and may not be administered under the Bankruptcy Code.1 This directive pertains even in cases in which such assets are not illegal under state law.

In recent months, we have noticed an increase in the number of bankruptcy cases involving marijuana assets. This is to reiterate and emphasize the importance of prompt notification to your United States Trustee whenever you uncover a marijuana asset in a case assigned to you. Our goal is to ensure that trustees are not placed in the untenable position of violating federal law by liquidating, receiving proceeds from, or in any way administering marijuana assets. In some cases, trustees move to dismiss or object to a chapter 13 plan confirmation on grounds unrelated to the controlled substance. You should continue to file any motions or objections you deem appropriate. It is the policy of the United States Trustee Program that United States Trustees shall move to dismiss or object in all cases involving marijuana assets on grounds that such assets may not be administered under the Bankruptcy Code even if trustees or other parties object on the same or different grounds.

I appreciate your continued and heightened attention to our directive for prompt notification of all cases involving marijuana assets. I am grateful for all the work you do every day to uphold the integrity of the bankruptcy system and to satisfy the highest fiduciary standards. Your accomplishments, while not always heralded, are much appreciated.

Sincerely yours,

Clifford J. White III Director

cc: Deputy Director/General Counsel United States Trustees Assistant United States Trustees

1 Cases involving marijuana assets include cases in which the marijuana assets would leave the estate through exemption or abandonment. Marijuana Bankruptcy 1/27/2020

Weed Love to File Bankrutpcy But We Can't Get Served

Presented by: Gary Michael Smith, Esq. Guidant Law Firm

Gary Michael Smith, Esq.

Me mber, Guidant Law Firm Presidentand Four>dingDirector,ArimnaCannabisBarAssociation

Garyconbe contocledotSmith@G uidanl. ill w

C2020G,ryMich.,,Smith,hq

GaryMichaelSmith, Esq AMERTCAN AmericanArbitratiooAssociatiooPanelist MediationandArbitration • ARBITRATION ASSOCIATION°

~ ' ·, ·th ew ty, ~Wh , m•,f ton,; u l,;t,oto,,adhu, ,d ,,,....,lom,atooafu.,,co · o,. ,,,o· ,,, -,

Amon , <1h 'ADfl.0

Guidant

Arizona Cannabis Bar Association ~-~ ,n,m ···· 4

Let's accept as given that marijuana is Federally illegal. If you don't already know this, you may be sitting in the wrong seminar. M'kay?

21 USC § 841 makes it a serious felony to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense marijuana.

Guidant 6

{d) A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or Arizona ER 1.2. Scope of I fraudulent, but a lawyer may discuss the Representation and Allocation I of Authority between Client legal consequences of any proposed and Lawyer course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.

Guidant f;wloG, ryMich><:ISmith.ts,i

Lawyers may ethically advise clients about complying with the Arizona Medical Marijuana Act, including advising them about compliance with Arizona law, assisting them to establish business State Bar of Arizona I entities, and formally representing clients I Ethics Opinion 11-01 before a governmental agency regarding licensing and certification issues, but only in the narrow circumstances set forth in this opinion and only if lawyers strictly adhere to those requirements.

Guidant

American "Hemp"story

In 1619, America's first marijuana law was enacted at Jamestown Colony, Virginia, "ordering" all farmers to "make tryal of" (grow) Indian hempseed.

More mandatory (must-grow) hemp cultivation laws were enacted in Massachusetts in 1631, in Connecticut in 1632 and in the Chesapeake Colonies into the mid-1700s.

Guidant 9

e To encourage America n fa rmersto grow more $

George Washington and Thomas Jefferson grew cannabis on their plantations.

Guidant C 2020G, ryMich,,,ISmith,tsq 11

THE DECLARATION OF INDEPENDENCE AND THE UNITED STATES CONSTITUTION ARE PRINTEDONHEMPPAPER

Thatpaperpossiblycamefrom one of Ben Franklin's paper mills.

Benjamin Franklin started one of America's first paper mills with cannabis, to relieve American dependence upon British paper.

Various marijuana and hashish extracts were the first, second or third most- prescribed medicines 11' in the United States from 1842 until the 1890s. It's medicinal use continued legally through the 1930s.

-~ Guidant

The rise of the World War I industrialists heralded the beginning of the end for Cannabis.

Enemies of Cannabis were: • Petroleum Industry • Wood Pulp Industry • Chemical Industry • Hearst Newspapers • US Banking Interests • Pharmaceutical Industry

The first person to be arrested under the Marihuana Tax Act of 1937

A young, Mexican-American named Moses Baca, who had a quarter-ounce of cannabis tucked into his drawer in his third floor rooming house in Denver's Five Points neighborhood. Judge John Foster Symes sentenced Baca and made his disgust for cannabis known: "I consider marijuana the worst of all narcotics, far worse than the use of morphine or cocaine. Under its influence, men become beasts. Marijuana destroys life itself I have no sympathy with those who sell this weed."

C: 2020GaryMich..,ISmith,hq Guidant ~ 19

1970 Comprehensive Drug Abuse Prevention and Control Act

In its 1969learyv. United States decision, t he Suprem e Court held the Marijuana Tax Act to be unconstitutional, since it violated the Fifth Amendment privilege against self-incrimination. In response, Congress repealed the Marijuana Tax Act and passed the Controlled Substances Act as Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970, which repealed the Marijuana Tax Act.

Guidant

History of State Decriminalization and the Rise of State Regulation

Stotesbion of , ma ll Gon zal es v. Ra ich(542 U.S. l )

197319'3(] ~ 2()()5 2012T00ay

Guidant 21

History of Criminalization

1969

1937 1970

Lea ryv.USholdsMTAviolates Sth Amendment

Guidant C: 2020GaryMich..,ISmith,hq

1937

Anslinger get Congress to pass the Marihuana Tax Act. [Yes, they spelled it with an "h".] The 1937 Marihuana Tax Act did NOT outlaw marijuana. Rather, it made it too expensive for farmers to justify growing the crop. Under pertinent provisions of the Marihuana Tax Act, 26 U.S.C.S. §§ 4751-4753, every person who sells, deals in, dispenses, or gives away marihuana must register with the Internal Revenue Service and pay a special occupational tax. -Minor v. United States, 396 U.S. 87 (U.S. 1969).

Guidant C2020G,ryMich><,ISmith,hq 17

1937 Marihuana Tax Act Barely Gets a Footnote in the New York Times ------

• • c::. . C: 2020GaryMicha,,ISmith,hq 18

30 9 Medical Aecreation a1· 16 4 CBO None

Guidant

Com parative Yield per Acre for Gra ins and Marijuana

$1 .2 m So urces: US DA; The Ran d Corporation; Reports of Oregon Cu lt ivators Sl,1 m S1m ? $700 $.,,, $500 ,,.,S

Mariju am1 Corn Soylle ans Wh eat Guidant 23

The 2018 • • • Farm Bill - Hemp Returns to the US • o

C: 2020GaryMich..,ISmith,hq 25

Federal Legalization of Industrial Hemp and CBD to Be Primarily Regulated by the States

The Farm Bill effectively gives states the primary regulatory authority over the production of industrial hemp. The Farm Bill defines "hemp" as "the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis." Each state must submit its plan for the regulation of hemp production to the US Department of Agriculture. Each state's plan must provide the following information as to how the state will monitor and regulate production.

l: 2020GaryMich><,ISmlth,hq 26

Additional ..• 2018 Federal Farm Bill Caveats

------OnDecemberZ0,2018,the Hemp vs. marijuana federal government altogether removed"industrialhemp"and allderivativesofcannabiswith Hemp Marijuana less than 0.3%THC-including • Shorle,, ,esemblesabush,wrth more~ave, CBD products - from the aridbud:ISIJrtOIH>

Guidant 29

One Path to Bankruptcy is to Have Presence in Canada and Access Canadian Courts

FINANCIAL POST HEW'.'i • I~ • MlRt:m PEMJ.l fl ~J. IICE • llll+ffljJk'JH IHfllilMDIT DIIREPIIEIIEUR • IXECTJ lll'E • ff lU(JltlE • SU8SCRIBE • MORE

'There's just no money coming in': Cannabis sector bracing for wave of insolvencies in 2020

Guidant C2020G,ryMich><,ISmith,t,q 30

Today's Marijuana Products

• Vaporizer5

• Bongs

• Shatter • Vape Pens

• Hashish

THC and CBD Are Very Similar, But Not The Same

"11010GaryMichae lSmith,E,q 32

l l [A L- 11 O[N CFITS OF CANNABIDIOL

ui ant 33

Chapter 7 Fact Pattern

Bob Saget was a custom glass maker in Arizona. In 2014, with Amazon’s recent boom, Bob’s Glass began struggling to survive. After months of soul searching, Bob decided to enter into an agreement to become Laughing Grass LLC's (a Marijuana grower and distribution company) sole water pipe maker (a filtration device used for smoking cannabis). Bob’s business began thriving once again. In mid-2018, Amazon decided to enter the water pipe distribution business. Amazon was able to bring in cheaper water pipes from overseas and sell them for much less, thereby destroying all of its competition. Bob, after attempting to rebrand, lost all he had built over the years and only has $2,500.00 in his bank account to pay for a bankruptcy.

Bob comes to you for a consultation. He wants you to file his bankruptcy right away so he can pack his bags and move to Alaska to be a bushman. What will you advise him to do?

Issues

What is the status of the Debtor’s actions under State law?

States that Permit the Use, Sale, and Distribution of Medical Marijuana Notwithstanding the federal prohibition against growing, distributing and possessing marijuana, to date 33 states and the District of Columbia (over half of the country) have enacted state or local laws that remove criminal sanctions for qualifying patients, physicians and caregivers.[3] Ten of these states, as well as the District of Columbia, have also immunized the recreational use of marijuana from prosecution. Arizona Arizona Medical Marijuana Act. 36 Ariz. Rev. Stat. §§ 36-2801—2819 allows a patient with an Arizona registry ID card to use cannabis for medical purposes. Not surprisingly, the legalization of marijuana for medical and recreational uses has resulted in the development of a multibillion-dollar industry consisting of producers, developers and distributors, and the landlords, vendors and others who provide services and do business with these budding entrepreneurs. Inevitably, some of these burgeoning marijuana businesses and their affiliates will fail, raising the following question: Can businesses and individuals that derive income at least in part through marijuana-related activities in violation of the CSA nonetheless seek relief under the Bankruptcy Code?

Is Debtor eligible for a discharge under Chapter 7?

In re Arenas (B.A.P. 10th Cir. 2015)

Facts: Debtors (husband and wife) owned building with two units. In one unit, debtors grew and sold marijuana, while the other unit was leased to third parties who used the space to dispense medical marijuana.

Debtors filed a Chapter 7 then wanted to convert to Chapter 13. The U.S. Trustee sought dismissal of the bankruptcy case. The bankruptcy court held that debtors’ conduct violated the CSA and denied the motion to convert to Chapter 13. Debtors were also denied relief in Chapter 7 because “engaging in criminal conduct demonstrated lack of good faith that would bar confirmation of their Chapter 13 plan.” In re Arenas, 535 B.R. at 847.

Issue: “Can a debtor obtain relief in the federal bankruptcy court?” Id.

Rule: “The court may dismiss a case under this chapter only after notice and a hearing and only for cause, including (1) unreasonable delay by the debtor that is prejudicial to creditors.” 11 U.S.C. § 707(a)(1). “Cause” includes a nonexhaustive list of examples. 11 U.S.C. § 1307(c)(1)-(11).

Held: Affirmed the bankruptcy court, because debtors violated the CSA.

Reasoning: “[W]hile the debtors have not engaged in intrinsically evil conduct, the debtors cannot obtain bankruptcy relief because their marijuana business activities are federal crimes.” In re Arenas, 535 B.R. at 849-850. The Bankruptcy Court did not abuse its discretion in denying motion to convert to Chapter 13. Thus, there was cause to deny the motion to convert to Chapter 13. The court reasoned that debtors’ marijuana business activities violated the federal CSA. Id. at 846.

How close is too close? What issues could client face if he filed his case today?

Dismissal under Section 707(a) of the Bankruptcy Code

Violation of the CSA

Since 1970, the federal government has prohibited selling, growing and distributing marijuana through the Controlled Substances Act, or CSA. The CSA categorizes marijuana as a Schedule I controlled substance and makes a variety of activities related to marijuana illegal, including using, selling and manufacturing marijuana; financing businesses that sell or manufacture marijuana; leasing property to any such business; and selling related drug paraphernalia.

Forfeiture under the CSA

Under the CSA, “[a]ny person convicted of a violation of [the federal CSA] punishable by imprisonment for more than one year shall forfeit to the United States, irrespective of any provision of State law

Upstream/downstream operations

Upstream marijuana operations: Entity’s business directly and purposefully involves marijuana or the marijuana industry (Cultivators/Dispensaries)

Downstream marijuana operations: Entity knowingly or even unknowingly transacts with a marijuana-related industry or provides to a marijuana-related operation a good or service that is available in the general stream of commerce (Ancillary Services)

Way to Grow, Inc.

The debtors in Way to Grow Inc. conducted such a downstream business — they sold indoor hydroponics and gardening equipment for consumer use in Colorado retail stores, a California sales

2 facility and on the internet. Pure Agrobusiness was the 100% shareholder of Way to Grow and Green Door Agro, along with the nondebtor affiliate Crop Supply, which focused on selling hydroponic equipment to commercial customers.

One of the debtors’ secured creditors, a former owner, followed the debtors into the bankruptcy court and moved to dismiss the case, arguing that the debtors’ sale of hydroponic equipment to, among others, marijuana grow operations constituted violations of the CSA. The court first determined that there was no evidence of the debtors’ alleged violations of the CSA. The court held that selling products that can be used to cultivate marijuana did not make the debtors liable for directly manufacturing, distributing, dispensing or possessing with intent to manufacture, distribute or dispense a controlled substance under the CSA.

Similarly, the court held that the debtors did not violate the CSA under theories of aiding and abetting or conspiracy because there was insufficient evidence to establish the requisite intent. Simply selling products to customers involved in the marijuana industry did not violate the CSA under these theories. Notwithstanding such a promising start, the court then turned to Section 843 of the CSA, which requires a lesser mens rea for violations of the CSA by simply knowing how debtors’ products will be used. Specifically, Section 843(a)(7) makes it a federal crime to “manufacture” or “distribute” any “equipment, chemical, product or material which may be used to manufacture a controlled substance ... knowing, intending, or having reasonable cause to believe, that it will be used to manufacture a controlled substance.”

Unfortunately for the debtors, there was substantial evidence indicating that they had reasonable cause to believe that the equipment they sold would be used by some customers in the cultivation of marijuana. Specifically, the court pointed to (1) debtors’ reliance on the marijuana industry for business growth, (2) the debtors intentionally selling products targeted toward and designed for growing marijuana, (3) the debtors participating in and sponsoring numerous marijuana industry trade shows and growing competitions and (4) the debtors’ employees routinely offering advice to customers about marijuana cultivation. While not directly involved in the distribution of marijuana, the debtors nevertheless specifically targeted the marijuana industry and knowingly sold equipment and products to customers growing marijuana.

The holding in Way to Grow may be limited by its unique fact pattern. Other companies offering ancillary services to the marijuana industry might not as brazenly support the industry as publicly as the Way to Grow debtors did. For example, the companies paid for booths at cannabis industry trade shows and gave away promotional materials, including lighters and rolling papers. The charge to dismiss the case was also spearheaded by a former owner hell-bent on proceeding against the debtors in a prepetition lawsuit.

What if the Client destroyed or abandoned the water pipes and was no longer operating?

In re Wright (Bankr. N.D. Cal. August 3, 2007)

The court rejected the US Trustee’s argument that Chapter 7 was unavailable to the debtors as “flawed and premature,” writing: “The mere fact that a trustee cannot liquidate the debtor’s assets does not make the debtor ineligible for Chapter 7 relief... . [I]n an individual Chapter 7 case there are two purposes: liquidation of an estate and discharge of a debtor. The ability to liquidate an estate is not a prerequisite to a discharge. In any event, this discussion is moot until and unless the debtors seek relief in Chapter 7.”

Comparison with In re Arenas and In re Wright:

In light of the court’s reasoning in In re Wright, the debtors later filed a notice converting their cases to Chapter 7 and no objection was filed by the US Trustee or any other party in interest. Wright

3 therefore stands in contrast to Arenas, at least regarding the availability of Chapter 7 for individual debtors engaged in state-legalized marijuana cultivation. Wright, however, is an outlier case.

If bankruptcy relief is not available to the debtor, what alternatives may be available?

Statutory and common law receiverships

A.R.S. § 12-1241 empowers the Superior Court to appoint receivers. It provides: “The Superior Court or a judge thereof may appoint a receiver to protect and preserve property or the rights or parties therein, even if the action includes no other claim for relief.”

Ariz. R. Civ. P. 66 provides the procedure by which a party can petition the superior court for the appointment of a receiver.

Assignments for the benefit of creditors

A.R.S. § 44-1031-1047 governs

Winding up the affairs of the corporation before applying

Remedies available to secured creditors under the Uniform Commercial Code (UCC Article 9 Secured Party Sales)

Chapter 13 Fact Pattern

Jeff Lebowski is a botanist with a PhD in Biological and Agricultural Engineering and a Masters in Agribusiness. He is employed by Electric Lettuce in its sales department. Jeff travels throughout the US meeting with customers and provides advice on equipment and its proper usage. Electric Lettuce is a US corporation with about 500 employees and does business in 33 states. Its principal business is the production of hydroponic and lighting equipment used in indoor agricultural grow operations: everything from small backyard greenhouses to large scale producers of lettuce, tomatoes, hemp and marijuana. Whether its Grandma Sally growing tomatoes in her small greenhouse or a large-scale cannabis farm, Jeff is there to make sure customers have everything they need. He only provides direct sales and therefore knows how each client is using the equipment.

Jeff also owns a 40% interest in Uncle Herb’s which is no longer operating. Uncle Herb’s produced edibles, wax, shatter, concentrates and other marijuana products for sale in Arizona. Uncle Herb’s contracted with Cheba Hut for the “flowers” used to produce its marijuana products. Unfortunately, Cheba Hut was unable to consistently supply Uncle Herb’s the contracted amount of marijuana. As a result, Uncle Herb’s was unable to produce and sell enough product to cover its operating costs. Uncle Herb’s filed a lawsuit in state court against the Cheba Hut for recovery of lost profits due to Cheba Hut’s failure to supply the contracted marijuana. Starbuds Legal Solutions, is representing Uncle Herb’s on a contingency fee. Jeff believes any recovery from the lawsuit is unlikely due to the substantial costs associated with the litigation; however, the lawsuit is still ongoing.

Jeff fancies himself as a bit of a weedologist. In his spare time, Jeff provides consulting services to hemp and marijuana growers giving advice on increasing yield and developing new varieties. Jeff has built up quite a large client base and is considered one of the leading experts in the industry. He is “highly” sought after is known as “The Dude.” Jeff provides consulting services in several states, not all of which have legalized the production and/or use of marijuana.

Jeff also publishes a quarterly newsletter called The Stoned Age. The Stoned Age advocates for the decriminalization and use of marijuana and marijuana products. It provides tips and best practices for increasing yield and potency, features how-to articles, recipes, and interviews with various industry leaders, doctors, politicians and the occasional celebrity. Jeff sells ad space to medical providers, growers, dispensaries, and producers of marijuana product and receives income from subscriptions.

With an established base of sales and consulting clients and the income from his newsletter, things were going well for Jeff. He started spending more and more time at the bowling alley. Although his bowling game greatly improved and he won a couple league championships, Jeff began to lose touch with his clients. An upstart company called Uncle Buddz moved in and captured a significant portion of Jeff’s client base. With his sales income down, Jeff fell behind on his mortgage and his house was set for foreclosure. His credit cards were in default and his vehicle was about to be repossessed. He also was audited by the IRS and had a large tax bill. Jeff just knew that he could win back his customers and save his house if he could keep his creditors at bay. He found a local attorney named Seth Dogg that had the perfect solution: Jeff could file a Chapter 13 and keep his house, his car and pay off the IRS. Even better, most of Jeff’s attorney’s fees would be paid through the bankruptcy from funds that would otherwise go to those pesky credit card companies. Jeff sat back and sipped on his White Russian thinking his troubles were over.

Issues

Can Jeff fund a Chapter 13 Plan if he segregates his income sources and funds a plan only from funds earned from activities legal under federal law?

In re Johnson 532 B.R. 53 (Bankr. W.D. Mich. 2015)

Debtor was a licensed caregiver and marijuana grower in Michigan. He earned income from providing marijuana to patients and sold surplus marijuana to dispensaries. He also received social security income. The debtor fell behind on his mortgage payments and filed a chapter 13 bankruptcy to stop the foreclosure of his home. Debtor proposed a plan that segregated marijuana income from social security income and funded the plan only with his social security income. The U.S. Trustee moved to dismiss the case, because part of Johnson’s income came from the sale of marijuana. The court held that Johnson’s operation of a marijuana business, even if the income were segregated, required the court, the trustee, and the debtor to violate federal law. The court gave Johnson the option to remain in bankruptcy by ceasing his marijuana business operations.

Although Jeff has several different sources of income, merely segregating them and using income derived from activities that do not violate the CSA will not be enough to prevent the dismissal of his case. The court will not allow Jeff to continue any business activities that violate the CSA and remain in the bankruptcy.

Can Jeff propose a plan that meets the good faith requirement of 1325(a)(3)?

In re McGinnis, 453 B.R. 770 (Bankr. D. Or. 2011)

Debtor proposed a chapter 13 plan that would be funded by three sources: (1) rental income from a warehouse leased to medical marijuana growers; (2) profits from debtor’s own medical marijuana operation; and (3) rental income from a commercial property not affiliated with medical marijuana cultivation or sales. The court denied confirmation because the plan relied on income derived from the marijuana industry and violated the good faith requirement under Section 1325(a)(3). The court held that the good faith requirement requires the plan to be in compliance with Title 11 and all other applicable federal and state laws. The court further concluded that because the contemplated marijuana operations were illegal under both federal and Oregon law (because the product was sold for more than the cost of production), the debtor could not satisfy Section 1325(a)(6), which requires proof of a debtor's ability "to make all payments under the plan and to comply with the plan."

Jeff’s plan would likely fail the good faith requirement. Jeff is providing consulting services in states that have not legalized the use and/or production of marijuana. Jeff is not only violating federal law; he is also violating state law. A plan that relies on funding from illegal activities will not meet the good faith requirement of 1325(a)(3).

Suppose that Jeff decides to stop all consulting services to individuals and businesses producing marijuana. He is left with income from sales of hydroponic equipment and advertising income from the Stoned Age. Would Jeff’s case survive a motion to dismiss now?

Olson v. Van Meter (In re Olson), In re Olson, 2018 WL 989263 (9th Cir. B.A.P. 2018).

Debtor received rental income from a marijuana dispensary on real property she proposed to sell under her plan. The bankruptcy court sua sponte dismissed the bankruptcy case because the debtor was accepting rental income during the post-petition period from a source engaged in a business that violated federal law. On appeal, the BAP vacated and remanded the case, stating that the bankruptcy court needed to make findings of fact and conclusions of law to support dismissal. In a concurring opinion, Judge Tighe stated that "[a]lthough debtors connected to marijuana distribution cannot expect to violate federal law in their bankruptcy case, the presence of marijuana near the case should not cause mandatory dismissal." In re Olson, 2018 WL 989263 (9th Cir. B.A.P. 2018). Courts should consider whether a debtor is actually violating the Controlled Substances Act before dismissing a case.

If Jeff abandons his interest in the lawsuit would his Chapter 13 survive a motion to dismiss? Can Jeff sell his interest in Uncle Herb’s and/or the lawsuit to a disinterested 3rd party prior to filing?

Burton v. Maney (In re Burton) BAP No. AZ-19-12126-LTaF (B.A.P. 9th Cir. 2020)

Debtors owned a majority interest in an LLC engaged in cultivating and selling marijuana. LLC was no longer operating; however, the LLC was a plaintiff in at least two state court lawsuits for breach of contract related to the growing and selling of marijuana. The only income on Schedule I was from Ms. Burton’s non-marijuana employment as Mr. Burton was unemployed. An unsecured creditor filed a motion to convert the case to chapter 7 arguing that the Burtons exceed the debt limits under §109(e) and that the plan was filed in bad faith due to Mr. Burton’s connections to the LLC. The Burtons argued that the LLC had ceased operations prior to the filing of the bankruptcy and therefore, none of their income was derived from the marijuana industry. The bankruptcy court dismissed the bankruptcy case due to the Burton’s interest in the LLC. The court reasoned that any recovery by the LLC in the state court litigation would ultimately be disbursed to the Burtons. Such a distribution would be “tainted as proceeds of an illegal business” because the underlying cause of action related to lost profits from the growing and selling of marijuana.

Jeff will have issues related to his ownership interest in the LLC. Although it is not operating, there is the possibility of a recovery in the state court litigation. Any recovery would essentially flow from the growing and/or selling of marijuana and marijuana products which is illegal under the CSA.

Relevant CSA Provisions

841(a)(1)—Cultivators/Dispensaries

it shall be unlawful for any person knowingly or intentionally to manufacture, distribute, dispense, or possess with intent to manufacture, distribute or dispense, a controlled substance

843(a)(7)—Ancillary Companies

it shall be unlawful for any person knowingly or intentionally to manufacture, distribute, export or import any…equipment, chemical, product, or material which may be used to manufacture a controlled substance…knowing, intending, or having reasonable cause to believe, that it will be used to manufacture a controlled substance

843(c)(7)—Advertisement

It shall be unlawful for any person to place in any newspaper, magazine, handbill, or other publications, any written advertisement knowing that it has the purpose of seeking or offering illegally to receive, buy, or distribute a Schedule I controlled substance. The term "advertisement" does not include material which merely advocates the use of a similar material, which advocates a position or practice, and does not attempt to propose or facilitate an actual transaction in a Schedule I controlled substance.

Chapter 11 Fact Pattern

After a long and successful career of corrupting impressionable youth, Thomas Chong decided to pursue his true passion, real estate investment, as a late retirement plan. Mr. Chong capitalized and formed a wholly-owned entity: MJ Enterprises, Inc (“MJ Enterprises”). MJ Enterprises acquired several real property interests in different states. Always a wise businessman, Mr. Chong diversified his real property interests but made sure they all shared a common connection, one near and dear to his heart. As of now, Mr. Chong has the following real property interests:

- California Warehouse: A 250,000 square foot industrial warehouse in Humboldt, California. The current tenant, WeGrowWeed Ltd., (“WeGrow”) uses the space for growing copious amounts of marijuana which is sold to a local dispensary for recreational and medical use. As expected, WeGrow pays entirely in cash which is deposited into a segregated account at a local credit union.

- Arizona Retail Space: A 10,000 square foot commercial space in Tempe, Arizona. The current tenant, SnakeOilz, LLC, (“Oilz”) sells all manner of organic herb-based medicine. In addition to the turmeric, ginseng, and Hawaiian Baby Woodrose remedies, Oilz specializes in CBD products, specifically popsicles sweetened with stevia.

- Utah Multi-family Residence: a 25-unit apartment complex in Provo, Utah. Apart from the occasional ruckus caused when the Utes come to town, the tenants of Lower Downtown Salt Flats (“Flats”) are law-abiding tenants. Thomas Gooselane is the exception. Mr. Gooselane rents a one-bedroom apartment where he sleeps on a futon and uses his bedroom and spacious walk-in closet to grow marijuana. Mr. Gooselane has no other job and sells the marijuana to college students to pay rent.

- Nevada Retail Space: A small 2,500 square shop in the middle of Las Vegas, Nevada. The current tenant, Devil’s Lettuce Corp., (“Lettuce”) sells innocent hydroponic equipment for growing of all types of leafy produce. Nevertheless, 95% of Lettuce’s clientele use the equipment for marijuana growing (the other 5% grow mint). Lettuce occasionally presents information regarding cutting edge hydroponic technologies at conventions, including Pot Con, the marijuana-dispensary convention. Lettuce makes no sales at Pot Con.

- Kentucky Agricultural Land: A small 5-acre farm in Danville, Kentucky. Mr. Chong rents out the farm land to a group of family farmers, the Washingtons. The Washingtons grow hemp and only hemp.

Due to a government shutdown which put all DEA agents on a much-deserved unpaid vacation, local law enforcement coordinated a raid of MJ Enterprises’s properties and the related businesses. Except for a backed-up toilet at Flats, the local authorities found nothing suspicious and determined that all properties and businesses were operating in accordance with the respective state law.

Nevertheless, the raids did put MJ Enterprises’s business behind in their rent. While the rent generally provided enough income for the secured debt on the associated properties, the disruption in income put MJ Enterprises in default on several secured liens. Additionally, MJ Enterprises defaulted on

{00213603} significant unsecured debt from financial investors. MJ Enterprises believes if it can restructure its secured debt and discharge some investment debt, it can successfully get back on track. Case Law

Can MJ Enterprises Reorganized Under the Bankruptcy Code? MJ Enterprises can likely reorganize if it sheds its connection to actions which violate the Controlled Substance Act. In regards to marijuana-related businesses, many courts follow the example set out in In re Rent-Rite Super Kegs W. Ltd., 484 B.R. 799 (Bankr. D. Colo. 2012). Rent-Rite leased out approximately 25% of its warehouse space to marijuana growers. While the court acknowledge its operations may comply with Colorado law, Rent-Rite’s operations nonetheless violated 21 U.S.C. § 856(a)(2) which made it illegal to “manage or control any place, ... as an owner, ... and knowingly and intentionally rent, lease, profit from, or make available for use, with or without compensation, the place for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance.” The Court found that the continuing violation subjected Rent-Rite’s secured creditor to potential forfeiture under 21 U.S.C. § 881(a)(7). For such reasons, the court found “cause” for dismissal or conversion due to 11 U.S.C. § 1112(b)(4)(B). The Court set a hearing on whether dismissal or conversion was in the best interest of creditors but noted a concern that conversion would put the Chapter 7 trustee in charge of managing a criminal activity and threaten feasibility of administration. A recent bankruptcy court in Michigan also found cause under 11 U.S.C. § 1112(b)(1) when it concluded that the debtor’s intent in a reorganization was to increase its own profitability in a marijuana- related business. In In re Basrah Custom Design, Inc., 600 B.R. 368 (Bankr. E.D. Mich. 2019), Basrah operated a custom cabinet operation. Basrah’s sole shareholder and president owned the real property occupied by Basrah. The shareholder also leased a large portion of the warehouse to a medical marijuana dispensary, MJCC 8 Mile, LLC. However, the lease indicated Basrah as the landlord. MJCC attempted to exercise an option to purchase which led to significant dispute in state court regarding Basrah’s ability to encumber the land. MJCC eventually prevailed with the court finding the shareholder leased the property to MJCC through Basrah as an agent. The Court also found the Basrah and its shareholder opposed the lease for the sole purpose of either fetching a higher price for other marijuana businesses or using the space themselves to operate the same. Basrah then filed for Chapter 11 relief and attempted to reject the lease, claiming it was attempting to disentangle itself from the marijuana industry. After noting that Basrah did not have the authority to reject the lease, the bankruptcy court found that collateral estoppel prevented Basrah from arguing that it opposed the lease for any other purpose than advancing its own interest in the marijuana industry. The court found that the debtor’s intent to reject an illegal lease only to replace it with a better illegal lease constituted “unclean hands” and constituted cause under Section 1112(b)(1). Among other reasons, the court determined that it could not convert the case to Chapter 7 because it would place the court in an “impossible situation” regarding MJCC, who also had unclean hands, and MJCC’s right under the state court’s decision to take possession of the property. A recent Ninth Circuit decision stepped back from regulating conduct under the CSA. In Garvin v. Cook Invs. NW, SPNWY, LLC, 922 F.3d 1031 (9th Cir. 2019), several related real estate holding companies owned by Michael Cook filed for reorganization. One of the companies leased space to a commercial marijuana grower doing business as Green Haven. The U.S. Trustee attempted to dismiss the case but the court allowed Cook to reject to lease and propose a plan not dependent on marijuana-related income. Cook did so, but the U.S. Trustee opposed confirmation based on 11 U.S.C. § 1129(a)(3), arguing that confirmation of a plan based, at least indirectly, on the debtor’s previous involvement in marijuana and Cook’s continuing, though unclear, involvement with Green Haven gave tacit approval of the illegal

{00213603} activity. The Ninth Circuit in rejecting an interpretation found in Rent-Rite followed a line of cases holding that Section 1129(a)(3) only required proposal of a plan in good faith and not by any means forbidden by law and did not require the plan itself to comply with all applicable nonbankruptcy laws and regulations. In doing so, the Ninth Circuit apparently agreed with the Western District Court of Washington’s observation that bankruptcy courts are neither regulatory nor criminal courts and enforcement of the CSA is outside the bankruptcy court’s purview. While a Nevada bankruptcy court recently affirmed the binding nature of Gavin’s interpretation of Section 1129(a)(3), it noted that Gavin did not prevent dismissal of marijuana-related cases on other grounds. In In re CWNevada LLC, 602 B.R. 717, 723 (Bankr. D. Nev. 2019), CWNevada operated a medical and recreational marijuana business. Apart from CSA issues, the debtor faced numerous procedural deficiencies, including lack of independent council, as well as minimal creditors and a pending receivership action. While it noted that Gavin left open the door for businesses directly involved in the marijuana industry to reorganize under the right circumstances, the court determined the dismissal based on abstention under 11 U.S.C. § 305(a) was appropriate under the specific facts of the case. This is an excellent case for a practitioner who would like to gain a good background of bankruptcy issues concerning the marijuana business. While companies related to the marijuana industry have faced challenges on bad faith and plan feasibility, the Ninth Circuit appears to have eliminated at least some of these issues and returned reorganization issues to simply economic terms. Not only does Gavin properly note that pre-petition and pre-confirmation conduct does not necessarily implicate Section 1129(a)(3), it arguably goes further to reject a per se bar on marijuana-related activity. Nevertheless, if MJ Enterprises or its tenant’s activities risk forfeiture of material assets or income, MJ Enterprises will face denial of a plan based on feasibility and even potential dismissal based on mismanagement of assets. Gavin also does not address the issue of “clean hands,” leaving this grounds open for dismissal as well. However, if it can shed parts of its business risking forfeiture or seizure in the bankruptcy, MJ Enterprises can likely successfully reorganize. What Should MJ Enterprises do with WeGrow Lease? As discussed in Rent-Rite, knowingly leasing to an entity involved in manufacturing and distributing marijuana is a violation of the CSA. Such actions put any assets associated with the WeGrow operations in risk of forfeiture which raises grounds for dismissal based on gross mismanagement of assets. Nevertheless, Gavin suggests the court should allow MJ Enterprises to reject the lease and reorganize despite MJ Enterprises’ past involvement with federally illegal activities. Even more so, Gavin leaves open the potential that, under the right circumstances, MJ Enterprises could potentially retain connection with a marijuana-related businesses, such as WeGrow, if the activity does not put material assets of the estate at risk and otherwise does not impact the plan. What Should MJ Enterprises do with SnakeOilz and the Washingtons? Hemp and hemp-related products, including cannabidiol [CBD] products, may be excluded from coverage by the CSA. Under the Agricultural Improvement Act of 2018, the definition of “marijuana” under 21 U.S.C. § 802(16)(B) and “Tetrahydrocannabinols” under 21 U.S.C. § 812(c) was amended to exclude “hemp” which is defined as “plant Cannabis sativa L. and any part of that plant . . . and all derivatives . . . with a delta-9 terahydrocannibinol concentration [THC] of not more than .3 percent on a dry weight basis.” 7 U.S.C. §1639o(1). So long as the Washingtons hemp plants do not exceed the THC threshold, their operations are legal under the CSA act.

{00213603} Several parties have interpreted the hemp-derivatives exclusion in the CSA to legalize CBD extracts. In CWNevada, in addition to a medical and recreational marijuana business, the debtor also had a CBD-based operation, albeit significantly smaller than its federally illegal counterpart. While the court dismissed the case based on abstention as discussed above, the court notes that the CBD operation potentially does not offend the CSA so long as the plants from which the CBD derives fall into the CSA’s hemp exclusion. However, the federal enforcement agencies have been equivocal when it comes to CBD concentrates. In fact, “cannabidiol drugs,” and only to the extent the drug has no more than .1 percent THC and has been approved by the FDA, remains classified as Schedule V drug under the CSA. See 21 CFR 1308.15(f). Recently, the FDA has become increasingly active in regulation of CBD, noting that introduction of CBD in food products can violate the Federal Food, Drug, and Cosmetic Act. As a result, even if the CBD in SnakeOilz popsicles comes from hemp and potentially legal under the CSA, the product would likely violate other federal law. While this violation would have significantly less implications for MJ Enterprises in a reorganization, especially in light of Garvin, MJ Enterprises should encourage SnakeOilz to eliminate the portion of their business that violates federal law. What Should MJ Enterprises do with Lettuce? If Lettuce does not actively market to marijuana growers, MJ Enterprises can likely use revenue from Lettuce in the reorganization. In In re Way to Grow, Inc., 597 B.R. 111 (Bankr. D. Colo. 2018), a group of three interconnected and jointly administered debtors operated a business involving the sale of hydroponic and gardening-related supplies. The Court noted that the Way to Grow debtors’ actions in the bankruptcy evidenced a legitimate commitment to reorganize through rejection of over-market leases and reduction of expenses. While the court acknowledges that the debtors had a customer base including commercial and individual horticulturalists growing a variety of legal crops, marijuana-related sales constituted 65 to 95% of the debtors’ revenue. While it found that the debtors’ actions fell short of aiding and abetting manufacturing and distribution of marijuana in violation of 21 U.S.C. § 841(a)(1), the court conclude that the Way to Grow debtors did violate Section 843(a)(7) which makes it a crime to “manufacture or distribute any equipment, chemical, product or material which may be used to manufacture a controlled substance . . . knowing, intending, or having reasonable cause to believe, that it will be used to manufacture a controlled substance.” The bankruptcy court noted the strict mens rea standard required that the person be aware, or have reasonable cause to believe, that the substance would be used for the specific purpose of manufacturing drugs. The court found ample evidence suggesting that the debtors marketed their hydroponic equipment specifically to marijuana growers, including the founder’s testimony on the debtors’ reliance on sales to marijuana growers, sale of marijuana-specific products, conversations with customers regarding marijuana growing, participation in the Cannabis Cup and other “grow offs,” and promotional materials directly related to marijuana. While the debtors argued that they were distancing themselves from the marijuana business by, among other things, removing references to marijuana in their stores, the court found such representations disingenuous when the debtors previously tailored themselves specifically to the needs and interests of the marijuana business. The fact that Lettuce’s customer base is predominately marijuana growers puts its business close to the line in relation to the CSA. This is especially true because hydroponic industry, in general, has a known close relationship with marijuana growers. Still, the court in Way to Grow acknowledges that many hydroponic customers have fully legal operations. The Way to Grow debtors likely pushed the line by actively marketing themselves to and assisting marijuana growers. As a result, the Way to Grow debtors did not just know that their equipment may be used for illegal purposes, they had actual knowledge that their equipment would be used in such ways. If it does not target marijuana growers and refuses to sell the

{00213603} customers who indicate they will use the equipment for illegal purposes, Lettuce likely does not violate the CSA even if its customers ultimately do largely engage in conduct that directly violates the CSA. Under such circumstances, MJ Enterprises can likely retain its connection with Lettuce.

What Should MJ Enterprises do with Gooselane? While Gooselane’s actions may violate the CSA, MJ Enterprises’s receipt of his illegal drug money does not impede a reorganization. Way to Grow discusses complicity theories of liability under the CSA. For aiding and abetting under 18 U.S.C. § 2, an individual must take an affirmative act in furtherance of that offense with the intent of facilitating the offense's commission, i.e., with full knowledge of the circumstances constituting the charged offense. The state of mind requires something more than mere assent or acquiescence. For conspiracy, there must be an actual agreement between the parties to violate the CSA. Even if MJ Enterprises had reason to believe that Gooselane was paying rent from profits of illegal drug sales, such knowledge itself is unlikely to arise to the strict mens rea requirement for criminal liability. As in Way to Grow, Gooselane’s lease does not contemplate, depend upon, or require any action that is necessarily illegal. As far as aiding and abetting, mere knowledge that a crime is committed does not suggest MJ Enterprises’s shares Gooselane’s specific intent to cultivate and distribute marijuana. While Gooselane’s criminal activities puts his revenue stream in significant risk, the revenue stream alone is not significant enough to implicate feasibility of a plan for MJ Enterprises even if it includes his rental payments. As a result, apart from moral considerations, MJ Enterprise can likely continue to receive income from Gooselane without much concern in the reorganization.

{00213603} FILED

JAN 14 2020 ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

In re: BAP No. AZ-19-1126-LTaF

BRIGHAM A. BURTON, a/k/a Kent Bk. No. 2:18-bk-04571-BMW Burton and CARLY RAE BURTON,

Debtors.

BRIGHAM A. BURTON, a/k/a Kent Burton; CARLY RAE BURTON,

Appellants, v. OPINION

EDWARD JOHN MANEY, Chapter 13 Trustee; STRATTON RESTORATION, LLC,

Appellees.

Submitted Without Argument on November 21, 2019

Filed – January 14, 2020

Appeal from the United States Bankruptcy Court for the District of Arizona

Honorable Brenda Moody Whinery, Chief Bankruptcy Judge, Presiding

1 Appearances: Appellants Brigham A. Burton, a/k/a Kent Burton, and Carly Rae Burton, pro se on brief; Ross M. Mumme, Esq. on brief for Appellee Edward J. Maney, Chapter 13 Trustee.

Before: LAFFERTY, TAYLOR, and FARIS, Bankruptcy Judges.

LAFFERY, Bankruptcy Judge:

INTRODUCTION

Brigham and Carly Rae Burton appeal the bankruptcy court’s dismissal of their chapter 131 case. The Burtons own the majority interest in

Agricann, LLC (“Agricann”), an entity that was engaged in cultivating and selling marijuana, which, while legal under Arizona law, violated federal law. In response to the bankruptcy court’s order to show cause why the case should not be dismissed based on the Burtons’ interest in Agricann, the Burtons asserted that Agricann was no longer operating and was not being relied upon to fund the Burtons’ chapter 13 plan. Agricann, however, was a plaintiff in at least two state court lawsuits in which it sought recovery of damages for breach of contracts related to growing and selling marijuana. The Burtons asserted that recovery from those lawsuits was

1Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

2 unlikely, but the bankruptcy court rejected this assertion as not credible and concluded that any recovery from those lawsuits would be derived from conduct that is illegal under federal law. Accordingly, allowing the case to continue would likely require the court and the trustee to become involved in such illegal conduct.

Because the Burtons did not provide sufficient evidence that the potential litigation proceeds would not materialize, requiring the court and the trustee to become involved in their administration, the bankruptcy court did not abuse its discretion in dismissing the Burtons’ case.

We AFFIRM.

FACTUAL BACKGROUND

The Burtons filed a chapter 13 petition in April 2018. On their original

Schedule A/B, they disclosed interests in four limited liability companies,

all with unknown values, including a 65 % membership interest in

Agricann, of which Mr. Burton was a manager and its president. They also

listed a pending claim belonging to Agricann against Natural Remedy

Patient Center LLC, described as a breach of contract action, also with an

unknown value. They later amended Schedule A/B to disclose additional

ownership interests in other LLCs.2

2The other LLC membership interests included on original and amended Schedule A/B were as follows: (1) a 70% interest in 363, LLC; (2) a 100% interest in 363 Business Alliance, LLC; (3) a 50% interest in Natural Agriculture, LLC; and (4) a 100% (continued...)

3 According to original and amended Schedule I, Mr. Burton was unemployed during the pendency of the bankruptcy case. All Schedule I income was attributed to Ms. Burton’s wages from her employment.

Schedule J showed a monthly net income of $458.80, with which the

Burtons proposed to fund their chapter 13 plan.3

Postpetition, Agricann sued Total Accountability Systems I, Inc. and

Cannabis Research Group in state court. Both lawsuits sought damages for breach of contracts under which Agricann was to cultivate, grow, and sell medical marijuana.

Although the Burtons proposed three different chapter 13 plans during the approximately one year their case was pending, they were unsuccessful in getting a plan confirmed.4

2(...continued) interest in Carly Rae Burton, PLLC. The Burtons also listed entities that they had owned but which they contended were “inactive, insolvent and [had] no assets.” Those entities were: Zyrax, LLC, Burton Partners, LLC, Eleava, LLC, B&B Businesses, LLC, Nestaba, LLC. Finally, they disclosed a “de minimus” (less than 20%) interest in Twenty Sixth Ave Ventures, LLC.

3We have exercised our discretion to review the bankruptcy court’s electronic docket and pleadings. See O'Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957–58 (9th Cir. 1989); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).

4The Burtons’ Second Amended Plan filed January 6, 2019, drew an objection from creditor Kevin Erdmann on grounds of: (1) lack of good faith; and (2) failure to pledge all disposable income (based on an allegation that Debtors had not disclosed income from their business entities). The chapter 13 trustee, John Maney (“Trustee”), (continued...)

4 On May 29, 2018, creditor Stratton Restoration filed a motion to convert, in which it argued that there was cause to convert the bankruptcy case to chapter 7. It contended that the Burtons were ineligible for chapter

13 relief because their debts exceeded the limitations under § 109(e), based on Stratton’s $2.4 million unsecured claim arising from state court breach of contract litigation, which the Burtons had not included on their schedules. It also argued that the Burtons filed their case in bad faith because, among other things, Mr. Burton derived income from a marijuana business that was illegal under federal law.

At the preliminary hearing on the motion to convert held on March 5,

2019, the bankruptcy court raised its concerns regarding the Burtons’ alleged connections to the marijuana industry. After that hearing, the court issued an order to show cause (“OSC”) requiring the Burtons to appear and show cause why their case should not be dismissed due to their ownership interest in, and deriving income from, an entity involved in the marijuana industry.

4(...continued) filed an Evaluation and Recommendation indicating that the plan was not ready for confirmation for numerous reasons, including the unresolved Erdmann objection and the fact that the Debtors’ general unsecured debts of $2.5 million reflected on the claims register were well over the chapter 13 debt limits. Trustee also required Debtors to provide documentation of a value for all of the Debtors’ businesses listed on amended Schedule B.

5 The Burtons filed a response to the OSC, verified by Mr. Burton’s declaration, in which they disputed having an interest in an entity involved in the marijuana industry. They stated that Agricann went out of business in 2016 and had generated no income since then. As such, they claimed they did not currently derive income from any entity involved in the marijuana industry. Although they acknowledged that Agricann was a party to litigation, they stated they did not expect to receive any proceeds from such litigation due to a contingency fee agreement with the attorney handling the litigation and a litigation financing lien on any recovery. The

Burtons also stated their intention to abandon from the estate their interest in Agricann, after which they would divest themselves of their interest in that entity. Finally, they asserted that the sole source of funding for the chapter 13 plan would be Mrs. Burton’s employment income. The following day, they filed a motion to compel abandonment of their interest in Agricann.5

5Attached to the motion to compel abandonment (but not included with the response to the OSC) was a spreadsheet entitled “Agricann, LLC Financial Information” that purported to show the expected recovery from the litigation. Although difficult to decipher, the spreadsheet does not seem to support the Burtons’ assertion that the litigation is worthless. The spreadsheet shows, as of March 2019, a potential gross recovery of $31,285,273.45, reduced to a net of $18,771,164.07 after deducting a 40 % contingency fee, with a litigation loan balance of $15,731,993.03. This leaves a final net figure of over $3 million. The spreadsheet then projects that the litigation loan balance would be nearly $21 million by June 2019, but there is no explanation or backup documentation regarding the source of these figures. In any event, the bankruptcy court (continued...)

6 Trustee and Stratton Restoration each filed responsive briefs in which they argued that the case should be dismissed given the Burtons’ involvement in the medical marijuana industry.

The bankruptcy court held a preliminary hearing on the OSC on

April 3, 2019. The court stated that it did not expect to resolve the matter without an evidentiary hearing.6 The court noted that there were other entities owned by the Burtons and that there was no evidence regarding whether those businesses were also involved in the marijuana business.7

The bankruptcy court heard argument from the Burtons’ counsel as well as counsel for Trustee, Stratton Restoration, creditor Kevin Erdmann, creditor

5(...continued) never ruled on the motion to compel abandonment.

6On the eve of the hearing, Stratton Restoration had filed a 35-page (including exhibits) document entitled “Creditor Stratton Restoration, LLC’s Supplemental Evidence Regarding Debtors’ Bad Faith Filings,” to which it attached documents that it argued showed that (1) Mr. Burton has an interest in an entity called Green Tree Alliance, LLC (which had paid the Burtons’ chapter 13 counsel’s fees), which had been set up using other LLCs so as to hide the Burtons’ interest in that entity; and (2) the Burtons had set up a GoFundMe page during the bankruptcy case that explicitly told donors that due to their bankruptcy, the Burtons could not receive funds directly and so funds would go to a member of their church who had agreed to be the “Shepard [sic] of the funds.”

7In fact, there was evidence that the Burtons held an interest in another entity that was involved in the marijuana business. Stratton Restoration attached to its response to the OSC a copy of a deposition transcript from a January 30, 2017, judgment debtor exam in state court litigation between Mr. Erdmann and the Burtons, in which Mr. Burton testified that Natural Agriculture, LLC, in which Debtors held a 50% membership interest, was engaged in the medical marijuana business.

7 Kerry Lechner, and the United States Trustee. The Burtons’ counsel represented that the Debtors were not currently involved in the cannabis industry and were “willing to get out of the Agricann business entirely.”

Counsel for Trustee noted that the Burtons had provided no evidence of the value of the Agricann lawsuit other than a “one-page self-serving spreadsheet” and no evidence regarding the litigation financing agreement.

Trustee’s counsel also pointed out that there were questions regarding whether the Burtons had disclosed all their interests in business entities and sources of income, which raised concerns about the Burtons’ good faith.

At the May 6, 2019 final hearing on the OSC, the bankruptcy court delivered its oral ruling. The court stated that it had determined it did not need to hold an evidentiary hearing because the record before it was sufficient for it to rule. It found that dismissal was appropriate under the circumstances because, despite the assertion that Agricann was no longer in the medical marijuana business, it was seeking recovery in the state court litigation

of funds attributable to contracts under which it was to serve as a cultivator, grower, holder, deliverer, and/or seller of marijuana. Any recovery from the litigation would be derived from conduct that is illegal under federal law. Any distributions from Agricann to its members, specifically the Debtors, would also be derived from illegal conduct. The Debtors assert that the Agricann litigation has no value.

8 However, this assertion is not credible given that the litigation continues to be pursued. These cases are still active and pending.

Given the nature[] of Agricann’s business, which was clearly involvement in the marijuana industry, neither a case trustee, nor these Debtors, can sell or liquidate the 65 percent ownership interest in Agricann, which is property of this estate through the bankruptcy case. This would necessitate the Court and the Trustee’s involvement in condoning the illegal activity.

Hr’g Tr. (May 6, 2019) at 13:21-14:13.

The bankruptcy court entered an order dismissing the case, and the

Burtons timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(1) and (b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Whether the bankruptcy court abused its discretion in dismissing the

Burtons’ chapter 13 case.

STANDARD OF REVIEW

We review a bankruptcy court’s dismissal of a chapter 13 case for

abuse of discretion. Ellsworth v. Lifescape Med. Assoc., P.C. (In re Ellsworth),

455 B.R. 904, 914 (9th Cir. BAP 2011). A bankruptcy court abuses its discretion if it applies the wrong legal standard, misapplies the correct legal standard, or makes factual findings that are illogical, implausible, or

9 without support in inferences that may be drawn from the facts in the record. See TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir.

2011) (citing United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)).

DISCUSSION

In recent years, numerous states have legalized the medical and recreational use of marijuana. Marijuana, however, remains a Schedule I controlled substance under the federal Controlled Substances Act, 21 U.S.C.

§§ 801-904 (“CSA”). The CSA prohibits, among other things, the manufacture, distribution, dispensing of, or possession with intent to manufacture, distribute, or dispense, a controlled substance. 21 U.S.C.

§ 841(a). As a result, a bankruptcy filing by an individual or entity with ties to a marijuana business raises difficult issues regarding how involved the debtor may be in that business and still be permitted to seek relief under the Code. The case law continues to evolve, and few bright line rules have emerged from decisions published to date. One principle seems implicit in the case law, however: the mere presence of marijuana near a bankruptcy case does not automatically prohibit a debtor from bankruptcy relief. Olson v. Van Meter (In re Olson), BAP No. NV-17-1168-LTiF, 2018 WL 989263, at *7

(9th Cir. BAP Feb. 5, 2018) (Tighe, J., concurring) (citing Northbay Wellness

Grp., Inc. v. Beyries, 789 F.3d 956, 960–61 (9th Cir. 2015)); cf. Garvin v. Cook

Inv. NW, SPNWY, LLC, 922 F.3d 1031 (9th Cir. 2019) (affirming bankruptcy

10 court’s confirmation of a chapter 11 plan where the plan derived indirect support from rental income from a lessor engaged in a marijuana growing business).8 Instead, a bankruptcy court must be explicit in articulating its legal and factual bases for dismissal in cases involving marijuana. See In re

Olson, 2018 WL 989263 at *6 (remanding for the bankruptcy court to

“articulate the findings that led it to determine that Debtor was violating the CSA and what legal standard it relied upon in dismissing the case.”).

Several courts have held that a bankruptcy case must be dismissed if the continuation of the case would require the court, trustee, or debtor in possession to administer assets that are illegal under the CSA or that constitute proceeds of activity criminalized by the CSA. Arenas v. U.S. Tr.

(In re Arenas), 535 B.R. 845, 853 (10th Cir. BAP 2015); In re Way to Grow, Inc.,

597 B.R. 111, 120 (Bankr. D. Colo. 2018), aff’d, No. 18-cv-3245-WJM, 2019

WL 6332541 (D. Colo. Sept. 18, 2019); In re Medpoint Mgmt., LLC, 528 B.R.

178, 184-85 (Bankr. D. Ariz. 2015), vacated in part, Medpoint Mgmt., LLC v.

8The sole issue before the Ninth Circuit in Garvin was whether the plan at issue violated § 1129(a)(3)’s requirement that a chapter 11 plan be proposed “not by any means forbidden by law.” The Circuit held that § 1129(a)(3) directs courts to look only to the proposal of a plan, not its terms. Garvin, 922 F.3d at 1035 (citing Irving Tanning Co. v. Me. Superintendent of Ins. (In re Irving Tanning Co.), 496 B.R. 644, 660 (1st Cir. BAP 2013)). The Circuit specifically rejected the notion that § 1129(a)(3) forecloses confirmation of a plan that relies on income from criminal activity, as held by some bankruptcy courts considering whether to dismiss a case based on a debtor’s involvement in the marijuana business. Id. The court acknowledged that there may be consequences arising from a debtor's connections with criminal activity, but denial of confirmation under § 1129(a)(3) is not one of them. See id. at 1036.

11 Jensen (In re Medpoint Mgmt., LLC), 2016 WL 3251581 (9th Cir. BAP June 3,

2016); In re Johnson, 532 B.R. 53, 56-57 (Bankr. W.D. Mich. 2015). Cf. In re

Rent-Rite Super Kegs W. Ltd., 484 B.R. 799, 810 (Bankr. D. Colo. 2012) (noting that, where a chapter 11 debtor rented warehouse space to tenants who were growing marijuana, conversion of the case would require the trustee to be responsible for a site where continuing criminal conduct is taking place, raising a question of feasibility of chapter 7 estate administration).

Additionally, some courts have held that a bankruptcy filing or a plan of reorganization proposed by a debtor who is involved in an illegal enterprise is not in good faith, even where the debtor does not have a subjective bad motive, is in legitimate need of bankruptcy relief, and there are no other indicia of an attempt to abuse the bankruptcy process. In re

Arenas, 535 B.R. at 852-53; see also In re Rent-Rite Super Kegs W. Ltd., 484 B.R.

at 809.9 Related to the good faith analysis, some courts have concluded that

a debtor engaged in an illegal business who seeks bankruptcy relief comes

into court with unclean hands and is not eligible for relief. In re Rent-Rite

Super Kegs W. Ltd., 484 B.R. at 807; cf. In re Medpoint Mgmt., LLC, 528 B.R. at

186-87 (petitioning creditors who knew the putative debtor was engaged in

9The Ninth Circuit appears to have rejected this line of reasoning, at least as it pertains to plan confirmation. See Garvin, 922 F.3d at 1036 n.3 (noting that the good faith confirmation requirement pertains to a plan’s proposal, not its contents).

12 a federally prohibited medical marijuana business had unclean hands and could not seek relief from the bankruptcy court).

The reported decisions also illustrate that the nature and extent of debtors’ involvement in the marijuana business can vary widely. Compare

In re Arenas, 535 B.R. at 847 (where the debtor grew and sold marijuana and leased premises to a marijuana dispensary), with In re Rent-Rite Super Kegs

W. Ltd., 484 B.R. at 803 (where the debtor derived about 25% of its income from leasing space to a marijuana grower). The connection between the debtors’ illegal business and the bankruptcy case can also vary: some debtors attempt to reorganize and continue their marijuana-related business, see In re Way to Grow, Inc., 597 B.R. at 115, while other debtors

wish to use the bankruptcy process to sever their connection to the

business, see In re Olson, 2018 WL 989263 at *3 (where the debtor declared,

“I wish only to terminate any dealings with [a marijuana dispensary

tenant] and to sell my property and pay my creditors in full.”).

We believe that the stated reluctance in this Circuit to adopt per se

bright-line rules requiring the immediate disposition of bankruptcy cases

in which marijuana activity is present, and the flexible cause standard

under § 1307(c), coupled with the abuse of discretion standard of review on

appeal, give bankruptcy courts appropriate latitude to deal with these

variations.

13 Against this backdrop, the bankruptcy court dismissed the Burtons’ chapter 13 case pursuant to §§ 105(a) and 1307(c), finding that their ownership interest in Agricann constituted “cause” for dismissal10 because the continuation of the case would likely require the trustee or the court to become involved in administering the proceeds of the Agricann litigation, which the court implicitly found would be tainted as proceeds of an illegal business. The bankruptcy court did not err in this finding, nor did it abuse its discretion in dismissing the case on those grounds.

Moreover, the court sufficiently articulated the legal and factual bases for its ruling. It is undisputed that the Burtons own an interest in Agricann, an entity that was engaged in a business that is illegal under federal law, and that interest became property of the estate when they filed their chapter 13 petition. Whether Agricann is currently actively engaged in growing or selling marijuana is irrelevant, given that Agricann is a plaintiff in litigation seeking to recover damages consisting at least in part of profits lost as a result of breaches of contracts related to the growing and selling of marijuana. As such, any proceeds received from the litigation would represent profits from a business that is illegal under federal law.

10Trustee assumes on appeal that the bankruptcy court dismissed the case for bad faith. To the contrary, the bankruptcy court made no bad faith finding, instead determining that the Burtons’ connection with the marijuana business in the circumstances presented here was itself “cause” for dismissal.

14 The Burtons contend that the bankruptcy court should have held an evidentiary hearing to determine the true nature of Agricann’s operations and the value of the Burtons’ interest in that entity, arguing that there was no evidence that it was involved in any of the activities prohibited by the

CSA. But the bankruptcy court did not err in ruling on the evidence it had before it. It based its ruling on the undisputed fact that Agricann, in which the Burtons held a membership interest, was a plaintiff in litigation seeking recovery for breaches of contract relating to growing and selling marijuana.

The Burtons point to no disputed material factual issue, nor do they describe any evidence they would have presented to resolve any such issue.

In response to the court’s OSC, the Burtons needed to produce evidence to satisfy the court that its ownership interest in Agricann was not cause for dismissal. The Burtons did not do so.11 With respect to the value of the litigation, they provided only a foundationless, conclusory, and equivocal statement that they did not expect to receive any proceeds from the Agricann litigation after payment of a contingency fee and repayment of a litigation loan. This statement was far from a categorical denial that the

11We note that the bankruptcy court found not credible the Burtons’ assertion that Agricann’s litigation claims were worthless. Ordinarily, credibility determinations are not proper absent an evidentiary hearing. However, we interpret the bankruptcy court’s credibility determination (to which the Burtons do not assign error) as a finding that the Burtons did not meet their burden of proof.

15 claims had value, and the Burtons provided no details or documentary evidence to support it. While we cannot agree with the bankruptcy court’s blanket assertion that Agricann’s pursuit of these claims was indicative, per se, that they had value, in light of Agricann’s undoubted legal obligation under the litigation funding agreement fully to pursue the claims, we discern no evidentiary support in the record for the Burtons’ assertions that the litigation would not result in their receipt of any litigation proceeds.

The Burtons’ next arguments misconstrue the court’s ruling. They argue that the bankruptcy court erred in concluding that they were involved in any business activities that violated the CSA, such as manufacturing, distributing, or dispensing marijuana. They also contend that dismissal was not warranted because they did not propose to fund their plan with proceeds generated by the illegal marijuana business. But the court’s ruling was not based on those factors; its concern was that any litigation recovery entering the bankruptcy estate would constitute proceeds from a federally prohibited business, regardless of whether or not the business was still engaged in activities prohibited by the CSA.

The Burtons also argue that the bankruptcy court was not required to dismiss their case, citing In re Johnson and In re McGinnis, 453 B.R. 770

(Bankr. D. Or. 2011). In Johnson, the bankruptcy court permitted a debtor to remain in chapter 13 on condition that he discontinue growing, selling, and transferring marijuana and cease using property of the estate to further the

16 marijuana business. 523 B.R. at 58. And in McGinnis, the court stated that if the debtor could propose a plan meeting the requirements of the bankruptcy code, it was prepared to allow its confirmation. 453 B.R. at 773.

But the Burtons read too much into these cases. Although it is true that a bankruptcy court has broad discretion in deciding whether to dismiss a case, a particular court’s signal that it might permit a case to continue under certain circumstances does not create a rule that all bankruptcy courts must, in every instance, permit a debtor with ties to the marijuana business to stay in bankruptcy. To the extent a court has discretion to decline to dismiss such a case, that result would seem appropriate only if the case were otherwise in compliance with the Code and rules. Here, there were numerous unresolved issues that would have supported dismissal but that did not arise out of the Burtons’ connections with the marijuana business. For example, the Burtons’ eligibility for chapter 13 was called into question when Stratton Restoration filed a proof of claim for $2.4 million, and, although the case was pending over a year, the Burtons had failed to propose a confirmable plan.

Finally, the Burtons argue that Congress deliberately chose not to impose limitations on the ability of medical marijuana businesses to file for bankruptcy. In support, they point to § 362(b)(23), which excepts from the automatic stay an eviction action seeking possession of a residential property where the tenant is engaging in the illegal use of controlled

17 substances. This argument was not raised before the bankruptcy court, and in any event reflects a complete misreading of the cited statute. We need not address it further. Roberts v. Erhard (In re Roberts), 331 B.R. 876, 881 (9th

Cir. BAP 2005).

CONCLUSION

The Burtons failed to demonstrate that their ties to Agricann would not result in proceeds of an illegal business becoming part of the bankruptcy estate, requiring the trustee and the court to administer assets that constitute proceeds of activity criminalized by the CSA. Under the facts presented, the bankruptcy court did not abuse its discretion in dismissing the case for that reason. Accordingly, we AFFIRM.

18 Garvin v. Cook Investments NW, SPNWY, LLC, 922 F.3d 1031 (2019) 67 Bankr.Ct.Dec. 34, Bankr. L. Rep. P 83,392, 19 Cal. Daily Op. Serv. 4088...

KeyCite Yellow Flag - Negative Treatment West Headnotes (7) Disagreed With by In re Way to Grow, Inc., D.Colo., September 18, 2019 922 F.3d 1031 [1] Bankruptcy United States Court of Appeals, Ninth Circuit. ... Proceedings Gregory M. GARVIN, Acting United Chapter 11 trustee waived issue of whether States Trustee for Region 18, Appellant, bankruptcy case should have been dismissed for v. “gross mismanagement,” based on fact that land COOK INVESTMENTS NW, SPNWY, LLC; Cook owned by debtor had been leased to company engaged in marijuana growing operation which, Investments NW, Fern, LLC; Cook Investments while legal under state law, violated federal NW, LLC; Cook Investments NW, DARR, LLC; drug laws; trustee failed to renew motion to Cook Investments NW, ARL, LLC, Appellees. dismiss at plan confirmation hearing, as invited No. 18-35119 by bankruptcy court. 11 U.S.C.A. § 1112(b)(4) | (B). Argued and Submitted December 1 Cases that cite this headnote 3, 2018 Seattle, Washington | Filed May 2, 2019 [2] Bankruptcy ... Conclusions of law; de novo review Synopsis On appeal in bankruptcy case, the Court Background: Trustee objected to Chapter 11 plan proposed of Appeals would determine de novo the by bankrupt real estate holding companies based on fact proper interpretation of statutory Chapter 11 that one of the debtors' tenants was involved in marijuana plan confirmation requirement. 11 U.S.C.A. § growing operation which, while legal under state law, violated 1129(a). federal drug laws. The United States Bankruptcy Court for the Western District of Washington overruled trustee's objection and confirmed plan, and trustee appealed. The [3] Bankruptcy District Court, No. 3:17-cv-05516, Benjamin H. Settle, J., Good faith and legality 2017 WL 10716993, affirmed. Trustee appealed. ... In deciding whether proposed Chapter 11 plan was unconfirmable, as allegedly having been proposed “by any means forbidden by law,” court Holdings: The Court of Appeals, McKeown, Circuit Judge, had to look only to the proposal of the plan, not held that: to its terms. 11 U.S.C.A. § 1129(a)(3).

[1] in deciding whether plan was unconfirmable, as allegedly 5 Cases that cite this headnote having been proposed “by any means forbidden by law,” court had to look only to the proposal of the plan, not to its terms, [4] Bankruptcy and ... Good faith and legality [2] plan which was negotiated and proposed in lawful manner Proposed Chapter 11 plan which, while deriving could not be denied confirmation as having “been proposed at least indirect financial support from lease … by any means forbidden by law.” payments that bankrupt real estate holding companies' principal would continue to collect from lessee engaged in marijuana growing Affirmed. operation that was illegal under federal law, was negotiated and proposed in lawful manner, could not be denied confirmation as having “been

WESTLAW © 2020 Thomson Reuters. No claim to original19 U.S. Government Works. 1 Garvin v. Cook Investments NW, SPNWY, LLC, 922 F.3d 1031 (2019) 67 Bankr.Ct.Dec. 34, Bankr. L. Rep. P 83,392, 19 Cal. Daily Op. Serv. 4088...

proposed … by any means forbidden by law.” 11 Joseph H. Hunt, Assistant Attorney General; Civil Division, U.S.C.A. § 1129(a)(3). United States Department of Justice, Washington, D.C.; Wendy Cox, Trial Attorney; P. Matthew Sutko, Associate 2 Cases that cite this headnote General Counsel; Ramona D. Elliott, Deputy Director/ General Counsel; Department of Justice, Executive Office for [5] Bankruptcy United States Trustees, Washington, D.C.; for Appellant. Construction, execution, and performance .. James L. Day (argued) and Aditi Paranjpye, Bush Kornfeld Criminal Law LLP, Seattle, Washington, for Debtors-Appellees. .. Defenses in general Confirmation of Chapter 11 plan does not Appeal from the United States District Court for the Western insulate debtors from prosecution for criminal District of Washington, Benjamin H. Settle, District Judge, activity, even if that activity is part of the plan Presiding, D.C. No. 3:17-cv-05516-BHS itself. Before: Susan P. Graber, M. Margaret McKeown, and Morgan 1 Cases that cite this headnote Christen, Circuit Judges.

[6] Bankruptcy OPINION Good faith and legality .. McKEOWN, Circuit Judge: In deciding whether Chapter 11 plan has been proposed in “good faith,” as required for *1033 Facing insolvency, five real estate holding companies confirmation, courts must determine whether owned and managed by Michael Cook (collectively, “Cook” the plan achieves a result consistent with the or the “Cook companies”) sought Chapter 11 protection. objectives and purposes of the Code. 11 U.S.C.A. Cook's foray into Chapter 11 was by most standards a § 1129(a)(3). resounding success. It culminated with the Second Amended Joint Debtors' Plan of Reorganization (“Amended Plan”), 3 Cases that cite this headnote which paid all creditors in full and provided for Cook to continue as a going concern. The Amended Plan was [7] Bankruptcy confirmed by the bankruptcy court. .. Good faith and legality Proposed Chapter 11 plan that provided for But now the United States Trustee (“Trustee”) asks that the repayment of creditors and the debtors' ongoing Amended Plan go up in smoke, because one of the Cook operations was consistent with objectives and companies leases property to N.T. Pawloski, LLC (“Green purpose of the Bankruptcy Code, and could not Haven”), which uses the property to grow marijuana. The be denied confirmation for lack of “good faith” Trustee complains that, even if Green Haven's business simply because plan derived indirect financial complies with Washington law, the lease itself violates federal support from the lease payments that bankrupt drug law. The Trustee reasons that this violation proves the real estate holding companies' principal would Amended Plan was “proposed ... by ... means forbidden by continue to collect from lessee engaged in law” and is thus unconfirmable under 11 U.S.C. § 1129(a)(3). marijuana growing operation that was illegal under federal law. 11 U.S.C.A. § 1129(a)(3). The problem with the Trustee's theory is that it ignores the plain text of § 1129(a)(3), which directs bankruptcy courts to police the means of a reorganization plan's proposal, not its substantive provisions. Resolution of this appeal rests on a straightforward question of statutory interpretation rather Attorneys and Law Firms than on any conflict between federal and state drug laws. We affirm confirmation of the Amended Plan because it was not *1032 Sonia Carson (argued) and Mark B. Stern, Appellate proposed “by any means forbidden by law.” Staff; Annette L. Hayes, Acting United States Attorney;

WESTLAW © 2020 Thomson Reuters. No claim to original20 U.S. Government Works. 2 Garvin v. Cook Investments NW, SPNWY, LLC, 922 F.3d 1031 (2019) 67 Bankr.Ct.Dec. 34, Bankr. L. Rep. P 83,392, 19 Cal. Daily Op. Serv. 4088...

that a plan be “proposed in good faith and not by any BACKGROUND means forbidden by law.” The Trustee was the only Cook Investments NW, DARR, LLC (“Cook DARR”), one objector; Cook's creditors fully supported the Amended Plan, of the Cook companies, owns commercial real estate in which satisfactorily provided for their repayment. Because Darrington, Washington (the “Darrington Property”). Cook the Trustee failed to renew its motion to dismiss at the DARR leased the Darrington Property to two tenants, one confirmation hearing, the district court affirmed the denial of which was Green Haven. The lease with Green Haven of the motion to dismiss Cook DARR's case. Following (the “Green Haven Lease”) provides that Green Haven will confirmation, the Trustee moved for a stay, but the district use the Darrington Property exclusively as a marijuana court denied the request. As a result, Cook has continued establishment. Although Green Haven appears to be in to make payments pursuant to the Amended Plan during the compliance with Washington law, the Green Haven Lease pendency of this appeal. The unsecured creditors have been puts Cook in violation of the federal Controlled Substances repaid and the secured creditor, Columbia State Bank, is in Act, 21 U.S.C. §§ 801–971, which prohibits “knowingly ... the process of being repaid. leas[ing] ... any place ... for the purpose of manufacturing, distributing, or using any controlled substance,” id. § 856(a) (1). ANALYSIS [1] On appeal, the Trustee first challenges the bankruptcy In 2009, one of the Cook companies defaulted on a loan from court's refusal to dismiss Cook DARR under § 1112(b) for Columbia State Bank. The loan was secured by Cook's real “gross mismanagement of the estate.” 11 U.S.C. § 1112(b) estate holdings, including the Darrington Property. The bank (4)(B). We need not decide the merits of this issue because, won default judgments against Cook in state court. Although like the district court, we conclude the Trustee waived the Cook and the bank reached forbearance agreements, Cook argument by failing to renew its motion to dismiss. failed to fulfill the agreements' terms. The bank then obtained state-court orders appointing receivers for Cook's properties. The bankruptcy court initially denied the motion to dismiss At that point, all of the Cook companies filed Chapter 11 but explicitly invited the Trustee to renew the motion at the bankruptcy petitions, which the bankruptcy court ordered plan confirmation hearing. The Trustee chose, at its peril, jointly administered. not to do so. As the district court put it: “The Trustee failed to renew the motion or subsequently raise the gross The Trustee filed a motion to dismiss Cook DARR's Chapter mismanagement argument. Although the Debtors fail to raise 11 case, asserting that the Green Haven Lease constituted waiver, it seems to be plain error for this Court to reverse gross mismanagement and thus cause to dismiss under 11 the bankruptcy court's denial when the Trustee failed to U.S.C. § 1112(b). The bankruptcy court denied the motion renew its motion.” This failure was especially significant to dismiss, but with leave to renew at the plan confirmation because it meant the bankruptcy court had no opportunity hearing. to consider whether the claimed gross mismanagement had been “cured.” As a consequence, neither the bankruptcy court, Cook filed the Amended Plan, which provides for repayment nor the district court, nor this court could properly determine of all creditors' claims in full and for Cook to continue as the applicability of the exception to dismissal for “unusual a going concern. The Amended Plan incorporates *1034 circumstances.” See 11 U.S.C. § 1112(b)(2) (exception to by reference an earlier Chapter 11 Plan Agreement between dismissal for unusual circumstances applies only if, inter alia, Cook and Columbia State Bank, but in the Amended Plan cause for dismissal “will be cured within a reasonable period Cook rejected the Green Haven lease and structured the of time”); cf. Walsh v. Nev. Dep't of Human Res., 471 F.3d plan so that his monthly obligations would be paid without 1033, 1037 (9th Cir. 2006) (holding that a claim raised in the revenue from Green Haven. Cook's counsel also explained complaint was waived when it was not re-raised in response at argument that, pursuant to the Amended Plan, Cook's to a motion to dismiss, because “the district court had no other tenants pay their rent directly to Columbia State Bank reason to consider the contention that the claim ... could not in satisfaction of its claim, while Green Haven rents were be dismissed” (internal quotation marks omitted)). 1 presumably paid directly to Cook. We therefore turn to the issue of confirmation. To be The bankruptcy court confirmed the Amended Plan, over the confirmed, the Amended Plan had to satisfy § 1129(a), which Trustee's objection that it violated § 1129(a)(3)'s requirement

WESTl.AW © 2020 Thomson Reuters. No claim to original21 U.S. Government Works. 3 Garvin v. Cook Investments NW, SPNWY, LLC, 922 F.3d 1031 (2019) 67 Bankr.Ct.Dec. 34, Bankr. L. Rep. P 83,392, 19 Cal. Daily Op. Serv. 4088... provides that “[t]he court shall confirm a plan only if” sixteen Turning to the statute, the phrase “not by any means forbidden enumerated requirements are met. The third requirement is by law” modifies the phrase “[t]he plan has been proposed.” An interpretation that reads the words “has been proposed” that “[t]he plan has been proposed in good faith *1035 and not by any means forbidden by law.” 11 U.S.C. § 1129(a)(3). out of the second prong of the requirement would be Only the second prong is at issue here. Because it appears that grammatically nonsensical, i.e., “The plan has been ... not Cook continues to receive rent payments from Green Haven, by any means forbidden by law.” Moving the reference to which provides at least indirect support for the Amended illegality to before “proposed” fares no better, i.e., “The plan, Plan, the Trustee asserts that it was “proposed ... by ... means not by any means forbidden by law, has been proposed in good forbidden by law.” 11 U.S.C. § 1129(a)(3). faith.” The Trustee's position would require us to rewrite the statute completely, rather than resort to its clear meaning. See Duncan v. Walker, 533 U.S. 167, 174, 121 S.Ct. 2120, 150 [2] We determine de novo the proper interpretation of § 1129(a)(3). See Tighe v. Celebrity Home Entm't, Inc. L.Ed.2d 251 (2001) (“It is our duty to give effect, if possible, (In re Celebrity Home Entm't, Inc.), 210 F.3d 995, to every clause and word of a statute.” (internal quotation 997 (9th Cir. 2000) (reviewing de novo the bankruptcy marks omitted)). court's interpretation of the Bankruptcy Code). Whether the Amended Plan was confirmable depends on whether § A contrary interpretation not only renders the words “has 1129(a)(3) forbids confirmation of a plan that is proposed in been proposed” meaningless, but makes other provisions of § 1129(a) an unlawful manner as opposed to a plan with substantive redundant. For example, § 1129(a)(1) requires that provisions that depend on illegality, an issue of first “[t]he plan complies with the applicable provisions of this impression in the Ninth Circuit. title.” If § 1129(a)(3) is read to mean that the plan must comply with all applicable law, there would be no need for a separate requirement that the plan comply with the provisions [3] Like the First Circuit Bankruptcy Appellate Panel, we 2 conclude that § 1129(a)(3) directs courts to look only to the of the Bankruptcy Code specifically. proposal of a plan, not the terms of the plan. Irving Tanning Co. v. Me. Superintendent of Ins. (In re Irving Tanning Co.), *1036 [5] [6] [7] We do not believe that the 496 B.R. 644, 660 (1st Cir. B.A.P. 2013). This reading accords interpretation compelled by the text will result in bankruptcy with both the statutory text, which does not refer to the proceedings being used to facilitate legal violations. To begin, substance of the plan, and the weight of persuasive authority. absent waiver, as in this case, courts may consider gross See In re Gen. Dev. Corp., 135 B.R. 1002, 1007 (Bankr. mismanagement issues under § 1112(b). And confirmation of S.D. Fla. 1991) (“Courts addressing the issue have uniformly a plan does not insulate debtors from prosecution for criminal held that Section 1129(a)(3) does not require that the contents activity, even if that activity is part of the plan itself. In of a plan comply in all respects with the provisions of re Food City, Inc., 110 B.R. 808, 812 (Bankr. W.D. Tex. all nonbankruptcy laws and regulations.” (internal quotation 1990). There is thus no need to “convert the bankruptcy judge marks omitted)). into an ombudsman without portfolio, gratuitously seeking out possible ‘illegalities’ in every plan,” a result that would [4] It is true that some bankruptcy courts have accepted be “inimical to the basic function of bankruptcy judges in the Trustee's interpretation. In concluding that a bankruptcy bankruptcy proceedings.” 3 Id. case should be dismissed “[b]ecause a significant portion of the Debtor's income [wa]s derived from an illegal activity,” Because the Amended Plan was lawfully proposed, the the Bankruptcy Court of Colorado stated that “§ 1129(a) Bankruptcy Court correctly concluded that it met the (3) forecloses any possibility of this Debtor obtaining requirements of 11 U.S.C. § 1129(a). confirmation of a plan that relies in any part on income derived from a criminal activity.” In re Rent-Rite Super AFFIRMED. Kegs W. Ltd., 484 B.R. 799, 809 (Bankr. D. Colo. 2012) (footnote omitted). But such decisions fail to “square[ ] that understanding with subsection (a)(3)'s express focus on the All Citations manner of the plan's proposal.” Irving Tanning, 496 B.R. at 922 F.3d 1031, 67 Bankr.Ct.Dec. 34, Bankr. L. Rep. P 83,392, 660. 19 Cal. Daily Op. Serv. 4088, 2019 Daily Journal D.A.R. 3689

WESTl.AW © 2020 Thomson Reuters. No claim to original22 U.S. Government Works. 4 Garvin v. Cook Investments NW, SPNWY, LLC, 922 F.3d 1031 (2019) 67 Bankr.Ct.Dec. 34, Bankr. L. Rep. P 83,392, 19 Cal. Daily Op. Serv. 4088...

Footnotes 1 Although Cook did not raise this issue, the district court ruled on this ground, and the Trustee addressed the issue in its briefing, so Cook's failure to raise waiver did not prejudice the Trustee. See Hall v. City of Los Angeles, 697 F.3d 1059, 1071 (9th Cir. 2012) (“We may consider an issue sua sponte ... if the opposing party will not suffer prejudice.”). 2 Section 1129(a)(16), which requires that “transfers of property under the plan [comply] with [certain] applicable provisions of nonbankruptcy law,” would be similarly redundant under the Trustee's interpretation. 3 Cases directing courts to look to the “totality of the circumstances” to determine whether a plan was proposed in good faith do not change the analysis here. Under the good faith prong of § 1129(a)(3), courts must determine whether the plan “achieves a result consistent with the objectives and purposes of the Code.” Platinum Capital, Inc. v. Sylmar Plaza, L.P. (In re Sylmar Plaza, L.P.), 314 F.3d 1070, 1074 (9th Cir. 2002); see also In re Emmons-Sheepshead Bay Dev. LLC, 518 B.R. 212, 225 (Bankr. E.D.N.Y. 2014) (“The good-faith test speaks more to the process of plan development than to the content of the plan.” (internal quotation marks omitted)); In re 431 W. Ponce de Leon, LLC, 515 B.R. 660, 673 (Bankr. N.D. Ga. 2014) (holding both that, “[i]n assessing whether the plan was proposed in good faith, the assessment is focused on the plan itself” and “§ 1129(a)(3) requires that only the plan's proposal, as opposed to the contents of the plan, be in good faith and in compliance with all nonbankruptcy laws” (internal quotation marks omitted)). Here, the Amended Plan provides for the creditors' repayment and the debtors' ongoing operations, so it is consistent with the objectives and purpose of the Bankruptcy Code.

WESTLAW © 2020 Thomson Reuters. No claim to original23 U.S. Government Works. 5 In re Arenas, 535 B.R. 845 (2015) 74 Collier Bankr.Cas.2d 171, Bankr. L. Rep. P 82,870 .. Conclusions of law; de novo review 535 B.R. 845 Bankruptcy United States Bankruptcy Appellate .. Discretion Panel of the Tenth Circuit. Bankruptcy court order granting or denying a motion to convert Chapter 7 case to one under IN RE Frank Anthony ARENAS, doing business Chapter 13 is reviewed for abuse of discretion, as FA Husbandry LLC, doing business as as is an order dismissing a Chapter 7 petition FSA LLC, doing business as Twenty Eighth for cause, and if, in making those orders, the Larimer LLC, and Sarah Eve Arenas, Debtors. bankruptcy court makes conclusions of law, Frank Anthony Arenas and those are reviewable de novo, requiring an Sarah Eve Arenas, Appellants, independent determination of the legal issues, v. giving no special weight to the bankruptcy United States Trustee, Appellee. court's decision. 11 U.S.C.A. §§ 707(a)(1), 1307(c). BAP No. CO–14–046 3 Cases that cite this headnote | Bankr. No. 14–11406 | [2] Bankruptcy Signed August 21, 2015 .. Clear error Bankruptcy Appellate Panel (BAP) reviews Synopsis bankruptcy court's findings of fact for clear error Background: United States Trustee (UST) moved to dismiss and disturbs them only when they lack factual Chapter 7 case filed by Colorado marijuana grower and his support in the record or if BAP is left with the wife, and debtors moved to convert case to one under Chapter definite and firm conviction that a mistake has 13. The United States Bankruptcy Court for the District of been made, focusing on whether the bankruptcy Colorado, Howard R. Tallman, J., 514 B.R. 887, ruled that court acted within the bounds of permissible “cause” existed to dismiss case based on trustee's inability choice in reaching its decision and whether that to lawfully administer debtors' assets, and debtors could not decision was properly grounded in the law. convert case to one under Chapter 13. Debtors appealed. 2 Cases that cite this headnote

Holdings: The Bankruptcy Appellate Panel, Nugent, J., held [3] Bankruptcy that: .. Discretion Under the abuse of discretion standard, a [1] bankruptcy court did not abuse its discretion in denying bankruptcy court's decision will not be disturbed debtors' motion to convert, and unless the reviewing court has a definite and firm conviction that the lower court made a clear [2] bankruptcy court did not abuse its discretion in dismissing error of judgment or exceeded the bounds of debtors' case for cause. permissible choice in the circumstances.

5 Cases that cite this headnote Affirmed.

[4] Bankruptcy ... Discretion West Headnotes (14) Bankruptcy court abuses its discretion when it makes an arbitrary, capricious or whimsical, or [1] Bankruptcy manifestly unreasonable judgment.

3 Cases that cite this headnote

[10] Bankruptcy [5] Bankruptcy ... Conversion to debt adjustment ... Grounds or cause in general; bad faith Bankruptcy court did not abuse its discretion in Unreasonable delay by debtor that is prejudicial denying debtors' motion to convert Chapter 7 to creditors such as that brought about by case to one under Chapter 13 based on debtors' inability to confirm a plan, may be cause for bad faith due to their inability to propose a dismissal. 11 U.S.C.A. § 1307(c). confirmable Chapter 13 plan; debtors lacked ability to deal with their reported monthly expenses of $7,000 and to fund plan without [6] Bankruptcy using proceeds of marijuana growing operation, ... Discretion and any plan proposed by debtors would require trustee to take possession, sell and distribute Bankruptcy court's denial of debtors' motion to marijuana assets in violation of federal criminal convert Chapter 7 case to one under Chapter 13 law. 11 U.S.C.A. §§ 706(a), 1307(c), 1325(a)(3). based on debtors' bad faith due to their inability to propose a confirmable Chapter 13 plan would 5 Cases that cite this headnote be reviewed for an abuse of discretion. 11 U.S.C.A. §§ 706(a), 1307(c), 1325(a)(3). [11] Bankruptcy 5 Cases that cite this headnote ... Cause in general Determining what amounts to “cause” for [7] Bankruptcy dismissal is within the court's discretion. 11 ... Particular cases and issues U.S.C.A. § 707(a). Bankruptcy court's finding that debtors' conduct 1 Cases that cite this headnote showed a lack of good faith would be reviewed for clear error. 11 U.S.C.A. § 1325(a)(3). [12] Bankruptcy 1 Cases that cite this headnote ... Cause in general Factors that are often considered in determining [8] Bankruptcy “cause” for dismissal are as follows: the best ... Good faith in general interests of both debtor and creditors, trustee's consent or objection, potential to delay creditor Courts evaluate a Chapter 13 debtor's good payments, good or bad faith in seeking dismissal, faith case by case, examining the totality of and the possibility of payment priority becoming circumstances. 11 U.S.C.A. § 1325(a)(3). reordered outside of bankruptcy; emphasis is typically given to any prejudice that dismissal might cause the estate's creditors. 11 U.S.C.A. § [9] Bankruptcy 707(a). ... Factors considered in determining presence of good faith In determining whether Chapter 13 plan has [13] Bankruptcy been proposed in good faith, court considers ... Bankruptcy whether debtor has stated his debts and Bankruptcy relief is merely a privilege. expenses accurately, whether he has made any fraudulent misrepresentation to mislead the court, or whether he has unfairly manipulated the Bankruptcy Code. 11 U.S.C.A. § 1325(a)(3). [14] Bankruptcy

WESTLAW © 2020 Thomson Reuters. No claim to original25 U.S. Government Works. 2 In re Arenas, 535 B.R. 845 (2015) 74 Collier Bankr.Cas.2d 171, Bankr. L. Rep. P 82,870 .. Cause in general a debtor in the marijuana business obtain relief in the federal Bankruptcy court did not abuse its discretion in bankruptcy court? No. dismissing Chapter 7 debtors' case “for cause” based on trustee's inability to lawfully administer In the Marrama case, the United States Supreme Court marijuana assets included in property of the held that a debtor who is involved in unlawful or deceitful estate; selling the marijuana assets would require conduct may not convert his Chapter 7 case to Chapter the trustee to violate federal law, and if the trustee 13 because the conduct betrays a lack of good faith that abandoned the assets, debtors would retain their would bar confirmation under 11 U.S.C. § 1325(a)(3). 1 business after exposing the trustee to grave risk, Section 707(a)(1) allows a Chapter 7 case to be dismissed for provide the creditors with little or no recovery, cause, including unreasonable prejudicial delay to creditors. and receive a discharge, protected all the while A debtor's conduct may demonstrate a lack of good faith that from their creditors' collection efforts by the amounts to such cause. automatic stay and then the discharge injunction, which would be the epitome of prejudicial delay. Frank Arenas is licensed in Colorado to grow and dispense 11 U.S.C.A. §§ 706(a), 1325(a)(3). medical marijuana. He and Sarah Arenas leased a building to third parties who dispense medical marijuana from it. After 2 Cases that cite this headnote litigation with the renters resulted in a state court judgment against them, the Arenases filed a Chapter 7 petition that they later attempted to convert to Chapter 13. The United States Trustee (“UST”) objected to the conversion motion and *846 Appeal from the United States Bankruptcy Court for instead asked that the case be dismissed. The bankruptcy court the District of Colorado found that even though the debtors' conduct was legal under Colorado law, it violated the federal Controlled Substances Attorneys and Law Firms Act, 21 U.S.C. § 801 et seq. (the “CSA”). For that reason, Daniel J. Garfield of Foster Graham Milstein & Calisher LLP, the bankruptcy court not only denied the debtors' motion to Denver, Colorado, for Appellants. convert their Chapter 7 case to Chapter 13, but also concluded that the debtors could not receive Chapter 7 relief because *847 Noah M. Schottenstein, Trial Attorney, Executive engaging in federal criminal conduct demonstrated a lack of Offices of the United States Trustee, Department of Justice good faith that would bar confirmation of their Chapter 13 (Ramona D. Elliott, Deputy Director/General Counsel and plan and was cause to dismiss their Chapter 7 case, too. We P. Matthew Sutko, Associate General Counsel, Executive affirm. Offices of the United States Trustee, Department of Justice, Washington, D.C.; Patrick S. Layng, United States Trustee for Region 19, Gregory Garvin, Assistant United States Trustee, I. Factual Background and Alan K. Motes, Trial Attorney, United States Trustee, The debtors jointly own a commercial building in Denver Department of Justice, Denver, Colorado with him on the that consists of two units (the “Property”). Mr. Arenas grows 2 brief), Washington, D.C., for Appellee. and wholesales marijuana in one unit. He and Sarah Arenas lease the other unit to Denver Patients Group, LLC (“DPG”), Before CORNISH, NUGENT, and SOMERS, Bankruptcy a marijuana dispensary. While Mr. Arenas' cultivation and Judges. sale of marijuana, and the debtors' leasing of space to a marijuana dispensary are lawful activities under Colorado OPINION state law, they violate the CSA. 3

NUGENT, Bankruptcy Judge. The debtors filed their Chapter 7 bankruptcy petition after they brought an eviction action against DPG in state Possessing, growing, and dispensing marijuana and assisting court that resulted in a $40,000 attorney's fees award others to do that are federal offenses. But like several other *848 against them even before the state court addressed states, Colorado has legalized these acts and heavily regulates DPG's counterclaims against them for $120,000 in damages. them, triggering a flourishing marijuana industry there. Can Lacking the resources to pay the $40,000 judgment or defend

WESTLAW © 2020 Thomson Reuters. No claim to original26 U.S. Government Works. 3 In re Arenas, 535 B.R. 845 (2015) 74 Collier Bankr.Cas.2d 171, Bankr. L. Rep. P 82,870 the counterclaims, the debtors filed a Chapter 7 petition We review findings of fact for clear error and disturb them on February 12, 2014. 4 According to their schedules, Mrs. only when they lack factual support in the record or if we are Arenas is disabled and receives monthly pension benefits “left with the definite and firm conviction that a mistake has 16 and social security totaling $2,977. 5 The family's remaining been made.” We focus on whether the bankruptcy court monthly income of $4,265 stems from rental income and Mr. acted within the bounds of permissible choice in reaching its decision and whether that decision was properly grounded Arenas' marijuana business. 6 Their monthly expenses are in the law. “Under the abuse of discretion standard: ‘a trial 7 approximately $7,235, making their monthly net income $7. court's decision will not be disturbed unless the appellate Their nonexempt assets are 25 marijuana plants (valued at court has a definite and firm conviction that the lower court $6,250) 8 and the Property 9 (collectively the “Assets”). made a clear error of judgment or exceeded the bounds of permissible choice in the circumstances.’ ” 17 A trial court After the meeting of creditors, the Chapter 7 trustee (the abuses its discretion when it makes an “arbitrary, capricious 10 “Trustee”) filed a Notice of No Distribution. The Trustee or whimsical,” or “manifestly unreasonable judgment.” 18 subsequently withdrew the notice when DPG expressed an interest in purchasing the Property. The Trustee then sought guidance from the UST about whether he could administer the III. Analysis Property and whether Mr. Arenas' marijuana-related activities The pivotal issue here is whether engaging in the marijuana precluded the debtors from proceeding in Chapter 7. trade, which is legal under Colorado law but a crime under federal law, amounts to “cause” including a “lack of good The UST filed a motion to dismiss for cause under § 707(a). faith” that effectively disqualifies these otherwise eligible The UST alleged that it would be impossible for a Chapter debtors from bankruptcy relief. We agree with the bankruptcy 7 trustee to administer the Assets without violating federal court that while the debtors have not engaged in intrinsically law. 11 In response, the Arenases moved to convert their case evil conduct, the debtors cannot obtain bankruptcy *850 to Chapter 13 and objected to the motion to dismiss. After relief because their marijuana business activities are federal an evidentiary hearing on both motions, the bankruptcy court crimes. issued a written order denying the debtors' motion to convert and granting the UST's motion to dismiss on August 28, A. No abuse of discretion to deny motion to convert to 12 2014. This appeal followed. Chapter 13, §§ 706, 1307, and 1325. While a Chapter 7 debtor may convert his case to Chapter 13 “at any time,” § 706 requires that the debtor not have *849 II. Appellate Jurisdiction and Standard of Review previously converted the case to Chapter 7 and that the debtor This Court has jurisdiction to hear timely filed appeals from be eligible for Chapter 13 relief. Section 706 provides in part: “final judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to (a) The debtor may convert a case under this chapter to a have the district court hear the appeal. 13 The Arenases timely case under chapter 11, 12, or 13 of this title at any time, if filed their notice of appeal from the Appealed Order, and the case has not been converted under section 1112, 1208, the parties have consented to this Court's jurisdiction by not or 1307 of this title.... electing to have this appeal heard by the United States District Court for the District of Colorado. We have jurisdiction of this .... appeal. (d) Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter [1] [2] [3] [4] An order granting or denying a motion to of this title unless the debtor may be a debtor under such convert under § 1307(c) is reviewed for abuse of discretion 19 as is an order dismissing a Chapter 7 petition for cause under chapter. § 707(a)(1). 14 If in making those orders, the trial court Because the Arenases originally filed their case in Chapter makes conclusions of law, those are reviewable de novo, 7, only the subsection (d) eligibility prong applies. Section requiring an independent determination of the legal issues, 109(e) provides that only individuals with regular income giving no special weight to the bankruptcy court's decision. 15

WESTl.AW © 2020 Thomson Reuters. No claim to original27 U.S. Government Works. 4 In re Arenas, 535 B.R. 845 (2015) 74 Collier Bankr.Cas.2d 171, Bankr. L. Rep. P 82,870 may be Chapter 13 debtors. 20 Many courts consider a most deferential standard of review, whether denial of the debtor's good faith to be a condition of Chapter 13 conversion motion was an abuse of discretion. 31 eligibility. 21 [7] [8] [9] We review the bankruptcy court's finding that In Marrama v. Citizens Bank of Mass., the United States the debtors' conduct showed a lack of good faith for clear Supreme Court held that a Chapter 7 debtor who had made error. 32 Courts evaluate a debtor's good faith case by case, pre-petition false statements and concealed assets from the examining the totality of circumstances. 33 Courts in the trustee could not exercise his right to convert his case to Tenth Circuit look to the eleven factors set forth in Flygare v. Chapter 13 “at any time” because his pre- and post-petition Boulden. 34 Courts should also consider “whether the debtor lack of good faith rendered him ineligible for Chapter 13 has stated his debts and expenses accurately; *852 whether 22 relief. Because of the debtor's lack of good faith, the court he has made any fraudulent misrepresentation to mislead the could dismiss his potential Chapter 13 case for cause under bankruptcy court; or whether he has unfairly manipulated the § 1307(c). In addition, the debtor's bad conduct prevented Bankruptcy Code.” 35 confirmation of any plan because good faith is an affirmative confirmation requirement under § 1325(a)(3). The Supreme Only a few of the eleven Flygare factors are in play here. They Court equated “a ruling that an individual's Chapter 13 case include (1) the debtor's employment history, ability to earn should be dismissed or converted to Chapter 7 because of and likelihood of future increases in income; (2) the burden prepetition bad faith” with a “ruling that the individual does the plan's administration would place on the trustee; and (3) 23 not qualify as a Chapter 13 debtor.” the debtor's motivation and sincerity in seeking Chapter 13 relief. 36 [5] The bankruptcy court may dismiss a Chapter 13 case for cause. Section 1307(c) defines “cause” with a nonexclusive [10] The debtors contend that when the bankruptcy court 24 list of eleven examples. One nonenumerated cause and held that they could not propose a Chapter 13 plan in one enumerated cause are important in this case. First, this good faith, it erred by adopting a per se rule that debtors Court has previously held that a debtor's lack of good faith who are engaged in the marijuana business are not eligible —although not explicitly included in § 1307(c)—amounts to for bankruptcy relief. 37 This oversimplifies the court's 25 cause for dismissal under § 1307. Second, “unreasonable reasoning. The bankruptcy court applied the Flygare factors *851 delay by the debtor that is prejudicial to creditors,” 26 and concluded that the debtors couldn't propose a feasible such as that brought about by inability to confirm a plan, plan. First, the Arenases' monthly income from sources other may be cause for dismissal. 27 Had the debtors filed their than marijuana was not enough to fund their plan. Even the original case as a Chapter 13, it would have been susceptible debtors agree that the only way they can fund a plan is with to dismissal for either reason. the rental income from the marijuana dispensary. Without the rental income, their monthly expenses of $7,000 exceed [6] The bankruptcy court denied the Arenases' motion their non-marijuana income by $4,000 a month. Even with to convert their Chapter 7 case to Chapter 13 because the rental income, the plan is barely feasible because their it concluded that “their reorganization would be funded Schedule I reflects a surplus of less than $8 a month, yielding from profits of an ongoing criminal activity under federal at best, a nominal dividend. 38 Sarah Arenas is disabled law and would necessarily involve the Chapter 13 Trustee and unable to work. That, combined with Frank Arenas' in administering and distributing funds derived from the age and employment history, amply supports a finding that Debtors' violation of the CSA.” 28 Because “[a]ny plan the debtors' income is unlikely to increase during the plan proposed by the Debtors would necessarily be executed by term. The court considered the debtors' “ability to earn and unlawful means ... [the court was] unable to find, under § likelihood of future increases in income” and concluded 1325(a)(3), that their plan [was] ‘proposed in good faith and that their plan is not likely confirmable because it is not 39 not by any means forbidden by law.’ ” 29 That was “cause for feasible. dismissal [under] § 1307(c) on account of the Debtors' bad faith due to their inability to propose a confirmable Chapter Second, short of exposing him to physical harm, nothing could be more burdensome to the Trustee's administration 13 plan.” 30 On appeal, that conclusion is entitled to the

WESTl.AW © 2020 Thomson Reuters. No claim to original28 U.S. Government Works. 5 In re Arenas, 535 B.R. 845 (2015) 74 Collier Bankr.Cas.2d 171, Bankr. L. Rep. P 82,870 than requiring him to take possession, sell and distribute given to any prejudice that dismissal marijuana Assets in violation of federal criminal law. There might cause the estate's creditors. 43 is no way the Trustee could administer the plan without committing one or more federal crimes. 40 The Supreme Court has held that “[t]here is no constitutional Finally, as for the debtors' “motivation and sincerity,” the right to obtain a discharge of one's debts in bankruptcy.” 44 bankruptcy court found the debtors to be sincere and credible 45 and took pains to emphasize that their motives in seeking Bankruptcy relief is merely a privilege. bankruptcy relief were not improper. 41 That said, the The bankruptcy court concluded that it would be impossible court also recognized that lack of good faith carries an for the Chapter 7 Trustee to administer the Arenases' estate objective rather than a subjective meaning. If the debtors are because selling and distributing the proceeds of the marijuana incapable of proposing a confirmable plan, it is objectively assets would constitute federal offenses. Because of that, unreasonable for them to seek Chapter 13 relief *853 the creditors had no expectation of receiving any dividend whether their intentions are kindly or not. We concur in this while the debtors would receive a discharge. Meanwhile, the view. creditors are stayed from enforcing their state law rights. The impossibility of lawfully administering the estate constituted Plenty of evidence supports the bankruptcy court's finding 46 of lack of good faith. We affirm that finding and need not cause for dismissal under § 707(a). The debtors argue address whether the debtors' plan was “proposed by any here that the Trustee could have abandoned the marijuana means forbidden by law.” Instead, we turn to the fate of the assets. They say that § 707(a) “cause” should be limited to Arenases' Chapter 7 petition. circumstances where the debtor's actions have frustrated the administration of the estate or a bankruptcy purpose and that they have not engaged in such conduct. 47 B. No abuse of discretion to dismiss debtors' Chapter 7 case, § 707(a)(1). [14] In fact, the debtors have violated federal law and [11] [12] [13] After it concluded that the debtors could apparently intend to continue to do so. 48 Selling the plants not convert their case to Chapter 13, the bankruptcy court and the building would require the Trustee to violate federal granted the UST's motion to dismiss their Chapter 7 case for law. If the Trustee abandoned the Assets, the debtors would “cause” under § 707(a). Section 707(a) provides “[t]he court retain their business after exposing the Trustee to grave may dismiss a case under this chapter only after notice and risk, provide the creditors with little or no recovery, and a hearing and only for cause, including—(1) unreasonable receive a discharge, protected all the while from their delay by the debtor that is prejudicial to creditors.” “Cause” is creditors' collection efforts by the automatic stay and then the not defined in the Code. Determining what amounts to cause discharge injunction. *854 That is the epitome of prejudicial 42 for dismissal under § 707(a) is within the court's discretion. delay. The bankruptcy court did not abuse its discretion by As we have previously held: dismissing the debtor's Chapter 7 case. 49

As for the debtors' claim that the bankruptcy court should have required the Trustee to abandon the marijuana assets Dismissal factors that are often if he couldn't administer them, they never raised that in the considered are: the best interests of 50 both debtor and creditors; trustee's bankruptcy court. It is not clear that a bankruptcy court consent or objection; potential to may order a trustee to abandon assets sua sponte. 51 And delay creditor payments; good or even if the court can do that, this bankruptcy estate, shorn bad faith in seeking dismissal; of its marijuana assets, would likely yield no dividend to and the possibility of payment the creditors. The debtors would get a discharge and get to priority becoming reordered outside keep (via abandonment) their marijuana assets while being of bankruptcy. Emphasis is typically protected from collection activities. This also strikes us as prejudicial delay that amounts to cause for dismissal.

Administering the debtors' Chapter 7 estate would require IV. Conclusion In this case, the debtors are unfortunately caught between the Trustee to either violate federal law by possessing and pursuing a business that the people of Colorado have declared selling the marijuana assets or abandon them. If he did the to be legal and beneficial, but which the laws of the former, the Trustee would be at risk of prosecution; if he United States—laws that every United States Judge swears to did the latter, the creditors would receive nothing while the uphold–proscribe and subject to criminal sanction. Because debtors would retain all of their assets and receive a discharge of that, neither a Chapter 7 nor 13 trustee can administer the as well. Either amounts to prejudicial delay that is sufficient most valuable assets in this estate. Without those assets or to demonstrate cause to dismiss their Chapter 7 case under the marijuana based income stream, the debtors cannot fund § 707(a). The bankruptcy court did not abuse its discretion a plan without breaking the law, and are therefore ineligible in granting the UST's motion to dismiss. Accordingly, we for relief under Chapter 13. In reaching that conclusion, the AFFIRM the bankruptcy court's order. bankruptcy court stayed well within the bounds of permissible choice and in no way abused its discretion in denying the All Citations debtors' motion to convert. 535 B.R. 845, 74 Collier Bankr.Cas.2d 171, Bankr. L. Rep. P 82,870

Footnotes 1 All future references to “Code,” “Section,” and “§” are to the Bankruptcy Code, Title 11 of the United States Code, unless otherwise indicated. 2 There is no evidence that Mrs. Arenas participates in the growing business. Mr. Arenas possesses all of the required licenses and permits necessary to legally engage in his business under Colorado law. 3 21 U.S.C. § 856(a) makes it unlawful to— (1) knowingly open, lease, rent, use, or maintain any place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using any controlled substance; (2) manage or control any place, whether permanently or temporarily, either as an owner, lessee, agent, employee, occupant, or mortgagee, and knowingly and intentionally rent, lease, profit from, or make available for use, with or without compensation, the place for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance. 21 U.S.C. § 841(a)(1) makes it unlawful for any person knowingly or intentionally to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance. 4 Voluntary Petition, in Appellants' Appendix (“App.”) at 17–20. 5 Schedule I at 2, in App. at 40; Statement of Financial Affairs, in App. at 46. 6 Schedule I at 2, in App. at 40. 7 Schedule J at 3, in App. at 43. 8 Arenas Dep. 20:9–13, June 19, 2014, in App. at 341. The plants were not listed in the debtors' Schedule B. 9 The value of the Property is unclear. Although the debtors' schedules indicate that the Property was heavily encumbered, some evidence indicated that the Property had value to the estate. See Schedule A, in App. at 25 (debtors listed the Property's value at $262,725 with secured claims against it of $295,957.51); Schedule D, in App. at 30 (same); Statement of Financial Affairs, in App. at 46 (Property generated rental income of $52,920 in 2012 and $41,008 in 2013); United States Trustee's Motion to Dismiss Debtors' Case Under 11 U.S.C. § 707(a) (the “Motion to Dismiss”) ¶ 7, at 2, in App. at 71 (“[T]he Trustee has received preliminary communications concerning a potential purchase of the building by [DPG] ... ”). The bankruptcy court did not determine either the value of the Property or whether the debtors had any equity in the Property. 10 See Bankruptcy Dkt. Entry No. 16, in App. at 4. The Notice of No Distribution effectively abandons all nonadministered assets and closes the case. 11 Motion to Dismiss, in App. at 70–73. SeeIn re Rent–Rite Super Kegs West Ltd., 484 B.R. 799 (Bankr.D.Colo.2012). 12 Order on the United States Trustee's Motion to Dismiss and the Debtors' Motion to Convert (the “Appealed Order”), in App. at 229–37.

WESTl.AW © 2020 Thomson Reuters. No claim to original30 U.S. Government Works. 7 In re Arenas, 535 B.R. 845 (2015) 74 Collier Bankr.Cas.2d 171, Bankr. L. Rep. P 82,870 13 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr.P. 8001(e) (now atFed. R. Bankr.P. 8005, effective Dec. 1, 2014); 10th Cir. BAP L.R. 8001–3 (now at 10th Cir. BAP L.R. 8005–1, effective Dec. 1, 2014). 14 Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (bankruptcy court has authority to immediately deny a motion to convert a Chapter 7 case to a Chapter 13 in lieu of a conversion order that postpones the allowance of equivalent relief and may provide a debtor with an opportunity to take action prejudicial to creditors); S. REP. NO. 95–989, at 94 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5880 (“The decision whether to convert is left in the sound discretion of the court, based on what will most inure to the benefit of all parties in interest.”); In re Isho, Nos. UT–12–090, 11–30284, 2013 WL 1386208, *3 (10th Cir. BAP April 5, 2013) (determination of cause for dismissal pursuant to § 707(a) is within the discretion of the bankruptcy court). 15 Salve Regina Coll. v. Russell, 499 U.S. 225, 238, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991). 16 Las Vegas Ice & Cold Storage Co. v. Far W. Bank, 893 F.2d 1182, 1185 (10th Cir.1990) (quoting LeMaire ex rel. LeMaire v. United States, 826 F.2d 949, 953 (10th Cir.1987)). 17 Moothart v. Bell, 21 F.3d 1499, 1504 (10th Cir.1994) (quoting McEwen v. City of Norman, 926 F.2d 1539, 1553–54 (10th Cir.1991)). 18 Id. at 1504–05 (internal quotation marks omitted). 19 11 U.S.C. §§ 706(a) and (d). 20 Section 101(30) defines “individual with regular income” as “[an] individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13 of this title, other than a stockbroker or a commodity broker.” The regular income requirement anticipates that the income is sufficient to fund the debtor's living expenses and the plan payments. The debt limitation is not an issue in this appeal. 21 Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Edition, § 5.1 at ¶ 5, Sec. Rev. Apr. 19, 2011, www.Ch13online.com. (“Although not mentioned in the Code as a condition for eligibility for Chapter 13, many reported decisions have considered a debtor's ‘good faith’ at the threshold of a Chapter 13 case, typically in the context of a motion to dismiss.”). 22 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). 23 Marrama, 549 U.S. at 375, 127 S.Ct. 1105. 24 11 U.S.C. § 1307(c)(1)-(11). 25 In re Armstrong, 303 B.R. 213, 218 (10th Cir. BAP 2004) (egregious prepetition conduct and other actions constituted bad faith, warranting dismissal of Chapter 13); In re Davis, 239 B.R. 573, 578–79 (10th Cir. BAP 1999) (cause for dismissal of Chapter 13 existed based on debtor's lack of good faith in filing bankruptcy, inability to propose a feasible amendment to unconfirmable plan, debtor's lack of good faith in filing plan, and debtor's ineligibility for Chapter 7 based on a prior discharge) (citing In re Love, 957 F.2d 1350, 1354 (7th Cir.1992)). 26 11 U.S.C. § 1307(c)(1). 27 In re Paulson, 477 B.R. 740, 745–46 (8th Cir. BAP 2012) (cause for dismissal under § 1307 due to unreasonable delay stemming from the debtor's inability to get a plan confirmed); In re Merhi, 518 B.R. 705, 719–20 (Bankr.E.D.N.Y.2014) (continuation of case when debtor cannot propose a confirmable debt adjustment plan constituted prejudicial delay to creditors under 11 U.S.C. § 1307(c)(1)); In re Yarborough, Case No. 12–30549, 2012 WL 4434053, *2 (Bankr.E.D.Tenn. Sept. 24, 2012) (“The right to convert [from chapter 7] to Chapter 13, however, is not absolute, and conversion may be denied where ‘cause’ would exist to convert or dismiss the debtor's Chapter 13 case under 11 U.S.C. § 1307(c), including inability to propose a confirmable plan and bad faith.”) (footnote and citations omitted). See alsoIn re Ames, 973 F.2d 849, 851–52 (10th Cir.1992) (Chapter 12 bankruptcy may be dismissed due to failure to propose a confirmable plan). 28 Appealed Order at 5–6, in App. at 233–34. 29 Id. at 6–7, in App. at 234–35. 30 Id. at 6, in App. at 234. 31 Marrama, 549 U.S. at 375, 127 S.Ct. 1105 (bankruptcy court has authority to immediately deny a motion to convert a Chapter 7 case to a Chapter 13 in lieu of a conversion order that postpones the allowance of equivalent relief and may provide a debtor with an opportunity to take action prejudicial to creditors); S. REP. NO. 95–989, at 94 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5880 (“The decision whether to convert is left in the sound discretion of the court, based on what will most inure to the benefit of all parties in interest.”). 32 In re Davis, 239 B.R. 573, 576 (10th Cir. BAP 1999) (“Whether a Chapter 13 plan has been proposed in good faith is a question of fact subject to the clearly erroneous standard of review.”). 33 Id. at 577.

WESTl.AW © 2020 Thomson Reuters. No claim to original31 U.S. Government Works. 8 In re Arenas, 535 B.R. 845 (2015) 74 Collier Bankr.Cas.2d 171, Bankr. L. Rep. P 82,870 34 709 F.2d 1344 (10th Cir.1983). 35 In re Cranmer, 697 F.3d 1314, 1319 n.5 (10th Cir.2012). 36 Id. at 1347–48. 37 Appellants' Opening Brief at 9, 29–30. 38 We recognize that nominal repayments alone do not violate the good-faith standard of § 1325(a)(3). Other factors, however, weigh against a good-faith finding. 39 The debtors' suggestion that the United States Government's decision not to prosecute Colorado participants in the marijuana business somehow addresses the feasibility and good-faith question fails to account for the possibility that subsequent Administrations and Attorneys General could exercise their prosecutorial discretion to take a different approach. As long as marijuana remains a controlled substance, a matter left entirely to Congress, people who engage in the Colorado marijuana trade remain at risk of federal criminal prosecution, regardless of the Department of Justice's current posture. 40 The CSA criminalizes virtually every aspect of selling, manufacturing, distributing and profiting from the use of controlled substances. See21 U.S.C. §§ 841(a)(1) and 856(a). 41 Appealed Order at 6, n.8, in App. at 234. 42 In re Isho, Nos. UT–12–090, 11–30284, 2013 WL 1386208, at *3 (10th Cir. BAP April 5, 2013). 43 Id. (citations omitted). 44 United States v. Kras, 409 U.S. 434, 446, 93 S.Ct. 631, 34 L.Ed.2d 626 (1973). 45 In re Michael, 285 B.R. 553, 556 (Bankr.S.D.Ga.2002) (citing In re Sochia, 231 B.R. 158, 160 (Bankr.W.D.N.Y.1999); In re Khan, 35 B.R. 718, 719 (Bankr.W.D.Ky.1984)). 46 Appealed Order at 5, in App. at 233. 47 Appellants' Opening Brief at 23. 48 July 30, 2014 Hrg Tr. at 18, in App. at 198. 49 In re Medpoint Mgmt., LLC, 528 B.R. 178, 184–86 (Bankr.D.Ariz.2015) (finding reasoning in Arenas and Rent Rite persuasive; dual risks of forfeiture of assets and a trustee's inevitable violation of CSA constitute cause to dismiss involuntary petition under § 707(a)). 50 Walker v. Mather (In re Walker), 959 F.2d 894, 896 (10th Cir.1992) (appellate court will not consider issues not raised below); Pritner v. COFCO Credit Co., LLC (In re Pritner), Nos. WO–040–080, 99–16898–BH, 03–1371–BH, 2005 WL 705363, at *5 (10th Cir. BAP 2005) (refusing to consider argument not raised below). 51 Section 554(b) states: “(b) On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.” 11 U.S.C. § 554(b) (emphasis added).

bankruptcy court jurisdiction, as proceeding was created or determined by a statutory provision of 600 B.R. 368 title 11. 28 U.S.C.A. § 1334(b). United States Bankruptcy Court, E.D. Michigan, Southern Division.

IN RE: BASRAH CUSTOM DESIGN, INC., Debtor. [2] Bankruptcy .. Particular proceedings or issues Case No. 18-56801 Bankruptcy | Core or related proceedings Signed May 21, 2019 .. Proceeding whereby trustee sought to dismiss Synopsis corporate debtor's Chapter 11 case and debtor Background: Trustee moved to dismiss corporate debtor's sought to reject lease was a “core” proceeding as Chapter 11 case, and debtor filed motion to reject lease. one “arising in” a case under title 11, for purposes of bankruptcy court jurisdiction, given that, by its very nature, the proceeding could arise only in the bankruptcy case. 28 U.S.C.A. § 1334(b). Holdings: The Bankruptcy Court, Thomas J. Tucker, J., held that:

[1] debtor could not reject lease, as debtor was not a real party [3] Bankruptcy in interest under the lease; .. Core or non-core proceedings Matters “arising under title 11” and “arising in” [2] “cause” existed to dismiss Chapter 11 case based on a case under title 11 are “core” proceedings, debtor's involvement with a medical marijuana dispensary for purposes of bankruptcy court jurisdiction. 28 business; U.S.C.A. § 1334(b).

[3] dismissal of Chapter 11 case, rather than conversion to Chapter 7, was in the best interests of creditors and the estate; [4] Federal Courts and .. Conclusiveness; res judicata and collateral estoppel [4] bankruptcy court would exercise its discretion to bar the In determining whether a state court judgment filing of any new bankruptcy case, by or against the debtor, precludes relitigation of issues under the doctrine for a period of two years. of collateral estoppel, the full faith and credit statute requires bankruptcy courts to consider first the law of the state in which the judgment Motion granted. was rendered to determine its preclusive effect. 28 U.S.C.A. § 1738.

West Headnotes (15) [5] Federal Courts Conclusiveness; res judicata and collateral [1] Bankruptcy .. .. Particular proceedings or issues estoppel In determining whether, under the doctrine Bankruptcy .. Core or related proceedings of collateral estoppel, a state court judgment precludes relitigation of issues before the Proceeding whereby trustee sought to dismiss bankruptcy court, if the state courts would not corporate debtor's Chapter 11 case and debtor deem the judgment binding under collateral sought to reject lease was a “core” proceeding estoppel principles, then the bankruptcy court as one “arising under title 11,” for purposes of

cannot do so either, but if the state courts would give preclusive effect to the judgment, then the [9] Bankruptcy bankruptcy court generally must also give the ... Leases judgment preclusive effect. Chapter 11 corporate debtor could not reject lease, where debtor was not a real party in interest under the lease, rather, debtor signed the lease [6] Judgment only in its capacity as agent for the only owner ... Nature and requisites of former adjudication of the property, namely, individual who was as ground of estoppel in general the president and sole shareholder of debtor. 11 U.S.C.A. § 365. Under Michigan law, the following requirements must be met in order for collateral estoppel to apply: (1) there is identity of parties across the proceedings, (2) there was a valid, final judgment [10] Bankruptcy in the first proceeding, (3) the same issue was ... In General; Grounds in General actually litigated and necessarily determined in In determining whether “cause” exists to dismiss the first proceeding, and (4) the party against a Chapter 11 case, a court must engage in a whom the doctrine is asserted had a full and case-specific factual inquiry that focuses on the fair opportunity to litigate the issue in the earlier circumstances of each debtor. 11 U.S.C.A. § proceeding. 1112(b).

[7] Judgment [11] Bankruptcy ... Matters actually litigated and determined ... Dismissal or suspension Under Michigan law, an issue is “actually “Cause” existed to dismiss Chapter 11 case based litigated,” for purposes of collateral estoppel, if on corporate debtor's involvement with a medical it is put into issue by the pleadings, submitted to marijuana dispensary business, even though that the trier of fact for determination, and thereafter business might have been legal under state determined. law; actual purpose of filing and prosecuting the bankruptcy case was for debtor's 100% shareholder to use the bankruptcy court and [8] Judgment Bankruptcy Code to avoid enforcement of state ... Identity of parties and issues in general court decision and rent or sell certain property to medical marijuana dispensary business for Judgment a higher price, or for shareholder to use the ... Bankruptcy property to operate a marijuana dispensary State court decision whereby tenant sought himself, which was a result that would be to obtain possession of or purchase property contrary to federal criminal law under the used for medical marijuana dispensary had Controlled Substances Act and contrary to preclusive effect, under Michigan collateral federal public policy. 11 U.S.C.A. § 1112(b); estoppel principles, as to Chapter 11 debtor's Controlled Substances Act, § 101 et seq., 21 motion to reject lease; the relevant parties were U.S.C.A. § 801 et seq. the same, state court decision was a valid, final judgment, the issues were actually litigated and 1 Cases that cite this headnote necessarily determined by the state court, and all the parties in the state court lawsuit had a full and [12] Bankruptcy fair opportunity to litigate the issues decided in ... In General; Grounds in General the state court decision. Dismissal of corporate debtor's Chapter 11 case, rather than conversion to Chapter 7,

was in the best interests of creditors and the estate; conversion to Chapter 7 would mean a liquidation of the debtor and termination of debtor's business of manufacturing and installing custom cabinets, but debtor had expressed Attorneys and Law Firms a desire to continue operating its business, there was no reason to think that debtor *370 Stuart Sandweiss, Metro Detroit Bankruptcy Law could not continue to operate its business Group, Southfield, Michigan, Attorney for Debtor. outside of bankruptcy, no creditor advocated Sean M. Cowley, Office of the United States Trustee, Detroit, for the conversion and liquidation of debtor Michigan, Attorney for Daniel M. McDermott, United States in Chapter 7, and there was no practical Trustee. alternative to dismissal, given debtor's 100% shareholder's involvement in lease of property Bryan Marcus, Bryan D. Marcus, P.C., Royal Oak, Michigan, with medical marijuana dispensary business and Attorney for MJCC 8 Mile, LLC. the bankruptcy court's unwillingness to assist a party to violate federal law. 11 U.S.C.A. § OPINION REGARDING THE UNITED STATES 1112(b). TRUSTEE'S MOTION TO DISMISS, THE DEBTOR'S MOTION TO REJECT LEASE, AND THE MOTION BY MJCC 8 MILE, LLC FOR RELIEF FROM STAY [13] Bankruptcy ... Power and Authority Thomas J. Tucker, United States Bankruptcy Judge A federal court cannot be asked to enforce the I. Introduction protections of the Bankruptcy Code in aid of a Among other things, this Chapter 11 case raises the question debtor whose activities constitute a continuing whether the Debtor's entanglement with a medical marijuana federal crime. dispensary business, which business is illegal under federal criminal law but not necessarily illegal under Michigan law, requires the dismissal of this federal bankruptcy case. The [14] Bankruptcy Court concludes that dismissal is required. ... Cause; Grounds and Objections A federal court cannot be asked to enforce any This case came before the Court on March 6, 2019, for creditor protections under the Bankruptcy Code, a hearing on three motions, namely: (1) the United States such as the relief-from-stay provisions, in aid of Trustee's motion to dismiss this case (Docket # 30, the a creditor's commission of a federal crime. 11 “Dismissal Motion”); (2) the motion by the Debtor entitled U.S.C.A. § 362(d). “Debtor's Motion to Reject Executory Lease with MJCC 8 Mile, LLC” (Docket # 37, the “Lease Rejection Motion”); and (3) the motion by MJCC 8 Mile, LLC for relief from the [15] Bankruptcy automatic stay (Docket # 43, the “Stay Relief Motion”). ... Proceedings Upon “for cause” dismissal of Chapter 11 After the hearing, after obtaining leave of Court to do so, 1 case based on corporate debtor's involvement the Debtor filed a supplemental brief in further support of with a medical marijuana dispensary business, its position on the pending motions, and the United States bankruptcy court would exercise its discretion to Trustee and MJCC 8 Mile, LLC filed responses to the Debtor's bar the filing of any new bankruptcy case, by or supplemental brief. 2 The Court has reviewed those post- against the debtor, for a period of two years, to hearing papers filed by the parties. give ample time for debtor's pending state court appeal regarding lease of property with medical The Court has considered all of the oral and written arguments marijuana dispensary business, to conclude. 11 of the parties, and all of the briefs and exhibits filed by the U.S.C.A. §§ 105(a), 349(a), 1112(b). parties. For the reasons stated in this opinion, the Court will

WESTLAW © 2020 Thomson Reuters. No claim to original35 U.S. Government Works. 3 In re Basrah Custom Design, Inc., 600 B.R. 368 (2019) 67 Bankr.Ct.Dec. 68 deny the Debtor's Lease Rejection Motion, grant the United States Trustee's Dismissal Motion, and deny the Stay Relief In the State Court Lawsuit, MJCC 8 Mile, LLC (“MJCC”) Motion as moot. claimed to have the right to possession of the Nocha Property under a written lease, which lease also gave MJCC an option to purchase the Nocha Property. MJCC sought enforcement II. Jurisdiction of that lease and the purchase option. The lease was executed This Court has subject matter jurisdiction over this on November 16, 2016, and is referred to in this Opinion as bankruptcy case and this *371 contested matter under 28 the “November Lease” or the “November 2016 Lease.” A U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule copy of the November Lease appears in the record of this case 83.50(a) (E.D. Mich.). This is a core proceeding under 28 as Exhibit 1 to the brief filed by the Debtor on February 8, U.S.C. §§ 157(b)(2)(A), 157(b)(2)(G), and 157(b)(2)(O). 2019. 7

[1] [2] [3] This proceeding also is “core” because it falls The November Lease named the Debtor as the “Landlord” within the definition of a proceeding “arising under title 11” and MJCC as the “Tenant,” and it was signed on November and of a proceeding “arising in” a case under title 11, within 16, 2016 by Weaam Nocha for the Debtor, as “Its Owner,” the meaning of 28 U.S.C. § 1334(b). Matters falling within and by MJCC. either of these categories in § 1334(b) are deemed to be core proceedings. See Allard v. Coenen (In re Trans–Industries, Under the November Lease, MJCC leased the part of the Inc.), 419 B.R. 21, 27 (Bankr. E.D. Mich. 2009). This is Nocha Property located at 7461 West 8 Mile Road, for an a proceeding “arising under title 11” because it is “created initial term of 5 years, renewable by MJCC for 6 additional or determined by a statutory provision of title 11,” see id., 8 including Bankruptcy Code §§ 1112, 365, and 362. And this 5-year terms. During that lease term, MJCC also had the is a proceeding “arising in” a case under title 11, because it option to lease the adjacent part of the Nocha Property, located is a proceeding that “by [its] very nature, could arise only in at 7451 West 8 Mile Road, also for an initial term of 5 years, bankruptcy cases.” See id. at 27. renewable by MJCC for 3 additional 5-year terms. 9 The November Lease also gave MJCC an option to purchase the Nocha Property, for $ 1.2 million. 10 III. Discussion

A. Background It is undisputed, and was clearly understood by all parties at The Debtor filed this Chapter 11 bankruptcy case on the time of the signing of the November Lease, that MJCC's purpose in entering into the November Lease was to use the December 16, 2018. 3 The Debtor is a Michigan corporation Nocha Property to operate a medical marijuana dispensary. that “is in the business of manufacturing and installing custom And this is clear from the face of the November Lease. 4 cabinets[.]” The Debtor occupies and uses two conjoined For example, the document stated that “[t]he Premises will buildings, located at 7451 and 7461 West 8 Mile Road, be used for a licensed medical marijuana dispensary (the Detroit, Michigan. That real estate (the “Nocha Property”) ‘Designated Use’) and for no other purpose whatsoever.” 11 is owned by Weaam Nocha, who is the President and sole And the initial 5-year term of the Lease was to begin “on the 5 shareholder of the Debtor. It is undisputed that the Debtor date Tenant receives approval from the City of Detroit for its 6 is not, and never has been, an owner of the Nocha Property. Designated Use[.]” 12

The defendants in the State Court Lawsuit were the Debtor, B. The November 16, 2016 Lease, and the Debtor's pre- Weaam Nocha, Rafaa Nocha (Weaam Nocha's wife, a/k/a petition state court litigation with MJCC 8 Mile, LLC Rafaa Dawood), Holden Dawood (the Nochas's son), and Before filing this bankruptcy case, the Debtor, Weaam Nocha, DMCC, LLC (a limited liability company formed by the and others were defendants in a state court lawsuit filed by defendants). All of the defendants jointly defended against MJCC 8 Mile, LLC, captioned MJCC 8 Mile, LLC v. Basrah MJCC's claims, and opposed the efforts of MJCC to obtain Custom Design, Inc., et al., Case No. 17-001663 (Wayne possession of or purchase the Nocha Property. One of their County, *372 Michigan Circuit Court) (the “State Court primary defenses was that MJCC “fraudulently tricked” Lawsuit”). Weaam Nocha into signing the November Lease. 13

City of Detroit that is available and suitable for conducting It is undisputed that in seeking relief in the State Court a medical marijuana dispensary. The state court found that Lawsuit, and in now seeking stay relief in this Court, “there are very few fully compliant properties in the City MJCC has sought possession and ownership of the Nocha [of Detroit]” where one can “open a medical marijuana Property, in order to use that property as a medical marijuana dispensary.” 20 This is “due to the tight restrictions imposed dispensary. Such a marijuana business apparently would not by Detroit's Medical Marijuana Zoning Ordinance.” 21 But violate Michigan law, but as *373 discussed below, it would the Nocha Property is such an available property — as the violate federal criminal law. state court put it, the property is “in the ‘green zone.’ ” 22

C. The State Court Decision The state court also found that the efforts by Weaam Nocha, The State Court Lawsuit went to trial, and on December 7, the Debtor, and the other defendants to avoid enforcement 2018, the state court found for MJCC, in a lengthy written of the November Lease, including its purchase option, were opinion and order, entitled “Finding of Facts and Conclusions motivated by a desire to make more money from the Nocha of Law” (the “State Court Decision”). A copy of the State Property, either by (1) renting or selling the Nocha Property Court Decision appears in the record of this case as Exhibit 4 to MJCC, or someone else in the medical marijuana business, to the Debtor's brief filed on February 8, 2019. 14 for a higher rent or a higher sale price than the $ 1.2 million price set by the purchase option in the November Lease; or (2) As discussed in Part III.D of this Opinion, below, the findings using the property to open and operate a marijuana dispensary and conclusions of the State Court Decision are binding in this themselves. Court, on the Debtor, Weaam Nocha, and MJCC, under the doctrine of collateral estoppel. For this reason, and because The State Court Decision described, in detailed findings: 23 they are important to this Court's decision on the pending motions, the Court will describe the state court's findings and • how Weaam Nocha and his wife, Rafaa, continually conclusions in detail. demanded more money from MJCC for the lease or purchase of the Nocha Property, even after the In the State Court Decision, the state court found and November Lease was signed, demanding, for example, concluded, among other things, that: an increase in rent from the $ 5,000.00 per month in the November Lease 24 to $ 7,500.00 per month, and • Weaam Nocha was not tricked or fraudulently induced demanding $ 1.5 million to sell the property to MJCC into signing the November Lease; 15 instead of the $ 1.2 million agreed to in the November Lease's purchase option; 25 • at the time the November Lease was signed, the Nocha Property was owned solely by Weaam Nocha; 16 • how MJCC refused the Nochas's greater financial demands, and instead insisted on performance of the • Weaam Nocha signed the November Lease as an agent of November Lease; 26 the Debtor, and the Debtor in turn signed the November Lease as agent of and on behalf of the owner of the • how the Nochas then reacted by refusing to honor the 17 property at issue, Weaam Nocha; November Lease; 27 and

• the November Lease, including the purchase option it • how all of the state court defendants — i.e., the Debtor, contains, is valid and enforceable by MJCC; 18 Weaam Nocha, Rafaa Nocha, and their son Holden Dawood — then decided to open and operate a medical • the term of the November Lease began on November 10, marijuana dispensary themselves at the Nocha *375 2016, and MJCC's right to exclusive possession of the Property, and went to great lengths to try to do so; Nocha Property began on November 26, 2016. 19 including the defendants' formation of a new LLC — the defendant DMCC, LLC — to obtain a license from *374 The State Court Decision found that the Nocha the City of Detroit to operate a medical marijuana Property is one of the very few properties located within the dispensary. 28

[4] [5] This Court previously has explained how collateral Based on its detailed findings, the state court entered a estoppel applies in bankruptcy cases, under the federal Full judgment in favor of MJCC and against the defendants. 29 For Faith and Credit Statute, 28 U.S.C. § 1738: 34 relief, “given the validity of the November 2016 Lease,” the State Court Decision ordered that MJCC could elect one of “In determining whether a state court judgment precludes relitigation of issues under the doctrine of collateral two options. 30 estoppel, the Full Faith and Credit Statute, 28 U.S.C. § 1738, requires bankruptcy courts to “ ‘consider first Under the first option, MJCC could elect to have a the law of the *376 State in which the judgment was “[d]eclaratory judgment that the November 2016 Lease rendered to determine its preclusive effect.’ ” Bay Area is valid and enforceable.” Under this option, MJCC was Factors v. Calvert (In re Calvert), 105 F.3d 315, 317 (6th required to “exercise[ ] its option [under the November 2016 Cir. 1997)(quoting Marrese v. Am. Acad. of Orthopaedic Lease] to purchase the entire property (7451 and 7461) for [$] Surgeons, 470 U.S. 373, 375, 105 S.Ct. 1327, 84 L.Ed.2d 1.2 million” and MJCC would obtain the “immediate transfer 274 (1985)). If the state courts would not deem the of ownership to DMCC to Plaintiff[ ] along with possession judgment binding under collateral estoppel principles, then 31 of the Property.” the bankruptcy court cannot do so either. But if the state courts would give preclusive effect to the judgment, Under the second option, MJCC could elect to have a then the bankruptcy court [generally] must also give the declaratory judgment that “the November 2016 [L]ease judgment preclusive effect[.]” [is] null and void,” plus a money judgment in the total amount of $ 713,658.72. 32 Under this option, “Defendants Taleb v. Kramer (In re Kramer), 543 B.R. 551, 553 (Bankr. would maintain ownership of the property and the Marijuana E.D. Mich. 2015) (footnote omitted) (quoting McCallum v. Pixley (In re Pixley), 456 B.R. 770, 775-76 (Bankr. E.D. Mich. license.” 33 2011)); see also In re Indiana Hotel Equities, LLC, 586 B.R. 870, 875 (Bankr. E.D. Mich. 2018) (same). MJCC elected the first of these alternative forms of relief, and desires to close, as soon as possible, on its purchase of [6] [7] Because the State Court Decision was entered in the Nocha Property for the $ 1.2 million price. This is so the Wayne County Circuit Court in the state of Michigan, the MJCC can begin to operate its medical marijuana dispensary Court must look to Michigan law to determine the collateral business on the Nocha Property as soon as possible. estoppel effect of that decision. As this Court has explained in prior cases, Nine days after the State Court Decision, and in direct response to it, the Debtor filed this bankruptcy case. The Under Michigan law, the following requirements must be Debtor and the other state court defendants also filed an met in order for collateral estoppel to apply: appeal of the State Court Decision to the Michigan Court of Appeals, which appeal is pending. 1) there is identity of parties across the proceedings,

2) there was a valid, final judgment in the first D. The preclusive effect of the State Court Decision, under proceeding, the doctrine of collateral estoppel As the Debtor's counsel conceded during the hearing, the 3) the same issue was actually litigated and necessarily findings and conclusions of the state court in the State Court determined in the first proceeding, and Decision are binding on the Debtor and MJCC. Those parties 4) the party against whom the doctrine is asserted had a are precluded from contesting such findings and conclusions full and fair opportunity to litigate the issue in the earlier in this bankruptcy case, under the doctrine of collateral proceeding. estoppel. And this is so even though the Debtor has appealed the State Court Decision. Phillips v. Weissert (In re Phillips), 434 B.R. 475, 485 (6th Cir. BAP 2010) (citation omitted)....

opposes that motion on several grounds. The United States Under Michigan law, an issue is “actually litigated” if it Trustee also opposes that motion, because he seeks dismissal is “put into issue by the pleadings, submitted to the trier of this case. of fact for determination, and is thereafter determined.” Phillips, 434 B.R. at 486 (majority opinion) (quoting [9] The Court must deny the Debtor's Lease Rejection Latimer v. William Mueller & Son, Inc., 149 Mich.App. Motion, for two reasons. First, the November Lease is not 620, 386 N.W.2d 618, 627 (1986)); Phillips, 434 B.R. at a lease that the Debtor may reject under 11 U.S.C. § 365, 490 (Rhodes, J., concurring) (same).... because the Debtor is not a real party in interest under that lease. Rather, the Debtor signed the November Lease only An issue that is “actually litigated” is also considered in its capacity as agent for the one and only owner of the to be “necessarily determined” if “it is necessary to the Nocha Property at issue, namely, Weaam Nocha. This is judgment.” See id. at 493; see also Rohe Scientific Corp. conclusively established by the State Court Decision, as noted v. Nat'l Bank of Detroit, 133 Mich.App. 462, 350 N.W.2d in parts III.C and III.D of this Opinion. As a result, the Debtor 280, 282 (1984) (citation omitted) .... cannot assume or reject the November Lease under § 365. Pixley I, 456 B.R. at 776, 778-79. That section says that a “trustee,” which includes a Chapter 11 debtor-in-possession under 11 U.S.C. § 1107(a), “subject Lenchner v. Korn (In re Korn), 567 B.R. 280, 298-99 (Bankr. to the court's approval, may assume or reject any executory E.D. Mich. 2017). contract or unexpired lease of the debtor.” 11 U.S.C. § 365(a) (emphasis added). Many of the subsections in § 365 use this [8] With respect to each of the findings and conclusions phrase, executory contract or unexpired lease “of the debtor,” recounted in this Opinion from the State Court Decision, all and thereby reinforce the point that § 365 applies only to such of the requirements for the application of collateral estoppel contracts “of the debtor.” See, e.g., 11 U.S.C. §§ 365(b)(1), are met: (1) the relevant parties (the Debtor, Weaam Nocha, 365(b)(4), 365(c), 365(d)(1), 365(d)(2), 365(e)(1), 365(e)(2), and MJCC) are the same; (2) the State Court Decision is a 365(f)(1), 365(f)(2), 365(f)(3), 365(g), 365(i)(1). valid, final judgment; (3) the issues were actually litigated and necessarily determined by the State Court Decision; and (4) The November Lease is not a lease “of the debtor” but rather all the parties in the State Court Lawsuit, including the Debtor, is a lease of the Debtor's 100% shareholder, Weaam Nocha, Weaam Nocha, and MJCC, had a full and fair opportunity to who at the time of the November Lease was the only owner of litigate the issues decided in the State Court Decision. the subject property. (As noted in Part III.A of this Opinion, it is undisputed that the Debtor is not and never has been an The State Court Decision is considered a valid, final judgment owner of the subject property.) The Debtor therefore cannot for collateral estoppel purposes, even though the Debtor and assume or reject the November Lease, so the Debtor's Lease Weaam Nocha have appealed that decision to the Michigan Rejection Motion must be denied. Court of Appeals. See Taleb v. Kramer, 543 B.R. at 559 (“[U]nder Michigan law, a final ... judgment has preclusive That Motion also must be denied for a second reason, namely, effect under the doctrine of collateral estoppel ... even when because this bankruptcy case must be dismissed, for the the judgment is on appeal or the time for appeals *377 has reasons discussed below. not yet expired.”). Collateral estoppel therefore applies, and in effect, the parties to the State Court Decision, including the Debtor, Weaam Nocha, and MJCC, are bound by the findings F. Discussion of the United States Trustee's Dismissal and conclusions in the State Court Decision, unless and until Motion that State Court Decision is reversed, vacated, or modified on [10] The United States Trustee (the “UST”) seeks dismissal appeal. And counsel for the Debtor explicitly conceded this, of this bankruptcy case, for “cause” under 11 U.S.C. § 1112(b) during the hearing. (1). That section states:

E. Discussion of the Debtor's motion to reject the (b)(1) Except as provided in paragraph November 2016 Lease, under Bankruptcy Code § 365. (2) and subsection (c), on request of In its Lease Rejection Motion, the Debtor seeks an order a party in interest, and after notice allowing it to reject the November 2016 Lease. MJCC

and a hearing, the court shall convert a case under this chapter to a case In enacting the CSA, Congress classified marijuana as under chapter 7 or dismiss a case under a Schedule I drug. 21 U.S.C. § 812(c).... By classifying this chapter, whichever is in the best marijuana as a Schedule I drug, as opposed to listing interests of creditors and the estate, for it on a lesser schedule, the manufacture, distribution, or cause unless the court determines that possession of marijuana became a criminal offense, with the appointment under section 1104(a) the sole exception being use of the drug as part of a Food of a trustee or an examiner is in the best and Drug Administration preapproved research study. §§ interests of creditors and the estate. 823(f), 841(a)(1), 844(a); see also *379 United States v. Oakland Cannabis Buyers' Cooperative, 532 U.S. 483, 490, 121 S.Ct. 1711, 149 L.Ed.2d 722 (2001).

11 U.S.C. § 1112(b)(1). In partially defining what the general ... “cause” standard in § 1112(b)(1) means, “[s]ection 1112(b)(4) contains a nonexhaustive list of examples of ‘cause’ justifying Despite considerable efforts to reschedule marijuana, it dismissal of a Chapter *378 11 case.” In re Creekside Sr. remains a Schedule I drug. Apartments, L.P., 489 B.R. 51, 60 (6th Cir. BAP 2013). 545 U.S. at 14-15, 125 S.Ct. 2195 (footnote omitted). Of In determining whether cause exists to dismiss a case the statutes cited by the Supreme Court in Gonzales v. under § 1112(b), a court must engage in a “case-specific” Raich, 21 U.S.C. § 841(a)(1) makes it a crime “knowingly factual inquiry which “focus[es] on the circumstances of or intentionally ... to manufacture, distribute, or dispense” each debtor.” United Savs. Ass'n of Tex. v. Timbers of a controlled substance, including marijuana, and that statute Inwood Forest Assocs., Ltd. (In re Timbers of Inwood provides for criminal penalties including imprisonment and Forest Assocs., Ltd.), 808 F.2d 363, 371–72 (5th Cir.1987) fines. E.g., 21 U.S.C. § 841(b)(1)(D). (en banc), aff'd, 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988); In re Great Am. Pyramid Joint Venture, 144 And as the UST points out, operating a medical marijuana B.R. 780, 791 (Bankr.W.D.Tenn.1992). dispensary, or owning or renting a place operating as such a dispensary, also would be a federal crime under 21 U.S.C. § Id.; see also In re Skymark Properties II, LLC, 597 B.R. 391, 856(a). That section states: 395-96 (Bankr. E.D. Mich. 2019). Except as authorized by this subchapter, it shall be unlawful to— 1. The federal Controlled Substances Act The UST seeks dismissal of this case because of the Debtor's (1) knowingly open, lease, rent, use, or maintain entanglement with a medical marijuana dispensary business. any place, whether permanently or temporarily, for the That business may well be legal under Michigan law, 35 and purpose of manufacturing, distributing, or using any the Court will assume as much for purposes of deciding controlled substance; the Dismissal Motion. But it is clear that such a marijuana (2) manage or control any place, whether permanently dispensary business is illegal under federal law. or temporarily, either as an owner, lessee, agent, employee, occupant, or mortgagee, and knowingly There is no dispute that operating a medical marijuana and intentionally rent, lease, profit from, or make dispensary is a violation of the federal Controlled Substances available for use, with or without compensation, the Act, 21 U.S.C. §§ 801-904 (the “CSA”). Marijuana is an place for the purpose of unlawfully manufacturing, illegal Schedule I controlled substance under the CSA, see storing, distributing, or using a controlled substance. 21 U.S.C. § 812(c)(10), despite the adoption by several states in recent years of laws permitting the sale and use 21 U.S.C. § 856(a)(1)-(2) (emphasis added). Violation of this of marijuana for medical and/or recreational purposes. See statute subjects one to possible imprisonment of up to 20 generally Gonzales v. Raich, 545 U.S. 1, 10-15, 125 S.Ct. years, and a possible criminal fine of up to $ 2 million “for a 2195, 162 L.Ed.2d 1 (2005). As the Supreme Court explained person other than an individual,” as well as the possibility of in Gonzales v. Raich, substantial civil penalties. See 21 U.S.C. §§ 856(b), 856(d).

535 B.R. at 847 (emphasis added). 2. Bankruptcy cases Because of these federal statutes, several bankruptcy courts In Arenas, one of the joint debtors was licensed in Colorado have found cause to dismiss a bankruptcy case filed by a “to grow and dispense medical marijuana,” and he did so debtor whose income was derived, directly or indirectly, at in one of the two units of a commercial building that least in part, from the business of selling marijuana. For the debtors jointly owned. 36 The debtors leased the other example, in In re Rent-Rite Super Kegs West Ltd., 484 B.R. unit of their building to an LLC that operated a marijuana 799, 802-04 (Bankr. D. Colo. 2012), the bankruptcy court dispensary. Id. The bankruptcy court denied a motion by found that the Chapter 11 debtor had “unclean hands,” and the debtors to convert their case to Chapter 13, and granted that “cause” existed under 11 U.S.C. § 1112(b) to dismiss a motion by the United States Trustee to dismiss the case, or convert the bankruptcy case, because the debtor derived for cause under 11 U.S.C. § 707(a). Id. at 848. The B.A.P. roughly 25% of its revenues from leasing warehouse space affirmed the bankruptcy court's decisions. The B.A.P. found to tenants engaged in the business of growing marijuana. The that while the debtors' activities were legal under Colorado court found that the debtor's business “involves a continuing state law, they violated the CSA. Id. at 847. It held that violation of the federal Controlled Substances Act,” even “while the debtors have not engaged in intrinsically evil though the marijuana growing activity was “arguably legal conduct, the debtors cannot obtain bankruptcy relief because under Colorado law.” 484 B.R. at 802 (footnote omitted). The their marijuana business activities are federal crimes.” Id. at court held that “a federal court cannot be asked to enforce the 849-50. The B.A.P. also held that a bankruptcy trustee could protections of the Bankruptcy Code in aid of a Debtor whose not administer the marijuana assets, including the marijuana activities constitute a continuing federal crime.” Id. at 805 plants and the debtors' building, because that would violate (footnote omitted). federal criminal law. See id. at 852-53. The court noted that “[t]he CSA criminalizes virtually every aspect of selling, This is so, the Rent-Rite court held, “even if the Debtor manufacturing, distributing and profiting from the use of is never charged or prosecuted under the CSA,” and even controlled substances.” Id. at 852 n.40 (citing 21 U.S.C. §§ though, generally, “federal prosecutors may well choose to 841(a)(1) and 856(a)). exercise their prosecutorial discretion and decline to seek indictments under the CSA where the activity that is illegal on Finally, in the case of In re Way to Grow, Inc., 597 B.R. 111 the federal level is legal under ... state law.” 484 B.R. at 805. (Bankr. D. Colo. 2018), the bankruptcy court dismissed the Chapter 11 cases of three affiliated companies, because of In another case arising in Colorado, Arenas v. United States the debtors' involvement in a marijuana-related business. That Trustee (In re Arenas), 535 B.R. 845 (10th Cir. BAP 2015), involvement was more indirect than that of the debtors in the Bankruptcy Appellate Panel (the “B.A.P.”) for the Tenth the other cases, discussed above. In Way to Grow, the court Circuit affirmed *380 the bankruptcy court's dismissal of a described the debtors' business as follows: Chapter 7 case filed by a marijuana grower and his wife. The B.A.P. stated: Debtors' business involves the sale of equipment for indoor hydroponic and gardening-related supplies. As to their customers' uses of their products, Debtors have represented Possessing, growing, and dispensing “[w]hile the hydroponic gardening equipment may [be] and marijuana and assisting others to is used for many types of crops, the Debtors' future business do that are federal offenses. But expansion plan is tied to the growing cannabis industry like several other states, Colorado which is heavily reliant on hydroponic gardening.” has legalized these acts and heavily 597 B.R. at 114-15 (footnote omitted). After citing certain regulates them, triggering a flourishing provisions of the CSA, namely 21 U.S.C. §§ 812 and 841(a) marijuana industry there. Can a (1), quoted above, the court in Way to Grow further noted that debtor in the marijuana business obtain relief in the federal the CSA prohibits any person from possessing or bankruptcy court? No. distributing “any equipment ... product or material which may be used to manufacture a controlled substance ...

knowing, intending, or having reasonable cause to believe, marijuana-based deal than what is provided by the November that it will be used to manufacture a controlled substance” Lease and the State Court Decision. in violation of federal law. The CSA also expressly provides any person who “conspires to commit any The Debtor denies that it has unclean hands. The Debtor says offense” under the CSA shall be subject to the same that it wants to disentangle itself from the November Lease, penalties as the principal. by rejecting that lease. The Debtor insists that it does not want to be involved in the marijuana business, but rather just wants 597 B.R. at 116 (footnotes omitted) (citing 21 U.S.C. §§ to try to reorganize its custom cabinet business, and continue 843(a)(6), 843(a)(7), and 846). doing that business, at its existing location.

The Way to Grow court observed that “bankruptcy courts have But this Court is bound to reject these assertions by the consistently dismissed cases where debtors engaged in *381 Debtor. It is clear and obvious to this Court, from the findings ongoing CSA violations, or where a debtor's reorganization and conclusions in the State Court Decision, that the Debtor's efforts depend on funds which can be considered proceeds sole shareholder, Weaam Nocha, caused the Debtor to file of CSA violations.” 597 B.R. at 117. 37 The court ultimately this bankruptcy case for the sole purpose of evading the concluded that the debtors' business violated the CSA, both State Court Decision, and avoiding the enforcement of the before and after filing their bankruptcy cases: November Lease, so that Weaam Nocha does not have to sell the Nocha Property to MJCC for only $ 1.2 million. Weaam Debtors certainly know they are selling products to Nocha obviously wants to realize more money for himself, as customers who will, and do, use those products to owner of the Nocha Property, than what the enforcement of manufacture a controlled substance in violation of the the State Court Decision will give him, either by (1) renting CSA. Debtors tailor their business to cater to those needs, or selling the Nocha Property to MJCC, or to some other tout their expertise in doing so, and market themselves marijuana dispensary business, for a higher rent or a higher consistent with their knowledge. There is no evidence this sale price than $ 1.2 million; or (2) using the property to business model has materially changed post-petition. operate a marijuana dispensary himself, as he started to do with the help of his immediate family members before the The Court concludes Debtors' business model and State Court Decision was issued. Weaam Nocha did not cause execution thereof fundamentally violates § 843(a)(7). the Debtor to file this bankruptcy case for the benefit of the These violations continue post-petition, .... Debtor or the Debtor's creditors, but rather solely for his own Id. at 131. Because of this, the court found, “inescapably,” benefit — a benefit that depends on activity that is illegal that there was cause to dismiss the bankruptcy case under under the CSA. 11 U.S.C. § 1112(b). Id. at 132. And because the court saw “no practical alternative to dismissal,” the court dismissed the Borrowing from the words used by the UST in its motion, bankruptcy case. Id. This result, the court held, was necessary Weaam Nocha wants to use this bankruptcy case “to set aside “[t]o prevent this Court from violating its oath to uphold this illegal contract [i.e., the November Lease] so that he can 39 federal law[.]” Id. 38 negotiate a better illegal contract.”

Under Weaam Nocha's control, the Debtor denies these *382 3. This case things. But these denials are precluded by the State Court Decision's findings and conclusions. The Debtor and Weaam a. “Cause” exists under § 1112(b)(1) to dismiss or convert Nocha both are bound by the findings and conclusions in this case. the State Court Decision, under the doctrine of collateral [11] The UST argues that the Debtor has filed and is pursuing estoppel. That means that they are precluded from now this bankruptcy case with unclean hands, because the Debtor's making assertions that are contrary to the findings and purpose is not to disentangle from any marijuana-based conclusions of the State Court Decision. And those findings business, but rather to enable its owner to profit from a and conclusions, described in Part III.C of this Opinion, marijuana business. The UST argues that the Debtor's real inescapably lead to this Court's conclusions of what that the purpose is to use this bankruptcy case to help enable the actual purpose of this bankruptcy case is. Debtor's 100% shareholder, Weaam Nocha, to obtain a better

The assertion that the Debtor, Weaam Nocha, and his family Second, like the court in the Way to Grow case, discussed do not want the Nocha Property to be used or involved in in Part III.F.2 of this Opinion, this Court sees “no practical the marijuana business, especially, is belied *383 by the alternative to dismissal” in this case. See Way to Grow, 597 state court's detailed findings about all the efforts Weaam B.R. at 132. Conversion is not a practical alternative. As Nocha and his family went to in order to operate their own discussed in Part III.E of this Opinion, the Court has ruled that marijuana dispensary business at the Nocha Property, after the Debtor cannot reject (or *384 assume) the November refusing to honor the November Lease with MJCC. And then, Lease under § 365(a), because that lease is not a lease or only nine days after losing the State Court Lawsuit, Weaam executory contract “of the debtor.” That ruling will thwart the Nocha caused the Debtor to file this bankruptcy case (1) to bankruptcy strategy in this case of the Debtor and its owner, try to “reject” the November Lease under Bankruptcy Code § Weaam Nocha. But even with that ruling, the continued 365; and (2) to try to obtain the benefit of the automatic stay pendency of this bankruptcy case, whether in Chapter 11 or to delay MJCC's obtaining ownership of the Nocha Property in Chapter 7, creates an impossible situation for this Court. while Weaam Nocha, the Debtor, and the other state court defendants appeal the State Court Decision. One major problem has to do with the automatic stay. After this Court's ruling on the Debtor's Lease Rejection Motion, The actual purpose of filing and prosecuting this bankruptcy Weaam Nocha will be forced by the state court, under the case is for the Debtor and its 100% shareholder to use this State Court Decision, to sell the Nocha Property to MJCC, and bankruptcy court, and the Bankruptcy Code, to assist them MJCC then will become the owner of that property. As owner, in obtaining a result that is contrary to federal criminal law MJCC will have the exclusive right to possession of the under the Controlled Substances Act, and therefore contrary Nocha Property, under Michigan law. But the Debtor operates to federal public policy. its custom cabinet business from that property, and currently is in sole possession of that property. While this bankruptcy This federal court cannot allow itself to be used in this way. case remains pending, under either Chapter 11 or Chapter 7, The Court finds that the Debtor has unclean hands, and that the automatic stay will prevent MJCC from taking any action there is “cause” to dismiss or convert this case, under 11 to wrest away possession of the Nocha Property from the U.S.C. § 1112(b)(1). Debtor, even after MJCC becomes the owner of the Nocha Property. See, e.g., 11 U.S.C. §§ 362(a)(1), 362(a)(3); 42 Convenient Food Mart No. 144, Inc. v. Convenient Indus. b. There is no practical alternative to dismissal of Am., Inc. (In re Convenient Food Mart No. 144, Inc.), [12] Having found that cause exists to dismiss or convert 968 F.2d 592, 594 (6th Cir. 1992) (holding that a bankruptcy this case under § 1112(b)(1), the Court next must determine debtor in possession of real estate, which has no right to which of these choices is “in the best interests of creditors possession, but which has a “tenancy at sufferance” under 40 and the estate.” The Court finds that dismissal, rather than Kentucky law, has a “possessory interest in real property” that conversion to Chapter 7, is in the best interests of creditors is protected by the automatic stay); Chrysler LLC v. Plastech and the estate, for the following reasons. Engineered Prods., Inc. (In re Plastech Engineered Prods., Inc.), 382 B.R. 90, 106 (Bankr. E.D. Mich. 2008) (holding First, a conversion to Chapter 7 would mean a liquidation that even a bankruptcy debtor's “bare possessory interest” in of the Debtor, and the termination of the Debtor's business certain tooling was protected by the automatic stay, under 11 of manufacturing and installing custom cabinets. The Debtor U.S.C. § 362(a)(3)). does not want to liquidate in Chapter 7. Rather, the Debtor has expressed a desire to continue operating its custom In a normal case, when a bankruptcy debtor is in possession cabinets business, even though that business is relatively of real property that belongs to another person, and the small, 41 and there is no reason to think that the Debtor cannot debtor has no right to possession of that property under continue to operate its custom cabinets business outside of applicable non-bankruptcy law, it might be relatively easy bankruptcy. Nor has any creditor of the Debtor advocated for for the owner of the property to file a motion seeking relief the conversion and liquidation of the Debtor in Chapter 7. from the automatic stay, and obtain such relief. Such relief There is no reason to think that a liquidation of the Debtor in from the stay would be to permit that owner to prosecute Chapter 7 is in the best interests of the creditors or the estate. an eviction action in an appropriate non-bankruptcy court, to

WESTl.AW © 2020 Thomson Reuters. No claim to original43 U.S. Government Works. 11 In re Basrah Custom Design, Inc., 600 B.R. 368 (2019) 67 Bankr.Ct.Dec. 68 obtain possession of the property. (MJCC has filed a motion for relief from stay in this case.) [15] So the Court will dismiss this bankruptcy case. And in order to prevent any attempted evasion by anyone of the Court's decisions today, the Court will bar the filing of any [13] [14] But this is not a normal case. In this case, the Court likely would have to refuse to grant any stay relief, or new bankruptcy case, by or against the Debtor, for a period any other relief, requested by MJCC, because MJCC also has of two years. This should give ample time for the Debtor's unclean hands. The granting of stay relief to MJCC obviously pending state court appeal to conclude. Imposing this bar to would assist MJCC in its efforts to open and operate a medical a new bankruptcy filing is within the Court's discretion and marijuana dispensary, in violation of federal law. Just as “a authority, under 11 U.S.C. § 105(a), and also under 11 U.S.C. federal court cannot be asked to enforce the protections of § 349(a). See In re Packard Square LLC, 575 B.R. 768, 783 the Bankruptcy Code in aid of a Debtor whose activities (Bankr. E.D. Mich. 2017); In re Packard Square LLC, 577 constitute a continuing federal crime,” Rent-Rite, 484 B.R. at B.R. 533, 537-38 (Bankr. E.D. Mich. 2017), aff'd., 586 B.R. 805 (footnote omitted), neither can a federal court be asked to 853 (E.D. Mich. 2018); In re Skymark Properties II, LLC, 597 enforce any creditor protections under the Bankruptcy Code, B.R. 391, 403 (Bankr. E.D. Mich. 2019). such as the relief-from-stay provisions of 11 U.S.C. § 362(d), in aid of a creditor's commission of a federal crime. G. Discussion of the Stay Relief Motion The Court's decision to dismiss this bankruptcy case will This Court is unwilling and unable to assist a party like MJCC make MJCC's Stay Relief Motion moot. The automatic stay to violate federal law. So this Court likely would not *385 will terminate upon the dismissal of this case. See 11 U.S.C. grant stay relief to MJCC, even after MJCC became the owner §§ 362(c)(1) and 362(c)(2)(B). So the Court will deny the Stay of the Nocha Property. Relief Motion, as moot.

Thus, the continuation of this bankruptcy case, under either Chapter 11 or Chapter 7, would leave the Court and the parties IV. Conclusion stuck in the middle of a continuing tug-of-war between two For the reasons stated in this Opinion, the Court will enter parties with unclean hands (the Debtor and MJCC), with the orders (1) denying the Debtor's Lease Rejection Motion; (2) Court unable and unwilling to grant relief to either party. granting the UST's Dismissal Motion, and dismissing this To use a metaphor employed by the UST, the only practical case, with a two-year bar to refiling; and (3) denying the Stay solution is to “cut the Gordian knot,” 43 by dismissing this Relief Motion, as moot. case. Such dismissal is available here, at the request of a party that does not have unclean hands — the UST. And dismissal All Citations will leave the Debtor, Weaam Nocha, and MJCC to continue their battles in the state court, where those battles belong. 600 B.R. 368, 67 Bankr.Ct.Dec. 68

Footnotes 1 See Order Allowing Debtor's Supplemental Brief, [etc.], filed March 18, 2019 (Docket # 90). 2 Docket ## 88-1, 96, 99. 3 This is the Debtor's second Chapter 11 bankruptcy case. The Debtor filed its first such case in this Court on April 19, 2013 (Case No. 13-47956). That case was dismissed on October 25, 2013, with a 180-day bar to refiling, after the Debtor failed to timely file a plan and disclosure statement. See Order Dismissing Case, filed October 25, 2013 (Docket # 79 in Case No. 13-47956). 4 Debtor's Obj. to the U.S. Trustee's Mot. to Dismiss (Docket # 40) at 2, ¶ 3. 5 See Debtor's Obj. to the U.S. Trustee's Mot. to Dismiss (Docket # 40) at 2, ¶ 4; Petition (Docket # 1) at 4; Statement Regarding Authority to Sign and File Petition, filed December 16, 2018 (Docket # 3); Statement of Debtor Regarding Corporate Ownership, and List of Equity Security Holders, filed December 25, 2018 (Docket # 10). The Debtor admitted that Weaam Nocha is the owner of the Nocha Property, in answering the United States Trustee's motion to dismiss. (Debtor's Obj. to the U.S. Trustee's Mot. to Dismiss (Docket # 40) at 2, ¶ 4.) But in another pleading, involving a different motion, the Debtor stated that the Nocha Property is owned by “Weaam Nocha ... and his wife, Rafah Dawood[.]” (Debtor's Mot. to Enforce the Automatic Stay, [etc.] (Docket # 104) at 1-2, ¶ 2; Debtor's Br. (Docket # 104-1) at 2-3). But in that

same pleading, the Debtor stated that this property is owned by “Nocha and/or Dawood.” (See Debtor's Mot. to Enforce the Automatic Stay, [etc.] (Docket # 104) at 2, ¶ 5; Debtor's Br. (Docket # 104-1) at 3, 18). In yet another pleading, the Debtor stated that the Nocha Property is owned “by Weaam Nocha and/or his wife, Rafah Dawood.” (Debtor's Obj. to MJCC's Mot. to Lift Stay (Docket # 73) at 3). This inconsistency in the Debtor's pleadings is not material to the Court's decision on the pending motions. 6 See, e.g., Debtor's Obj. to the U.S. Trustee's Mot. to Dismiss (Docket # 40) at 4, ¶ 21. 7 Docket # 41-1. 8 See November Lease at 1, ¶ 1 and Ex. A thereto. 9 See id. at 12, ¶ 39 and Ex. B thereto. 10 See id. at 12, ¶ 40 and Ex. C thereto; see also discussion of the relief granted by a decision of the state court in the State Court Lawsuit discussed below. 11 November Lease at 2, ¶ 4 (emphasis in original). 12 Id. at 1, ¶ 1. 13 The Debtor continues to make this assertion in this bankruptcy case. (See, e.g., Debtor's Obj. to the U.S. Trustee's Mot. to Dismiss (Docket # 40) at 2, ¶ 8). 14 Docket # 41-4. 15 See, e.g., State Court Decision at ¶¶ 69, 96, 97. 16 Id. at ¶¶ 155, 156, 168. 17 See id. at ¶¶ 63, 124, 155, 156, 158, 165-170, 176. This latter finding of the state court, that the Debtor signed the November Lease as agent of and on behalf of the sole owner, Weaam Nocha, makes sense because the state court found that Weaam Nocha, not the Debtor, was the “sole owner” of the Nocha Property. Moreover, Weaam Nocha's status as the real party-in-interest lessor under the November Lease is clearly implied in the state court's findings that (1) “as the sole owner of the [Nocha] Property, Mr. Nocha had full authority to grant possessory rights to the [Nocha] Property;” id. at ¶ 158; and (2) the Debtor had the authority, as agent, to bind Weaam Nocha to “lease the [Nocha] Property;” see id. at ¶¶ 165-167, 170. 18 See id. at ¶¶ 94, 106, 123. 19 See id. at ¶¶ 53, 58, 109, 152. The November Lease was signed on November 16, 2016, and states in the first paragraph that its “Effective Date” was November 16, 2016. (November Lease at 1). As the State Court Decision found, MJCC's right to exclusive possession of the Nocha Property began 10 days after the Effective Date of the November Lease, i.e., on November 26, 2016. (See State Court Decision at ¶ 109; November Lease at 3, ¶ 8). The “term” of the November Lease, and MJCC's obligation to pay rent, was defined to occur “beginning on the date [MJCC] receives approval from the City of Detroit for its Designated Use [i.e., as a ‘licensed medical marijuana dispensary’].” (See November Lease at 1, ¶ 1; 2, ¶ 4). As the State Court Decision found, this identical language was contained in an earlier lease signed by the parties on February 15, 2016 (referred to in the State Court Decision as the “February Lease”), which February Lease was later replaced by the November Lease. And the State Court Decision also found that this required approval from the City of Detroit was obtained by MJCC on November 10, 2016. (See State Court Decision at ¶¶ 15, 53, 58, 152). Although the State Court Decision found in one paragraph of the decision that the City of Detroit's approval was a “conditional” approval, (State Court Decision at ¶ 58 (“On November 10, 2016, the City of Detroit granted MJCC conditional approval for a license to operate a [medical marijuana] Dispensary.”)), the State Court Decision made clear in at least two other paragraphs that the November 10, 2016 approval by the City of Detroit was sufficient to trigger the beginning of the Lease “term” under the identical language in the February Lease and the November Lease. (See State Court Decision at ¶ 53 (finding that MJCC's obligation to pay rent under the terms of the February Lease began when it “obtained approval from the City of Detroit to operate a medical marijuana dispensary at the Property ... [which it obtained on] November 10, 2016”), ¶ 152 (finding that “the date [MJCC] receive[d] approval from the City of Detroit for its Designated Use [a licensed medical marijuana dispensary]” was November 10, 2016 (“MJCC obtained approval from the City of Detroit on November 10, 2016, but Defendants refused to give them possession.”) 20 State Court Decision at ¶¶ 2-3. 21 Id. at ¶ 2. 22 Id. at ¶ 5. 23 See, e.g., id. at ¶¶ 54-56, 55 n.5, 59, 70-79, 139-147. 24 November Lease at 1, ¶ 2(a). 25 See, e.g., State Court Decision at ¶¶ 70-74, 55 & n.5.

WESTl.AW © 2020 Thomson Reuters. No claim to original45 U.S. Government Works. 13 In re Basrah Custom Design, Inc., 600 B.R. 368 (2019) 67 Bankr.Ct.Dec. 68 26 See, e.g., id. at ¶¶ 72, 76. 27 See, e.g., id. at ¶ 76. 28 See, e.g., id. at ¶¶ 76-79, 139-147. 29 Id. at 27. 30 Id. 31 Id. 32 Id. 33 Id. 34 The Full Faith and Credit Statute states, in relevant part: The ... judicial proceedings of any court of any ... State ... shall have the same full faith and credit in every court within the United States ... as they have by law or usage in the courts of such State ... from which they are taken. 28 U.S.C. § 1738. 35 Effective December 4, 2008, Michigan enacted legislation to allow the medical use of marijuana under state law, in the act known as the “Michigan Medical Marihuana Act,” Mich. Comp. Laws Ann. §§ 333.26421 through 333.26430. This Act was passed by voter initiative, by the approval of Michigan voters in the November 2008 election. This Act was later amended, with amendments that became effective April 1, 2013, December 20, 2016, and April 10, 2017. Also added to Michigan law, in 2016, was the “Marihuana Tracking Act” (effective December 20, 2016 and later amended effective March 21, 2019), Mich. Comp. Laws Ann. §§ 333.27901 through 333.27904, and the “Medical Marihuana Facilities Licensing Act” (effective December 20, 2016 and later amended effective January 26, 2018, January 1, 2019, March 28, 2019, and April 16, 2019), Mich. Comp. Laws Ann. §§ 333.27101 through 333.27801. Recently, Michigan enacted legislation to make marijuana legal under state and local law for recreational use, for adults 21 years of age or older. This legislation was passed by voter initiative, by the approval of Michigan voters in the November 2018 election. It became effective on December 6, 2018, and is known as the “Michigan Regulation and Taxation of Marihuana Act,” Mich. Comp. Laws Ann. §§ 333.27951 through 333.27967. Among other things, this Act provides for the licensing, regulation, and taxation of “marihuana establishments.” The Act gives the Michigan Department of Licensing and Regulatory Affairs up to one year after the effective date of the Act (i.e., until December 6, 2019) to promulgate rules for implementation of the Act. See Mich. Comp. Laws Ann. §§ 333.27953(b), 333.27953(h), 333.27957, 333.27958, 333.27966. 36 Id. 37 The Way to Grow court noted that “there remains an ever-shifting landscape of federal enforcement of marijuana criminalization where the same activity is fully legal under state law.” 597 B.R. at 117 (footnote omitted). As an example of this “ever-shifting landscape,” the court cited the Trump administration's 2018 revocation of the enforcement policy announced in 2013 by the Obama administration. Id. at 117 n.24 (citing “James M. Cole, Deputy Attorney General, MEMORANDUM FOR ALL UNITED STATES ATTORNEYS: GUIDANCE REGARDING MARIJUANA ENFORCEMENT (Aug. 29, 2013) (commonly known as the “Cole Memo”); but see Jeffrey B. Sessions, Attorney General, MEMORANDUM FOR ALL UNITED STATES ATTORNEYS: MARIJUANA ENFORCEMENT (January 4, 2018) (revoking Cole Memo)”). 38 In addition to the cases discussed in this Opinion, this Court has reviewed and considered all of the cases cited by the parties. And the Court is aware of the May 2, 2019 decision by the Ninth Circuit Court of Appeals, in Garvin v. Cook Invs. NW, 922 F.3d 1031 (9th Cir. 2019). In Garvin, the Court of Appeals for the Ninth Circuit affirmed a bankruptcy court's confirmation of a Chapter 11 plan, over the objection of the UST, even though one of the debtors had a tenant who was involved in a marijuana growing operation. But Garvin involved only a narrow issue of law that is not before this Court. The issue was whether the debtors' plan met the confirmation requirement in 11 U.S.C. § 1129(a)(3), that the plan be “proposed ... not by any means forbidden by law.” The court of appeals held that this provision in § 1129(a)(3) applies only to the “means of a reorganization plan's proposal, not its substantive provisions.” Garvin, 922 F.3d at 1033, 1035 (italics in original). Thus, the court held that the quoted prong of § 1129(a)(3) was not violated by the substance of the confirmed plan, including the debtor's continuing to lease its building to a marijuana grower in violation of federal law. In Garvin, earlier in the bankruptcy case, before the plan was confirmed by the bankruptcy court, the UST had filed a motion to dismiss, based on the one debtor's leasing to a marijuana grower. The dismissal motion argued that “cause” existed to dismiss that debtor's case, because of “gross mismanagement of the estate” by the debtor, within the meaning of 11 U.S.C. § 1112(b)(4)(B). 922 F.3d at 1033. The bankruptcy court denied that dismissal motion, “but with leave to renew [it] at the plan confirmation hearing.” Garvin, 922 F.3d at 1034. But the UST failed to renew its dismissal motion at the confirmation hearing, and instead argued only its objection to confirmation based on § 1129(a)(3). In affirming

confirmation of the debtors' plan, the court of appeals ruled that the UST waived its dismissal motion argument under § 1112(b). For this reason, the court of appeals refused to address that issue. The decision of the Ninth Circuit Court of Appeals in Garvin is not binding on this Court, and, with respect, this Court does not necessarily agree with the Garvin court's holding about § 1129(a)(3). And, respectfully, one might reasonably question whether the Garvin court should have refused to decide the § 1112(b) dismissal issue. That refusal, on waiver grounds, arguably is questionable, because it allowed the affirmance, by a federal court, of the confirmation of a Chapter 11 plan under which a debtor would continue to violate federal criminal law under the CSA. 39 UST Mot. (Docket # 30) at 1. 40 No one has argued that it is in the best interests of the creditors and the estate to appoint a Chapter 11 trustee under 11 U.S.C. § 1104(a) or to appoint an examiner. See 11 U.S.C. § 1112(b)(1). The Court finds that neither of these choices is in the best interests of the creditors and the estate. This is so because neither of these options would serve any useful purpose in this case, and also for the same reasons why dismissal, rather than conversion, is in the best interests of the creditors and the estate, as discussed below. So the choice under § 1112(b)(1) is between dismissal and conversion. 41 The Debtor's monthly operating reports filed in this case show that the Debtor's income from its custom cabinets business is rather small. These reports show that the Debtor's total income was zero for the partial month of December 16-31, 2018 (Docket # 31 at 2); $ 16,000.00 in January 2019 (Docket # 62 at 2); $ 48,500.00 in February 2019 (Docket # 91 at 2); $ 10,000.00 in March 2019 (Docket # 103 at 2), and $ 13,000.00 in April 2019 (Docket # 112 at 2). 42 Under § 362(a)(1), the filing of the bankruptcy petition in this case operates as a stay, among other things, of the “commencement or continuation ... of a judicial ... action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title.” Under § 362(a)(3), the automatic stay prevents, among other things, “any act to obtain possession” not only of “property of the estate,” but also of “property from the estate.” (emphasis added). 43 See UST Suppl. Br. (Docket # 96) at 2.

Debtor limited liability company (LLC) was both a person and an entity, and therefore was 602 B.R. 717 permitted under the Bankruptcy Code to file its United States Bankruptcy Court, D. Nevada. voluntary Chapter 11 petition. 11 U.S.C.A. §§ IN RE: CWNEVADA LLC, Debtor. 101(9)(A)(iv), 101(15), 101(41), 301(a).

Case No.: 19-12300-MKN | [4] Corporations and Business Organizations Date: May 15, 2019, Time: 10:30 a.m. ... Disregarding Entity; Piercing Protective | Veil Filed June 03, 2019 Nevada law limited liability companies (LLC) Synopsis are subject to the alter ego doctrine that is applied Background: Creditor filed motion to dismiss debtor to pierce the veil of Nevada corporations. limited liability company's (LLC) Chapter 11 petition or, alternatively, for relief from automatic stay to allow receivership and contempt proceedings to continue. [5] Bankruptcy ... Interest of debtor in general Bankruptcy [Holding:] The Bankruptcy Court, Mike K. Nakagawa, J., ... After-acquired property; proceeds; wages held that dismissal based on abstention was warranted. and earnings Prior to the commencement of a case, a debtor simply holds interests that may ultimately Motion to dismiss granted. become property of the bankruptcy estate, and after a bankruptcy estate comes into existence, it may thereafter acquire interests in additional property that also become property of the West Headnotes (27) bankruptcy estate. 11 U.S.C.A. § 541(a).

[1] Bankruptcy ... Evidence; witnesses [6] Bankruptcy Bankruptcy court can take judicial notice ... Rights of Action; Contract Rights of documents filed in underlying state court Generally proceedings, as well as in this bankruptcy court. Amongst the legal or equitable interests of the Fed. R. Evid. 201. debtor in property as of the commencement of a bankruptcy case, which may ultimately become property of the bankruptcy estate, are any claims [2] Bankruptcy or causes of action that the debtor may assert ... Construction and Operation against any parties. 11 U.S.C.A. § 541(a). A limited liability company (LLC) is treated as a “corporation” under the Bankruptcy Code, and therefore is a “person” as defined by the Code. [7] Bankruptcy 11 U.S.C.A. §§ 101(9)(A)(iv), 101(41). ... In general; nature and purpose Fundamental purpose for allowing businesses and individuals to reorganize in Chapter 11 is [3] Bankruptcy to preserve jobs, pay creditors as much as they ... Corporations would receive in a Chapter 7 liquidation, and to preserve the investment equity of shareholders.

[8] Bankruptcy [13] Bankruptcy ... Debtor in possession, in general ... Necessity or grounds Because a voluntary Chapter 11 debtor remains Bankruptcy court may appoint a Chapter in possession of property of its bankruptcy estate, 11 trustee sua sponte if it determines the and because it has the rights, powers and duties appointment of a trustee to be in the interests of a bankruptcy trustee, a Chapter 11 debtor in of creditors, equity security holders, and other possession has a fiduciary responsibility to all interests of the estate. 11 U.S.C.A. § 1104(a)(2). creditors of the bankruptcy estate. 11 U.S.C.A. § 1107(a). [14] Bankruptcy ... Dismissal or suspension [9] Bankruptcy If there are unusual circumstances establishing ... Debtor in possession, in general that conversion or dismissal of a Chapter 11 A Chapter 11 debtor in possession is required to case is not in the best interests of creditors and manage and operate the property in its possession the estate, such relief is prohibited if the debtor according to the requirements of state law. 28 establishes a reasonable likelihood that a plan U.S.C.A. § 959(b). will be confirmed in a reasonable amount of time, and, inter alia, that any act constituting cause, including gross mismanagement, will be cured [10] Bankruptcy within a reasonable amount of time fixed by the ... Confirmation; Objections court. 11 U.S.C.A. § 1112(b)(2). Creditors who oppose a Chapter 11 debtor's efforts can object at any time during the case and to any plan of reorganization that might be [15] Bankruptcy proposed. ... Feasibility in general Chapter 11 plan proponent must demonstrate that any necessary financing or funding has been [11] Bankruptcy obtained, or is likely to be obtained. 11 U.S.C.A. ... Acceptance § 1129(a)(11). As a general rule, a Chapter 11 debtor can propose a plan of reorganization to which all of its creditors agree, and such a consensual [16] Bankruptcy plan is confirmed without the necessity of a ... Effect as discharge “cramdown” of plan treatment; if all creditors A Chapter 11 plan may provide for the do not agree, then the plan may be confirmed liquidation of the assets of the estate, but through cramdown only if the treatment of the confirmation of a plan does not discharge the objecting creditors' claims is fair and equitable. debtor if the plan provides for liquidation of all or 11 U.S.C.A. § 1129(b). substantially all property of the estate, the debtor does not engage in business after consummation of the plan, and the debtor would be denied a [12] Bankruptcy discharge if the case was a case under Chapter 7. ... Discharge 11 U.S.C.A. §§ 1129(a)(11), 1141(d)(3). Party that files for bankruptcy protection does not have a constitutional right to receive a discharge of debts. [17] Bankruptcy

... Involuntary Cases ... Representation of debtor, estate, or creditors Bankruptcy Bankruptcy ... Individual Debt Adjustment ... Discharge Relief under Chapter 13 is available only For individual Chapter 7 debtors, the property to individuals who are eligible under the of the bankruptcy estate is administered by a Bankruptcy Code and who are willing to devote bankruptcy trustee, and a bankruptcy discharge their future disposable income to the payment is obtained if no timely objections are filed by of creditors, and because individuals cannot be parties in interest. 11 U.S.C.A. §§ 704(a), 727(b). subjected to forced labor, they cannot be placed into Chapter 13 involuntarily. 11 U.S.C.A. §§ 109(e), 303(a). [22] Bankruptcy ... Representation of debtor, estate, or creditors Bankruptcy [18] Bankruptcy ... Discharge Reorganization cases ... For non-individual Chapter 7 debtors, the Bankruptcy property of the bankruptcy estate is administered ... Voluntary Cases by a bankruptcy trustee, but a discharge is not Bankruptcy available. 11 U.S.C.A. § 727(a)(1). ... Involuntary Cases Relief under Chapter 11 is available to both individuals and non-individuals, and may be [23] Equity initiated both voluntarily and involuntarily. ... He Who Comes into Equity Must Come with Clean Hands Proper application of the unclean hands doctrine [19] Bankruptcy is designed to preserve public confidence in, as ... Effect as discharge well as the integrity of the court, by preventing For individual Chapter 11 debtors, a bankruptcy it from becoming a participant in inequitable discharge is obtained only upon completion of conduct. payments of a confirmed plan, whereas for non- individual Chapter 11 debtors, a bankruptcy discharge is obtained upon confirmation of a plan [24] Bankruptcy unless the plan does not provide for continued ... Proceedings operations. 11 U.S.C.A. § 1141(d)(5). The burden of proof on motion to dismiss Chapter 11 case rests with the party seeking relief. 11 U.S.C.A. §§ 305(a)(1), 1112(b). [20] Bankruptcy ... Who May Be a Debtor Bankruptcy [25] Bankruptcy ... Voluntary Cases ... Dismissal or suspension Bankruptcy Dismissal of debtor limited liability company's ... Involuntary Cases (LLC) Chapter 11 case based on abstention was Relief under Chapter 7 is available to both warranted, where debtor was directly engaged individuals and non-individuals, and may be in a marijuana-related business which, although initiated both voluntarily and involuntarily. apparently authorized under Nevada law, was not authorized under the Controlled Substances Act, debtor had not identified an approved depository institution to open its required [21] Bankruptcy

debtor in possession accounts, debtor did not have independent counsel to advise debtor in Honorable Mike K. Nakagawa, United States Bankruptcy bankruptcy proceedings, there appeared to be Judge no consensus amongst debtor's management in On May 15, 2019, the court heard Creditor 4Front favor of Chapter 11 relief, and upon dismissal, Advisors LLC's Motion to Dismiss Bankruptcy Petition or, parties could return to state court where Alternatively, Motion for Relief from the Automatic Stay to receivership application, among other matters, Allow Receivership and Contempt Proceedings to Continue may be fully addressed. 11 U.S.C.A. § 305(a); (“Dismissal Motion”). The appearances of counsel were Comprehensive Drug Abuse Prevention and noted on the record. After arguments were presented, the Control Act of 1970 §§ 202, 401, 21 U.S.C.A. §§ matter was taken under submission. 812(c), 841(a)(1).

BACKGROUND [26] Equity On April 16, 2019, a voluntary petition for Chapter 11 ... Application and operation in general reorganization (“Petition”) was filed by CWNevada LLC When all sides to a pending dispute may be (“Debtor”). (ECF No. 1). Attached to the Petition is a accused of wrongdoing, a court in equity may “Resolution Authorizing Bankruptcy” that identifies BCP simply deny relief to all sides and dismiss the Holding 7, LLC (“BCP Holding”) as managing member of case. the Debtor, and that authorizes BCP Holding to seek Chapter 11 relief for the Debtor. The Petition filed on behalf of the Debtor is signed by Brian C. Padgett (“Padgett”) as manager of BCP Holding, and by Michael D. Mazur, as the Debtor's [27] Bankruptcy general counsel. ... Equitable powers and principles Equity The voluntary Petition is a “skeleton” petition inasmuch as He Who Comes into Equity Must Come ... it is not accompanied by a schedule of assets and liabilities with Clean Hands (“Schedules”), a statement of financial affairs (SOFA”), or Under the “unclean hands” doctrine, bankruptcy any of the initial information required to obtain bankruptcy courts, like all courts, are required to consider the relief. Moreover, the Petition is not accompanied by a circumstances of each case rather than routinely “creditor matrix” setting forth the names and addresses dismissing entire swaths of petitions and requests of the Debtor's creditors. The Petition is accompanied by filed by parties seeking legal relief. an unsigned List of Creditors Who Have the 20 Largest Unsecured Claims and Are Not Insiders (“20 List”). (ECF No. 4). Only ten creditors are identified on the 20 List. 2

*721 On the same day the skeleton Petition and 20 List were Attorneys and Law Firms filed, a Notice of Chapter 11 Bankruptcy Case (“Bankruptcy *720 Michael D. Mazur, Mazur & Brooks, A P.L.C., Las Notice”) was issued by the clerk of the court informing Vegas, NV, for Debtor. creditors that a meeting of creditors would be held on May 16, 2019. (ECF No. 3). Because a creditor matrix was never filed by the Debtor, it appears that the Bankruptcy Notice was ORDER REGARDING CREDITOR 4FRONT served only on the creditors appearing on the 20 List. (ECF ADVISORS LLC'S MOTION TO DISMISS No. 12). BANKRUPTCY PETITION OR, ALTERNATIVELY, MOTION FOR RELIEF FROM THE AUTOMATIC On April 17, 2019, an Ex Parte Application for Order STAY TO ALLOW RECEIVERSHIP AND CONTEMPT Authorizing Rule 2004 Examination [“2004 Exam”] of Brian 1 PROCEEDINGS TO CONTINUE C. Padgett (“2004 Exam Request”) was filed by The CIMA Group, LLC (“CIMA Group”). (ECF No. 8). On April 19, 2019, the clerk of the court signed an order granting the

WESTLAW © 2020 Thomson Reuters. No claim to original51 U.S. Government Works. 4 In re CWNevada LLC, 602 B.R. 717 (2019) request pursuant to Local Rule 5075(a)(2)(L) because the On May 7, 2019, Debtor filed an opposition to the Dismissal 2004 Exam Request sought to conduct the examination more Motion (“Opposition”) to which is attached four documents than fourteen days later and did not include a request for marked as exhibits “A” through “D.” (ECF No. 51). The production of documents (“CIMA 2004 Order”). (ECF No. Opposition is supported by the Declaration of Brian C. 10). On the same date, CIMA Group filed a 2004 Exam Padgett (“Padgett Declaration”). (ECF No. 52). On the same notice which included a Subpoena for Rule 2004 Examination date, Debtor filed oppositions to the Highland Joinder, as well (“2004 Subpoena”) that required the witness to produce as the joinders filed by Van Oyen and MC Brands. (ECF Nos. various documents. (ECF No. 11). 3 54 and 55).

On April 23, 2019, 4Front Advisors LLC (“4Front”) filed the On May 8, 2019, Debtor filed an opposition to the CIMA instant Dismissal Motion seeking dismissal of the Chapter Joinder (“Additional Opposition”). (ECF No. 56). 11 case based on Section 305(a)(1), 4 or, Section 1112(b). 5 *723 [1] On May 8 and May 9, 2019, Debtor filed a request In the alternative, 4Front seeks relief from the automatic for judicial notice (“RJN”) of numerous documents marked stay under *722 Section 362(d) to allow it to proceed with as exhibits “A” through “O.” (ECF Nos. 57 and 60). Exhibits collection activities under non-bankruptcy law. Numerous “A” through “J” apparently consist of copies of the “Register documents are attached to the Dismissal Motion and marked of Actions” or list of docket entries for proceedings of public as exhibits “1” through “24.” (ECF No. 18). In support of the 9 Dismissal Motion, 4Front filed the declarations of Kris Krane record pending in State Court, and in this bankruptcy court. Exhibits “K” through “O” consist of documents that were not, (“Krane Declaration”) 6 and Cory L. Braddock (“Braddock until now, of public record. 10 Declaration”). 7 (ECF Nos. 20 and 21). 8

On May 13, 2019, 4Front filed a reply in support of the On April 25, 2019, a combined joinder in the Dismissal Dismissal Motion (“4Front Reply”), to which is attached five Motion was filed on behalf of Highland Partners NV documents marked as Exhibits “A” through “E.” (ECF No. LLC, MI-CW Holdings NV Fund 2 LLC, and MI-CW 68). On the same date, Highland Partners filed a reply in Holdings LLC (collectively “Highland Partners”), as well support of the Highland Joinder (“Highland Reply”). (ECF as by Green Pastures Fund, LLC Series 1 (CWNevada, No. 69). On the same date, CIMA Group filed a reply in LLC), Jakal Investments, LLC, Green Pastures Group, LLC, support of the CIMA Joinder (“CIMA Reply”), to which is Jonathan S. Fenn Revocable Trust, and Growth Properties, attached a single document marked as exhibit “1.” (ECF No. LLC (collectively “Green Pastures”). (ECF No. 26). In 11 support of that combined joinder (“Highland Joinder”), 71). Highland Partners and Green Pastures filed the declarations of David J. Malley, Esq. (“Malley Declaration”), Christopher DISCUSSION R. Miltenberger, Esq. (“Miltenberger Declaration”), and Debtor is in the business of cultivating, producing, and Brandon Kanitz (“Kanitz Declaration”). (ECF Nos. 27, 28, distributing medical and recreational marijuana (“Marijuana and 29). Business”). See Padgett Declaration at ¶¶ 4-5. It also is in the business of producing and distributing products that On April 26, 2019, a joinder in the Dismissal Motion was filed contain cannabidiol (“CBD”) which apparently are used, on behalf of Timothy Smits Van Oyen (“Van Oyen”). (ECF inter alia, to treat epilepsy (“CBD Business”). Id. at ¶ No. 37). 6. Debtor apparently operates or once operated marijuana cultivation, production, or dispensary facilities at up to five On May 2, 2019, a joinder in the Dismissal Motion was filed Nevada locations: three in Las Vegas, one in North Las on behalf of MC Brands, LLC (“MC Brands”). (ECF No. 47). Vegas, and one in Pahrump. See CWNevada Investor Update, February 2016, attached as Exhibit “1” to Dismissal Motion, On May 7, 2019, a limited joinder in the Dismissal Motion at pages 13-17; see also Benchmark Insurance Company - was filed on behalf of The CIMA Group (“CIMA Joinder”), Workers Compensation and Employers Liability Insurance, to which is attached copies of three documents marked as 04/26/2019 to 04/26/2020, attached as Exhibit “N” to RJN exhibits “1” through “3.” (ECF No. 50). and as Exhibit “A” to Opposition. Debtor's health plan coverage apparently encompasses 54 subscribers. See Health

Plan of Nevada Bill Statement for May 2019, attached as 4Front. Before 4Front's Receivership Application could be Exhibit “M” to RJN and as Exhibit “B” to Opposition. heard by the State Court, however, Debtor filed its voluntary Debtor apparently made a payment of $ 81,850 to the Nevada Chapter 11 Petition. Department of Taxation (“NDOT”) on April 23, 2019. See Marijuana Tax Return dated *724 March 29, 2019, attached [2] [3] [4] No one disputes that the Debtor is a limited as Exhibit “K” to RJN and as Exhibit “D” to Opposition. 12 liability company formed under Nevada law. A limited liability company is treated as a “corporation” under Section Debtor's business operations apparently are authorized 101(9)(A)(iv), and therefore is a “person” as defined under Section 101(41). SeeAE Rest. Assocs. LLC v. Giampietro under Nevada law. 13 Debtor's Marijuana Business is (In re Giampietro), 317 B.R. 841, 844 n.3 (Bankr. D. Nev. prohibited under federal law by provisions of the Controlled 16 Substances Act, 21 U.S.C. § 841(a)(1) and 21 U.S.C. § 2004). Under Section 109(a), a person that resides, has 812(c), Schedule I(c)(10) [Marihuana] and Schedule I(c) a place of business, or has property in the United States, may be a debtor in bankruptcy. Because the Debtor in this (17) [Tetrahydrocannibinols]. 14 Debtor's CBD Business, case resides and has a place of business in Nevada, it is however, may no longer be prohibited under federal law as a eligible under Section 109(a) to file a bankruptcy petition. result of the Agriculture Improvement Act of 2018, Pub. L. Additionally, under Section 101(15), a person is included 115-334, 132 Stat. 4490. in the term “entity.” Under Section 301(a), a voluntary bankruptcy petition commencing a case may be filed by an The Agriculture Improvement Act became effective on entity. Because the Debtor is both a person and an entity, December 20, 2018, when the bill was signed into law. The it clearly was permitted under Section 301(a) to file its Act amended the term “Marihuana” under the Controlled voluntary Chapter 11 Petition. Substances Act to exclude hemp “as defined under section 1639o of Title 7.” See21 U.S.C. § 802(16)(B). The Act also [5] [6] As a result of filing a bankruptcy petition, the amended Schedule I(c)(17) of the Controlled Substances Act automatic stay arose under Section 362(a), applicable to to exclude from the definition of “Tetrahydrocannabinols” all entities, barring various acts and actions from being the “tetrahydrocannabinols in hemp (as defined under section taken or continued against the Debtor or property of the 1639o of Title 7).” See21 U.S.C. § 812(c), Schedule I(c) bankruptcy estate. See11 U.S.C. § 362(a)(1 through 8). (17). Under 7 U.S.C. § 1639o(1), the term hemp “means the Property of the bankruptcy estate includes, inter alia, all legal plant Cannabis sativa L. and any part of that plant, including and equitable interests of the Debtor in property as of the the seeds thereof and all derivatives, extracts, cannabinoids, 17 isomers, acids, and salts of isomers, whether growing or not, commencement of the case. See11 U.S.C. § 541(a)(1). So with a delta-9 tetrahydrocannibinol concentration of not more when the Chapter 11 petition was filed in the instant case, than 0.3 percent on a dry weight basis.” (Emphasis added.) 4Front, Highland Partners, Green Pastures, CIMA Group, Because products derived from hemp plants containing MC Brands, Van Oyen, and all other creditors were barred restricted concentrations of tetrahydrocannabinols (“THC”), from continuing with their State Court litigation against the which is the active ingredient in marijuana, are no longer in Debtor, or engaging in any other acts against the Debtor or violation of the Controlled Substances Act, the Food and Drug any property of the Debtor. See generallyHillis Motors, Inc. Administration (“FDA”) apparently will assume a regulatory v. Hawaii Auto. Dealers' Ass'n, 997 F.2d 581, 585 (9th Cir. 18 role for such products. 15 1993).

Under these circumstances, the portion of the Debtor's *726 [7] [8] [9] A fundamental purpose for allowing operations devoted to the Marijuana Business appears to be businesses and individuals to reorganize in Chapter 11 is to in violation *725 of federal law, while the portion devoted preserve jobs, pay creditors as much as they would receive in to the CBD Business might be excluded from the Controlled a Chapter 7 liquidation, and to preserve the investment equity Substances Act if the CBD products sold by the Debtor are of shareholders. SeeU.S. v. Whiting Pools, Inc. (In re Whiting derived from the type of hemp permitted under federal law. Pools, Inc.), 462 U.S. 198, 203, 103 S.Ct. 2309, 2312-13, 76 Notwithstanding its operations of these two businesses in L.Ed.2d 515 (1983); In re Mohave Agrarian Group, LLC, 588 accordance with Nevada law, Debtor apparently defaulted on B.R. 903, 915 (Bankr. D. Nev. 2018). Because a voluntary payment of many of its obligations, including the claim of Chapter 11 debtor remains in possession of property of its bankruptcy estate, and because it has the rights, powers and

WEST AW © 2020 Thomson Reuters. No claim to original53 U.S. Government Works. 6 In re CWNevada LLC, 602 B.R. 717 (2019) duties of a bankruptcy trustee, see11 U.S.C. § 1107(a), a Partners, Green Pastures, and Van Oyen join in the arguments Chapter 11 debtor in possession has a fiduciary responsibility based on Section 305(a) and Section 1112(b). See Highlands to all creditors of the bankruptcy estate. SeeWoodson v. Joinder at 6:15-27 and 7:2 to 10:20; Van Oyen Joinder Fireman's Fund Ins. Co. (In re Woodson), 839 F.2d 610, 614 at 2:1-2. The “joinder” filed by CIMA Group, however, (9th Cir. 1988) (“[Debtor's] failure to notify his creditors of seeks the appointment of a Chapter 11 trustee under Section the $ 1 million in a timely fashion is especially troubling 1104(a) in the event the case is not dismissed under Section because [Debtor] is not an ordinary litigant. As debtor in 1112(b). 22 See CIMA Joinder at 8:2 to 12:2. 23 possession he is the trustee of his own estate and therefore stands in a fiduciary relationship to his creditors.”). A debtor Debtor does not dispute the characterization of most of the in possession also is required to manage and operate the events leading up to the filing of its Chapter 11 petition. See property in its possession according to the requirements of Opposition at 2:26 to 4:4. Instead, it offers eight separate state law. See28 U.S.C. § 959(b). but overlapping arguments of its own: (1) that a Chapter 11 plan will be proposed in good faith, see Opposition at 4:12 [10] [11] [12] Creditors who oppose a Chapter 11 debtor's to 6:2, (2) that the Justice Department is currently barred efforts can object at any time during the case and to any plan from expending funds to enforce the marijuana restrictions of reorganization that might be proposed. A Chapter 11 debtor applicable under the Controlled Substances Act, id. at 6:5 in possession typically has an exclusive period of 120 days to to 7:13, (3) that abstention through dismissal under Section propose a plan of reorganization, after which time a creditor 305(a) will not better serve the interests of the Debtor, may file its own plan. See11 U.S.C. § 1121(b). As a general id. at 7:14 to 9:3, (4) that the Debtor is in the process rule, a Chapter 11 debtor can propose a plan of reorganization of establishing relationships with banks that currently do to which all of its creditors agree, and such a consensual plan business with 4Front, id. at 9:5-12, (5) that the Debtor is confirmed without the necessity of a “cramdown” of plan has workers compensation, employee health, and automobile treatment. 19 If all creditors do not agree, then the plan may insurance in place, and made a tax payment to the NDOT be confirmed through cramdown only if the treatment of the on April 23, 2019, id. at 9:14-27, (6) that the doctrine of objecting creditors' claims is “fair and equitable.” 11 U.S.C. unclean hands does not bar bankruptcy relief, id. at 10:2-13, § 1129(b). It is under this legal framework that the court (7) that the balance of hardships favor keeping the automatic addresses this Dismissal Motion. 20 stay in place, id. at 10:15 to 11:8, and (8) that civil contempt proceedings currently pending in State Court may be exempt from the automatic stay, id. at 11:11-17. 1. The Arguments of the Parties. [13] After describing a litany of events that allegedly preceded the commencement of this Chapter 11 proceeding, 2. The Existing Case Law is Distinguishable. 24 see Dismissal Motion at 2:6 to 10:20, 4Front offers eight Interspersed amongst the parties arguments are citations to separate, but overlapping arguments in favor of its request: various decisions by *728 other courts suggesting why a (1) that Debtor is ineligible for relief under bankruptcy law, marijuana-related bankruptcy case should, or should not, be id. at 10:25 to 13:20, (2) that all parties are better served by dismissed. None of those decisions, however, are controlling abstention under Section 305(a) through dismissal of the case, under the circumstances of the case now before this court. 25 id. at 13:23 to 14:10, (3) that appointment of a receiver in State Court offers a superior forum to resolve disputes, id. at 14:12 to 15:13, (4) that the Debtor commenced the Chapter A. The Most Recent Decision of the Ninth Circuit Court 11 proceeding to frustrate creditor rights, id. at 15:15 to of Appeals. 16:2, (5) that economy and efficiency supports abstention by On May 2, 2019, sixteen days after the Debtor commenced dismissal, id. at 16:4 to 17:10, (6) that dismissal is warranted this Chapter 11 proceeding, the Ninth Circuit Court under Section 1112(b) because of bad faith, 21 *727 id. at of Appeals (“Ninth Circuit”) entered its decision in 17:13 to 18:3, (7) that dismissal is warranted based on the Garvin v. Cook Investments NW, SPNWY, LLC (In re doctrine of unclean hands, id. at 18:5-24, and (8) that the Cook Investments NW), 922 F.3d 1031 (9th Cir. 2019). automatic stay should be lifted to permit the actions in State That Chapter 11 proceeding was commenced in the Court to proceed, id. at 18:27 to 19:19. MC Brands simply bankruptcy court for the Western District of Washington and joins in all of the arguments raised by 4 Front. Highland encompassed five related real estate entities. One of those

WEST AW © 2020 Thomson Reuters. No claim to original54 U.S. Government Works. 7 In re CWNevada LLC, 602 B.R. 717 (2019) entities, Cook Investments NW DARR (“Cook DARR”), Circuit held that the good faith requirement under Section leased property to an unrelated third party licensed under 1129(a)(3) “...directs courts to look only to the proposal of a Washington law to grow marijuana. That lease violated, [Chapter 11] plan, not to the terms of the plan.” 922 F.3d at however, the provision of the Controlled Substances Act 1035. (Emphasis added). Because the Debtor's plan had been that prohibited the knowing lease of any space “...for negotiated during the Chapter 11 proceeding in good faith, it the purpose of manufacturing, distributing, or using any had not been proposed by any means forbidden by bankruptcy controlled substance...” 21 U.S.C. § 856(a)(1). The U.S. or non-bankruptcy law. Id. at 1033-34. With respect to any Trustee filed a motion under Section 1112(b)(1) to dismiss alleged violations of the Controlled Substances Act, the court the Chapter 11 proceeding based on gross mismanagement as observed: defined under Section 1112(b)(4)(B). The bankruptcy court denied the motion on the debtors' representation that an We do not believe that the interpretation compelled by amended plan would include a rejection of the lease with the text [of Section 1129(a)(3)] will result in bankruptcy the marijuana grower and payments under the plan therefore proceedings being used to facilitate legal violations. To would not depend on a source that violates federal law. begin, absent waiver, as in this case, courts may consider SeeGeiger v. Cook Investments NW, SPNWY, LLC (In re gross mismanagement under § 1112(b). And confirmation Cook Investments NW), 2017 WL 10716993, at *1 (W.D. of a plan does not insulate debtors from prosecution for Wash. Dec. 18, 2017). The bankruptcy court gave the U.S. criminal activity, even if that activity is part of the plan Trustee leave to renew the motion at the time of confirmation itself...There is thus no need to “convert the bankruptcy judge into an ombudsman without portfolio, gratuitously of the amended plan. 26 seeking out possible ‘illegalities’ in every plan,” a result that would be “inimical to the basic function of bankruptcy *729 The debtors filed an amended plan along with a judges in bankruptcy proceedings.” separate motion to reject the marijuana tenant's lease. The U.S. Trustee objected to confirmation of the amended plan, Id. at 1036 (citations omitted). 28 With respect to dismissal but not to the motion to reject the lease. An order was entered for gross management within the meaning of *730 Section authorizing rejection of the lease. The U.S. Trustee objected 1112(b)(4)(B), the Ninth Circuit concluded that the U.S. that the amended plan was not proposed in good faith under Trustee had waived the objection by failing to renew its Section 1129(a)(3), but did not renew the motion to dismiss motion at plan confirmation. The circuit panel reached that under Section 1112(b)(1) based on gross mismanagement. conclusion because the motion was not presented under The bankruptcy court overruled the plan objection and Section 1112(b)(1) and therefore there was no opportunity 27 confirmed the amended plan under Section 1129(a). Id. for the bankruptcy court to consider whether any claim of at *1-2. On appeal, the federal district court affirmed both gross mismanagement could be cured under Section 1112(b) the plan confirmation order and the order denying the U.S. (2). 29 Id. at 1034. Trustee's motion to dismiss. As to dismissal based on gross mismanagement, the district court concluded that the U.S. [15] While the Ninth Circuit's decision in Garvin is Trustee had waived the objection by failing to renew the prior controlling when a good faith objection to plan confirmation motion. Id. at *3. The district court also concluded that it is raised under Section 1129(a)(3), there is no proposed was not an abuse of discretion to deny dismissal because Chapter 11 plan before the court at this time. Similarly, the debtors might be able to propose a Chapter 11 plan that the Garvin decision does not address other requirements does not rely on income from the marijuana lease. Id. at for Chapter 11 plan confirmation, such as feasibility under *4. The district court emphasized that the debtors' plan of 30 reorganization provided for payment of the single creditor Section 1129(a)(11). At this stage, the Debtor wants to whose judgment would be paid in full from non-marijuana remain under the protection of the automatic stay while it income. Id. tries to formulate a plan of reorganization. The Garvin panel did not preclude consideration of a motion to dismiss under [14] On further appeal, the Ninth Circuit again affirmed. Section 1112(b)(1), even at plan confirmation, but did not In particular, the circuit panel addressed the U.S. Trustee's do so only because the U.S. Trustee had waived the ground objection that the debtors' Chapter 11 plan did not meet by failing to renew its prior motion. So procedurally, the Section 1129(a)(3) because it had not “been proposed in good Garvin decision offers no guidance on whether dismissal faith and not by any means forbidden by law.” The Ninth under Section 1112(b)(1) on the basis of mismanagement

WEST AW © 2020 Thomson Reuters. No claim to original55 U.S. Government Works. 8 In re CWNevada LLC, 602 B.R. 717 (2019) under Section 1112(b)(4)(B), or any other ground, would be the plan's reliance on income derived from the marijuana appropriate in the present case. industry violated the good faith requirement under Section 1325(a)(3). 33 The court further concluded that because the On the other hand, the more obvious factual distinction is contemplated marijuana operations were illegal under both that the Chapter 11 debtor in Garvin was not engaged in the federal and Oregon law, 34 debtor could not satisfy *732 cultivation, production and distribution of marijuana. Unlike Section 1325(a)(6), which requires proof of a debtor's ability the debtor in Garvin, this is not a case where proceeds of the “to make all payments under the plan and to comply with Marijuana Business would provide merely “indirect support” the plan.” 35 The court, however, expressed a willingness to for a confirmed plan. 31 Rather, the Marijuana Business consider confirmation of any amended plan that did not rely operated by the Debtor appears to be the primary source of on funding from illegal sources of income. As a result, the the Debtor's revenue and appears to be in clear violation of court denied plan confirmation but permitted the debtor to file the Controlled Substances Act. an amended plan. In the event a timely amended plan was not filed, the court indicated that it would issue an order to Perhaps more important is that the Garvin decision does not show cause for dismissal or conversion to Chapter 7. Id. at address whether dismissal *731 independently based on 36 abstention under Section 305(a) is appropriate. The debtors in 773-74. Garvin were not subject to multiple state court actions brought by creditors clamoring to enforce their claims against limited In In re Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015), the assets. The Debtor in the current case is. U.S. Trustee moved to dismiss a Chapter 13 case because part of the debtor's income came from the sale of medical [16] Under these circumstances, the recent decision in marijuana permitted under Michigan law. The court credited Garvin is informative, but neither procedurally nor factually the debtor's testimony that all plan payments made to the trustee came from his Social Security income but nevertheless apposite. 32 concluded that the court could not, and would not, allow the debtor to remain in a bankruptcy case that assisted in the B. The Remaining Cases Cited by the Parties. advancement of an illegal activity. The court, however, did The other cases cited by the parties involved marijuana- not agree with the U.S. Trustee that dismissal was a foregone related bankruptcy relief under various chapters of the conclusion, but instead gave the debtor the option to remain Bankruptcy Code, but under very different circumstances. in bankruptcy by ceasing his illegal business operations. Three other non-bankruptcy cases cited by the parties are not Specifically, the court enjoined the debtor from continuing persuasive. with his marijuana business, ordered him to destroy all marijuana plants, and scheduled a further evidentiary hearing to determine the debtor's compliance with these conditions. (1) Chapter 13 Cases. Id. at 59. The court also provided the debtor with the option [17] Relief under Chapter 13 is available only to individuals to terminate the injunction by moving to dismiss his own case who are eligible under Section 109(e) and who are willing under Section 1307(b). Id. 37 to devote their future disposable income to the payment of creditors. Individuals essentially commit to earn income from In Olson v. Van Meter (In re Olson), 2018 WL 989263 (9th their labors over time in exchange for a discharge in Chapter Cir. BAP Feb. 5, 2018), a Chapter 13 debtor obtained rental 13. Because individuals cannot be subjected to forced labor, income from a marijuana dispensary on real property she they cannot be placed into Chapter 13 involuntarily. See11 proposed to sell under her plan. The bankruptcy court sua U.S.C. § 303(a). sponte dismissed the bankruptcy case because the debtor was accepting rental income during the post-petition period In In re McGinnis, 453 B.R. 770 (Bankr. D. Or. 2011), a from a source engaged in a business that violated federal Chapter 13 debtor proposed a plan that would be partially law. On appeal, the bankruptcy appellate panel vacated and funded by the debtor's own marijuana business and rental remanded the case, stating that the bankruptcy court needed income derived from other marijuana-related businesses. to make more findings of fact and conclusions of law to After an evidentiary hearing in which the Chapter 13 support dismissal. In her concurring opinion, Judge Tighe trustee objected, the court denied confirmation because expressed her opinion that “[a]lthough debtors connected to

WEST AW © 2020 Thomson Reuters. No claim to original56 U.S. Government Works. 9 In re CWNevada LLC, 602 B.R. 717 (2019) marijuana distribution cannot expect to violate federal law in unless the plan does not provide for continued operations. See their bankruptcy case, the presence of marijuana near the case discussion at note 32, supra. should not cause mandatory dismissal.” Id. at *7. Judge Tighe also provided additional clarification regarding the detail she In In re Rent-Rite Super Kegs W. Ltd., 484 B.R. 799 believes to be necessary in future rulings involving similar (Bankr. D. Colo. 2012), creditors sought to dismiss a cases: voluntary Chapter 11 case filed by the owner of a warehouse. Dismissal was sought because twenty-five percent of the non-individual debtor's revenues came from warehouse *733 I concur in the memorandum tenants engaged in the medical marijuana industry. Although and write separately to emphasize (1) the tenants' operations were authorized under Colorado the importance of evaluating whether law, the bankruptcy court found that the revenue source the Debtor is actually violating violated the Controlled Substances Act and subjected the the Controlled Substances Act and secured creditor's real property collateral to potential criminal (2) the need for the bankruptcy forfeiture proceedings under federal law. Id. at 805-06. The court to explain its conclusion that court, therefore, found that “cause” existed under Section dismissal was mandatory under these 1112(b) due to gross mismanagement and application of the circumstances. With over twenty- unclean hands doctrine. Id. at 809. Because the remaining five states allowing the medical or seventy-five percent of the debtor's revenues were not derived recreational use of marijuana, courts from the marijuana tenants, however, the court scheduled a increasingly need to address the needs further hearing to determine whether conversion or dismissal of litigants who are in compliance with would be in the best interests of creditors. Id. at 810-11. 38 state law while not excusing activity that violates federal law. A finding In In re Arm Ventures, LLC, 564 B.R. 77 (Bankr. S.D. Fla. explaining how a debtor violates 2017), the Chapter 11 debtor, which did not have any income federal law or otherwise provides derived from marijuana-related sources as of the petition date, cause of dismissal is important to proposed a plan that contemplated leasing real property to an avoid incorrectly deeming a debtor a affiliate that would generate income from medical marijuana criminal and denying both debtor and as permitted by Florida law. The secured creditor sought creditors the benefit of the bankruptcy dismissal based on a variety of factors, including the debtor's laws. reliance on marijuana-related sources of income to fund its plan. The court agreed that it could not confirm such a plan, but it provided the secured creditor with relief from the Id. at *6. automatic stay in lieu of dismissal. Id. at 86-87. The court also *734 gave the debtor two weeks to file an amended plan that The common theme in all of these Chapter 13 cases is the did not rely on marijuana-related sources of income, absent willingness of the bankruptcy court to allow the voluntary which the court would convert the case to Chapter 7 and the debtor to propose a feasible plan that does not rely on income secured creditor would be authorized to immediately proceed received through a violation of the Controlled Substances Act. with its foreclosure sale. Id. at 86 & n.23. 39

In In re Way to Grow, Inc., 597 B.R. 111 (Bankr. D. Colo. (2) Chapter 11 Cases. 2018), the Chapter 11 debtors' business [18] [19] Relief under Chapter 11 is available to both individuals and non-individuals, and may be initiated both involve[d] the sale of equipment for indoor hydroponic voluntarily and involuntarily. For individual Chapter 11 and gardening-related supplies. As to their customers' uses debtors, a bankruptcy discharge is obtained only upon of their products, Debtors have represented “[w]hile the completion of payments of a confirmed plan. See11 U.S.C. hydroponic gardening equipment may and is used for many § 1141(d)(5). For non-individual Chapter 11 debtors, a types of crops, the Debtors' future business expansion plan bankruptcy discharge is obtained upon confirmation of a plan is tied to the growing cannabis industry which is heavily reliant on hydroponic gardening.”

venerable reputation for expertise in hydroponic marijuana Id. at 115. After discussing various bankruptcy decisions growing, and it is difficult to imagine how Debtors could involving debtors engaged in illegal activities, including prevent customers from continuing to patronize Debtors' the decision in Rent-Rite, the court discussed “three basic stores because of this reputation. Indeed, the evidence does propositions” gleaned from this caselaw: not show Debtors' essential business model has changed post-petition, which, of course, is the relevant time to determine whether Debtors may remain in bankruptcy. First, a party cannot seek equitable In any event, any such order would require the Court, bankruptcy relief from a federal and interested *735 parties, to monitor the Debtors' court while in continuing violation sales and customers, which would be very difficult and of federal law. Second, a bankruptcy inefficient. Further, in light of the acrimonious nature of case cannot proceed where the court, [the relationship between the party-in-interest moving for the trustee or the debtor-in-possession dismissal] with the Debtors, the Court can be reasonably will necessarily be required to possess certain such an order would lead to costly and time- and administer assets which are either consuming future litigation over the Debtors' compliance. illegal under the CSA or constitute proceeds of activity criminalized by To prevent this Court from violating its oath to uphold the CSA. And third, the focus of federal law, under the specific facts of this case, the Court this inquiry should be on debtor's sees no practical alternative to dismissal. marijuana-related activities during 40 the bankruptcy case, not necessarily Id. at 132. before the bankruptcy case is filed. The common theme of these voluntary Chapter 11 cases is the bankruptcy court's consideration of whether the debtor in possession could propose a feasible plan that did not rely Id. at 120. Utilizing these principles, the court found “cause” on income received through a violation of the Controlled existed to dismiss the case under Section 1112(b) because Substances Act. the debtors' business violated the Controlled Substances Act. Specifically, after conducting a four-day evidentiary hearing, the court did not find credible the debtors' explanation that it (3) Chapter 7 Cases. would try to distance itself from selling its products to entities [20] [21] [22] Relief under Chapter 7 is available to both engaged in marijuana-related activities. The court further individuals and non-individuals, and may be initiated both found that the reduction of debtors' revenue from marijuana- voluntarily and involuntarily. For individual Chapter 7 related sources would devastate the debtor's income stream, debtors, the property of the bankruptcy estate is administered thereby making confirmation difficult, if not impossible. by a bankruptcy trustee, see11 U.S.C. § 704(a), and a Finally, even if the court required the debtors to extricate bankruptcy discharge is obtained if no timely objections are themselves from the marijuana industry, the court concluded filed by parties in interest. See11 U.S.C. § 727(b). For non- that the cost and effort of ensuring compliance would be individual Chapter 7 debtors, the property of the bankruptcy inefficient, costly, and difficult to monitor: estate is administered by a bankruptcy trustee, but a discharge is not available. See11 U.S.C. § 727(a)(1). In any event, the Court does not believe such an order [requiring the debtor to extricate itself from marijuana- In Arenas v. U.S. Trustee (In re Arenas), 535 B.R. 845 related sources of business], or the remediation it would (10th Cir. BAP 2015), the U.S. Trustee moved to dismiss a require, would be effective in this case. The Court cannot voluntary Chapter 7 case in which the individual debtors sold simply order Debtors to cease all sales to customers marijuana and obtained rental income from an entity engaged known to be involved in marijuana cultivation, because the in the marijuana industry that was lawful under Colorado law. usefulness of Debtors' products in illegal grow operations In response, the debtors sought to convert the case to Chapter will continue to attract marijuana horticulturalists to 13. The bankruptcy court denied conversion and dismissed Debtors' business, including those growing marijuana the case. The bankruptcy appellate panel for the Tenth Circuit solely for personal use. Debtors have already acquired a affirmed and expressed their agreement “with the bankruptcy

WEST AW © 2020 Thomson Reuters. No claim to original58 U.S. Government Works. 11 In re CWNevada LLC, 602 B.R. 717 (2019) court that while debtors have not engaged in intrinsically evil v.] Yellow Cab [Transit Co.], 321 U.S. [383, 387, 64 S.Ct. conduct, the debtors cannot obtain bankruptcy relief because 622, 88 L.Ed. 814 (1944) ]. Rather, determining whether their marijuana business activities are federal crimes.” Id. the doctrine of unclean hands precludes relief requires at 849-50. The appellate panel concluded that the debtors balancing the alleged wrongdoing of the plaintiff against likely would be unable to satisfy the “good faith” requirement that of the defendant, and “weigh[ing] the substance of the under Section 1325(a)(3) to confirm a Chapter 13 plan, and right asserted by [the] plaintiff against the transgression neither a Chapter 7 or 13 trustee could administer assets which, it is contended, serves to foreclose that right.” without violating federal law. Id. at 852. 41 It further observed Republic Molding Corp. v. B.W. Photo Utils., 319 F.2d that allowing the debtors to remain in Chapter 7 would 347, 350 (9th Cir. 1963). In addition, the “clean hands prejudicially delay creditors, who would likely receive no doctrine should not be strictly enforced when to do so distribution on their claims, while the debtors would receive would frustrate a substantial public interest.” EEOC v. a discharge and would be allowed to continue business Recruit U.S.A., Inc., 939 F.2d 746, 753 (9th Cir. 1991). operations that were illegal under the Controlled Substances Id. at 960. The Ninth Circuit additionally observed “that the Act. Id. at 853-54. doctrine of unclean hands cannot prevent recovery of funds 44 In In re Medpoint Mgmt., LLC, 528 B.R. 178 (Bankr. D. stolen from a client by his or her lawyer.” Id. at 961. Ariz. 2015), vacated in part on other grounds, 2016 WL 3251581 (9th Cir. BAP June 3, 2016), an involuntary Chapter The common theme in all of these Chapter 7 cases is that 7 case was filed against a non-individual entity that provided the mere involvement of marijuana-related assets, income, management services to medical marijuana *736 businesses or connections to the debtor, is not dispositive of whether a licensed under Arizona law. The alleged debtor stated “that all particular case is permitted to proceed. 45 of its assets are marijuana-related,” and counsel for the U.S. Trustee also expressed her belief that the alleged debtor did not have “any legal, non-marijuana assets that a trustee could *738 (4) Non-Bankruptcy Cases. lawfully administer.” 528 B.R. at 184. The court dismissed Two of the other cases cited by the parties address the the case because its continuation would require a Chapter likelihood of prosecution under the Controlled Substances 7 bankruptcy trustee to violate federal law and subject the Act, rather than whether particular conduct is in fact bankruptcy estate to possible forfeiture of the alleged debtor's illegal under federal law. The remaining case addresses the appointment of a receiver under Colorado law, but does not assets. Id. at 186. 42 The court also found that the petitioning address the Controlled Substances Act at all. As previously creditors, who voluntarily conducted business with an entity discussed, there is no meaningful dispute that the Marijuana engaged in illegal activities, were barred from seeking relief Business operated by the Debtor is not permitted by federal 43 under the “unclean hands” doctrine. Id. at 186-87. law.

[23] In Northbay Wellness Group, Inc. v. Beyries, 789 F.3d In U.S. v. McIntosh, 833 F.3d 1163 (9th Cir. 2016), 956 (9th Cir. 2015), an attorney stole money from his client, several defendants from California and Washington, which i.e., a medical marijuana dispensary, and subsequently filed authorized the cultivation of medical marijuana, sought a personal, voluntary Chapter 7 bankruptcy. The dispensary to enjoin their convictions for various marijuana-related instituted an adversary proceeding seeking to except its violations of the Controlled Substances Act. They argued claim from discharge, but the bankruptcy court dismissed that Congress approved a rider to successive appropriations the adversary complaint under the “unclean hands” doctrine. bills (referred to as “§ 542”) 46 that prohibited the Justice The Ninth Circuit reversed and remanded, explaining that Department from spending any of its funds “to prevent States the bankruptcy court failed to balance the parties' respective [who have legalized medical marijuana] from implementing wrongdoings as required under that doctrine: their own State laws that authorize the use, distribution, The Supreme Court has emphasized, however, that the possession, or cultivation of medical marijuana.” Id. at doctrine of unclean hands “does not mean that courts must 1169-70. In examining its jurisdiction and appellants' always permit a defendant wrongdoer to retain the profits standing, the Ninth Circuit found, among other things, that of his wrongdoing merely because the plaintiff himself is “[e]ven if Appellants cannot obtain injunctions of their possibly guilty of transgressing the law.” [ *737 Johnson prosecutions themselves, they can seek—and have sought—

WEST AW © 2020 Thomson Reuters. No claim to original59 U.S. Government Works. 12 In re CWNevada LLC, 602 B.R. 717 (2019) to enjoin [the Justice Department] from spending funds from would not vacate that conviction. It the relevant appropriations acts on such prosecutions.” Id. at would only mean that the [Justice 1172 (emphasis in original). Thereafter, the court held that Department's] continued expenditure § 542 only prohibits the Justice Department from utilizing of funds pertaining to that particular funds to prosecute individuals who are in full compliance with state-law-compliant conviction after § applicable state medical marijuana laws: 542 took effect was unlawful. That is because, as we explained in McIntosh, § 542 did not change any substantive Individuals who do not strictly comply law; it merely placed a temporary hold with all state-law conditions regarding on the expenditure of money for a the use, distribution, possession, and certain purpose. cultivation of medical marijuana have engaged in conduct that is unauthorized, and prosecuting such Id. at 1028 (emphasis in original). individuals does not violate § 542. Congress could easily have drafted In Yates v. Hartman, ––– P.3d ––––, 2018 WL 1247615 (Colo. § 542 to prohibit interference with App. Mar. 8, 2018), a spouse sought the appointment of laws that address medical marijuana, a receiver over medical and recreational marijuana entities but it did not. Instead, it chose held in a marital dissolution proceeding. The entities were to proscribe preventing states from authorized to operate under Colorado law, and none of the implementing laws that authorize parties asserted that their operations otherwise were illegal the use, distribution, possession, and under the Controlled Substances Act. The appellate court cultivation of medical marijuana. concluded that any receiver must possess the proper licenses under Colorado law to operate the entities. Id. at –––– – ––––, at *3-4. It therefore reversed the trial court's appointment of Id. at 1178. The Ninth Circuit therefore vacated and remanded a receiver. Id. at ––––, at *4. appellants' cases with instructions for the district courts to conduct evidentiary hearings to determine whether or not The relevant theme of these non-bankruptcy cases 47 is appellants' operations fully complied with their respective that while Congress may act to deny funding for federal state's medical marijuana laws. Id. at 1179. prosecution of marijuana offenses under the Controlled Substances Act, it has not acted to legalize the cultivation, In U.S. v. Kleinman, 880 F.3d 1020 (9th Cir. 2017), an production and distribution of marijuana. 48 Until it does individual appealed his conviction of various marijuana- so, all parties *740 engaged in or having a significant related offenses based, in part, on the Justice Department's connection with the marijuana industry face a creeping prohibited use of funds under § 542. In affirming his absurdity 49 : they can rely in good faith on more and conviction, the Ninth Circuit first found that appellant's more state laws to increasingly form new businesses, conviction, which was entered prior to the passage of § 542, 50 would not be vacated because § 542 did not change the increasingly invest and loan millions of dollars, and illegality *739 of marijuana-related offenses under federal increasingly enter into occupations that expose all of them law: to possible federal criminal prosecution. 51 Moreover, state and local governments that derive tax revenues from medical and recreational marijuana businesses face continuous § 542 does not require a court to vacate uncertainty. 52 convictions that were obtained before the rider took effect. In other words, when a defendant's conviction was *741 3. The Evidence Presented by the Parties. entered before § 542 became law, a [24] The burden of proof on this Dismissal Motion rests determination that the charged conduct with 4Front as the party seeking relief. See, e.g., In re was wholly compliant with state law Rosenblum, 2019 Bankr. LEXIS 1160 (Bankr. D. Nev.

Mar. 15, 2019) (order denying former spouse's alternative the Debtor to purchase certain promissory notes, and also to requests for dismissal, abstention, appointment of trustee, or loan additional funds to the Debtor, all of which agreements relief from stay). The evidentiary record before the court *742 have been breached. Id. at ¶ 5. Kanitz also attests consists of the written testimony offered by declarants Krane, that in September 2017 and January 2018, other members Braddock, Malley, Miltenberger, Kanitz, and Padgett, the of Highland Partners entered into other transactions with the exhibits offered by the declarants, and the documents for Debtor, including a secured line of credit, all of which have which judicial notice has been requested. No objections have been breached. Id. at ¶ 6. been raised as to any of the written testimony offered, the exhibits accompanying the declarations, or to the matters As the manager of BCP Holding, which is the manager of for which judicial notice was requested. Likewise, various the Debtor, Padgett attests, inter alia, that on March 14, documents have been attached as “exhibits” to the written 2019, a judgment was entered by the State Court confirming legal arguments, some of which are not authenticated, but an arbitration award in favor of 4Front in the amount of no objections have been raised to the inclusion of those $ 4,987,092.29. See Padgett Declaration at ¶ 7. He also documents as part of the record. attests that the Debtor has workers compensation and liability insurance coverage in place through April 26, 2020. Id. at ¶ Among other things, Krane attests that 4Front entered into 10. Padgett also attests that the Debtor has employee health a consulting agreement with the Debtor in March 2014, for insurance as well as automobile insurance in place as of which it has not been paid under an arbitration award. See April 8, 2019. Id. at ¶¶ 11 and 12. He attests that the Debtor Krane Declaration at ¶¶ 6, 10, 11 and 12. As counsel for made a payment of $ 81,850 to the Nevada Department of 4Front, Braddock attests, inter alia, that in May 2017, 4Front Taxation on April 23, 2019. Id. at ¶ 13. Padgett attests that sued the Debtor in State Court to collect payments under an eviction proceeding has been commenced by “Renaissance the consulting agreement. See Braddock Declaration at ¶ one landlord” with respect to a commercial lease “which 3. He also attests that prior to the Debtor's commencement is critical to CWNevada's operations.” Id. at ¶ 15. He also of this Chapter 11 proceeding, 4Front took numerous steps attests that the “Debtor is in the process of establishing to confirm and enforce an arbitration award in its favor, banking relationships at the very same banks that 4Front has including prosecution of its Receivership Application and established its relationships with.” Id. at ¶ 20. a request to hold the Debtor in contempt. Id. at ¶¶ 6 and 14. Braddock further attests that the State Court entered a In addition to the exhibits previously mentioned in this order, judgment confirming the arbitration award, and the Debtor see discussion at 722–24, supra, the record encompasses still refused to pay. Id. at ¶ 16. copies of various documents submitted by 4Front, including: the Declaration of Anthony Imbimbo in Support of As counsel for Highland Partners, and on behalf of both CWNevada's Opposition to Motion to Affirm Arbitration Highland Partners and Green Pastures, Malley attests that in Award (“Imbimbo Declaration”) filed in State Court on or July 2018, these parties commenced additional State Court about February 14, 2019, in Case No. A-17-755479-C (Ex. actions against the Debtor for breach of a lease as well “4”); the final arbitration award in favor of 4Front in the as certain loan agreements. See Malley Declaration at ¶ 5. amount of $ 3,741,803.92 (Ex. “8”); the State Court order He also attests that numerous other legal actions have been and final judgment confirming the arbitration award (Ex. commenced in State Court by other parties. Id. at ¶ 8. As “9”); a preliminary injunction entered by the State Court counsel for Green Pastures, Miltenberger attests that in May on March 14, 2019, enjoining the Debtor from “selling, 2015, Green Pastures entered into an agreement with the transferring, or otherwise disposing of any assets in their Debtor to purchase certain promissory notes but that the possession, custody, and/or control, including any Nevada Debtor has been in default since no later than June 2018. See cannabis license and cash received (except as needed for Miltenberger Declaration at ¶¶ 5, 6 and 7. As the manager of normal business operations) from the lawful sale of cannabis an asset management firm, Kanitz attests that in May 2017, through their Nevada retail dispensaries until this court Highland Partners entered into a commercial lease with the orders otherwise” (Ex. “11”); a State Court complaint entitled Debtor for premises located at 3132 Highland Drive and 3152 Maria Navarrete, et al. v. CWNevada, LLC, et al., Case No. Highland Drive, in Las Vegas. See Kanitz Declaration at ¶ 4. A-19-792575-C, filed April 4, 2019, alleging, inter alia, that He also attests that between June and November 2016, certain the Debtor was in default in payment of employees at three members of Highland Partners entered into agreements with Nevada marijuana dispensaries operating under the name

“Canopi” (Ex. “13”); email correspondence dated April 10, 2019, in State Court in Case No. A-17-755479-C (“Van Oyen 2019, from a revenue officer at the Nevada Department of Affidavit”) (Ex. “1” to CIMA Reply). Taxation indicating that a balance of $ 388,890.45 was then- owing by the Debtor, along with various periodic statements of taxes due (Ex. “14”); an ex parte application for order to 4. Dismissal Based on Abstention is Warranted under show cause why the Debtor should not be held in contempt, Section 305(a). filed by 4Front in State Court on April 12, 2019 (Ex. “15”); [25] The production and distribution of CBD products is an email dated April 13, 2019, from Padgett to Van Oyen not prohibited by the Controlled Substances Act if the THC and Kanitz (“Padgett Email”) (Ex. 16); the U.S. Trustee's concentrations in the particular hemp plant conform to the Guidelines for Region 17 as of December 16, 2016 (“UST limitations prescribed under Title 7. See discussion at 727, Guidelines”) (Ex. “A”); and the UST List of Authorized supra. No one challenges Padgett's written testimony that a Depositories, District of Nevada, Fourth Quarter CY 2018 portion of the Debtor's operations includes a CBD Business. (“Approved Depository List”) (Ex. “B”). According to the Debtor's independent accountant, however, as of February 14, 2019, the Debtor's Copies of various documents also were submitted by Highland Partners and Green Pastures, including: the Declaration of Brian Padgett dated September 5, 2018, Current inventory on hand includes filed in State Court in Case No. A-18-777270-B (“2018 over [redacted] pounds of Cannabis Padgett Declaration”) (Ex. “1” to Malley Declaration); Flower broken down into various the Convertible Note Purchase Agreement dated May sales weights (valued at $[redacted] ), 20, 2015, between various purchasers (including Green Cannabis Trim of [redacted] ) Pastures) and the Debtor *743 (Ex. “1” to Miltenberger valued at $[redacted] ) pound Declaration); a Commercial Lease dated May 24, 2017, for a total of $[redacted], Edible for the Debtor's lease of premises from Highland Partners Products of [redacted] units (valued for an industrial building located at 3132 Highland Drive at $[redacted] ), Concentrates and 3135 Highland Drive in Las Vegas (Ex. “1” to Kanitz of [redacted] units (valued at Declaration); a Series B Preferred Convertible Note Purchase $[redacted] ), and Work in Process Agreement dated November 7, 2016, between the Debtor inventory (valued at $[redacted] ). The and Appleseed Ventures Growth Opportunity Fund LLC, that fair market value of this inventory includes, as Schedule 7(f), the CWNevada, LLC, Financial totals $[redacted]. Statements for the Year Ended December 31, 2015 (“2015 Financial Statement”) (Ex. “2” to Kanitz Declaration); and, a Promissory Note dated June 9, 2017, memorializing a loan See Imbimbo Declaration at ¶ 7. Inasmuch as the recent to the Debtor in the amount of $ 161,802.81, obtained from inventory provided by its independent accountant may or may Appleseed Ventures Growth Opportunity Fund LLC (Ex. “3” not include any CBD products, it is difficult to determine the to Kanitz Declaration). significance of the Debtor's CBD Business. Moreover, there is no evidence of whether any portion of the Debtor's CBD CIMA Group also submitted a number of documents, Business includes the type of CBD products that are excluded including the following: CIMA Group's emergency ex from the Controlled Substances Act. 54 parte application for appointment of receiver and notice of suspension of registration, filed on April 13, 2019, in *744 Upon the commencement of a Chapter 11 proceeding, State Court in Case No. A-17-755479-C (“CIMA Group a debtor in possession ordinarily is required to close Application”) (Ex. “1” to CIMA Joinder); the Notice of its existing bank accounts “and establish new debtor in Verified Third-Party Claim and Demand for Surety, filed possession accounts to be used for all transactions during on February 15, 2019 on behalf of Brian Padgett, in State the pendency of the case.” UST Guidelines at 4.4.6(b). Court in Case No. A-18-773230-B (“Padgett Claim”) (Ex. The new accounts must be established at a depository “2” to CIMA Joinder); and the Affidavit of Timothy Smits institution meeting the requirements of Section 345(b). Those 53 Van Oyen, a member of the Debtor , filed on May 13, requirements are designed to ensure the safety of the funds held by a trustee or debtor in possession as a fiduciary

WESTLAW © 2020 Thomson Reuters. No claim to original62 U.S. Government Works. 15 In re CWNevada LLC, 602 B.R. 717 (2019) of a bankruptcy estate. A list of approved depositories is emphasis added). Id. at ¶ 5. Assuming these representations maintained by the U.S. Trustee. See UST Guidelines at are accurate, Padgett at one time, or perhaps continuously, has 4.4.6(a)(1). Padgett attests that the Debtor is attempting to provided legal services to an entity whose operations have establish debtor in possession accounts with the “very same resulted in nine separate lawsuits that are pending in various banks that 4Front has established its relationships with.” stages in State Court. See Padgett Declaration at ¶¶ 8, 14 and Padgett Declaration at ¶ 20. While 4Front has offered no 15. 59 More important, despite apparently perfecting only a evidence to the contrary, the Debtor's factual and legal security interest in the assets of the Debtor, he has made a position is a false equivalency: 4Front is not a debtor in verified claim in State Court that he actually owns all of the possession and is not subject to the same requirement. The assets of the Debtor. In essence, the record before this court names of thirty-nine approved financial institutions, including indicates that Padgett has taken positions that may be in actual Bank of Nevada, Bank of George, First Security Bank of and direct conflict with the interests of the Debtor, and that Nevada, and Heritage Bank of Nevada, have been provided to he also may be subject to claims by the Debtor that would be the voluntary Chapter 11 debtor in possession. See Approved property of the bankruptcy estate. Depository List at 1. Because Debtor has never filed any Schedules nor a SOFA that would disclose any bank accounts The necessity of independent counsel to advise the Debtor that existed when it filed its voluntary Chapter 11 Petition, or is amply demonstrated by the record. While the Debtor which were closed prior to filing the Petition, the court does is a limited liability company that, according to the not know whether the Debtor even had any bank accounts Chapter 11 Petition, is managed by BCP Holding, as the to close. 55 At the very least, however, Debtor should be managing member of the Debtor, see Resolution Authorizing able to identify an approved depository institution in which Bankruptcy attached to Petition, it apparently is managed by it has attempted to open its required debtor in possession a board of directors consisting of Padgett, Van Oyen, and accounts. 56 It has not done so. Jennifer Lazovich. See 2018 Padgett Declaration at ¶ 3. Van Oyen had a twenty percent (20%) membership interest in the As a non-individual, fictitious legal entity, Debtor cannot Debtor as of the end of 2015, see note 53, supra, and remains proceed without legal counsel. See generallyUnited States v. a member of the Debtor at this time. See Van Oyen Affidavit High Country Broadcasting Co. Inc., 3 F.3d 1244, 1245 (9th at ¶ 2. In addition to the board members he identifies, Padgett Cir. 1993). The voluntary Chapter 11 petition was signed by attests that the Debtor had two “shadow” directors, who the Debtor's general counsel, and such counsel conceded at apparently represented members of the Highland Partners the hearing on the Dismissal Motion that the Debtor must and Green Pastures groups that purchased various promissory obtain separate, disinterested, bankruptcy counsel. The record notes from the Debtor. See 2018 Padgett Declaration at ¶ 4. also reveals that Padgett holds the majority of the membership Whatever may be the validity or source of the alleged intrigue interests of the Debtor, see note 53, supra, and also is the in the management of the Debtor, there is no dispute that manager of BCP Holding, which is the manager of the Van Oyen joined in the Receivership Application brought in Debtor. The record further discloses that Padgett previously State Court by 4Front and also joins in the instant Dismissal provided some nature of legal services to the Debtor. See Motion. Thus, there appears to be no consensus amongst the 2015 Financial Statement *745 at Note 3: Related Party Debtor's management in favor of Chapter 11 relief. 60 Transactions. 57 The record also reveals that the Debtor's general counsel also represents Padgett personally and filed *746 Notwithstanding the significant issues concerning the Padgett Claim in one of the actions pending in State management, the record also suggests that the Debtor's financial woes have been understated by that management. Court. 58 In that claim, Padgett represents that he “is the No one disputes that the April 23, 2019 payment was made to owner of all rights, title and interest” to funds that previously NDOT in the amount of $ 81,850. See Padgett Declaration at had been garnished by CIMA Group. See Padgett Claim at ¶¶ 61 3-4. Moreover, he also alleges that pursuant to a previously ¶ 13. That is a significant sum. The record also suggests, perfected security interest, he “has the right of possession, however, that as of May 3, 2019, the balance owing by and owns all rights, title and interest in all of the assets of the Debtor was $ 405,076.91. See Van Oyen Affidavit at CWNevada, including but not limited to all personal property, ¶ 4. In other words, the tax payment made by the Debtor accounts, money, deposit accounts, products and the proceeds seven days after filing the Chapter 11 petition barely made therefrom that existed or acquired afterwards.” (Additional a dent in the amount likely owed to the State of Nevada. Additionally, no one disputes that the Debtor is the subject

of an eviction proceeding for “a commercial lease which is supra, require no less. Thus, the court is not convinced that the critical to the CWNevada's operations.” Padgett Declaration “unclean hands” doctrine has an appropriate role in this case. at ¶ 15. The record also suggests that as of May 3, 2019, the Debtor was $ 117,500 in arrears as to that commercial lease There may be cases where Chapter 11 relief is appropriate for of the dispensary premises located at 6540 Blue Diamond an individual or a non-individual entity directly engaged in a Road in Las Vegas, in addition to related obligations. See Van marijuana-related business. For the reasons discussed above, Oyen Affidavit at ¶¶ 5 and 6. Management simply ignores or this case is not one of them. apparently is unaware that a Chapter 11 debtor in possession is required to perform its obligations under any unexpired For the same reasons, the court instead concludes that lease of commercial real property, particularly the payment of the interests of creditors and the Debtor would be better scheduled rent. See11 U.S.C. § 365(d)(3). served by dismissal of the case. See11 U.S.C. § 305(a) (1). The parties may return to State Court where the Receivership Application, among other matters, may be fully [26] [27] The court has considered the role of the “unclean hands” doctrine in a bankruptcy case involving a marijuana- addressed. Having reached this conclusion, it is unnecessary related debtor and the many parties that willingly do business to address 4Font's alternative request for dismissal under with such an entity. It is clear that the Marijuana Business of Section 1112(b), as well as the request for appointment of a this Debtor is not authorized under the Controlled Substances Chapter 11 trustee under Section 1104(a). Because dismissal Act. It is equally clear that 4Front is a “national consultant of the case results in a termination of the automatic stay under in the cannabis industry,” see note 6, supra, and therefore has Section 362(c), it also is unnecessary to address 4Front's potential legal exposure under the Controlled Substances Act. alternative request for relief from stay. CompareRent-Rite (voluntary Chapter 11 dismissed based on gross mismanagement and unclean hands of the debtor), IT IS THEREFORE ORDERED that the Creditor 4Front with Medpoint Mgmt. (involuntary Chapter 11 dismissed Advisors LLC's Motion to Dismiss Bankruptcy Petition or, Alternatively, Motion for Relief from the Automatic Stay to based on, inter alia, unclean hands of petitioning creditors Allow Receivership and Contempt Proceedings to Continue, who did business with marijuana-related alleged debtor). Docket No. 18, be, and the same hereby is, . Likewise, Highland Partners, Green Pastures, Van Oyen, MC GRANTED Brands, and CIMA Group have potential legal exposure. See that the above-captioned note 14, supra. When all sides to a pending dispute may IT IS FURTHER ORDERED Chapter 11 proceeding is pursuant to 11 U.S.C. be accused of wrongdoing, a court in equity may simply DISMISSED § 305(a)(1). deny relief to all sides and dismiss the case. See, e.g.,Green v. Higgins, 217 Kan. 217, 535 P.2d 446 (1975) (denial of that all pending hearings in both claims and counterclaims on finding that the conduct IT IS FURTHER ORDERED connection with the above-captioned Chapter 11 proceeding of both plaintiff and defendant had been willful, fraudulent, are . illegal, and unconscionable). But bankruptcy courts, like all VACATED courts, are required to consider the circumstances of each case rather than routinely dismissing entire swaths of petitions All Citations and requests filed by parties seeking *747 legal relief. 62 Public confidence and the integrity of the court, see note 44, 602 B.R. 717

Footnotes 1 In this Order, all references to “ECF No.” are to the number assigned to the documents filed in the instant case, or any other specifically identified case, as the documents appear on the dockets maintained by the clerk of court. All references to “Section” are to the provisions of the Bankruptcy Code, 11 U.S.C. §§ 101-1532. All references to “Local Rule” are to the Local Rules of Practice for this bankruptcy court. All references to “FRE” are to the Federal Rules of Evidence. 2 The absence of a creditor matrix is significant because bankruptcy relief depends on proper notice being given to creditors and other parties in interest. Moreover, a “creditor” under Section 101(10)(A) includes any entity that has a “claim” against the bankruptcy estate on the date the bankruptcy petition is filed. Under Section 101(5)(A), a claim includes any “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured...”

3 Local Rule 2004(c) provides as follows: “Production of documents may not be obtained via an order under Fed. R. Bankr. P. 2004. Production of documents may, however, be obtained via subpoena as provided by Fed. R. Civ. P. 45(a)(1) (C), as adopted by Fed. R. Bankr. P. 9016.” (Emphasis added.) It appears that the 2004 Subpoena commands both testimony and production of documents based on the CIMA 2004 Order. The latter command appears to run afoul of Local Rule 2004(c). In addition, Local Rule 5075(a)(2) authorizes the clerk of the court to sign various orders on behalf of the court for certain matters, including 2004 Exam requests. That authorization applies to “[o]rders authorizing examinations to be taken under Fed. R. Bankr. P. 2004if the date set for examinations is set on not less than fourteen (14) days' notice and the request for examination does not include a request for production of documents. Orders that do not meet these requirements and orders under Fed. R. Bankr. P. 2004(d), must be signed by a judge...” Local Rule 5075(a)(2) (L) (emphasis added). The language of Local Rule 5075(a)(2)(L) is simply inconsistent with the language of Local Rule 2004(c) that precludes a production of documents from being obtained through an order authorizing a 2004 Exam. As a party in interest, CIMA Group is permitted to conduct a 2004 Exam of the Debtor's principal and should not be whipsawed, of course, between two poorly drafted local rules. CIMA Group has noticed a motion to be heard on June 19, 2019, if necessary, to address compliance with the CIMA 2004 Order and 2004 Subpoena. (ECF Nos. 70 and 74). 4 Section 305(a) provides that a bankruptcy court, after notice and a hearing, may dismiss a bankruptcy case at any time if “the interests of creditors and the debtor would be better served by such dismissal...” 11 U.S.C. § 305(a)(1). 5 Section 1112(b) provides that a bankruptcy court, after notice and a hearing, shall dismiss a Chapter 11 case, or convert it to Chapter 7, for cause, whichever is in the best of creditors and the estate. See11 U.S.C. § 1112(b)(1). Examples of “cause” include “gross management of the estate.” Id. at § 1112(b)(4)(B). To avoid dismissal or conversion, a party in interest must establish, inter alia, that there is a reasonable justification of the act or omission constituting cause, and that the act or omission will be cured within a reasonable amount of time. Id. at § 1112(b)(2)(B). 6 Through the written testimony of its co-founder, 4Front maintains that it is a “nationally recognized consultant in the legal cannabis industry.” Krane Declaration at ¶ 5. 4Front apparently entered into an agreement with the Debtor on March 10, 2014, to provide consulting services “to assist [Debtor] in applying for highly valuable and competitive licenses to operate sate-legal marijuana facilities in Nevada.” Id. at ¶ 6. In addition to that assistance, 4Front apparently provided “consulting services relating to the design and operation of successful retail cannabis dispensaries as permitted under Nevada state law.” Id. at ¶ 7. 7 Through the written testimony of its legal counsel, 4Front maintains that it obtained an arbitration award against the Debtor that it seeks to confirm in an action pending in “Nevada state court.” Braddock Declaration at ¶¶ 3, 4 and 5. Based on the arbitration award, 4Front apparently filed an application for the appointment of a receiver (“Receivership Application”), the hearing on which was continued by the Eighth Judicial District Court, Clark County, Nevada (“State Court”) on several occasions and eventually set for April 17, 2019. Id. at ¶¶ 6 through 13. The State Court apparently entered an order requiring the Debtor to show cause on May 6, 2019, why it should not be held in contempt for violating a prior order. Id. at ¶ 14. 8 Paragraphs 17 through 39 of the Braddock Declaration offer authentication under FRE 901 of the twenty-four exhibits attached to the Dismissal Motion. 9 The court can take judicial notice under FRE 201 of the documents filed in the state court proceedings, as well as in this bankruptcy court. SeeU.S. v. Wilson, 631 F.2d 118, 119 (9th Cir. 1980); Conde v. Open Door Mktg., LLC, 223 F. Supp. 3d 949, 970 n.9 (N.D. Cal. 2017); Gree v. Williams, 2012 WL 3962458, at *1 n.1 (D. Nev. Sept. 7, 2012); Bank of Am., N.A. v. CD-04, Inc. (In re Owner Mgmt. Serv., LLC Trustee Corps.), 530 B.R. 711, 717 (Bankr. C.D. Cal. 2015). 10 Exhibits “K” through “N” appear to be authenticated under FRE 901 by paragraphs 13, 12, 11, and 10 of the Padgett Declaration. Exhibit “O” is a copy of a document entitled “Cannex Notice of Meeting and Management Information Circular Relating to the Special Meeting of Security Holders to be Held on April 18, 2019” (“Cannex Notice”), the source of which is not addressed by the Padgett Declaration. 11 The Office of the United States Trustee (“U.S. Trustee”) is a component of the United States Department of Justice (“Justice Department”) and exercises oversight responsibilities in bankruptcy cases through regional offices located throughout the United States. See28 U.S.C. § 586. The U.S. Trustee has not joined in the instant Dismissal Motion, nor has it filed a statement expressing any view on the merits of this matter. Likewise, the U.S. Trustee did not enter an appearance at the hearing in this matter. Similarly, neither the Nevada Department of Taxation, Nevada Department of Health and Human Services, nor any other Nevada agency has joined in the Dismissal Motion, or expressed any view. Nor did any Nevada governmental agency enter an appearance at the hearing.

12 That exhibit is a photocopy that is obscured by a “sticky note” reflecting someone's handwriting and also what appears to be a receipt stapled to the original of the document. That receipt indicates that the NDOT received a total of $ 81,850 consisting of a check in the amount of $ 12,000, and cash in the amount of $ 69,850.00. 13 Nevada is one of many states that has enacted legislation to decriminalize marijuana. See generally NLJ Staff, The Elephant in Nevada's Hotel Rooms: Social Consumption of Recreational Marijuana, A Survey of Law, Issues, and Solutions, 2 Nev.L.J. Forum 99 (2018) [hereafter “NLJ Survey”]. 14 Violations of the Controlled Substances Act are subject to criminal prosecution, with a range of penalties including incarceration and fines. See21 U.S.C. §§ 841(b)(1)(A)(vii), 841(b)(1)(B)(vii), 841(b)(1)(C), and 841(b)(1)(D). See generally Brian T. Yeh, Drug Offenses: Maximum Fines and Terms of Imprisonment for Violation of the Federal Controlled Substances Act and Related Laws, Congressional Research Service, January 20, 2015, available at https://fas.org/ sgp/crs/misc/RL30722.pdf (last visited May 31, 2019). Persons who attempt or conspire in a violation of the Controlled Substances Act also may be subject to prosecution. See21 U.S.C. § 846. Compare18 U.S.C. § 2(a) (a person who aids, abets, counsels, commands, induces or procures the commission of an offense against the United States is punishable as a principal). The statute of limitations for the Justice Department to prosecute a violation of the Controlled Substances Act is five years. 18 U.S.C. § 3282. See, e.g., United States v. Mancuso, 718 F.3d 780, 787 n.1 (9th Cir. 2013) (five-year statute of limitations applies to federal prosecution under Controlled Substances Act). 15 See Statement from FDA Commissioner Scott Gottlieb, M.D., on new steps to advance agency's continued evaluation of potential regulatory pathways for cannabis-containing and cannabis-derived products, April 2, 2019, available at https:// www.fda.gov/news-events/press-announcements/statement-fda-commissioner-scott-gottlieb (last visited May 31, 2019). 16 In Giampietro, the bankruptcy court determined that Nevada limited liability companies are subject to the alter ego doctrine that is applied to pierce the veil of Nevada corporations. 317 B.R. at 846-48. In 2017, the Nevada Supreme Court reached the same conclusion. SeeGardner v. Eighth Judicial District Court, 133 Nev. 730, 405 P.3d 651, 656 (2017). 17 The Bankruptcy Code makes clear that it is the commencement of a case under Sections 301, 302 and 303 that “creates an estate.” 11 U.S.C. § 541(a). Prior to the commencement of a case, a debtor simply holds interests that may ultimately become property of the bankruptcy estate. After a bankruptcy estate comes into existence, it may thereafter acquire interests in additional property that also become property of the bankruptcy estate. See11 U.S.C. § 541(a)(7). Amongst the “legal or equitable interests of the debtor in property as of the commencement” of a bankruptcy case, see11 U.S.C. § 541(a)(1), are any claims or causes of action that the debtor may assert against any parties. SeeSierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, 707 (9th Cir. 1986). 18 This includes taking possession of or exercising control over property of the bankruptcy estate, or enforcing a lien against property of the estate. See11 U.S.C. §§ 362(a)(3 and 4). Even if a party is not a creditor having a claim against the Debtor, it is still an “entity” to which the automatic stay applies. The automatic stay described in Sections 362(a)(1, 2, 3 and 6) does not apply to certain activity, such as an action by a governmental unit to enforce the unit's police and regulatory power. See11 U.S.C. § 362(b)(4). 19 “Cramdown” is simply a description of what is permitted in bankruptcy: if creditors and interest holders do not agree to the proposed treatment of their claims, the court may confirm a proposed plan over their objections if certain conditions are met. 20 Bankruptcy permits individuals and non-individuals to obtain a discharge of their personal liability to pay a debt. The Bankruptcy Code provides the statutory framework for which a discharge may be obtained. No one disputes, however, that a party that files for bankruptcy protection does not have a constitutional right to receive a discharge of debts. SeeU.S. v. Kras, 409 U.S. 434, 446, 93 S.Ct. 631, 638, 34 L.Ed.2d 626 (1973). 21 Although 4Front seeks dismissal of the case under Section 1112(b), it does not request appointment of a Chapter 11 trustee under Section 1104(a). 22 As previously mentioned, see discussion at 721–22, supra, 4Front seeks dismissal under Section 305(a), or, in the alternative, Section 1112(b). A decision on a motion to dismiss under Section 1112 must be rendered no later than fifteen days after a hearing commences, unless the moving party consents or compelling circumstances otherwise requires. See11 U.S.C. § 1112(b)(3). 23 Although CIMA Group's request for the appointment of a Chapter 11 trustee first appeared in its joinder filed the day before the Debtor's opposition was due, see CIMA Joinder at 6:16 to 12:2, Debtor's written opposition to that joinder does not discuss whether appointment of a trustee is appropriate. See Additional Opposition at 2 (“Debtor hereby adopts all previous arguments made in their Opposition to 4Front Advisors, LLC's Motion as if fully set forth herein...”). In any event, the bankruptcy court may appoint a Chapter 11 trustee sua sponte, seeFukutomi v. U.S. Trustee (In re Bibo, Inc.), 76

F.3d 256 (9th Cir. 1996), if it determines the appointment of a Chapter 11 trustee to be in the interests of creditors, equity security holders, and other interests of the estate. See11 U.S.C. § 1104(a)(2). 24 Not surprisingly, a variety of cases have been filed in this court by individual or non-individual debtors that receive or propose to receive income from a source authorized under state law to cultivate or distribute marijuana. See, e.g., In re Warwick Properties, LLC, Case No. 17-15065-MKN (voluntary Chapter 11 limited liability company whose tenant cultivated marijuana on California real property as authorized by California law); In re Perez, Case No. 19-12284-MKN (voluntary individual Chapter 7 debtor apparently employed by a Nevada marijuana dispensary licensed under Nevada law); In re Misle, Case No. 18-15705-BTB (involuntary individual Chapter 7 debtor who receives income from an entity that manages marijuana cultivation facilities under Nevada law); In re Redrock Enterprises, LLC, Case No. 15-13493-ABL (voluntary Chapter 11 by debtor who proposed to lease property to a tenant engaged in marijuana operation under Nevada law); In re Olson, Case No. 17-50081-BTB (Chapter 13 debtor who received rental income from medical marijuana dispensary operating under Nevada law). 25 Cases involving marijuana-related individual and non-individual debtors have become the boogeyman of bankruptcy jurisprudence. Some courts have shied away, and other courts have approached such cases with caution. The bankruptcy debtor's actual connection to the potential illegal activity – whether direct, indirect, remote, or near – appears to be a significant consideration. It is worth noting, however, that bankruptcy courts have a long history of considering cases involving debtors whose activities and operations have included past, present and possibly ongoing violations of applicable non-bankruptcy, civil and criminal laws. See, e.g., Midlantic Nat'l Bank v. New Jersey Dept. of Envt'l Prot., 474 U.S. 494, 106 S.Ct. 755, 88 L.Ed.2d 859 (1986)(voluntary Chapter 11 of waste oil processor that possessed leaking containers of cancer-causing substances in violation of state and local law was converted to Chapter 7, rather than dismissed); In re Freedom Industries, Inc., Case No. 14-bk-20017 (Bankr. S.D. W.Va. Jan. 17, 2014)(voluntary Chapter 11 filed by chemical producer after chemical spill contaminated Elk River; Chapter 11 plan of reorganization confirmed even though the debtor and officers were subsequently sentenced for criminal violations of the federal Clean Water Act and federal Refuse Act). See also NCR Staff, Catholic Dioceses and Orders that Filed for Bankruptcy and Other Major Settlements, National Catholic Reporter (May 31, 2018), available at https://www.ncronline.org/news/ accountability/catholic-diocesese-and-orders-filed-bankruptcy-and-other-major-settlements (last visited May 31, 2019) (listing all Catholic diocese bankruptcy proceedings filed from July 6, 2004 through approximately February 28, 2018, to address sexual abuse claims against clergy). 26 Although the debtors were the subject of a prior state court judgment that precipitated the Chapter 11 filing, id. at *1, the U.S. Trustee sought dismissal of the bankruptcy case solely under Section 1112(b), and not dismissal based on abstention under Section 305(a). 27 Section 1129(a) sets forth sixteen separate requirements that generally apply to all Chapter 11 plan proponents seeking to confirm a plan. Only individual Chapter 11 debtors, however, are subject to the requirements under Section 1129(a)(15). 28 In Chapter 11 and Chapter 13 proceedings, however, bankruptcy judges have been directed to make an independent determination of whether the statutory requirements for confirmation of a debtor's proposed plan have been met. See, e.g., Liberty Nat'l Enters. v. Ambanc La Mesa Ltd. P'Ship (In re Ambanc La Mesa Ltd. P'Ship), 115 F.3d 650, 653 (9th Cir. 1997) (Chapter 11 plan confirmation); United Student Aid Funds, Inc. v. Espinosa (In re Espinosa), 559 U.S. 260, 276-77, 130 S.Ct. 1367, 1380-81, 176 L.Ed.2d 158 (2010) (Chapter 13 plan confirmation). See alsoIn re Las Vegas Monorail Co., 462 B.R. 795, 798 (Bankr. D. Nev. 2011) (Chapter 11); In re Escarcega, 573 B.R. 219, 231 (9th Cir. BAP 2017) (Chapter 13). Moreover, federal judges are directed to report to the appropriate United States attorney all the facts and circumstances of a case in which the judge has reasonable grounds to believe that a bankruptcy crime or any violation of “other laws relating to insolvent debtors, receiverships or reorganization plans have been committed, or that an investigation should be had in connection therewith...” 18 U.S.C. § 3057(a). 29 If there are unusual circumstances establishing that conversion or dismissal of a Chapter 11 case is not in the best interests of creditors and the estate, such relief is prohibited if the debtor establishes a reasonable likelihood that a plan will be confirmed in a reasonable amount of time, and, inter alia, that any act constituting cause, including gross mismanagement, will be cured within a reasonable amount of time fixed by the court. See11 U.S.C. § 1112(b)(2)(A and B). 30 Section 1129(a)(11) requires a Chapter 11 plan proponent to demonstrate that plan confirmation “is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.” The Chapter 11 plan proponent must “demonstrate that any necessary financing or funding has been obtained, or is likely to be obtained.” In re Trans Max Techs., Inc., 349 B.R. 80, 92 (Bankr. D. Nev. 2006). The Bankruptcy Code “...does not require the debtor to prove that

success is inevitable, and a relatively low threshold of proof will satisfy § 1129(a)(11)...But the court must still have a reasonable and credible basis for making the necessary findings...” Id. (citations and quotations omitted). 31 SeeGarvin, 922 F.3d at 1035 (“Because it appears that [debtors' principal] continues to receive rent payments from [the marijuana producer], which provides at least indirect support for the Amended Plan, the [U.S.] Trustee asserts that [the Chapter 11] pan was ‘proposed...by...means forbidden by law.’ ”). 32 A Chapter 11 plan may provide for the liquidation of the assets of the estate, see11 U.S.C. § 1129(a)(11), but confirmation of a plan does not discharge the debtor if the plan provides for liquidation of all or substantially all property of the estate, the debtor does not engage in business after consummation of the plan, and the debtor would be denied a discharge if the case was a case under Chapter 7. See11 U.S.C. § 1141(d)(3). A non-individual entity is not eligible for a discharge in Chapter 7. See discussion at 735, infra. A non-individual entity engaged solely in the cultivation, production and distribution of marijuana faces a difficult choice when seeking Chapter 11 relief: if it commits to disposing of its marijuana assets and to not engage in business, it will not receive a Chapter 11 discharge. If such a non-individual entity does not commit to ceasing operations that are in violation of the Controlled Substances Act, however, its Chapter 11 proceeding may well be subject to dismissal based on gross mismanagement established under Section 1112(b)(4)(B). The debtors in Garvin had substantial operations that did not violate the Controlled Substances Act and were able to engage in business even after rejecting the marijuana tenant's lease. Thus, a Chapter 11 discharge was available to the debtors in Garvin and occurred at the time their plan of reorganization was confirmed. See11 U.S.C. § 1141(d)(1). 33 Section 1325(a)(3) parrots the language in Section 1129(a)(3), and requires the court to find that a proposed Chapter 13 plan “has been proposed in good faith and not by any means forbidden by law.” 11 U.S.C. § 1325(a)(3). 34 Oregon law allowed a medical marijuana cultivation operation to be reimbursed for supplies and utility expenditures, but not to obtain a profit from the operation. 453 B.R. at 772-73. Oregon's non-profit requirement for medical marijuana cultivation businesses perhaps reflected a social policy to provide effective alternatives to traditional medicine, e.g., to address the side effects of chemotherapy, as a treatment for chronic pain, etc. A similar non-profit requirement for recreational marijuana presumably would not reflect a similar social policy any more than a non-profit requirement for the liquor industry. With more states authorizing the cultivation, production and distribution of recreational marijuana products, it is clear that the marijuana industry increasingly is based on profit motivations rather than altruism. 35 Section 1325(a)(6) is the “feasibility” requirement in Chapter 13 that requires the individual debtor to demonstrate that he or she can actually perform the terms of the proposed payment plan. SeeKEITH M. LUNDIN & WILLIAM H. BROWN, CHAPTER 13 BANKRUPTCY, 4TH EDITION, § 198.1, at ¶ [2], Sec. Rev. June 15, 2004, www.Ch13online.com. 36 Because the debtor did not file an amended Chapter 13 plan, the case was dismissed after the court issued an order to show cause and the debtor filed a motion for voluntary dismissal. (McGinnis ECF No. 62). 37 The debtor confirmed a Chapter 13 plan, but his case ultimately was dismissed when he defaulted on his plan payments. (Johnson ECF No. 87). 38 According to the docket in the Rent-Rite case, approximately two years later (April 17, 2014), the bankruptcy court entered an order dismissing the Chapter 11 proceeding pursuant to a stipulation between the U.S. Trustee and the debtor in possession. (Rent-Rite ECF No. 175). 39 According to the docket in the Arm Ventures case, the debtor filed a proposed amended plan of reorganization (Arm Ventures ECF No. 149), but the plan was never confirmed. Instead, the Chapter 11 proceeding was later dismissed. (Arm Ventures ECF No. 261). 40 The debtors subsequently appealed the bankruptcy court's order, although the district court denied their request for a stay pending appeal. SeeWay to Grow, Inc. v. Inniss (In re Way to Grow, Inc.), 2019 WL 669795 (D. Colo. Jan. 18, 2019). 41 There is disagreement on whether a bankruptcy trustee who merely requests the disposal of marijuana-related assets is acting in violation of the Controlled Substances Act. See Steven J. Boyajian, “Just Say No to Drugs? Creditors Not Getting a Fair Shake When Marijuana-Related Cases are Dismissed,” XXXVI ABI Journal 9, 24-25, 74-75, September 2017. 42 Apparently, the authority of a bankruptcy trustee to waive the attorney-client privilege between a corporate debtor and its legal counsel was not raised. SeeCommodity Futures Trading Comm. v. Weintraub, 471 U.S. 343, 354, 105 S.Ct. 1986, 1994, 85 L.Ed.2d 372 (1985). When the activity of the corporate client is admittedly in violation of federal law, the criminal penalties for which extend to multiple parties and for many years, see discussion at note 14, supra, the potential legal consequences of a waiver may be extraordinary. 43 In Misle, see note 24, supra, an involuntary Chapter 7 case was filed against an individual. The alleged debtor sought dismissal of the case based on his representation that his entire income is derived from marijuana sources authorized under Nevada law, but which are in violation of the Controlled Substances Act. See Order Denying Motion for Dismissal on Involuntary Case, entered January 2, 2019 (“Misle Order”), at 2-3. (Misle ECF No. 57). The alleged debtor conceded,

however, that (1) he had a 50% interest in a non-marijuana related entity, though he claimed that his ex-wife had exclusive control over that entity, (2) a Chapter 7 trustee could not legally take control of that entity, and (3) his ex-wife would likely not make any distributions to him. See Misle Order at 2-3 & n.5 and 5 n.11. The alleged debtor further relied on a letter and memo prepared by the Executive Office of the United States Trustee in arguing that trustees should not be put in the position to administer assets that would subject them to potential violations of federal law. Although the bankruptcy court agreed with this premise, the court found it premature to speculate as to the position of the U.S. Trustee, who had not yet entered an appearance. Id. at 4-5. The court further raised the possibility that a trustee might not be violating federal law if the marijuana-related assets were not property of the estate based on a non-marijuana-related, government forfeiture case entitled U.S. v. French, 822 F.Supp.2d 615 (E.D. Va. 2011). Id. at 4. Finally, the court opined that it did not have sufficient evidence from the alleged debtor that he did not have viable non-marijuana related assets that could be used to pay his creditors. For these reasons, the court declined to adopt a per se rule, as the alleged debtor urged, to dismiss the involuntary case based solely on the existence of marijuana-related business operations. Id. at 5-6. The individual alleged debtor appealed the order denying dismissal of the involuntary case, and the bankruptcy court stayed the involuntary case pending the outcome of the appeal. (Misle ECF No. 104). 44 Proper application of the unclean hands doctrine is designed to preserve public confidence in, as well as the integrity of the court, by preventing it from becoming a participant in inequitable conduct. SeePrecision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U.S. 806, 814-15, 65 S.Ct. 993, 997-98, 89 L.Ed. 1381 (1945); In re Leeds, 589 B.R. 186, 200 (Bankr. D. Nev. 2018). 45 In Misle, the bankruptcy court raised the prospect under U.S. v. French that a debtor's interest in property may not become property of a bankruptcy estate if the property was acquired through an illegal act that would be subject to forfeiture under federal law. In French, creditors filed an involuntary Chapter 7 petition against an individual, and an order for relief was subsequently entered. Months prior to the bankruptcy filing, however, the debtor had pled guilty to wire fraud and money laundering, and the government obtained orders of forfeiture of the debtor's personal property assets that were involved and/or obtained through the commission of those crimes. The Chapter 7 trustee asserted an interest in the forfeited property as a bona fide purchaser under Section 544(a). In entering summary judgment against the trustee, the court recognized that the “relation back” doctrine under 21 U.S.C. § 853(c) “vests all forfeited property in the United States upon the commission of the act giving rise to forfeiture.” 822 F.Supp.2d at 619. (Emphasis added). Therefore, by operation of the “relation back” doctrine, [the debtor's] forfeited property vested in the United States at the time of his criminal acts, i.e. in 2005—six years prior to the creation of the bankruptcy estate. Upon her appointment, the [Chapter 7] Trustee merely stands in the shoes of the debtor as a bona fide purchaser. Because [the debtor] lacked an ownership interest in the forfeited property at the creation of his bankruptcy estate, the Trustee also lacks an ownership interest and thus, lacks standing to challenge the forfeiture order. Id. at 619. Although it did not rule on the issue, the district court in French acknowledged other caselaw holding that a similar result applies even when the forfeiture order is entered after the creation of the bankruptcy estate.Id. at n.3, citing, e.g., U.S. v. Zaccagnino, 2006 WL 1005042 (C.D. Ill. Apr. 18, 2006). A more persuasive authority than French, however, is the decision by the bankruptcy appellate panel for the Ninth Circuit in U.S. v. Klein (In re Chapman), 264 B.R. 565 (9th Cir. BAP 2001). In Chapman, the appellate court concluded that a civil forfeiture action for assets used in the manufacture and distribution of marijuana is excepted from the automatic stay under Section 362(b)(4) as an exercise of the police and regulatory power of the federal government. Id. at 570-71. The court acknowledged that a civil forfeiture judgment may have the effect of retroactively eliminating property from the Chapter 7 bankruptcy estate because of the relation-back doctrine. Id. at 572. The appellate court concluded, however, that the federal government could complete its forfeiture action “even if the end result is that the Proceeds [from the sale of the assets] are not property of the estate.” Id. (Emphasis added). The resulting uncertainty is that a bankruptcy case might be filed for a marijuana-related entity, but the assets held at the time of the bankruptcy petition might be forfeited in favor of the federal government retroactive to the date of the debtor's violation of the Controlled Substances Act. See generally Craig Peyton Gaumer, When Two Worlds Collide: The Relationship and Conflicts between Asset Forfeiture and Bankruptcy Law, 21-May Am.Bankr.Inst.J. 10 (May 2002). 46 Debtor refers to § 542 as the “Rohrbacher-Farr Amendment,” see Opposition at 6:5 to 7:8, in arguing that the Justice Department may not expend funds to prosecute marijuana offences under the Controlled Substances Act. Although the Congressional appropriations process was once predictable, including the attachment of riders to spending bills, that may no longer be true. 47 The Yates v. Hartman decision raises a potential issue in any judicial proceeding that involves a party engaged in state- licensed activity: can a state court-appointed receiver, or an assigned bankruptcy trustee, continue to conduct operations

of the subject entity without express approval of the licensing authority? In Nevada's long-established gaming industry, a temporary gaming license may be sought from the Nevada Gaming Commission by a state-court receiver or bankruptcy trustee for continued operation of a casino or other gaming establishment. SeeNev. Gaming Reg. 9.030. The court is not aware of whether similar authority exists for Nevada's fledgling marijuana industry and the State of Nevada has not provided such information in this Chapter 11 proceeding. 48 Congress' efforts to criminalize the cultivation, production and distribution of marijuana, even if such activity occurs solely within the borders of a particular state, does not rule afoul of the U.S. Constitution. SeeGonzales v. Raich, 545 U.S. 1, 22, 125 S.Ct. 2195, 2208-09, 162 L.Ed.2d 1 (2005). Under 21 U.S.C. § 811(h)(2), Congress appears to have delegated its authority over the substances included on the Schedules to the Controlled Substances Act to whomever currently serves as the Attorney General of the United States. SeeTouby v. United States, 500 U.S. 160, 165, 111 S.Ct. 1752, 1756, 114 L.Ed.2d 219 (1991); Washington v. Sessions, 2018 WL 1114758, at *3 (S.D.N.Y. Feb. 26, 2018). Unfortunately, recent occupants of the position have taken widely divergent views on the enforcement of the federal laws, including the Controlled Substances Act, pertaining to marijuana. See generally NLJ Survey, supra, at 115-120. See, e.g., Memorandum to All United States Attorneys, [former] Attorney General Jefferson B. Sessions, January 4, 2018, attached as Exhibit “E” to 4Front Reply (“Given the Department's well-established general principles, previous nationwide guidance specific to marijuana enforcement is unnecessary and is rescinded, effective immediately.”)(Emphasis added); Sacramento Nonprofit Collective v. Holder, 552 Fed.Appx. 680, 683 (9th Cir. 2014) (“Appellants claim that the Government is judicially estopped from enforcing the CSA because in a prior lawsuit involving different plaintiffs, the parties entered into a joint stipulation to dismiss the sole remaining claim in that case – that the Tenth Amendment barred federal enforcement of the CSA with respect to medical marijuana use under California law – in light of the Ogden Memorandum. But the Appellants over-read the statements made in both the Ogden Memorandum and during the course of the prior litigation; at no point did the Government promise not to enforce the CSA. Appellants therefore identify no clear inconsistency between the Government's current and prior positions as is required to invoke the doctrine of judicial estoppel.”)(Emphasis added). 49 SeeU.S. v. Lozoya, 920 F.3d 1231, 1242 (9th Cir. 2019) (acknowledging a “creeping absurdity” of the appellate court's holding as to proper venue for prosecution of federal crimes occurring on transcontinental air flights, i.e., in the federal judicial district over which the aircraft was flying when the alleged federal criminal act occurred). 50 Commercial actors who deal with marijuana-related businesses authorized under state law apparently acknowledge the risk that they may be parties to a violation of the Controlled Substances Act. See, e.g., January 9, 2018, $ 3,000,000 Line of Credit Facility, between MI-CW Holdings NV Fund 2 LLC and CWNevada, LLC, at Representations and Warranties, Paragraph 6(d) (“Borrower (i) has all necessary permits, approvals, authorizations, consents, licenses, franchises, registrations and other rights and privileges...to allow it to own and operate its business with any violation of law (excluding the federal Controlled Substances Act and related regulations) or the rights of others; (ii) is duly authorized, qualified and licensed under and in compliance with all applicable laws, regulations, authorizations and orders of public authorities (other than the federal Controlled Substances Act and related regulations);...”). (Emphasis added). (Ex. “5” to Kanitz Declaration). 51 In the Misle involuntary Chapter 7 case, the bankruptcy court expressed a version of this absurdity as follows: “As previously noted, recreational marijuana is legal in Nevada, and trustees in this district have presumably administered cases in which individual debtors possessed and/or used marijuana during the bankruptcy case. In such circumstances, is the court required to dismiss every individual bankruptcy case upon the debtor's admission that he or she possesses and/ or uses marijuana for personal use? That is the natural progression of the Alleged Debtor's proposed per se rule and would only serve to invite abuse by opportunistic debtors who could simply use this mandatory ‘get out of bankruptcy’ card at any time they see fit.” Misle Order at 3 n.6. While Misle was an involuntary proceeding filed against an individual, it illustrates the prospect of more voluntary bankruptcy petitions being filed under any chapter by individuals and non-individuals solely for the purpose of triggering the automatic stay under Section 362(a). See discussion at 724–26, supra. If the disclosure of marijuana-related assets or activities requires a bankruptcy court to dismiss a case after a petition is filed, the debtor may have obtained temporary protection from creditors without any intention of obtaining a bankruptcy discharge of debts. While Congress has provided a partial solution for individuals who repeatedly file consumer bankruptcy petitions, see11 U.S.C. §§ 362(c)(3) and (c)(4), it has provided no meaningful solution for non-individual debtors that repeatedly file Chapter 11 petitions. 52 See NLJ Survey, supra, at 118 (“Since Nevada legalized recreational marijuana, there have been an estimated $ 126 million in sales and $ 19 million in marijuana excise and wholesale taxes independent of sales tax and state and local licensing fees for marijuana dispensaries. With nearly 300 licensed businesses, the Nevada Dispensary Association estimates that the marijuana industry employs 8,700 people and invested $ 280 million in real estate. Further, the state

awaits the funds from the 15 percent excise tax on marijuana sales, approximately $ 40 million, that it has earmarked for public education over the next biennium. Nevada, like other states, awaits the recreational marijuana industry's harvest.”). Compare Candace Carlyon, “We Don't Serve Your Kind Here: Federal Courts and Banks Don't Dance with Mary Jane,” 26 Nevada Lawyer, Issue 2, at 9 (February 2018) [hereafter “Nevada Lawyer”] (“The result of the conflict between state and federal law creates a dangerous situation in which businesses are booming but unable to deposit receipts without disguising the source of their funds. The case nature of the business, without any ability to deposit receipts, places the businesses, their employees and their customers in a dangerous situation. The ripple effect created by these successful businesses is huge. The receipts from marijuana-related businesses are paid over to vendors, landlords, employees and governmental agencies: all of these need to deposit those payments.”). 53 As of December 31, 2015, Van Oyen had a twenty percent (20%) ownership interest in the Debtor while Padgett had a sixty percent (60%) ownership interest. See Statement of Equity set forth in 2015 Financial Statement. 54 A marijuana-related business that cultivates, produces and distributes products that are both illegal and legal, with some proceeds subject to forfeiture and other proceeds not, may create the type of “tracing” concern commonly associated with Ponzi schemes. SeeCunningham v. Brown, 265 U.S. 1, 11-13, 44 S.Ct. 424, 426-27, 68 L.Ed. 873 (1924). CompareU.S. v. Gettel, 2017 WL 3966635 (S.D. Cal. Sep. 7, 2017)(resolution of competing claims to proceeds of real property that are the subject of government forfeiture). If the proceeds of a marijuana-related business are commingled, what test will be applied to determine which proceeds were subsequently used to acquire additional assets? Which of the subsequently acquired assets are subject to forfeiture and which of them are not? Which assets might be excluded from the bankruptcy estate, and which might not? 55 The difficulties that a marijuana business authorized under state law has in establishing bank accounts is often discussed. See Nevada Lawyer, supra, at 8-9. In this instance, it appears that the Debtor made a portion of its April 23, 2019 tax payment to NDOT using a check. See discussion at note 12, supra. Assuming the item referenced was a typical check from a checking account, rather than a check associated with a credit line, there should be information available as to the banking institution where the Debtor does business. That information does not appear in the record. 56 In its opposition to the Dismissal Motion, Debtor quotes from “Page 199” of the Cannex Notice referring to “banking relationships with 1st Bank of Colorado, Century Bank of Massachusetts, and Bank of Springfield in Illinois.” See Opposition at 9:7-10. Unfortunately, there appears to be no part of the Cannex Notice that includes a page 199. More important, even if 4Front has relationships with those financial institutions, none of them appear on the Approved Depository List. 57 During 2015, Debtor paid $ 117,625.00 in legal and professional fees. See 2015 Financial Statement, Statement of Income. The document does not state whether any portion of the fees were paid to Padgett for legal services. 58 The Padgett Claim includes a verification executed under penalty of perjury by general counsel on behalf of Padgett. See Padgett Claim at 3. 59 As late as September 5, 2018, it appears that as the attorney for the Debtor, Padgett prepared his own declaration that was filed in State Court. See 2018 Padgett Declaration at ¶ 1. 60 Given the infighting amongst the Debtor's board of directors, including the alleged “shadow directors,” it is not surprising that communications devolved into childishness immediately before the Chapter 11 petition was filed. See Padgett Email (“Since we are coming to the end of this clown convention, I'll tell you, smartest thing Jannotta did was not joining in on this one. I doubt any of you are fit to hold licenses. Heat's about to turn up boys.”). Notwithstanding the churlish tone of the email, it is not clear whether it was sent on behalf of the Debtor, as counsel for the Debtor, or, on behalf of the author. 61 That payment was made seven days after the Debtor commenced this Chapter 11 proceeding. If Padgett owns all of the Debtor's money, as he claims, those funds must have been borrowed from Padgett, or was an additional capital contribution, either of which was subject to prior court approval under Section 364(b). If Padgett has only a security interest in the Debtor's assets, then the funds likely constitute “cash collateral” under Section 363(a) that cannot be used without consent or prior court approval under Section 363(c)(2). If other creditors assert a security interest or lien against the same assets, then the funds also cannot be used by the Debtor except with the consent of those creditors or prior court approval. A bankruptcy trustee, of course, can thoroughly investigate these assertions by waiving the attorney- client privilege of a non-individual debtor. See discussion at note 42, supra. 62 If there are 8,700 residents of Nevada employed by the marijuana industry, see discussion at note 52, supra, then the impact of automatically denying a bankruptcy fresh start to those residents and their dependents would be unconscionable.

seq., 21 U.S.C.A. § 801 et seq.; Mich. Comp. Laws Ann. § 333.26421 et seq. 532 B.R. 53 United States Bankruptcy Court, W.D. Michigan. 6 Cases that cite this headnote IN RE: Jerry L. JOHNSON, Debtor.

Case No. DG 15–02000 | Attorneys and Law Firms Signed June 16, 2015 Roger G. Cotner, Cotner Law Offices, Grand Haven, MI, for Synopsis Debtor. Background: United States Trustee filed motion to dismiss Chapter 13 case of debtor, who had a medical marijuana *54 MEMORANDUM OF DECISION AND ORDER business under the Michigan Medical Marihuana Act (MMMA), asserting that the bankruptcy court should not PRESENT: HONORABLE SCOTT W. DALES, Chief enforce the protections of the Bankruptcy Code to aid United States Bankruptcy Judge violations of the federal Controlled Substances Act (CSA). I. INTRODUCTION The country's relationship with marijuana is changing, slowly, and one person's pusher is another's caregiver. Jerry L. [Holding:] The Bankruptcy Court, Scott W. Dales, Chief Johnson (the “Debtor”), a licensed “caregiver” and marijuana Judge, held that court would enjoin debtor from conducting 1 his medical marijuana business and violating the CSA, rather grower under the Michigan Medical Marihuana Act filed than dismiss case. for relief under chapter 13 after falling behind on his house payments, his utility payments, and at least one payment on his truck. His case presents the question of whether his Ordered accordingly. business, legitimate under state law but criminal under federal law, precludes the court from granting him the relief available under the United States Bankruptcy Code.

West Headnotes (1) The United States Trustee filed a motion to dismiss (the “Motion,” DN 37), arguing that “the debtor appears to be [1] Bankruptcy engaged in the marijuana industry and the Court should ... Injunction or stay of other proceedings not enforce the protections of the Bankruptcy Code to aid violations of the federal Controlled Substances Act.” See Bankruptcy Motion at p. 1. ... Grounds or cause in general; bad faith Bankruptcy court would enjoin Chapter 13 The court expedited its consideration of the Motion, and held debtor, who had a medical marijuana business an evidentiary hearing on June 15, 2015, in Grand Rapids, under the Michigan Medical Marihuana Act Michigan, at which the Debtor, the United States Trustee, and (MMMA), from conducting his business and the standing chapter 13 trustee, Brett N. Rodgers, all appeared violating the Controlled Substances Act (CSA) through counsel. 2 while his case was pending, rather than dismiss his case; debtor could not conduct an enterprise After listening to the Debtor's testimony and the arguments that violated federal criminal law while enjoying of counsel, the court took the matter under advisement. the federal benefits the Bankruptcy Code The following constitutes the court's findings of fact and afforded him, but at the same time, debtor had conclusions of law in accordance with Fed. R. Civ. P. 52, filed his case in good faith, and he was in applicable in this contested matter pursuant to Fed. R. Bankr. dire need of bankruptcy relief and the court's P. 9014(c) and 7052. assistance. Controlled Substances Act, § 101 et

per patient), and that he has never sold marijuana to minors II. JURISDICTION or outside Michigan. As for his personal use, he is eligible The United States District Court has jurisdiction over the to use marijuana under the MMMA due to certain medical Debtor's chapter 13 case pursuant to 28 U.S.C. § 1334(a), conditions, but he refrains from using it because he does not but has referred the case and all related proceedings to the like feeling “stoned.” United States Bankruptcy Court pursuant to 28 U.S.C. § 157(a) and W.D. Mich. LCivR 83.2(a). The Motion, which The Debtor further testified that he grows the marijuana seeks dismissal, is a contested matter raising the question of plants in the basement of his Residence, where he still lives the Debtor's eligibility for relief under title 11, and therefore because the foreclosure sale was stayed by the filing of lies at the core of the Bankruptcy Court's authority. 28 U.S.C. his chapter 13 petition. The court infers from the Debtor's § 157(b)(2)(A) & (O). The court, therefore, has authority to testimony that he uses his truck to transport the marijuana enter a final order in this contested matter. either to his “patients” or to the dispensary where he sells any surplus above the patients' requirements. The Residence, the truck, all horticultural items, including fertilizer and any III. ANALYSIS growing lights that the Debtor uses in connection with his 1. The Debtor's Testimony marijuana business, are included within the property of his The Debtor testified credibly under oath that he is a sixty- bankruptcy estate pursuant to § 541(a) or § 1306 (to the extent six year old man who lives in a house he has owned he acquired any such property post-petition). And, because for approximately nine years in Spring Lake, Michigan the Debtor filed for relief under chapter 13, all post-petition (the “Residence”). The Residence serves as collateral for a earnings from his marijuana business and his Social Security income are also included within the bankruptcy estate under mortgage loan, and because the loan is in default, 3 the *55 § 1306(a), although the Social Security benefits may not be Debtor's lender scheduled a foreclosure sale for April 2, 2015. available to pay claims without the Debtor's consent. To prevent the foreclosure, the Debtor filed his bankruptcy petition on April 1, 2015. The Debtor said he filed for protection under the Bankruptcy Code to save his Residence, prevent the termination of utility The Debtor also testified that he fell behind on his payments services, and avoid repossession of his truck—in his words, for electric service at the Residence, which prompted the to avoid turning his world “upside down.” The court credits utility company to threaten termination of the service. In his report, and assumes that he shares this motivation with addition, he was slightly late in making truck payments, and most other debtors on the court's consumer docket. Indeed, worried that his lender might repossess the vehicle. except for the fact that he derives almost half of his income from the cultivation of marijuana, the Debtor has much in As he evidently did during the meeting of creditors, the common with many older debtors in our District who have Debtor testified that his income consists of approximately health problems and difficulty making ends meet. $1,203.00 per month from the Social Security Administration, which he became entitled to receive four years ago, and The Debtor testified that he has already made two payments approximately $1,000.00 per month that he derives from to his chapter 13 trustee, *56 and that the source of those cultivating and selling marijuana to three patients and a payments was his Social Security income, rather than income regulated dispensary, pursuant to the MMMA. According from his marijuana business. He said that his monthly Social to his testimony, he is a registered “caregiver” under the Security benefit of $1,203.00 is directly deposited into one of MMMA. His identification card, admitted as Exhibit A, his two bank accounts on the third day of each month, and that shows that he has a “Registry Number” under the Michigan he made his pre-confirmation plan payments on the fourth or Medical Marihuana Program issued by the Michigan fifth day of May and June. According to the Debtor's proposed Department of Licensing and Regulatory Affairs. plan, his monthly plan payment is $948.00, well below his monthly Social Security benefit. Notwithstanding the The Debtor contended, without controversy, that possibility that proceeds of the Debtor's marijuana business his marijuana-related business activities—cultivation, 4 were commingled with the Social Security benefits, the court possession, and sale—all comply with the MMMA. He finds by a preponderance of the evidence that the Debtor used stated that the amount of marijuana he possesses from time to time is within the legal limits (i.e., 2 ½ ounces and 12 plants

WESTl.AW © 2020 Thomson Reuters. No claim to original74 U.S. Government Works. 2 In re Johnson, 532 B.R. 53 (2015) his retirement benefits to fund his plan payments in May and seems likely, his continued operation of the business depends June. upon the court's acquiescence. See 11 U.S.C. § 1304(b). The Debtor's financial life is inextricably bound up with his federal criminal activity through the chapter 13 plan, even 2. Legal Analysis if he segregates proceeds of that activity. The two aspects The parties agree, as they must, that Michigan law and of the Debtor's life cannot be hermetically sealed from each federal law diverge in the treatment of marijuana, at least other, and the pervasive benefits of bankruptcy will invariably with respect to so-called “medical marijuana.” Assuming advance both. compliance with the MMMA, a person may cultivate, possess, and even distribute some amount of the plant or Second, as a statutory matter, the same reasons that its products without offending the laws of Michigan. See preclude the Standing Trustee from holding contraband generally M.C.L. § 333.26421 et seq. Federal law, in contrast, or using proceeds or instrumentalities of federal criminal criminalizes possession and distribution of marijuana—the activity apply to a debtor in possession. Cf. 28 U.S.C. § very activities that are central to the Debtor's business 959(b); In re Commonwealth Oil Ref. Co., 58 B.R. 608 model—with exceptions only for limited, federally approved (Bankr.W.D.Tex.1985) (construing 28 U.S.C. § 959(b) as research activities. See 21 U.S.C. § 801 et seq. (the Controlled requiring trustees and debtors in possession to comply Substances Act or “CSA”); see also United States v. Hicks, with federal and state law). It goes without saying that 722 F.Supp.2d 829 (E.D.Mich.2010). The Debtor's marijuana a bankruptcy trustee must abide by federal law, including business, though presumably authorized as a matter of state federal criminal law, and the Debtor seems to concede the law, violates federal criminal law. This is true as a legislative point. It requires no stretch of the imagination to extend that matter, irrespective of any statements that the United States requirement to bankruptcy debtors who remain in possession Attorney General or any deputy may have made about the of estate property, 7 and who use that property or conduct 5 exercise of prosecutorial discretion as an executive matter. their business under the court's aegis. The court reads §§ 1303 and 1304 as bestowing on a chapter 13 debtor the authority By sanitizing the plan payments (i.e., segregating marijuana to use estate property that a trustee would have under various proceeds from Social Security benefits) and by distinguishing subsections of § 363, subject to the same limitations that the case law upon which the United States Trustee relies, 6 the would otherwise bind a trustee. See 11 U.S.C. §§ 1303 and Debtor implicitly concedes the impropriety of requiring the 1304. If the Standing Trustee is precluded by federal criminal Standing Trustee to hold the proceeds of the Debtor's criminal law from using estate property in a certain manner, the Debtor activity and to use those funds to pay claims under a court- as debtor in possession is similarly precluded. approved plan. Indeed, the court will not lend its office to such an arrangement for several reasons. The United States Trustee contends that the Debtor's postpetition medical marijuana business violates federal law and First, federal judicial officers take an oath to uphold federal renders the Debtor ineligible for relief under the Bankruptcy law, and countenancing the Debtor's continued operation of Code. The court accepts the United States Trustee's premise, his marijuana business under the court's protection is hardly but the conclusion that dismissal is required does not consistent with that oath. Even if the Debtor scrupulously necessarily follow. segregates the proceeds of his criminal activity from his Social Security benefits in the future, money is fungible The Debtor's business is patently incompatible with a and the arrangement would invariably taint the court and bankruptcy proceeding, but his financial circumstances are the Standing Trustee. In other *57 words, irrespective of not. In other words, if the Debtor were not engaged in any segregation of funds, the court and the Standing Trustee post-petition criminal activity, there would likely be no carrying out their respective statutory duties will inevitably controversy about his eligibility for relief under chapter 13. 8 support the Debtor's criminal enterprise. The automatic stay The problem, of course, is that he derives nearly half of preserves the Debtor's title and possession to the Residence his income from activity that Congress forbids as criminal. where he cultivates the marijuana, the horticultural equipment The Debtor, it seems, must choose between conducting his and fertilizers he uses to grow it, and even the truck in medical marijuana business and pursuing *58 relief under which he transports it. To the extent that the Debtor is the Bankruptcy Code. The court has ample authority to “engaged in business” within the meaning of § 1304(a), which require him to make that choice, and given his obvious

WESTl.AW © 2020 Thomson Reuters. No claim to original75 U.S. Government Works. 3 In re Johnson, 532 B.R. 53 (2015) financial distress, the court concludes that this approach is connection with the violation of the CSA puts the property preferable to dismissal. (and the related secured creditors) at risk of forfeiture. See, e.g., 21 U.S.C. §§ 856 & 881. The court has the authority to Although neither party cited the statute, the Debtor's mitigate that risk. testimony that he is running a sole-proprietorship from his Residence prompts the court to consider the role that § 1304 Under these unusual circumstances, the Debtor must make a plays in this proceeding. The Debtor is self-employed, and choice. He can either continue his medical marijuana business appears to be incurring trade debt in connection with the or avail himself of the benefits of the Bankruptcy Code, but business, at least in the form of debts for electricity. 9 not both. If he chooses the latter, the court will require him to discontinue growing, selling and transferring marijuana to He is arguably “engaged in business” within the meaning of any and all patients and dispensaries immediately and to cease § 1304 which provides in relevant part as follows: using property of the estate to further this activity.

With respect to the marijuana plants themselves (and any products or inventory derived therefrom) included within Unless the court orders otherwise, the estate pursuant to §§ 541(a) and 1306(a), because their a debtor engaged in business may contraband nature renders them of inconsequential value and operate the business of the debtor burdensome to the estate as a matter of law, the court will and, subject to any limitations on a order abandonment of the marijuana plants and any products trustee under sections 363(c) and 364 or inventory *59 derived therefrom without further notice of this title and to such limitations or opportunity for hearing. See 11 U.S.C. §§ 102(1) and or conditions as the court prescribes, 554. Furthermore, the court will order the Debtor to destroy shall have, exclusive of the trustee, the the marijuana plants and any product or inventory derived rights and powers of the trustee under therefrom forthwith. Eliminating the contraband from the such sections. estate by way of immediate abandonment, and ordering its destruction as a condition of the Debtor's eligibility to proceed further, will remove the shadow that the contraband casts on 11 U.S.C. § 1304(b) (emphasis added). Based upon the this proceeding, the Standing Trustee, and the court. Debtor's testimony, the court finds that he is using estate property (including the Residence, his truck, and all horticultural equipment, fertilizer and other supplies) in IV. CONCLUSION connection with his marijuana growing business, assuming In the court's view, the Debtor cannot conduct an enterprise the term “business” encompasses commercial activity that is that admittedly violates federal criminal law while enjoying legitimate under state law, but not federal. If so, §§ 363(c) and the federal benefits the Bankruptcy Code affords him. “There 1304 authorizes chapter 13 debtors to use estate property to is no constitutional right to obtain a discharge of one's debts conduct business, “[u]nless the court orders otherwise.” See in bankruptcy,” United States v. Kras, 409 U.S. 434, 446, 93 11 U.S.C. §§ 363(c) and 1304. Moreover, to the extent that S.Ct. 631, 34 L.Ed.2d 626 (1973), and it is not asking too the Debtor is not “engaged in business” within the meaning much of debtors to obey federal laws, including criminal laws, of § 1304, he may only use estate property with the court's as a condition of obtaining relief under the Bankruptcy Code. permission under § 363(b), which the court would obviously withhold for all the reasons set forth above. At the same time, the Debtor filed his case in good faith, and it is quite obvious from his credible testimony that he is For slightly different reasons, the court could prohibit or in dire need of bankruptcy relief and the court's assistance. condition the use of property that serves as collateral—here The court is willing to assist, provided, however, the Debtor the Residence and truck—to provide adequate protection. discontinues the medical marijuana business. See 11 U.S.C. § 363(e) (on request of creditor court may, at any time, prohibit or condition use of property to provide To balance the court's (and the Debtor's) obligations under adequate protection); id. § 105(a) (Bankruptcy Code shall not federal law, including federal criminal law, the Debtor's be construed to prevent court from taking action sua sponte). legitimate need for relief under chapter 13, and Michigan's The Debtor's current use of these two items of property in policy choices reflected in the MMMA, the court will refrain

from dismissing the Debtor's case at this time, but will enjoin immediately, and therefore no longer included within the him from conducting his medical marijuana business (and estate; violating the CSA), while his case is pending. (3) the Debtor shall forthwith destroy any marijuana plants, If, however, the Debtor prefers to continue his illicit business by-products or other substances derived from the marijuana activity (albeit subject to the possibility of federal criminal plants, which are in his possession, custody, or control, as a prosecution), he need only file a motion to dismiss this case condition of continuing as a debtor in bankruptcy; under § 1307(b), and the court's injunction will cease upon dismissal. (4) unless the case is sooner dismissed, the Clerk shall schedule an evidentiary hearing to consider the Debtor's To ensure compliance with the injunction, the court will hold compliance with this Order, to be held not later than 14 days an evidentiary hearing in the next several weeks, at a date to be after entry of this Order; and determined, to hear from the Debtor, under oath and subject to cross-examination, about the steps he has taken in response to *60 (5) the United States Trustee's Motion (DN 37) is this Order. If the court concludes that the Debtor has violated DENIED without prejudice to renewal, including by oral the court's injunction, it will almost certainly dismiss the case motion at the evidentiary hearing contemplated in this Order. at that time. IT IS FURTHER ORDERED that the Clerk shall serve a NOW, THEREFORE, IT IS HEREBY ORDERED as copy of this Memorandum of Decision and Order upon Jerry follows: L. Johnson, Roger G. Cotner, Esq., Brett N. Rodgers, Esq., chapter 13 trustee, Michelle Wilson, Esq., and the United (1) the Debtor shall forthwith cease using any property States Trustee, pursuant to Fed. R. Bankr. P. 9022 and LBR of the estate, including but not limited to the Residence, 5005–4. the truck, the horticultural equipment, the fertilizer or any other property, directly or indirectly, in connection IT IS SO ORDERED. with the possession, cultivation, sale, distribution, or other transfer of marijuana, irrespective of any regulation under, or All Citations compliance with, the MMMA; 532 B.R. 53 (2) any and all marijuana plants included within the estate under §§ 541 or 1306 are hereby ABANDONED, effective

Footnotes 1 M.C.L. § 333.26421 et seq. (hereinafter the “MMMA”). 2 The chapter 13 standing trustee, Brett N. Rodgers (the “Standing Trustee”), filed a similar motion, which the court scheduled for hearing at a later date. During the June 15, 2015 hearing, the Standing Trustee largely deferred to the United States Trustee regarding the Motion. 3 According to the Debtor's plan documents, which the court takes judicial notice of pursuant to Fed. R. Evid. 201, the Debtor is behind on his payments to “America's Servicing” in the amount of approximately $10,000.00. Through this proceeding he hopes to cure the default with funds from a program known as “Step Forward Michigan” operated through the Michigan State Housing Development Authority. 4 Nothing in this decision should be construed as finding that the Debtor's activities are legal as a matter of state law. Rather, like the United States Trustee, the court simply assumes the legality for purposes of argument. 5 The Debtor attaches to his responding brief two memoranda from high-ranking officials at the United States Department of Justice offering guidance to federal prosecutors regarding enforcement of the CSA in states, like Michigan, that have decriminalized marijuana under state law. Although the memoranda sensibly encourage prosecutors to think twice before suing cancer patients in states that permit medical use of marijuana, both clearly state that “Congress has determined that marijuana is a dangerous drug, and the illegal distribution and sale of marijuana is a serious crime ... ” See Memorandum

from Deputy Attorney General David W. Ogden to Selected United States Attorneys dated Oct. 19, 2009 (DN 56–2) and Memorandum from Deputy Attorney General James M. Cole to United States Attorneys dated June 29, 2011 (DN 56–3). 6 See, e.g., In re Rent–Rite Super Kegs West, Ltd., 484 B.R. 799, 805 (Bankr.D.Colo.2012). 7 11 U.S.C. § 1306(b). 8 The Debtor earnestly testified about his genuine financial problems, and about his efforts to pursue a business that his state regards as legitimate. Michigan's decriminalization and regulation of medical marijuana tends to undercut any finding of bad faith premised on the nature of his business. The Debtor, on the verge of foreclosure and facing the shutoff of utility service, is clearly in financial distress. He has health problems and, at sixty-six years of age, has limited earning potential. He apparently gave candid testimony during the meeting of creditors about the nature of his business, and continued his candor before the court during the hearing on June 15, 2015. He appears to be an honest and unfortunate debtor. Under the circumstances, the court does not regard this case as having been filed in bad faith, notwithstanding the CSA. 9 The court infers that the sizeable utility debts listed in the Debtor's schedules are attributable in part to the horticultural lighting almost certainly required for growing marijuana plants in one's basement. In the context of this Debtor's business, therefore, the utility debt qualifies as “trade debt” as used in § 1304(a).

Proposed Chapter 13 plan that was to be funded with income generated from debtor's sale, for 453 B.R. 770 medicinal purposes, of controlled substance United States Bankruptcy Court, D. Oregon. whose production was illegal under federal law In re Michael Lee McGINNIS, Debtor. was not proposed in compliance with applicable federal law and could not be confirmed. 11 No. 11–60010–fra13. U.S.C.A. § 1325(a)(3). | June 9, 2011. 3 Cases that cite this headnote

Synopsis [3] Bankruptcy Background: Chapter 13 trustee objected to confirmation Claims and assets; propriety and feasibility of debt adjustment plan that was to be funded with income ... in general generated from medicinal sale of marijuana. Proposed Chapter 13 plan that was to be funded with income generated from debtor's sale, for medicinal purposes, of controlled substance that Holdings: The Bankruptcy Court, Frank R. Alley, III, Chief could not be sold at profit, even for medicinal Judge, held that: purposes, under Oregon law as written, was not proposed in compliance with applicable state [1] proposed plan that was to be funded with income law and could not be confirmed. 11 U.S.C.A. § generated from debtor's sale, for medicinal purposes, of 1325(a)(3). controlled substance whose production was illegal under federal law was not proposed in compliance with applicable 2 Cases that cite this headnote federal law and could not be confirmed;

[4] Bankruptcy [2] plan was not in compliance with applicable state law ... Claims and assets; propriety and feasibility either; and in general

[3] plan was not “feasible” and could not be confirmed. Proposed Chapter 13 plan that was to be funded with income generated from medicinal sale of controlled substance whose production Confirmation denied. was illegal under federal law, and which could not be sold at profit under law of state, was not “feasible” and could not be confirmed. 11 U.S.C.A. § 1325(a)(6). West Headnotes (4) 2 Cases that cite this headnote [1] Bankruptcy ... Claims and assets; propriety and feasibility in general Attorneys and Law Firms In order for a proposed Chapter 13 plan to be confirmed, it must be in compliance, not only *771 Keith Y. Boyd, Medford, OR, for Debtor. with title 11, but with other applicable federal and state law. 11 U.S.C.A. § 1325(a)(3). MEMORANDUM OPINION RE: CONFIRMATION

FRANK R. ALLEY, III, Chief Judge. [2] Bankruptcy ... Claims and assets; propriety and feasibility An evidentiary hearing on confirmation of Debtor's Chapter in general 13 Plan of Reorganization was held on March 22, 2011

WESTLAW © 2020 Thomson Reuters. No claim to original79 U.S. Government Works. 1 In re McGinnis, 453 B.R. 770 (2011) and the matter was taken under advisement. The Chapter 13 At the end of the March 22 hearing I expressed some doubt Trustee and the Debtor were each given the opportunity to file as to whether a plan could be confirmed which relied upon post-hearing briefs regarding the confirmability of Debtor's the cultivation and sale of a product (marijuana) which is business plan. Having reviewed those memoranda, the record still classified as a Schedule 1 drug, and thus illegal for most in this case, and relevant law, I find that the Debtor's Pre– purposes, under federal law. The Trustee and the Debtor were Confirmation Amended Plan dated February 1, 2011 (the invited to brief this issue and have done so. Plan) cannot be confirmed. My reasons follow.

DISCUSSION11 U.S.C. § 1325(a)(3) 1 BACKGROUND Debtor filed for chapter 13 bankruptcy on January 3, 2011. A. Debtor's Proposed Operations Violate Federal Law Debtor's Plan provides for a monthly plan payment of $200 [1] [2] Section 1325(a)(3) requires that a chapter 13 “plan for six months, $2,350 for twelve months, $3,700 for the next has been proposed in good faith and not by any means twelve months, and $5,050 for the remaining six months. The forbidden by law.” I interpret this as meaning, at least in money for the plan payments will come from three sources: 1) part, that in order for a plan to be confirmed, it must be in A business under the name of Oregon Medical Growers, LLC, compliance with not only Title 11, but other applicable federal owned by the Debtor, in which a warehouse would be leased and state law. See 8 Collier on Bankruptcy ¶ 1325.04[2] and space would be rented to medical marijuana growers, (16th ed. 2011). Because Debtor's Plan depends on a product 2) Profits the Debtor hopes to obtain from his own medical the cultivation and sale of which violates federal law 2 , I marijuana operation, and 3) Rental income from commercial cannot find that the Plan meets the requirements of § 1325(a) property in Mesa, Arizona, housing a number of tattoo artists. (3). Debtor argues that the current Federal administration has stated that it will generally not interfere with medical The Plan provides for the sale of the Arizona commercial marijuana operations that are in compliance with state law 3 ; property by December 31, 2012, but if it is not sold prior to however, this does not change the fact that those operations that date the Debtor will continue to make the scheduled plan are still illegal under federal law. While a medical marijuana payments to pay off his plan. The Plan also provides for the grower who is in compliance with state law may find the sale of real property in Coos Bay adjacent to the property on risks acceptably small and of little deterrence to his operation, which Debtor resides. However, Debtor testified at the March when that grower files bankruptcy, § 1325(a)(3) prevents 22 hearing that his mother is now living in that property and confirmation of a plan depending on that operation. he no longer plans to sell it.

Schedule A of Debtor's bankruptcy petition indicates that B. Debtor's Proposed Operations Violate State Law the Arizona commercial property is worth $1,000,000 with [3] Debtor's Plan depends heavily on projected annual net secured debt of $6,922 and the real property adjacent to income of $56,400 4 from Debtor's own medical marijuana his residence has a value of $250,000 with secured debt of grow operation. The profit from this operation, however, is $35,000. Unsecured claims per the Debtor's schedules total currently not allowed under Oregon's Medical Marijuana Act. $62,192. Schedule B lists a 1959 El Camino and indicates that O.R. S. 475.304(7) provides that “[a] registry identification it is “in pieces, no value.” On February 18, 2011 Debtor filed cardholder or the designated primary caregiver of the a notice of intent to sell the vehicle to a party in Connecticut cardholder may reimburse the person responsible for a for $25,000. At the confirmation hearing on March 1, 2011, marijuana grow site for the costs of *773 supplies and Debtor's attorney indicated that the sale had been completed utilities associated with the production of marijuana for the and that the Debtor needed the sale proceeds for *772 his registry identification cardholder. No other costs ... may business. I directed at that hearing that the sale proceeds be 5 held and not spent. At the March 22 hearing, Debtor testified be reimbursed.” Under that provision, the Debtor could that the vehicle had already been sold and $14,079 of the be reimbursed only for supplies and utilities, estimated by net proceeds of $22,500 had been spent on the marijuana Debtor at $15,600, and any additional payments would be warehouse operation prior to the date the notice of intent to illegal. O.R.S. 475.316 makes this explicit by providing at sell was filed with the court on February 18. subsection (d) that no person authorized to possess, deliver, or produce marijuana for medical use under the Medical Marijuana Act is exempted from Oregon's general drug laws

if that person “[d]elivers marijuana for consideration to any Other Matters individual, even if the individual is in possession of a registry The Debtor's undervaluing of the El Camino in his identification card.” [emphasis added]. Debtor testified that schedules 6 and the sale of property of the estate and use he has been lobbying the Oregon legislature for changes in of the majority of the proceeds without court permission law that would allow for the sale of medical marijuana at a also have implications with regard to Debtor's good faith. profit. I take judicial notice of the fact that the legislature has Debtor's testimony that he believed he had permission to not made such changes to the law and that a ballot measure sell the vehicle I find to be dubious. However, because was defeated in November, 2010 that would have allowed for of Debtor's equity in real property, he is required to pay medical marijuana to be sold in dispensaries. unsecured creditors in full. If Debtor can propose an amended Plan of Reorganization which meets the requirements of Feasibility—11 U.S.C. § 1325(a)(6) the Bankruptcy Code, I would be prepared to allow its [4] Code § 1325(a)(6) provides as a condition of confirmation. confirmation that “the debtor will be able to make all payments under the plan and to comply with the plan.” CONCLUSION Because the sale and cultivation of marijuana as envisioned For the reasons given, Debtor's Amended Plan of in Debtor's Plan is illegal under federal law, I cannot Reorganization dated February 1, 2011, cannot be confirmed. find that the predicted income stream from the marijuana An order will be entered denying confirmation and providing operations is reasonably certain to produce sufficient income that an amended plan be filed within 28 days. Should Debtor to fund the Plan, despite federal authorities' current position fail to file an amended plan in the time allowed, the Court regarding medical marijuana operations. Moreover, Debtor's will enter an order to show cause *774 why the Debtor's own medical marijuana grow operation would require a bankruptcy case should not be dismissed or converted to one change in Oregon law before it would be in compliance with under chapter 7. state law. While Debtor has testified that he has been lobbying to have changes made to the Oregon Medical Marijuana Act, there is no evidence that changes as sought by the Debtor are All Citations imminent. 453 B.R. 770

Footnotes 1 Unless otherwise specified, all statutory references herein are to the Bankruptcy Code, 11 U.S.C. §§ 101 to 1532. 2 See 21 U.S.C. § 812(c)(10) designating marijuana as a Schedule 1 controlled substance. 21 U.S.C. §§ 841 to 863 describe prohibited acts involving controlled substances and penalties therefor. 3 The government's posture may not be all that clear: On June 3, 2011, the United States Attorney for Oregon and 33 of Oregon's 36 District Attorneys released a “Notice to Owners, Operators and Landlords of Oregon Marijuana Dispensaries” stating that “The sale of marijuana for any purpose—including as medicine—violates both Federal and Oregon law and will not be tolerated,” and that property used by anyone to cultivate marijuana for sale may be subject to forfeiture. As of the date this opinion was issued, the document could be viewed at http://www.justice. gov/usao/or/ Indictments/06032011_Marijuana.pdf. The reader should understand, however, that the Court's decision is based on the statutes cited in this Memorandum, and not the transient policies of agencies charged with enforcement of the criminal laws. 4 Annual gross income of $72,000 less expenses of $15,600 for supplies and utilities. 5 It is unclear whether rental expense is included in the term “costs of supplies and utilities associated with the production of marijuana”; if it is not, Debtor's business plan respecting the grow site rental operation is untenable, because his tenants would not be able to recoup the costs of renting space for growing. 6 While the El Camino sold for $25,000 shortly after Debtor filed bankruptcy, he testified at the March 22, 2011 hearing that he sold it at a bargain price to obtain a quick sale and, in fact, it could have been worth twice what he received for it. Schedule B listed the vehicle as worth nothing.

Debtor's postpetition acceptance of rents from the dispensary business was an ongoing criminal violation that disqualified 2018 WL 989263 her from bankruptcy relief. Only the Westlaw citation is currently available. NOT FOR PUBLICATION Because the bankruptcy court did not make adequate findings United States Bankruptcy Appellate for us to discern the standard under which it concluded that Panel of the Ninth Circuit. dismissal was mandatory, we VACATE and REMAND. IN RE: Patricia G. OLSON, Debtor. Patricia G. Olson, Appellant, 2 v. FACTS Prepetition, Debtor Patricia G. Olson was the general William Albert Van -Meter, Chapter 13 Trustee; partner of Olson Bijou Center, L.P., a California limited Cody Bass; City of South Lake Tahoe; United partnership (“OBC”). OBC owned- real property on Lake States of America;- U.S. Bank, N.A., Appellees. Tahoe Boulevard- in South Lake Tahoe, California, known as the Olson Bijou Shopping Center (the “Shopping Center BAP No. NV–17–1168–LTiF Property”). | - Bk. No. 3:17–bk–50081–BTB Beginning in January 2013, Appellee Cody Bass began | leasing space in the Shopping Center Property from OBC; Argued and Submitted on December 1, 2017 although the record includes only an unsigned copy of the | lease, the signature block on the lease indicates that it was FILED—February 5, 2018 to be signed by Debtor's son, Patrick Olson, as manager of Appeal from the United States Bankruptcy Court for the OBC. 3 The lease expressly authorized Mr. Bass to operate a District of Nevada, Honorable Bruce T. Beesley, Bankruptcy 4 - “dispensary.” Pursuant to that authority, Mr. Bass operated Judge, Presiding at the leased premises Tahoe Wellness Cooperative (“TWC”), a marijuana dispensary authorized under California law. Both Attorneys and Law Firms the operation of the dispensary business and the leasing Anne J. Williams of the Law Offices of J. Craig Demetras of the premises for such a business, however, potentially argued for Appellant Patricia G. Olson; violated the federal Controlled Substances Act, 21 U.S.C. §§ 801–904 (“CSA”). The CSA classifies marijuana as a Seth Joseph Adams of Woodburn- & Wedge argued for controlled substance, 21 U.S.C. § 812, and makes it unlawful Appellee Cody Bass. to

Before: LAFFERTY, TIGHE, * and FARIS, Bankruptcy (1) knowingly open, lease, rent, use, or maintain any Judges. place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using any controlled substance; MEMORANDUM ** (2) manage or control any place, whether permanently or Memorandum by Judge Lafferty temporarily, either as an owner, lessee, agent, employee, occupant, or mortgagee, and knowingly and intentionally *1 The Debtor is 92 years old, legally blind, and resides in rent, lease, profit from, or make available for use, with 1 an assisted living facility. She sought chapter 13 relief to or without compensation, the place for the purpose of stop foreclosure of her commercial real property. One of the unlawfully manufacturing, storing, distributing, or using a tenants at that property operated a marijuana dispensary on controlled substance. the premises and continued to pay rent to Debtor postpetition. Debtor's plan called for her to sell the commercial real *2 21 U.S.C. § 856(a). property to pay off all creditors. At the hearing on the motion to sell and reject the lease with the tenant, the bankruptcy In early 2016, Mr. Bass and OBC entered into a letter of intent court dismissed the case sua sponte on the ground that for Mr. Bass to purchase the Shopping Center Property for

$4.2 million; Mr. Bass made a $25,000 payment to Debtor's collateral stipulation extending the agreement to use cash attorney pursuant to the letter of intent. Shortly thereafter, collateral through July 31, 2017 and modifying the budget Mr. Bass, OBC, and Debtor entered into an option agreement, to exclude the rent from TWC. There is no evidence in the which expired on March 3, 2016. Mr. Bass tendered an record to indicate whether the postpetition rents paid by Mr. additional $50,000 to be applied to the purchase price if the Bass were used to make payments pursuant to the initial option were exercised. According to Mr. Bass' declaration in cash collateral stipulation; other than Debtor's counsel's oral support of his opposition to the motion to sell, he gave notice representation that the May 2017 rent payment was being held on April 1, 2016, that he was exercising the option agreement. in a safe in his office, the record does not show what happened He asserted that this notice was timely based on a First to those funds at all. Amendment to Option Agreement attached to his declaration, which extended the deadline for exercising the option to April Debtor's proposed chapter 13 plan called for monthly 4, 2016 and appears to be signed by Debtor. But in Debtor's payments of $150 for 12 months and $2,100 for 48 months. second declaration in support of pending motions, she stated The plan also provided that Debtor would sell the Shopping that Mr. Bass came to her assisted living facility on March 3, Center Property within six months of plan confirmation and 2016, the day the option agreement expired, and asked her to use the net proceeds to pay all administrative, priority, and sign papers, but she did not understand what she may have unsecured claims. signed, and she believed Mr. Bass misled her into “signing something.” 5 In April 2017, Debtor filed a motion to sell free and clear under § 363(f) the Shopping Center Property and the adjacent OBC and Debtor did not perform under the option agreement, property, which she also owned, for $3 million. Among the and, in May 2016, Mr. Bass sued OBC, Debtor, and Mr. Olson conditions of the sale of the Shopping Center Property were in El Dorado County Superior Court for damages and specific (i) court approval of the rejection or termination of Mr. performance. - Bass' lease and the commencement of eviction proceedings by Debtor; and (ii) court-ordered rejection, termination, or The Shopping Center Property was encumbered by a deed of voiding of the option agreement with Mr. Bass. Debtor also trust in favor of U.S. Bank, N.A. In August 2016 U.S. Bank filed a motion to reject the lease and the option agreement recorded a notice of default, and in December 2016 it recorded with Mr. Bass. 6 In her declaration in support of the motion a notice of sale. The foreclosure sale was set for February 1, to reject, Debtor stated that she had entered into the lease 2017. with Mr. Bass in January 2013 and that Mr. Bass “currently operates a medical marijuana dispensary at 3443 Lake Tahoe On January 30, 2017, Debtor filed a chapter 13 petition, which Blvd[.]” In a subsequent declaration filed May 11, 2017, stayed both the foreclosure and the Bass litigation. That same Debtor further testified: day, she filed a quitclaim deed transferring OBC's interest in the Shopping Center Property to herself individually. Mr. 1. am 92–years [sic] old and legally blind. I live in an Bass continued to pay rent postpetition to Debtor or her assisted living facility in Sparks, Nevada. counsel. ....

*3 About a month after the bankruptcy filing, the bankruptcy 9. t times prior to the filing of this case, my son, Patrick court approved a stipulation between Debtor and U.S. Bank Olson, acted and served as my attorney-in-fact. In doing for the use of cash collateral for Debtor's ordinary operating so, Patrick managed most of my financial affairs, which expenses and maintenance of the Shopping Center Property -included the management of 949 Bal Bijou Road and 3443 as well as assisted living expenses and health insurance, Lake Tahoe Blvd. Patrick's duties included obtaining leases through April 2017. In exchange, Debtor granted U.S. Bank for the properties, collecting rents and paying all expenses, a postpetition replacement lien on all rents generated from such as the secured mortgage payment to U.S. Bank, real the Shopping Center Property and agreed to make adequate property taxes and insurance premiums. protection payments of $4,000 per month. According to the stipulation, at that time expected rental income was $16,220 10. n 2012, Patrick Olson, through Olson Bijou Center per month, including TWC's monthly rental payment of L.P., leased space at 3443 Lake Tahoe Blvd. to Cody Bass. $10,200. In early May 2017, the court approved another cash --

.... Hr'g Tr. (May 22, 2017) at 6:4–5; 22–25. In response to a request for clarification from Debtor's counsel, the court 15. wish to end any involvement with Mr. Bass and his explained: illegal business. I do not want to use money from Mr. Bass to fund my Chapter 13 Plan. I don't want to sell my property to Mr. Bass and do not want to finance his purchase of 3343 [I]f the debtor has committed a crime Lake Tahoe Blvd. I wish only to terminate any dealings during the course of the bankruptcy with Mr. Bass and to sell my property and pay my creditors and continued for several months to in full. commit a crime during the course of the bankruptcy, I think that is Mr. Bass opposed both motions. In his declaration in support a basis for not providing relief to of his opposition to the motion to sell, Mr. Bass confirmed that the debtor. Had the debtor, prior he had been operating a marijuana dispensary on the premises to filing bankruptcy or not during pursuant to the terms of his lease with OBC and that he had the bankruptcy had not committed paid rent to the Debtor postpetition. the crime of taking money from a marijuana operation, I would Shortly thereafter, the chapter 13 trustee filed a motion to feel differently. But that's not what dismiss for failure to make plan payments and for failure happened here. Because you don't, in to file an amended plan. Mr. Bass also filed a motion to my opinion, get to go through five or dismiss the case on grounds that Debtor's acceptance of rents six months of a bankruptcy knowingly from his marijuana dispensary violated the CSA. Neither of receiving illegal proceeds and then those motions were heard because they were mooted by the say, oh, I'm not going to take those bankruptcy court's sua sponte dismissal of Debtor's case. anymore, I want to sell the property now, so I get to play here. I don't think *4 At the initial hearing on the motion to sell and motion that's correct. to reject, the bankruptcy court questioned whether it could authorize the sale, given that the Debtor had been accepting rents from leasing a marijuana dispensary; the parties argued the issue, and the court continued the matter for a few days Id. at 7:17–8:3. The bankruptcy court entered its sua sponte to study the relevant authorities. At the continued hearing, order dismissing the case on May 31, 2017; the court also the court heard additional argument but concluded, based on granted a stay pending appeal. Debtor timely appealed. its interpretation of relevant case law, that because Debtor had continued to receive rent postpetition, the case had to be JURISDICTION dismissed: The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158. I think it's a crime for Ms. Olson to be accepting rents from an illegal operation, so I am dismissing- this ISSUE case .... My finding is this debtor Whether the bankruptcy court abused its discretion in is leasing property for an unlawful dismissing Debtor's chapter 13 case. purpose under federal law, although lawful under state law ... and has continued to accept rents during the STANDARD OF REVIEW course of her bankruptcy. We review a bankruptcy court's dismissal of a chapter 13 case for abuse of discretion. Ellsworth v. Lifescape Med. Assoc., P.C. (In re Ellsworth), 455 B.R. 904, 914 (9th Cir. BAP 2011). A bankruptcy court abuses its discretion if it applies the wrong legal standard, misapplies the correct legal standard, or if

WEST AW © 2020 Thomson Reuters. No claim to original85 U.S. Government Works. 3 In re Olson, Not Reported in B.R. Rptr. (2018) its factual findings are clearly erroneous. TrafficSchool.com, for conversion or dismissal. 8 In dealing with questions of Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011). conversion and dismissal, the bankruptcy court engages in a two-step process: “First, it must be determined that there is ‘cause’ to act. Second, once a determination of ‘cause’ has DISCUSSION been made, a choice must be made between conversion and Ordinarily, a bankruptcy court grants or denies relief based dismissal based on the ‘best interests of the creditors and the on a specific provision in the Code. Here, the bankruptcy estate.’ Nelson v. Meyer (In re Nelson), 343 B.R. 671, 675 court did not specify what Code section or other authority it (9th Cir. BAP 2006). relied upon in dismissing Debtor's case. The court concluded, apparently based on case law from other jurisdictions, that Although not listed, bad faith is cause for dismissal. Leavitt Debtor's postpetition receipt of rental payments from a tenant v. Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir. 1999). that operated a marijuana dispensary on property she owned In determining bad faith, the bankruptcy court is to apply a was (i) a violation of the CSA that (ii) constituted grounds totality of the circumstances analysis, considering (1) whether for dismissal of the case. The legal basis for dismissal could the debtor misrepresented facts in her petition or plan, unfairly have been bad faith under § 1307(c), but the bankruptcy court manipulated the Bankruptcy Code, or otherwise filed her made no bad faith finding and did not engage in the totality of chapter 13 petition or plan in an inequitable manner; (2) the the circumstances analysis required for dismissal under that debtor's history of filings and dismissals; (3) whether the Code section. debtor only intended to defeat state court litigation; and (4) whether egregious behavior is present. Id. Alternatively, the bankruptcy court may have been acting pursuant to its inherent power to “issue any order, process, On appeal, Debtor assumes the bankruptcy court dismissed or judgment that is necessary or appropriate to carry out the her case on grounds of bad faith by arguing that the provisions of this title.” § 105(a). But, if acting pursuant bankruptcy court abused its discretion in not considering the to its inherent powers, the court could act only “within the totality of the circumstances, especially the fact that Debtor confines of the Bankruptcy Code.” Law v. Seigel, 134 S.Ct. was using the bankruptcy to sever her ties with Mr. Bass' 1188, 1194–95 (2014) (citations omitted). And where a statute business. But the bankruptcy court did not invoke § 1307(c), adequately addresses the conduct at issue, the court's inherent nor did it explicitly find bad faith. powers should be invoked only when that statute does not fully address the situation at hand. See Chambers v. NASCO, The bankruptcy court stated that it had “looked at the cases,” Inc., 501 U.S. 32, 50 (1991) (“[I]f in the informed discretion but did not articulate any rules drawn from those cases of the court, neither the statute nor the Rules are up to the task, that applied to the facts before it. The case law addressing the court may safely rely on its inherent power [in imposing facts such as those presented here is sparse, and there is no a sanction for bad faith litigation conduct].”). controlling authority in the Ninth Circuit.

*5 But the bankruptcy court did not articulate the legal *6 Some courts have held that, to the extent estate basis for its ruling or make findings to support its conclusions assets are used for or generated by the operation of a that the CSA was being violated and that that violation federally prohibited marijuana business, a trustee or debtor in was grounds for dismissal. When a court imposes the harsh possession may not administer those assets without violating penalty of dismissal in circumstances such as those presented federal law. Arenas v. U.S. Tr. (In re Arenas), 535 B.R. 845, here, it is imperative that it state with clarity and precision its 852 (10th Cir. BAP 2015); In re Medpoint Mgmt., LLC, 528 factual and legal bases for doing so. B.R. 178, 184–85 (Bankr. D. Ariz. 2015), vacated in part, Medpoint Mgmt., LLC v. Jensen (In re Medpoint Mgmt., The standard for dismissal of a chapter 13 case is set forth LLC), BAP No. AZ–15–1130–KuJaJu, 2016 WL 3251581 in § 1307(c). That section provides that on request of a party (9th Cir. BAP Jun. 3, 2016); In re Johnson, 532 B.R. 53, in interest and after notice and a hearing, the bankruptcy 9 court may convert a chapter 13 case to chapter 7, or may 56–57 (Bankr. W.D. Mich. 2015); In re Rent–Rite Super dismiss a case, whichever is in the best interests of creditors Kegs W., Ltd., 484 B.R. 799, 810 (Bankr. D. Colo. 2012). The bankruptcy court here made no finding, however, that and the estate, for “cause.” § 1307(c). 7 Section 1307(c) sets the trustee would be administering the proceeds of an illegal forth a non-exclusive list of factors that constitute “cause”

WEST AW © 2020 Thomson Reuters. No claim to original86 U.S. Government Works. 4 In re Olson, Not Reported in B.R. Rptr. (2018) business, and there is no evidence in the record that the rents and (2) the need for the bankruptcy court to explain were to be used to fund the plan. its conclusion that dismissal was mandatory under these circumstances. With over twenty-five states allowing the Some courts have held that a bankruptcy filing or a plan of medical or recreational use of marijuana, courts increasingly reorganization proposed by a debtor who is involved in an need to address the needs of litigants who are in compliance illegal enterprise is not in good faith, even where the debtor with state law while not excusing activity that violates federal does not have a subjective bad motive, is in legitimate need law. A finding explaining how a debtor violates federal law or of bankruptcy relief, and there is otherwise no indicia of an otherwise provides cause for dismissal is important to avoid attempt to abuse the bankruptcy process. In re Arenas, 535 incorrectly deeming a debtor a criminal and denying both B.R. at 852–53; In re Rent–Rite Super Kegs W., Ltd., 484 debtor and creditors the benefit of the bankruptcy laws. B.R. at 809. Related to the good faith analysis, some courts have concluded that a debtor engaged in an illegal business *7 As the memorandum details, there are a number who seeks bankruptcy relief comes into court with unclean of situations where the federal prohibition on marijuana hands and is not eligible for relief. In re Rent–Rite Super distribution prevented debtors from reorganizing or Kegs W., Ltd., 484 B.R. at 807; cf. In re Medpoint Mgmt., liquidating under federal bankruptcy laws. Typically, these LLC, 528 B.R. at 186–87 (petitioning creditors who knew the were cases where the debtor sought to continue to distribute putative debtor was engaged in a federally prohibited medical marijuana postpetition or where a trustee would be asked to marijuana business had unclean hands and could not seek accept proceeds of a drug-related business, situations where relief from the bankruptcy court). federal law would clearly be violated. See, e.g., In re Arenas, 535 B.R. 845 (debtors themselves grew and sold marijuana); The bankruptcy court here made no finding of bad faith or In re Rent–Rite Super Kegs W., Ltd., 484 B.R. 799 (debtor's unclean hands. Further, it concluded that it was a crime for ongoing postpetition leases with marijuana-growing tenant Debtor to be accepting rents from Mr. Bass' business without exposed debtor to criminal liability and primary asset to making any findings showing that all the elements of a CSA forfeiture). violation had been established (such as the requirement that the conduct be “knowing”). This Debtor's plan did not necessarily require the rental income from the dispensary to fund the proposed payments. The foregoing cases suggest possible reasons for the court's It provided for minimal plan payments until a sale motion decision, but without specific findings and conclusions, we could be filed and the Debtor's real property sold. The sale of cannot determine whether or how the court found those cases Debtor's real property would have been simply a liquidation applicable to the facts of this case, nor can we adequately of legal estate assets. In fact, but for the marijuana-related evaluate the propriety of the bankruptcy court's ruling. proceeds, the sale of real property to fund a plan is a common scenario because of the ability in bankruptcy to sell property Accordingly, on remand, the bankruptcy court should subject to a bona fide dispute free and clear of a lien. See § articulate the findings that led it to determine that Debtor was 363(f)(4). violating the CSA and what legal standard it relied upon in dismissing the case. If, on remand, the basis for dismissal is the court's concern that Debtor committed a crime by receiving postpetition rent derived from a marijuana business, an explicit finding of CONCLUSION the facts required for criminal liability is needed. Section For the reasons set forth above, we VACATE and REMAND. 856(a)(2) of Title 21 prohibits a person with a premises from knowingly and intentionally allowing its use for the purpose of distributing drugs. United States v. Tamez, 941 F.2d 770, Concurrence by Judge Tighe 774 (9th Cir. 1991). A violation of section 856(a) also requires a showing that a primary or principal use of the premises TIGHE, Bankruptcy Judge, CONCURRING. is for drug distribution or manufacture. See United States I concur in the memorandum and write separately to v. Mancuso, 718 F.3d 780, 794–96 (9th Cir. 2013). Any emphasize (1) the importance of evaluating whether the prosecution of this crime would require a showing that Debtor Debtor is actually violating the Controlled Substances Act

knew that Mr. Bass leased the property to operate a marijuana conscious to be criminal”). Debtor's son's knowledge in acting dispensary, and that she intended to allow that use. for her cannot be imputed to Debtor for purposes of showing criminal knowledge and intent. Nor can Mr. Bass' intent and The Debtor's personal knowledge is an especially critical knowledge be imputed to the Debtor. inquiry for an elderly, blind woman residing in assisted living with an attorney-in-fact in charge of the lease. Although Bankruptcy courts have historically played a role in providing Debtor stated in her second declaration in support of the for orderly liquidation of assets, equal payment to creditors, motion to reject the lease that Bass was operating a medical and resolution of disputes that otherwise would take many marijuana dispensary, the record does not indicate when years to resolve. Although debtors connected to marijuana Debtor became aware of this. She stated in that declaration distribution cannot expect to violate federal law in their that she did not want to be involved in leasing to a marijuana bankruptcy case, the presence of marijuana near the case 1 business. should not cause mandatory dismissal. I believe this focus on specific federal violations along with the further analysis Any prosecution of 21 U.S.C. § 856(a)(2) would need to prove required by the lead memorandum properly address the beyond a reasonable doubt that Debtor herself “knowingly challenge of a marijuana related case. and intentionally” leased the property where the marijuana is distributed. See Elonis v. United States, 135 S.Ct. 2001, All Citations 2009 (2015) (general rule is that a guilty mind is a necessary element in the proof of every crime); Morissette v. United Not Reported in B.R. Rptr., 2018 WL 989263 States, 342 U.S. 246, 252 (1952) (“wrongdoing must be

Footnotes * Hon. Maureen A. Tighe, U.S. Bankruptcy Judge for the Central District of California, sitting by designation. ** This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8024–1. 1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532. 2 The parties did not include all relevant documents in their excerpts of record. We have thus exercised our discretion to review relevant imaged documents from the bankruptcy court's electronic docket. See O'Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957–58 (9th Cir. 1989); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 3 In Debtor's declaration in support of the motion to reject lease, she stated that she believed the lease “agreements” were taken from her residence by government law enforcement authorities in May 2015. In Debtor's second declaration in support of the motions to sell and to reject, she stated, “[t]here is no signed lease agreement between Mr. Bass and me.” 4 The lease also required Mr. Bass to “comply with all statutes, codes, ordinances, orders, rules and regulations of any Federal, California, municipal or other governmental or quasi-governmental entity ....” 5 We include these “facts” merely to provide some context for the proceedings before the bankruptcy court, and for no other purpose. And we should be particularly circumspect in this instance, in which we remand after determining that the bankruptcy court neither articulated the legal basis for its decision sua sponte to dismiss this case, nor identified with precision the facts which it must have determined, or upon which it might have relied, under any cognizable theory, in dismissing the case. Accordingly, we neither make any determination concerning what appear to be disputed facts, nor “weigh” any such facts, nor determine credibility, nor even, indeed, opine regarding what facts might be relevant under the as-yet-undetermined legal standard to be applied by the bankruptcy court on remand. 6 The City of South Lake Tahoe (the “City”) filed a joinder in the motion to reject on the ground that Mr. Bass' permit to operate the dispensary had expired and had not been renewed because the Debtor had not provided her written consent. 7 Although that statute requires a request by a party in interest or the United States trustee, the bankruptcy court may dismiss or convert a case sua sponte under § 105(a). Tennant v. Rojas (In re Tennant), 318 B.R. 860, 868–70 (9th Cir. BAP 2004). Additionally, despite § 1307's requirement of notice and a hearing, due process is satisfied if the impacted party has had an opportunity to be heard. See id. at 870 (noting that the concept of notice and a hearing is flexible and depends on what is appropriate in the circumstances). Debtor does not argue that her due process rights were violated, nor does she dispute that the court had the authority to sua sponte dismiss the case.

8 Those enumerated factors include: unreasonable delay by the debtor that is prejudicial to creditors; failure to commence making timely payments; denial of confirmation of a plan; and material default by the debtor with respect to a term of a confirmed plan. 9 In In re Johnson, the bankruptcy court acknowledged the problems created when a debtor who operates a marijuana business that is legal under state law seeks bankruptcy relief, noting that continued operation of the marijuana business would result in the court and the trustee tacitly supporting the debtor's criminal enterprise. 532 B.R. at 56–57. Nevertheless, the court ruled that it would permit the debtor to remain in chapter 13 on the condition that he stop engaging in the marijuana business. Id. at 58. The bankruptcy court here explicitly disagreed with this approach. 1 Cf. Northbay Wellness Grp., Inc. v. Beyries, 789 F.3d 956, 960–61 (9th Cir. 2015) (bankruptcy court abused its discretion by failing to conduct the balancing test required by doctrine of unclean hands, and instead determining that unclean hands applied solely because the creditor had engaged in marijuana distribution).

WESTLAW © 2020 Thomson Reuters. No claim to original89 U.S. Government Works. 7 In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (2012) 90 A.L.R. Fed. 2d 777 .. Particular cases Disorderly House KeyCite Yellow Flag - Negative Treatment ... Owning or letting or permitting use of Disagreed With by Garvin v. Cook Investments NW, SPNWY, LLC, 9th Cir. (Wash.), May 2, 2019 house 484 B.R. 799 Fact that it was legal under Colorado law United States Bankruptcy Court, D. Colorado. to cultivate and distribute marijuana for medical purposes, and that Colorado voters, In re RENT–RITE SUPER by referendum, had recently legalized the KEGS WEST LTD., Debtor. recreational production and sale of marijuana, did not alter fact that, in deriving roughly No. 12–31592 HRT. 25% of its revenues from leasing warehouse | space to tenants who, to debtor's knowledge, Dec. 19, 2012. were engaged in business of growing marijuana without certificate of approval from the Synopsis Drug Enforcement Agency (DEA), debtor was Background: Creditor moved to dismiss Chapter 11 case engaged in conduct that violated the so- filed by Colorado debtor that derived roughly 25% of its called “crack house” statute, and that subjected revenues from leasing warehouse space to tenants who, to warehouse property securing creditor's claim to debtor's knowledge, were engaged in business of growing forfeiture. Controlled Substances Act, §§ 416(a) marijuana without certificate of approval from the Drug (2), 511(a)(7), 21 U.S.C.A. §§ 856(a)(2), 881(a) Enforcement Agency (DEA). (7); West's C.R.S.A. Const. Art. 18, §§ 14, 16.

2 Cases that cite this headnote Holdings: The Bankruptcy Court, Howard R. Tallman, Chief Judge, held that: [2] Controlled Substances ... Preemption [1] in deriving roughly 25% of its revenues from leasing States warehouse space to tenants who, to debtor's knowledge, were Product safety; food and drug laws engaged in business of growing marijuana without certificate .. of approval from the Drug Enforcement Agency (DEA), By expressly disclaiming any intention to debtor was engaged in conduct that violated the so-called preempt state police powers by occupying the “crack house” statute, and that subjected warehouse property field with respect to area of recreational drug securing creditor's claim to forfeiture; use, Congress, in the Controlled Substance Act (CSA), restricted any question of preemption [2] debtor's conduct provided “cause” to dismiss or convert to those cases in which positive conflict exists case based on its “gross mismanagement of the estate”; but between provision of the CSA and state law. U.S.C.A. Const. Art. 6, cl. 2; Controlled [3] court could not determine, based on record before it, Substances Act, § 708, 21 U.S.C.A. § 903. whether it was in best interests of creditors and estate to dismiss or convert. [3] Controlled Substances .. Preemption So ordered. States .. Product safety; food and drug laws Because Colorado constitutional amendment West Headnotes (15) for both medical marijuana, and more recent amendment legalizing marijuana possession and usage generally, both made it clear that [1] Controlled Substances their provisions applied only to Colorado

WESTLAW © 2020 Thomson Reuters. No claim to original90 U.S. Government Works. 1 In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (2012) 90 A.L.R. Fed. 2d 777 state narcotics law, and were not meant to .. Equitable powers and principles impede enforcement of federal law, there Bankruptcy court's equitable powers must and was no conflict with federal law, and these can only be exercised within confines of the constitutional amendments were not conflict Bankruptcy Code. 11 U.S.C.A. § 105(a). preempted. U.S.C.A. Const. Art. 6, cl. 2; West's C.R.S.A. Const. Art. 18, §§ 14, 16.

2 Cases that cite this headnote [7] Bankruptcy ... Good Faith; Motive Debtor's bad faith, in suitable cases, will result in [4] Bankruptcy a denial or limitation of the relief that debtor may In General; Grounds in General .. hope to be granted by filing for bankruptcy relief. Bankruptcy ... Dismissal or suspension 1 Cases that cite this headnote Disorderly House .. Owning or letting or permitting use of [8] Equity house ... Nature of unconscionable conduct Mere fact that, in light of Colorado's legalization Plaintiff's misconduct need not necessarily be of of recreational production and sale of marijuana, such a nature as to be punishable as crime, or federal prosecutors might well choose to exercise as to justify legal proceedings of any character, their prosecutorial discretion to decline to in order to support application of unclean hands seek indictment against Chapter 11 debtor doctrine; any willful act concerning the cause of under the so-called “crack house” statute for action which rightfully can be said to transgress leasing portion of its warehouse facilities to equitable standards of conduct is sufficient cause parties that used the leased space to cultivate for invocation of clean hands maxim. marijuana in violation of federal law, and that it might be highly speculative whether warehouse property securing creditor's claim was lost [9] Bankruptcy through forfeiture, did not alter fact that debtor .. In General; Grounds in General was violating “crack house” statute and that Bankruptcy warehouse property was potentially subject to Dismissal or suspension forfeiture, and bankruptcy court could consider .. this fact in deciding whether “cause” existed to On motion to dismiss Chapter 11 case under dismiss or convert Chapter 11 case based on “for cause” dismissal provision, bankruptcy debtor's “gross mismanagement of the estate” or court must first determine if “cause” exists for other “cause.” 11 U.S.C.A. § 1112(b)(4)(B); for dismissal or conversion of case, and if Controlled Substances Act, §§ 416(a)(2), 511(a) requisite “cause” exists, must then decide (7), 21 U.S.C.A. §§ 856(a)(2), 881(a)(7); West's whether dismissal or conversion of case is in best C.R.S.A. Const. Art. 18, §§ 14, 16. interests of creditors and estate. 11 U.S.C.A. § 1112(b). 6 Cases that cite this headnote 2 Cases that cite this headnote

[5] Bankruptcy .. Equitable powers and principles [10] Bankruptcy Equitable powers and principles Bankruptcy courts are courts of equity. ... Bankruptcy 1 Cases that cite this headnote .. In General; Grounds in General Bankruptcy [6] Bankruptcy .. Dismissal or suspension

Finding of “cause” for dismissal or conversion Equity of Chapter 11 case is, at bottom, an equitable ... Nature of unconscionable conduct determination. 11 U.S.C.A. § 1112(b). Whether characterized, strictly speaking, as application of “unclean hands” doctrine or 2 Cases that cite this headnote simply as part of the court's totality of the circumstances “cause” analysis, Chapter 11 [11] Bankruptcy debtor's continued criminal activity, in deriving ... In General; Grounds in General roughly 25% of its revenues from leasing Bankruptcy warehouse space to tenants who, to debtor's ... Dismissal or suspension knowledge, were engaged in business of growing marijuana without certificate of approval from Statutory list of factors that court may consider the Drug Enforcement Agency (DEA), satisfied in deciding whether “cause” exists for dismissal requirement of “cause” and required dismissal or conversion of Chapter 11 case does not restrict or conversion of its Chapter 11 case, whichever court's ability to consider other factors that are was in best interests of creditors and estate. 11 not enumerated in statute. 11 U.S.C.A. § 1112(b) U.S.C.A. § 1112(b); Controlled Substances Act, (4). §§ 416(a)(2), 511(a)(7), 21 U.S.C.A. §§ 856(a) (2), 881(a)(7); West's C.R.S.A. Const. Art. 18, §§ 14, 16. [12] Bankruptcy ... In General; Grounds in General 2 Cases that cite this headnote Bankruptcy Dismissal or suspension ... [14] Bankruptcy Chapter 11 debtor, in leasing out portion of ... Proceedings its warehouse to parties to cultivate marijuana Bankruptcy court could not determine, based there and thereby subjecting creditor's collateral on record before it, whether it was in best to potential forfeiture, “grossly mismanaged the interests of creditors and estate to dismiss or estate,” and provided “cause” for dismissal or convert Chapter 11 case, upon determining that conversion of case, notwithstanding debtor's debtor's criminal conduct in connection with belief that possibility of federal narcotics operation of its warehouse, in deriving roughly prosecution, and of loss of warehouse to 25% of its revenues from leasing warehouse forfeiture, was remote in light of Colorado's space to tenants who, to debtor's knowledge, legalization of recreational production and sale were engaged in business of growing marijuana of marijuana; bankruptcy court could not use the without certificate of approval from the adjudicative authority granted to it by Congress Drug Enforcement Agency (DEA), constituted to force creditor to bear even a highly improbable “cause” for dismissal or conversion of case; risk of total loss of its collateral. 11 U.S.C.A. hearing had to be scheduled to determine, inter § 1112(b)(4)(B); Controlled Substances Act, §§ alia, whether feasibility of administering Chapter 416(a)(2), 511(a)(7), 21 U.S.C.A. §§ 856(a)(2), 7 estate was affected by fact that conversion 881(a)(7); West's C.R.S.A. Const. Art. 18, §§ 14, would result in the trustee's having responsibility 16. for site where continuing criminal conduct was 3 Cases that cite this headnote taking place. 11 U.S.C.A. § 1112(b); Controlled Substances Act, § 416(a)(2), 21 U.S.C.A. § 856(a)(2). [13] Bankruptcy ... In General; Grounds in General 1 Cases that cite this headnote Bankruptcy ... Dismissal or suspension [15] Bankruptcy

WESTLAW © 2020 Thomson Reuters. No claim to original92 U.S. Government Works. 3 In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (2012) 90 A.L.R. Fed. 2d 777 ... In General; Grounds in General Bankruptcy 2 ... Dismissal or suspension I. FACTUAL BACKGROUND In analyzing best interests of creditors and 1. This case was filed on October 18, 2012. estate, for purposes of deciding whether to dismiss or convert debtor's Chapter 11 case *803 2. The Debtor owns a warehouse building upon showing of requisite “cause,” bankruptcy located at 3850 to 3900 E. 48th Avenue, Denver, court will normally look to assets that may be Colorado (the “Warehouse”). Debtor values the available for distribution, and balance creditors' property at $2.3 million. reasonable expectation of distribution in Chapter 7 case against inevitable race to the courthouse 3. On July 22, 2005, Debtor executed a promissory by individual creditors to obtain judgments and note to Commercial Federal Bank, FSB, in chase assets to execute thereon. 11 U.S.C.A. § the face amount of $1.8 million (the “Note”). 1112(b). That obligation is secured by a Deed of Trust, Assignment of Rents and Security Agreement dated 2 Cases that cite this headnote April 6, 2001, and modified on July 22, 2005, granting Commercial Federal a lien on the Debtor's Warehouse including rents and personal property (the “Deed of Trust”). Attorneys and Law Firms 4. On December 21, 2011, the Note and Deed of Trust *802 Jeffrey Weinman, Mark A. Larson, Patrick D. Vellone, were assigned to VFC. Denver, CO, for Debtor. 5. Approximately 25% of the Debtor's income is produced from leasing space in the Debtor's ORDER ON MOTION TO DISMISS Warehouse to tenants who use that space for the cultivation of marijuana. HOWARD R. TALLMAN, Chief Judge. II, DISCUSSIONA. Debtor's Business Operations Violate the This case comes before the Court on Secured Creditor VFC Controlled Substances Act Partners 14 LLC's Motion to Dismiss (docket # 31) (the [1] For the reasons that follow, the Court concludes that the “Motion”). Debtor engages in conduct that, while legal under Colorado law, violates the federal Controlled Substances Act (“CSA”). The Debtor's business involves a continuing violation of the federal Controlled Substances Act. See 21 U.S.C. §§ The CSA has been described by the United States 801–904. Debtor candidly acknowledges that it derives Supreme Court as “a lengthy and detailed statute creating roughly 25% of its revenues from leasing warehouse space a comprehensive framework for regulating the production, to tenants who are engaged in the business of growing distribution, and possession of five classes of ‘controlled 1 marijuana. This activity—arguably legal under Colorado substances.’ ” Gonzales v. Raich, 545 U.S. 1, 24, 125 S.Ct. law—forms the basis for the instant Motion filed by VFC 2195, 162 L.Ed.2d 1 (2005). Under the CSA, marijuana is Partners 14 LLC (“VFC”). VFC seeks dismissal of this case classified as a Schedule I controlled substance. 21 U.S.C. under the “clean hands doctrine” and argues that Debtor's § 812 Schedule I(c)(10). When a substance is placed on activities, which the Court finds to be illegal under federal Schedule I, that represents a legislative judgment that “[t]he law, make it unworthy of the equitable protection of the drug or other substance has a high potential for abuse; ... [t]he bankruptcy court. In addition, VFC argues that Debtors' case drug or other substance has no currently accepted medical was filed in bad faith and should be dismissed on that basis. use in treatment in the United States; [and] ... [t]here is a lack of accepted safety for use of the drug or other substance At the preliminary hearing on November 27, 2012, the parties under medical supervision.” 21 U.S.C. § 812(b)(1). “Under confined their arguments to the legal issue of whether the case the CSA, any person who seeks to manufacture, distribute, or must be dismissed under the clean hands doctrine. possess a Schedule I controlled substance must apply for and

WESTLAW © 2020 Thomson Reuters. No claim to original93 U.S. Government Works. 4 In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (2012) 90 A.L.R. Fed. 2d 777 obtain a certificate of registration from the Drug Enforcement Supremacy Clause provides that federal law “shall be the Agency (DEA).” Monson v. Drug Enforcement Admin., 522 supreme Law of the Land ... any Thing in the Constitution or F.Supp.2d 1188, 1192 (D.N.D.2007) (citing 21 U.S.C. §§ Laws of any State to the Contrary notwithstanding.” Id. This 822–23). At hearing, the Debtor did not argue that any of case does not present an issue of federal preemption. its tenants, whose operations are at issue here, are operating under DEA approval. The United States Supreme Court has had many opportunities to construe the Supremacy Clause. It recently said that Under § 856 of the CSA, it is a federal crime to Congress may, of course, expressly pre-empt state law, but “[e]ven without an express provision for preemption, we have found that state law must yield to a congressional manage or control any place, ... Act in at least two circumstances.” First, “state law is as an owner, ... and knowingly naturally preempted to the extent of any conflict with a and intentionally rent, lease, profit federal statute.” Second, we have deemed state law pre- from, or make available for use, empted “when the scope of a [federal] statute indicates with or without compensation, the that Congress intended federal law to occupy a field place for the purpose of unlawfully exclusively.” manufacturing, storing, distributing, or using a controlled substance. Kurns v. Railroad Friction Products Corp., ––– U.S. ––––, 132 S.Ct. 1261, 1265–66, ––– L.Ed.2d –––– (2012) (quoting Crosby v. National Foreign Trade Council, 530 U.S. 363, 372, 21 U.S.C. § 856(a)(2). 3 120 S.Ct. 2288, 147 L.Ed.2d 352 (2000); Freightliner Corp. v. Myrick, 514 U.S. 280, 115 S.Ct. 1483, 131 L.Ed.2d 385 Debtor freely admits that it leases Warehouse space to tenants (1995)). who use the space for the cultivation of marijuana. The Court, therefore, finds that the Debtor *804 is engaged [2] Here, Congress has expressly disclaimed any intention to in an ongoing criminal violation of the federal Controlled preempt state police powers in the CSA by occupying the field Substances Act. with respect to the area of recreational drug use. It provides that The Debtor argues the law is in flux. Under state law in Colorado, it is legal to cultivate and distribute marijuana for medical purposes. COLO. CONST. art. XVIII, § 14; No provision of this subchapter shall COLO.REV.STAT. §§ 12–43.3–101 to –1001. Voters recently be construed as indicating an intent on took marijuana legalization a step further and passed, by the part of the Congress to occupy the referendum, Amendment 64 to the Colorado Constitution, field in which that provision operates, which legalizes the recreational production and sale of including criminal penalties, to the marijuana and possession of up to one ounce of marijuana. exclusion of any State law on the COLO. CONST. art. XVIII, § 16. same subject matter which would otherwise be within the authority of That there is a sharp difference between state and federal the State, unless there is a positive law where the growing of marijuana is concerned does conflict between that provision of not make the controlling law unsettled or ambiguous. The this subchapter and that State law so Debtor cannot reasonably argue that legalization of marijuana that the two cannot consistently stand cultivation on the state level nullifies the provisions of the together. CSA.

The Court has considered the extent to which it is necessary 21 U.S.C. § 903. Section 903 removes any concerns with to determine whether the CSA preempts the provisions of respect to field preemption and explicitly restricts any Colorado state law under the Supremacy Clause of the question of preemption to those cases where a “positive United States Constitution. U.S. CONST., art. VI, cl. 2. The

WESTl.AW © 2020 Thomson Reuters. No claim to original94 U.S. Government Works. 5 In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (2012) 90 A.L.R. Fed. 2d 777 conflict” exists between the provisions of the CSA and state (criminal defendant cannot rely on public statements of non- law. A “positive conflict” my be found to exist between state prosecution policy issued by administration officials or justice law and federal law where “it is impossible for a private party department). Unless and until Congress changes that law, the to comply with both state and federal requirements, or where Debtor's operations constitute a continuing criminal violation state law stands as an obstacle to the accomplishment and of the CSA and a federal court cannot be asked to enforce the execution of the full purposes and objectives of Congress.” protections of the Bankruptcy Code in aid of a Debtor whose *805 Sprietsma v. Mercury Marine, a Div. of Brunswick activities constitute a continuing federal crime. 5 Corp., 537 U.S. 51, 64, 123 S.Ct. 518, 154 L.Ed.2d 466 (2002) (internal quotation marks and citations omitted). B. VFC's Collateral is at Risk [3] But conflict preemption is not an issue here. Colorado Due to the Debtor's ongoing criminal activity under the CSA, constitutional amendments for both medical marijuana, VFC's collateral is *806 placed at risk of forfeiture. The COLO. CONST. art. XVIII, § 14, and the more recent criminal penalty applicable to a violation of subsection (a) amendment legalizing marijuana possession and usage of 21 U.S.C. § 856 is “a term of imprisonment of not more generally, COLO. CONST. art. XVIII, § 16, both make it than 20 years or a fine of not more than $500,000, or both, or clear that their provisions apply to state law only. 4 Absent a fine of $2,000,000 for a person other than an individual.” from either enactment is any effort to impede the enforcement 21 U.S.C. § 856(b). Because the Debtor is committing an of federal law. See, e.g., Ter Beek v. City of Wyoming, ongoing criminal violation that is punishable by a prison 297 Mich.App. 446, 823 N.W.2d 864 (Mich.Ct.App.2012) sentence of more than one year, the forfeiture statute comes (Concluding that Michigan Medical Marijuana Act did not into play. “All real property ... which is used, or intended to hinder enforcement of federal CSA because it only granted be used, in any manner or part, to commit, or to facilitate the immunity from prosecution under state law). commission of, a violation of [the Controlled Substances Act] punishable by more than one year's imprisonment” is subject Federal preemption is not an issue because no part of the to forfeiture. 21 U.S.C. § 881(a)(7). Thus, VFC's collateral Colorado law must give way in order for federal authorities is at risk. Moreover, under 11 U.S.C. § 362(b)(b)(4), the to fully enforce the CSA. The fact that there is a difference automatic stay does not enjoin governmental entities against in legislative philosophy creates no conflict that requires an actions that constitute an exercise of governmental police analysis of federal preemption under the Supremacy Clause. powers. See, e.g., In re WinPar Hospitality Chattanooga, That marijuana cultivation may not be criminally prosecuted LLC, 404 B.R. 291, 296 (Bankr.E.D.Tenn.2009) (Title 11 under the laws of the state of Colorado is simply of no U.S.C. § 362(a) did not stay civil forfeiture action under 18 consequence and has no bearing on the Court's finding that U.S.C. § 981 to seize $7.2 million proceeds from estate's Debtor's business operation constitutes a continuing criminal sale of the debtor's only asset—a piece of real estate subject violation of the federal Controlled Substances Act. to forfeiture because it was purchased with the proceeds of criminal activities.). Debtor points out that federal authorities have never notified it that it is in violation of the law and that it has never been The Debtor might argue that any such risk is highly charged or convicted of any federal or state crime. But the fact theoretical, speculative and remote. As a practical matter, that a violator is never charged, tried or convicted does not the Court suspects that is true. Yet, the Court cannot use change the fact that the crime has been committed. the adjudicative authority granted to it by Congress to force VFC to bear even a highly improbable risk of total loss of [4] In light of Colorado's laws and constitutional amendment its collateral in support of the Debtor's ongoing violation of legalizing marijuana, federal prosecutors may well choose federal criminal law. to exercise their prosecutorial discretion and decline to seek indictments under the CSA where the activity that is illegal on C. The “Clean Hands Doctrine” is Applicable to Bankruptcy the federal level is legal under Colorado state law. Be that as it Proceedings may, even if the Debtor is never charged or prosecuted under The simple act of filing a voluntary bankruptcy petition the CSA, it is conducting operations in the normal course invokes protections under the Bankruptcy Code including the of its business that violate federal criminal law. See, e.g., automatic stay. 11 U.S.C. § 362. The protections invoked by U.S. v. Stacy, 734 F.Supp.2d 1074, 1078–81 (S.D.Cal.2010)

WESTl.AW © 2020 Thomson Reuters. No claim to original95 U.S. Government Works. 6 In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (2012) 90 A.L.R. Fed. 2d 777 a debtor by filing a bankruptcy petition are enforced by the faith relative to the matter in which he seeks relief.... That bankruptcy courts. 28 U.S.C. § 1334. doctrine is rooted in the historical concept of court of equity as a vehicle for affirmatively enforcing the requirements [5] [6] Traditionally, bankruptcy courts are regarded as of conscience and good faith.... ‘[E]quity does not demand courts of equity. See, e.g. Young v. U.S., 535 U.S. 43, 49– that its suitors shall have led blameless lives,’ as to other 50, 122 S.Ct. 1036, 152 L.Ed.2d 79 (2002); U.S. v. Energy matters, it does require that they shall have acted fairly and Resources Co., Inc., 495 U.S. 545, 549, 110 S.Ct. 2139, without fraud or deceit as to the controversy in issue.” 109 L.Ed.2d 580 (1990) (“[B]ankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor Precision Instrument Mfg. Co. v. Automotive Maintenance relationships.”); Pepper v. Litton, 308 U.S. 295, 304, 60 Machinery Co., 324 U.S. 806, 814–15, 65 S.Ct. 993, 89 L.Ed. S.Ct. 238, 84 L.Ed. 281 (1939) (“for many purposes ‘courts 1381 (1945) (citations omitted). Thus, as a court that utilizes of bankruptcy are essentially courts of equity, and their equitable principles, this Court, like the bankruptcy court in proceedings inherently proceedings in equity’ ”) (quoting Marrama, recognizes that a debtor's bad faith—in this case, Local Loan Co. v. Hunt, 292 U.S. 234, 240, 54 S.Ct. the Debtor's criminal violation—in suitable cases will result 695, 78 L.Ed. 1230 (1934)). Nonetheless, a bankruptcy in a denial or a limitation of the relief a debtor may hope to court's equitable powers “must and can only be exercised be granted. within the confines of the Bankruptcy Code.” Norwest Rank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 [8] The Court finds that the Debtor's misconduct is of L.Ed.2d 169 (1988). such a nature to justify the application of the clean hands doctrine. “[O]ne's misconduct need not necessarily have been The Debtor seeks to reorganize its financial affairs under of such a nature as to be punishable as a crime or as to the shelter of the Bankruptcy Code. A reorganization under justify legal proceedings of any character. Any willful act chapter 11 affords a debtor the protection of the automatic concerning the cause of action which rightfully can be said stay in order for the debtor to use that breathing spell to to transgress equitable standards of conduct is sufficient formulate its reorganization plan. The Court's power to adjust cause for the invocation of the [clean hands] maxim by the the debtor-creditor relationship in the process of confirming chancellor.” Id. at 815, 127 S.Ct. 1105. The Debtor freely a plan of reorganization goes to the essence of the Court's admits that it leases space to those who are engaged in equitable jurisdiction and requires the Court to look to the cultivation of marijuana. Even if the Debtor's holds a equitable factors to determine the propriety of the Debtor's good faith—albeit misguided—belief that Colorado state law filing. would prevail over the federal law or that the federal law is unlikely to be enforced, that is quite beside the point. The [7] In the case of Marrama v. Citizens Bank, 549 U.S. 365, Debtor has knowingly and intentionally engaged in conduct 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007), the Supreme Court that constitutes a violation of federal criminal law and it has held that the bankruptcy court's equitable powers, as set out in done so with respect to its sole income producing asset. Worse 11 U.S.C. § 105(a), were sufficient authority to deny a debtor's yet, every day that the Debtor continues under the Court's *807 request to convert his case from chapter 7 to chapter protection is another day that VFC's collateral remains at risk. 13. The debtor in that case had fraudulently under-reported his assets in his schedules and he sought the conversion after the D. 11 U.S.C. § 1112 chapter 7 trustee determined that the debtor owned assets that VFC argues for application of the clean hands doctrine to bar could be administered in the chapter 7 case. Despite the fact the Debtor's bankruptcy filing. But any equitable doctrine the that 11 U.S.C. § 706 contains no qualification of the right to Court applies is always done strictly within the confines of the convert to chapter 13, except that the debtor must be eligible Bankruptcy Code's statutory scheme. See, generally, Ahlers, to be a debtor under that chapter, the Supreme Court deemed 485 U.S. at 206, 108 S.Ct. 963. the debtor's bad faith to be sufficient to invoke the bankruptcy court's equitable powers and to disallow the conversion. Id. Title 11 U.S.C. § 1112(b) provides the statutory framework at 375, 127 S.Ct. 1105. for dismissal or conversion of a chapter 11 case. It provides “[T]he equitable maxim that ‘he who comes into equity in relevant part, that must come with clean hands' ... closes the doors of a court of equity to one tainted with inequitableness or bad

(b)(1) ... after notice and a hearing, the court shall convert (L) revocation of an order of confirmation under section a case under this chapter to a case under chapter 7 or 1144; dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless (M) inability to effectuate substantial consummation of the court determines that the appointment under section a confirmed plan; 1104(a) of a trustee or an *808 examiner is in the best (N) material default by the debtor with respect to a interests of creditors and the estate. confirmed plan; ... (O) termination of a confirmed plan by reason of the (4) For purposes of this subsection, the term ‘cause’ occurrence of a condition specified in the plan; and includes— (P) failure of the debtor to pay any domestic support (A) substantial or continuing loss to or diminution of the obligation that first becomes payable after the date of estate and the absence of a reasonable likelihood of the filing of the petition. rehabilitation; ... (B) gross mismanagement of the estate; 11 U.S.C. § 1112(b). (C) failure to maintain appropriate insurance that poses a risk to the estate or to the public; [9] The statute sets out a two step process. First, the Court must determine if “cause” exists for dismissal or conversion (D) unauthorized use of cash collateral substantially of the chapter 11 case. Next, the Court must determine harmful to 1 or more creditors; whether dismissal or conversion of the case is in the best interests of creditors and the estate. Rollex Corp. v. Associated (E) failure to comply with an order of the court; Materials, Inc. (In re Superior Siding & Window, Inc.), 14 F.3d 240, 242 (4th Cir.1994). (F) unexcused failure to satisfy timely any filing or reporting requirement established by this title or by [10] [11] A finding of “cause” in any context is, at bottom, any rule applicable to a case under this chapter; an equitable determination. Congress specifically understood, (G) failure to attend the meeting of creditors convened in drafting § 1112(b)'s list of factors that a court may consider under section 341(a) or an examination ordered in its determination of “cause” for dismissal or conversion, under rule 2004 of the Federal Rules of Bankruptcy that it was not restricting a court's ability to consider other Procedure without good cause shown by the debtor; factors that are not enumerated there. The legislative history to § 1112 states that (H) failure timely to provide information or attend meetings reasonably requested by the United States trustee (or the bankruptcy administrator, if any); Subsection (b) gives wide discretion to the court to make an appropriate (I) failure timely to pay taxes owed after the date of the disposition of the case when a party in order for relief or to file tax returns due after the date interest requests.... The list [appearing of the order for relief; in *809 § 1112(b) ] is not exhaustive. (J) failure to file a disclosure statement, or to file or The court will be able to consider confirm a plan, within the time fixed by this title or by other factors as they arise, and to order of the court; use its equitable powers to reach an appropriate result in individual cases. (K) failure to pay any fees or charges required under chapter 123 of title 28; H.R. REP. No. 95–595 at 406, 1978 U.S.C.C.A.N. 5963, 6362. It is, therefore, appropriate for the Court to give

WESTl.AW © 2020 Thomson Reuters. No claim to original97 U.S. Government Works. 8 In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (2012) 90 A.L.R. Fed. 2d 777 consideration, in addition to the enumerated factors in § utilize the shelter of the Bankruptcy Code while continuing its 1112(b), to VFC's equitable clean hands argument. unlawful practice of leasing space to those who are engaged in the business of cultivating a Schedule I controlled substance.

1) 11 U.S.C. § 1112(b)(4)(B) [12] Where a court finds “gross mismanagement of the 3) Best interests of Creditors and of the Estate estate” by a debtor, that finding compels a conclusion that [14] The Court has found that “cause” exists for dismissal “cause” exists for dismissal or conversion of the chapter 11 or conversion of the Debtor's case. Once a court finds “cause” case. 11 U.S.C. § 1112(b)(4)(B). In this case, the Court finds for dismissal or conversion of a chapter 11 *810 case, it gross mismanagement. The Debtor has freely acknowledged must determine whether dismissal is in the best interests of that it engages in conduct that exposes the Debtor to criminal the creditors and of the estate or whether conversion of the liability and that exposes its primary asset to forfeiture. case better serves those interests. 11 U.S.C. § 1112(b)(1). The It acknowledges that its criminal behavior has continued record before the Court is not sufficient for the Court to make post-petition. The fact that it engaged in this conduct and that determination. entered into the leases with its tenants pre-petition does not constitute mismanagement of the estate because the estate [15] When it analyzes the best interests of creditors and is a post-petition entity. However, the Debtor entered its the estate under § 1112(b)(1), the Court would normally bankruptcy case with the offending leases in place and has look to the assets that may be available for distribution and maintained those leases during the pendency of its chapter balance the creditors' reasonable expectation of a distribution 11 bankruptcy case. It is that post-petition presence of in a chapter 7 case against the inevitable race to the activity on the Debtor's property—pursuant to leases that it courthouse by individual creditors to obtain judgments and knowingly entered into—that violates the CSA; exposes the chase assets to execute on. See, e.g. Rollex Corporation v. Debtor to criminal liability; and exposes both the Debtor Assoc. Materials, Inc. (In re Superior Siding & Window, Inc.), and its mortgage creditor to forfeiture of the Warehouse that 14 F.3d 240, 243 (4th Cir.1994) (“The inquiry for [the best constitutes gross mismanagement of the estate and requires interests] element cannot be completed without comparing the the Court to either convert this case to a case under chapter creditors' interests in bankruptcy with those they would have 7 or to dismiss it. under state law.”). 7

The Court has reviewed the Debtor's schedules. The Debtor 2) Debtor's Lack of Clean Hands lists the value of its Warehouse at $2.3 million. It lists the [13] Whether it is characterized, strictly speaking, as value of its personal property at $1.5 million. The debt to an application of the clean hands doctrine or simply as VFC, its primary secured creditor, is around $1.7 million. part of the Court's totality of the circumstances “cause” Debtor shows approximately $50,000.00 of secured real analysis, the Debtor's continued criminal activity satisfies property tax claims but shows no priority unsecured debt. the requirement of “cause” under § 1112(b) and requires The Debtor's schedule of non-priority unsecured debt runs to dismissal or conversion of this chapter 11 bankruptcy case. 18 pages or approximately 120 creditors and lists debts that As detailed above, the Court finds that the Debtor is engaged total approximately $1.1 million. On the face of the Debtor's in an ongoing criminal violation of the CSA. schedules, Debtor reports substantial equity in property that may be used for the payment of creditors. Title 11 U.S.C. § 1129(a)(3) provides that a plan may only be confirmed if it is “proposed in good faith and not In a more mundane case, that might be the end of the analysis. by any means forbidden by law.” Because a significant But here, the Court must also consider whether consequences 6 portion of the Debtor's income is derived from an illegal of the Debtor's criminal conduct impact the ability of a chapter activity, § 1129(a)(3) forecloses any possibility of this Debtor 7 trustee to administer a chapter 7 estate. There have been obtaining confirmation of a plan that relies in any part on no motions filed in this case seeking abandonment or stay income derived from a criminal activity. This Debtor has relief with respect to the Debtor's Warehouse. Therefore, no reasonable prospect of getting its plan confirmed. Even immediately upon conversion, the chapter 7 estate would if § 1129 contained no such good faith requirement, under contain a major asset that is the location of ongoing criminal no circumstance can the Court place itself in the position of activity and is subject to forfeiture under the CSA. The trustee condoning the Debtor's criminal activity by allowing it to

WESTl.AW © 2020 Thomson Reuters. No claim to original98 U.S. Government Works. 9 In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (2012) 90 A.L.R. Fed. 2d 777 who is appointed in the case would have responsibility for a site where continuing criminal conduct is taking place. III. CONCLUSION That raises a question of the feasibility of chapter 7 estate In accordance with the above discussion, it is administration and is an issue on which the United States Trustee is likely to want to provide input. ORDERED that the Court hereby finds that “cause” exists, under 11 U.S.C. § 1112(b), for conversion of this case to a E. The Final Hearing case under chapter 7 or dismissal of the case. It is further At the preliminary hearing in this matter the Court heard legal that the Court will conduct a final hearing on argument. The *811 thrust of the parties arguments went to ORDERED the “cause” prong of the § 1112(b) analysis and the Court Tuesday, January 22, 2013, at 9:00 a.m. in Courtroom C203, has been able to make its determination that “cause” exists Byron G. Rogers U.S. Courthouse, 1929 Stout Street, Denver, for dismissal or conversion of the case. However, the Court Colorado, concerning the issue of whether conversion of this finds that the record it has before it does not allow it to make case to a case under chapter 7 or dismissal of the case is the determination of whether dismissal or conversion is in the in the best interests of the creditors and of the bankruptcy best interests of the creditors and the estate. estate. The parties shall, on or before January 15, 2013, (a) deliver to opposing counsel, a list and photocopies of the The Court reserved Tuesday, January 22, 2013, as a final proposed exhibits pre-marked for identification in accordance hearing date in the event that it could not fully resolve the with Local Bankruptcy Rule 9070–1(a)(2)(C) and a schedule pending Motion based on the legal argument presented at of witnesses who will be called as well as a schedule of the preliminary hearing. The Court will use that date to hear witnesses who may be called, and (b) file with the Court only evidence and argument with respect to whether conversion or the list of exhibits and schedules of witnesses. The original dismissal is in the best interests of the creditors and the estate. plus two copies of each exhibit shall be tendered to the Court The parties should be prepared to address any issues that are at the commencement of the hearing. The copies shall be used relevant to that determination. The Court will be interested in by the Court and the law clerk, and the original shall be used the usual economically oriented issues concerning the nature by the witnesses. Any party wishing to file a hearing brief in of a debtor's assets and the extent to which administration connection with this matter shall do so no later than January of the assets by a chapter 7 trustee is likely to produce a 15, 2013. distribution to creditors. In addition, because of the unusual nature of this case, the Court will also be interested in the All Citations feasibility of estate administration and the impact of the Debtor's conduct on the ability of a chapter 7 trustee to 484 B.R. 799, 90 A.L.R. Fed. 2d 777 administer the assets.

Footnotes 1 The Court has not heard evidence with respect to the details of the growing operations conducted by Debtor's tenants and makes no findings with respect to their compliance with the Colorado Medical Marijuana Code. COLO.REV.STAT. §§ 12–43.3–101 to 1001. For the purposes of this Order only, the Court assumes that Debtor's activities are lawful under Colorado state law. 2 The Court only heard legal argument at the preliminary hearing. With the exception of the Debtor's acknowledgment that it leases warehouse space to tenants who use the space to cultivate marijuana, the facts recited herein do not constitute the Court's finding of fact but are included as background information only. 3 Section 856 is known as the “crack house statute.” U.S. v. Miller, 698 F.3d 699, 705 (8th Cir.2012). It is, perhaps, harsh that a statute aimed at controlling crack houses is written so broadly that it embraces the Debtor's conduct. The Court has no evidence before it that suggests Debtor's activities have anything in common with the evil that § 856 of the CSA was purportedly written to combat. 4 See, e.g., COLO. CONST. art. XVIII, § 14(2)(a) (“[A] patient or primary care-giver charged with a violation of the state's criminal laws related to the patient's medical use of marijuana will be deemed to have established an affirmative defense to such allegation....”) (emphasis added); COLO. CONST. art. XVIII, § 14(2)(e) (“Any ... property interest shall not be forfeited under any provision of state law providing for the forfeiture of property other than as a sentence imposed after

conviction of a criminal offense or entry of a plea of guilty to such offense.”) (emphasis added); COLO. CONST. art. XVIII, § 16(3) (“[T]he following acts are not unlawful and shall not be an offense under Colorado law or (he law of any locality within Colorado....”) (emphasis added). 5 This is not to suggest that a Colorado state court would view the controlling law differently or that the federal system has any greater interest than the state in insuring its courts are not used to aid in the commission of a criminal offense. 6 To be clear, the Court does not suggest there is some less significant portion of a Debtor's income that may be derived from illegal activity and that might pass muster under § 1129(a)(3). 7 Collier suggests a much more expansive list of factors to be considered. (1) whether some creditors received preferential payments, and whether equality of distribution would be better served by conversion rather than dismissal, (2) whether there would be a loss of rights granted in the case if it were dismissed rather than converted, (3) whether the debtor would simply file a further case upon dismissal, (4) the ability of the trustee in a chapter 7 case to reach assets for the benefit of creditors, (5) in assessing the interest of the estate, whether conversion or dismissal of the estate would maximize the estate's value as an economic enterprise, (6) whether any remaining issues would be better resolved outside the bankruptcy forum, (7) whether the estate consists of a “single asset,” (8) whether the debtor had engaged in misconduct and whether creditors are in need of a chapter 7 case to protect their interests, (9) whether a plan has been confirmed and whether any property remains in the estate to be administered, and (10), whether the appointment of a trustee is desirable to supervise the estate and address possible environmental and safety concerns. 7 COLLIER ON BANKRUPTCY ¶ 1112.04[7] (16th ed.).

two debtors aided and abetted its subsidiaries' violations of federal law; and 2019 WL 6332541 Only the Westlaw citation is currently available. [5] the bankruptcy court did not clearly err in applying United States District Court, D. Colorado. to all three debtors its finding that, without revenue from IN RE: WAY TO GROW, INC., Pure Agrobusiness, marijuana-related customers, debtors lacked the ability to Inc., Green Door Agro, Inc., Debtors. reorganize. Way to Grow, Inc., et al., Appellants, v. Affirmed. Corey Inniss, Appellee.

Civil Action No. 18-cv-3245-WJM | West Headnotes (17) Bankruptcy Case Nos. 18-14330-MER, 18-14333-MER, and 18-14334-MER [1] Bankruptcy | Conclusions of law; de novo review Signed 09/18/2019 .. Bankruptcy Synopsis ... Clear error Background: Secured creditor who was former owner of In reviewing a bankruptcy court's decision, the debtors' business moved to dismiss their jointly administered district court normally functions as an appellate Chapter 11 cases “for cause” based on illegality, under court, reviewing the bankruptcy court's legal federal law, of some of debtors' business activity, which conclusions de novo and its factual findings for involved selling equipment and supplies to persons and clear error. 28 U.S.C.A. § 158(a). entities growing marijuana. The Bankruptcy Court, Michael E. Romero, Chief Judge, 597 B.R. 111, granted motion. Debtors appealed, and their motion for stay pending appeal [2] Controlled Substances was denied, 2018 WL 7352930, 2019 WL 669795. .. Substances regulated; definitions and schedules Under the Controlled Substances Act, marijuana Holdings: The District Court, William J. Martinez, J., held is a Schedule I controlled substance. that: Comprehensive Drug Abuse Prevention and Control Act of 1970 § 202, 21 U.S.C.A. § 812. [1] dismissal for “cause” is appropriate when the Chapter 11 debtor runs a business dedicated to servicing the marijuana 1 Cases that cite this headnote industry in violation of federal law; [3] Criminal Law [2] the federal statute which criminalizes selling goods with Aiding, abetting, or other participation in knowledge that they will be used to manufacture controlled .. offense substances is not void for vagueness; A party may be liable for aiding and abetting any [3] the bankruptcy court did not clearly err in finding federal crime. 18 U.S.C.A. § 2(a). that debtor whose business consisted of California-based marijuana-related operations knew that it was selling products that would be used to manufacture a controlled substance, in [4] Criminal Law violation of federal statute; .. Aiding, abetting, or other participation in offense [4] the bankruptcy court did not clearly err in finding that Aiding and abetting a federal crime requires debtor which was a holding company that owned the other proof that (1) someone else committed the

underlying crime, and (2) the alleged aider/ Test of good faith, for confirmation purposes, abettor willfully associated himself with the focuses on whether a Chapter 11 plan is likely criminal venture and sought to make the venture to achieve its goals and whether those goals are succeed through some action of his own. 18 consistent with the Bankruptcy Code's purposes. U.S.C.A. § 2(a). 11 U.S.C.A. § 1129(a)(3).

[5] Bankruptcy [9] Bankruptcy ... Dismissal or suspension ... Want or inadequacy of plan “Cause” exists to dismiss a Chapter 11 case Chapter 11 debtor's inability to propose a good- when the debtor runs a business dedicated to faith reorganization plan provides cause to servicing the marijuana industry in violation of dismiss debtor's case. 11 U.S.C.A. §§ 1112(b)(1), federal law; marijuana is a Schedule I controlled 1129(a)(3). substance, and although the Bankruptcy Code nowhere explicitly says that one of its purposes is to avoid facilitating commission of a [10] Constitutional Law federal crime, the Code is not blind to ... Drugs; controlled substances criminal behavior, it is inconceivable that Controlled Substances Congress could have ever intended that federal ... Validity judicial officials could, in the course of Federal statute which criminalizes selling goods adjudicating disputes under the Code, approve with knowledge that they will be used to a reorganization plan that relies on violations manufacture controlled substances is not void of federal criminal law, and so a debtor cannot for vagueness in violation of due process; propose a good-faith reorganization plan that although statute mentions specific and unique relies on knowingly profiting from the marijuana items, it also encompasses “any equipment, industry. 11 U.S.C.A. §§ 1112(b)(1), 1129(a) chemical, product, or material which may be (3); Comprehensive Drug Abuse Prevention and used to manufacture a controlled substance or Control Act of 1970 §§ 202, 403, 21 U.S.C.A. §§ listed chemical, knowing, intending, or having 812, 843(a)(7). reasonable cause to believe, that it will be used to manufacture a controlled substance or listed chemical,” which fairly provides notice to the [6] Bankruptcy ordinary person, and to the extent “reasonable Construction and Operation ... cause to believe” might pose a problem, the When used in the Bankruptcy Code, the words “akin to actual knowledge” gloss given the “includes” and “including” are not limiting. 11 language by controlling precedent overcame it. U.S.C.A. § 102(3). U.S. Const. Amend. 5; Comprehensive Drug Abuse Prevention and Control Act of 1970 § 403, 21 U.S.C.A. § 843(a)(7). [7] Bankruptcy ... In General; Grounds in General Congress's list of circumstances that count as [11] Bankruptcy “cause” to dismiss a Chapter 11 proceeding is not ... Dismissal or suspension exclusive. 11 U.S.C.A. §§ 1112(b), 1112(b)(4). In determining, on motion to dismiss cases “for cause,” whether business model and profitability of Chapter 11 debtors, which were involved in [8] Bankruptcy selling equipment and supplies to persons and ... Good faith and legality entities growing marijuana, relied on actions that could be prosecuted as a violation of

the federal statute criminalizing the selling violations of the federal statute criminalizing of goods with knowledge that they will be the selling of goods with knowledge that used to manufacture controlled substances, the they will be used to manufacture controlled bankruptcy court, unlike a prosecutor, needed substances, was supported by evidence that, no evidence of specific criminal transactions even though debtor itself sold nothing, debtor to sustain its findings; the court's inquiry acquired one subsidiary to increase debtor's was properly prospective, not retrospective. 11 dominance in the cannabis industry, that debtor's U.S.C.A. § 1112(b)(1); Comprehensive Drug website approvingly quoted another entity's Abuse Prevention and Control Act of 1970 § 403, characterization of the acquisition as resulting 21 U.S.C.A. § 843(a)(7). in debtor becoming “the leading one-stop solution for indoor plant, produce and cannabis growers in Colorado and California,” and that [12] Bankruptcy debtor's founder knew that certain dispensaries ... Scope of review in general and cannabis growers were customers of its subsidiaries. 11 U.S.C.A. § 1112(b)(1); 18 District court may affirm the bankruptcy court on U.S.C.A. § 2(a); Comprehensive Drug Abuse any basis supported by the record. Prevention and Control Act of 1970 § 403, 21 U.S.C.A. § 843(a)(7).

[13] Bankruptcy ... Proceedings [15] Criminal Law Bankruptcy court's finding, on motion to ... Aiding, abetting, or other participation in dismiss Chapter 11 debtors' cases “for cause,” offense that particular debtor knew that it was Liability under the federal aiding and abetting selling products that would be used to statute requires, first, an underlying crime and, manufacture a controlled substance, in violation second, willfully associating oneself with the of federal statute criminalizing such conduct, criminal venture and seeking to make the venture was supported by testimony of debtors' former succeed through some action of one's own. 18 owner that debtor in question, which was U.S.C.A. § 2(a). described as having “California marijuana- related operations,” was operating the same type of business as second, Colorado-based debtor, and by debtors' concession that this debtor [16] Bankruptcy “operated in a similar manner” as second debtor, ... Dismissal or suspension which concededly had at least “reasonable cause On motion to dismiss Chapter 11 debtors' cases to believe” that the equipment it sold to at “for cause” based on the illegality, under federal least some of its customers would be used to law, of some of debtors' business activity, manufacture marijuana. 11 U.S.C.A. § 1112(b) which involved selling equipment and supplies (1); Comprehensive Drug Abuse Prevention and to persons and entities growing marijuana, the Control Act of 1970 § 403, 21 U.S.C.A. § 843(a) bankruptcy court did not clearly err in applying (7). to all three debtors its finding that, without revenue from marijuana-related customers, debtors lacked the ability to reorganize; although [14] Bankruptcy one debtor was a holding company and the ... Proceedings court relied mostly on evidence from one subsidiary's managers, the evidence as a whole Bankruptcy court's finding, on motion to dismiss showed that all debtors developed their business Chapter 11 debtors' cases “for cause,” that specifically to service marijuana growers and debtor, a holding company that owned the other that a substantial percentage of customers were two debtors, aided and abetted its subsidiaries'

marijuana cultivators. 11 U.S.C.A. § 1112(b)(1); 18 U.S.C.A. § 2(a); Comprehensive Drug Abuse I. STANDARD OF REVIEW Prevention and Control Act of 1970 § 403, 21 [1] In reviewing a bankruptcy court's decision, the district U.S.C.A. § 843(a)(7). court normally functions as an appellate court, reviewing the bankruptcy court's legal conclusions de novo and its factual findings for clear error. 28 U.S.C. § 158(a); In re Warren, 512 F.3d 1241, 1248 (10th Cir. 2008). [17] Bankruptcy ... Proceedings In dismissing Chapter 11 debtors' cases “for II. BACKGROUND 1 cause,” the bankruptcy court did not err, much less clearly err, by failing to address an argument A. Origins of the Dispute which was never presented to it and could not Appellee Corey Inniss (“Inniss”) founded Way to Grow in have been a potential basis for relief until after Fort Collins in 2002 and eventually opened six more retail the court issued its decision. 11 U.S.C.A. § stores throughout Colorado. In re Way to Grow, Inc., 597 1112(b)(1). B.R. 111, 115 (Bnkr. D. Colo. 2018). In Debtors' words, Way to Grow's business model was “to market its stores as garden centers and carry high-end soil, nutrients, lights, and equipment to grow plants in both an indoor and outdoor setting.” (ECF No. 27 at 7.) Attorneys and Law Firms In 2014, a man named Richard Byrd (not a party here) Keri Lynn Riley, Lee Moss Kutner, Kutner Brinen, P.C., founded and became CEO of Pure Agro, which operates Denver, CO, for Appellants. as a holding company. (Id. at 8.) In 2015, Pure Agro Annette Wanlass Jarvis, Dorsey & Whitney, LLP-Salt Lake “acquired [Green Door], a Los Angeles-based hydroponic and City, Salt Lake City, UT, Gregory Scot Tamkin, Andrea Ahn gardening retail store.” (Id.) Wechter Dorsey & Whitney, LLP, Denver, CO, for Appellee. In January 2016, Inniss sold Way to Grow to Pure Agro for $25 million, with $2.5 million paid upfront and the ORDER AFFIRMING DECISION OF BANKRUPTCY remaining $22.5 million coming by way of a promissory COURT note in Inniss's favor, secured by each Debtor's property (then-existing and after-acquired), accounts receivable, and William J. Martinez, United States District Judge inventory. Id. Inniss also received 12,500 shares of Pure *1 Way to Grow, Inc. (“Way to Grow”), Pure Agrobusiness, Agro's common stock, amounting to a little more than 21% of Inc. (“Pure Agro”), and Green Door Agro, Inc. (“Green Pure Agro's outstanding shares. Id. Door”) (together, “Debtors”), appeal the bankruptcy court's decision to dismiss their Chapter 11 petitions “for cause” *2 Way to Grow's “operations ... remained largely given that Debtors' business relies on selling equipment unchanged” after Pure Agro's acquisition, “continu[ing] to and supplies to persons and entities growing marijuana, and market and sell high-end nutrients, soil, and equipment for Debtors know that the equipment and supplies will be used growing plants in a soil-based or water-based medium.” (Id. at to grow marijuana. Such conduct is legal under the laws of 10.) Green Door “operated in a similar manner, selling similar Colorado and California, where Debtors operate, but remains products and gardening supplies in a retail setting.” (Id.) illegal under federal law. Sometime in 2017, Debtors defaulted on the promissory note. For the reasons explained below, this Court affirms the (Id. at 10–11.) Debtors blame Inniss (who continued as a bankruptcy court as to Way to Grow and Green Door for consultant) and his ex-father-in-law (who became CEO of the reasons explained by the bankruptcy court. As to Pure Pure Agro) for this default, accusing them of “inappropriate Agro, the Court also affirms, but for a slightly different reason activities designed to strip the future cash flow away from evident in the record. [Way to Grow] and into their own pockets.” (Id.) In any event, in April 2018, Inniss filed a lawsuit in Larimer County

(Colorado) District Court on his own behalf, and derivatively The bankruptcy court eventually held a four-day evidentiary on behalf of Pure Agro, to appoint a receiver over Debtors. hearing on these allegations. See Way to Grow, 597 B.R. at Way to Grow, 597 B.R. at 115. 114. It rejected the argument that Debtors could be found guilty of aiding and abetting a Controlled Substances Act violation. Id. at 123–27. The court reasoned that the evidence B. Bankruptcy Proceedings did not show the proper mens rea, namely, “shar[ing] Before the state court could rule on Inniss's request for a the same intent as their customers to violate the CSA receiver, each Debtor filed a Chapter 11 bankruptcy petition, and willfully associat[ing] themselves with their customers' and the three petitions were jointly administered. See Id. at criminal ventures.” Id. at 126. But the bankruptcy court 114. Debtors soon moved the bankruptcy court for permission went on to examine whether Debtors could be found guilty to spend cash collateral to meet ongoing business expenses, of violating 21 U.S.C. § 843(a)(7). See Id. at 127–32. As representing that they “generally sell equipment for indoor described in more detail below, this statute criminalizes hydroponic gardening and related supplies.... While the selling goods with knowledge that they will be used to hydroponic gardening equipment may [be] and is used for manufacture controlled substances. many types of crops, the Debtors' future business expansion plan is tied to the growing cannabis industry which is heavily *3 No party had raised § 843(a)(7) as a potential basis reliant on hydroponic gardening.” (ECF No. 23-1 at 53.) But for criminal liability. Regardless, the bankruptcy court found Debtors were quick to add, somewhat inconsistently, that they “ample evidence” that Debtors—referred to collectively— “do not own or do business with cannabis.” (Id.) knew they were selling products that their customers would use to grow marijuana, which would be a violation of The bankruptcy court did not rule on this motion before the statute. Id. at 129. Accordingly, the court agreed with Inniss, appearing as a secured creditor, filed a motion asking Inniss that cause existed to dismiss Debtors' bankruptcy the bankruptcy court to abstain in favor of the Larimer County proceedings. receivership action, or to dismiss the petitions altogether. (ECF No. 27-1 at 32.) Regarding dismissal, Inniss argued, The bankruptcy court then asked whether Debtors could among other things, that the bankruptcy court should dismiss change their business model “to sever all ties to their Debtors' petitions “for cause” under 11 U.S.C. § 1112(b) marijuana customers,” and thereby avoid dismissal. Id. (discussed in detail below in Part III.A) because there was at 132. The court found that sales to marijuana growers were such an important part of Debtors' business that it no possibility of reorganization within a reasonable time was “inconceivable” Debtors could “still operate profitably” as proceeds from the sale of the Debtors' products come without selling to those customers. Id. Thus, “[t]o prevent from cannabis companies who violate federal law.... this Court from violating its oath to uphold federal law, under * * * the specific facts of this case, the Court sees no practical alternative to dismissal.” Id. The Debtors' businesses are not the kind that can meet 11 U.S.C. § 1129(a)(3)'s good faith requirement [also Finally, the bankruptcy court concluded by showing its full discussed Part III.A] for confirming a plan because their understanding of the real-world consequences of its ruling: sale of supplies and equipment to cannabis growers taints revenue and places assets at risk of forfeiture and The result in this case may be viewed by many seizure under federal law. as inequitable. The Debtors are insolvent, and their business could benefit significantly from reorganization (ECF No. 27-1 at 56, 58.) Through later briefing, it became under the Bankruptcy Code. The Debtors likely did clear that the criminal prohibition Inniss believed Debtors not seek bankruptcy relief in bad faith on a subjective were violating was the federal aiding and abetting statute, 18 standard. But for the marijuana issue, this would be U.S.C. § 2—more specifically, that Debtors were aiding and a relatively run-of-the-mill Chapter 11 proceeding. As abetting the growing of marijuana, which is prohibited under stated, even following those courts which have crafted the Controlled Substances Act (sometimes referred to in the alternatives to dismissal when debtors were violating the record as the “CSA”). (ECF No. 27-1 at 287–94.) CSA would produce no practical or efficient alternative to dismissal in this case. At bottom, if the result in this

case is unjust, Congress alone has power to legislate a relief to Debtors under the Bankruptcy Code. Way to Grow, solution. 597 B.R. at 116. The Court will first address the broader questions about the availability of bankruptcy protection to Ironically, if Inniss, as the party arguing Debtors are businesses that depend on the marijuana industry, and then violating federal law, wrests control of the Debtors address whether Debtors run such businesses. back from Byrd in the [Larimer County lawsuit], he will almost certainly continue, and perhaps expand, the Debtors' ongoing marijuana-related operations. This A. Bankruptcy Courts' Authority to Dismiss a Chapter 11 irony is not lost on the Court but provides no legal basis Proceeding Where the Debtor's Business Violates Federal for an alternate outcome. The Court casts no aspersions Law upon the Debtors or their businesses. The result in this case is dictated by federal law, which this Court is bound 1. Federal Crimes Related to Marijuana to enforce. [2] The Controlled Substances Act, 21 U.S.C. §§ 101 et seq., declares marijuana to be a Schedule I controlled Id. at 133. substance. See 21 U.S.C. § 812, Schedule I(c)(10). It is a federal crime “to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, C. Motion to Stay Pending Appeal a controlled substance.” Id. § 841(a)(1). It is also a federal Debtors immediately appealed to this Court and moved to crime “to manufacture, distribute, export, or import ... any stay the bankruptcy court's judgment pending appeal. (ECF equipment, chemical, product, or material which may be used No. 9.) Among Debtors' arguments was that the bankruptcy to manufacture a controlled substance or listed chemical, court improperly imputed the activities of Way to Grow to the knowing, intending, or having reasonable cause to believe, other two Debtors, which was particularly problematic as to that it will be used to manufacture a controlled substance.” Id. Pure Agro because it is a holding company that does not sell § 843(a)(7). anything, so it arguably could not violate § 843(a)(7). (Id. ¶¶ 19–21.) [3] [4] Finally, a party can be liable for aiding and abetting any federal crime. See 18 U.S.C. § 2(a) The Court denied the motion to stay pending appeal, for (“Whoever commits an offense against the United States various reasons. (ECF No. 20.) As to Debtors' argument that or aids, abets, counsels, commands, induces or procures the bankruptcy court erred by not distinguishing between its commission, is punishable as a principal.”). Aiding and Debtors for purposes of § 843(a)(7), the Court held that abetting requires proof that (i) someone else committed Debtors were not likely to succeed on the merits of this the underlying crime and (ii) the alleged aider/abettor argument because nothing in the record showed that they “willfully associate[d] himself with the criminal venture argued to the bankruptcy court that the evidence was and [sought] to make the venture succeed through some insufficient as to any particular one of them. (Id. at 6–7.) action of his own.” United States v. Leos-Quijada, 107 Moreover, Debtors had not argued that the bankruptcy court's F.3d 786, 794 (10th Cir. 1997); see also Tenth Circuit alleged error could be reviewed under the plain error doctrine. Criminal Pattern Jury Instructions § 2.06 (2011 ed., Feb. (Id. at 7.) 2018 update), available at https://www.ca10.uscourts.gov/ sites/default/files/clerk/Jury% 20Instructions% 20Update The parties then proceeded to merits briefing, and the dispute %202018.pdf (last accessed Sept. 16, 2019). is now ripe for a final disposition.

2. Dismissal for Cause (11 U.S.C. § 1112(b)) III. ANALYSIS Based on the evidence developed through the evidentiary *4 As aptly stated by the bankruptcy court, there are hearing, the bankruptcy court concluded that most of Debtors' many potential disputes here, but “the main event” in business comprised, and would continue to comprise, selling this lawsuit is threefold: (i) “Debtors' connections to supplies to marijuana growers while knowing that the the marijuana industry,” (ii) whether “those connections supplies would be used to grow marijuana. In other words, constitute continuing violations of federal law,” and (iii) the bankruptcy court found that the Debtors' primary business whether that restricts a bankruptcy court's ability to provide was a violation of 21 U.S.C. § 843(a)(7).

operate as such cannot propose a Chapter 11 reorganization In this light, the bankruptcy court held that there was “cause plan in good faith—and, in turn, the inability to propose to dismiss this bankruptcy case under 11 U.S.C. § 1112(b).” a reorganization plan in good faith is “cause” to dismiss a Way to Grow, 597 B.R. at 132. In relevant part, the statute Chapter 11 proceeding. See In re Rent-Rite Super Kegs W. cited by the bankruptcy court reads as follows: Ltd., 484 B.R. 799, 809 (Bankr. D. Colo. 2012). This Court agrees.

[O]n request of a party in interest, [8] The relevant statute is 11 U.S.C. § 1129(a)(3), which and after notice and a hearing, the reads in relevant part, “The court shall confirm a plan only court shall convert a case under this if * * * [t]he plan has been proposed in good faith.” “[T]he chapter to a case under chapter 7 test of good faith under § 1129(a)(3) focuses on whether a or dismiss a case under this chapter, plan is likely to achieve its goals and whether those goals whichever is in the best interests of are consistent with the [Bankruptcy] Code's purposes.” In re creditors and the estate, for cause Paige, 685 F.3d 1160, 1179 (10th Cir. 2012). unless the court determines that the appointment under section 1104(a) The Bankruptcy Code nowhere explicitly says that one of of a trustee or an examiner is in the its purposes is to avoid facilitating commission of a federal best interests of creditors and the crime. One could therefore take a narrow view and conclude estate. that the Bankruptcy Code is blind to the lawfulness of the debtor's activities under a reorganization plan. However, the Tenth Circuit has “not rule[d] out the possibility that a plan could be unconfirmable under § 1129(a)(3) because 11 U.S.C. § 1112(b)(1). 2 of the proponent's ... improper conduct.” Id. Moreover, the Bankruptcy Code does provide that the automatic stay does *5 [5] The first question, then, is whether “cause” exists not extend to “proceeding[s] by a governmental unit ... to under this statute when the debtor runs a business dedicated enforce such governmental unit's ... police and regulatory to servicing the marijuana industry. If the answer is “no,” power,” 11 U.S.C. § 362(b)(4), and that a bankruptcy the Court need not address Debtors' arguments about the discharge cannot extend to “a fine, penalty, or forfeiture application of this principle to them under the facts of this payable to and for the benefit of a governmental unit, and is case. For the reasons explained below, however, the Court not compensation for actual pecuniary loss,” Id. § 523(a)(7). finds that the answer is “yes.” In other words, the Code is not blind to criminal behavior. Finally, it is frankly inconceivable that Congress could have [6] [7] Congress provided a list of circumstances that ever intended that federal judicial officials could, in the course count as “cause” to dismiss a Chapter 11 proceeding. See of adjudicating disputes under the Bankruptcy Code, approve Id. § 1112(b)(4). It says nothing about reorganization plans a reorganization plan that relies on violations of federal that rely on violations of federal law. However, Congress criminal law. prefaced this list as follows: “For purposes of [§ 1112(b)], the term ‘cause’ includes ....” Id. The words “ ‘includes’ and [9] For all these reasons, the Court holds that, as long ‘including’ are not limiting” when used in the Bankruptcy as marijuana remains a Schedule I controlled substance, a Code. Id. § 102(3). Therefore, Congress's list is not exclusive, Chapter 11 debtor cannot propose a good-faith reorganization as further confirmed by legislative history: “The list [in plan that relies on knowingly profiting from the marijuana § 1112(b)(4)] is not exhaustive. The court will be able to industry. And, in turn, inability to propose a good-faith consider other factors as they arise, and to use its equitable reorganization plan is cause for dismissal under 11 U.S.C. § powers to reach an appropriate result in individual cases.” 3 H.R. Rep. 95-595, 406, 1978 U.S.C.C.A.N. 5963, 6362. 1112(b)(1).

In an oft-cited decision on bankruptcy law as it relates to 3. A Clarification Regarding § 1129(a)(3) marijuana-based businesses, Judge Howard R. Tallman of the *6 For clarity, the Court notes the following about the United States Bankruptcy Court for the District of Colorado requirement that a reorganization plan be proposed in good held that a marijuana-based business intending to continue to

WESTLAW © 2020 Thomson Reuters. No claim to original107 U.S. Government Works. 7 In re Way to Grow, Inc., --- B.R. ---- (2019) faith. Section 1129(a)(3) states that “[t]he court shall confirm (ECF No. 27-1 at 58.) The Court need not and does not opine a plan only if * * * [t]he plan has been proposed in good faith,” on what it means for a plan to be “proposed ... not by any but then goes on to add “and not by any means forbidden means forbidden by law.” by law.” Judge Tallman's decision in Rent-Rite (i.e., that an inability to satisfy § 1129(a)(3) is cause for dismissal under § 1112(b)(1)) has recently been criticized by the Ninth Circuit in 4. “Shock[ing to] the General Moral or Common Sense” Garvin v. Cook Investments NW, SPNWY, LLC, 922 F.3d 1031, Debtors argue that interpreting 21 U.S.C. § 843(a)(7) to be 1035 (9th Cir. 2019), based on—as it turns out—a mistaken a basis for lack of good faith under 11. U.S.C. § 1129(a) perception that Judge Tallman was relying on the “means (3) “causes results that are ‘so gross as to shock the general forbidden by law” clause, not the “good faith” clause. moral or common sense.’ ” (ECF No. 27 at 24 (citing Crooks v. Harrelson, 28[2] U.S. 55, 60, 51 S.Ct. 49, 75 L.Ed. In Garvin, the bankruptcy court, over the trustee's objection, 156 (1930)).) Debtors' citation to Crooks is instructive but confirmed a reorganization plan that included a continuing ultimately inapt. lease to an entity growing marijuana. Id. at 1033–34. The trustee argued that the reorganization plan contained a “means The defendant in Crooks sought to avoid the application of forbidden by law,” as proscribed by § 1129(a)(3), but the a tax statute. 282 U.S. at 57–58, 51 S.Ct. 49. The Supreme Ninth Circuit said that the trustee was misreading the statute Court said that “[t]he meaning of the provision in question, because it forbids only a “plan ... proposed ... by any means considered by itself, does not seem to us to be doubtful.” Id. forbidden by law.” Id. at 1035. In other words, the Ninth at 58, 51 S.Ct. 49. The defendant nonetheless argued that “the Circuit emphasized that the statute focuses on the means of literal meaning of the statute ... should be rejected as leading proposing the plan, not on the means of carrying it out. to absurd results, and a construction adopted in harmony with what is thought to be the spirit and purpose of the act in order Having held as much, Garvin then characterized Rent-Rite as to give effect to the intent of Congress.” Id. at 59, 51 S.Ct. a decision that misreads the “means forbidden by law” clause, 49. The defendant cited a case in which the Supreme Court see id., but Garvin itself misunderstood Rent-Rite. The entire appeared to have taken such an approach, and, in that context, relevant passage from Rent-Rite shows that Judge Tallman the Supreme Court in Crooks said the following: was not interpreting on the “means forbidden by law” clause, but only the “good faith” clause: *7 [A] consideration of [the prior Title 11 U.S.C. § 1129(a)(3) provides that a plan may case] will disclose that the principle only be confirmed if it is “proposed in good faith and not is to be applied to override the literal by any means forbidden by law.” Because a significant terms of a statute only under rare portion of the Debtor's income is derived from an illegal and exceptional circumstances. The activity, § 1129(a)(3) forecloses any possibility of this illustrative cases cited in [the prior Debtor obtaining confirmation of a plan that relies in case] demonstrate that, to justify a any part on income derived from a criminal activity. departure from the letter of the law This Debtor has no reasonable prospect of getting its upon that ground, the absurdity must plan confirmed. Even if § 1129 contained no such good be so gross as to shock the general faith requirement, under no circumstance can the Court moral or common sense. And there place itself in the position of condoning the Debtor's must be something to make plain the criminal activity by allowing it to utilize the shelter of the intent of Congress that the letter of Bankruptcy Code while continuing its unlawful practice the statute is not to prevail. of leasing space to those who are engaged in the business of cultivating a Schedule I controlled substance. Id. at 60, 51 S.Ct. 49 (citation omitted). 484 B.R. at 809 (footnote omitted; emphasis added).

Following Crooks, then, the question is, first, whether 21 Likewise, this Court grounds its holding in § 1129(a)(3)'s U.S.C. § 843(a)(7), as applied to businesses such as Debtors', requirement that a Chapter 11 plan is unconfirmable unless leads to an “absurdity ... so gross as to shock the general “proposed in good faith.” This is what Inniss argued below.

WESTLAW © 2020 Thomson Reuters. No claim to original108 U.S. Government Works. 8 In re Way to Grow, Inc., --- B.R. ---- (2019) moral or common sense”; and second, whether there is “plain” Depot will have committed a evidence of “the intent of Congress that the letter of the statute criminal act. The cashier, acting is not to prevail.” For context, the full text of § 843(a)(7) is as an agent of the store, knew as follows: that he was distributing a shovel to the marijuana grower, and sold the shovel having reasonable cause It shall be unlawful for any to believe that it would be used person knowingly or intentionally grow marijuana. The Home Depot * * * to manufacture, distribute, would not even need to know the export, or import any three- customer's name, nor whether the neck round-bottom flask, tableting shovel was actually used to grow machine, encapsulating machine, or marijuana. gelatin capsule, or any equipment, chemical, product, or material which may be used to manufacture (Id. at 26.) a controlled substance or listed chemical, knowing, intending, or It would be an absurd use of prosecutorial discretion to having reasonable cause to believe, charge The Home Depot with a crime based on this fact that it will be used to manufacture pattern, but such fact patterns can be imagined under many a controlled substance or listed criminal statutes. The ability to imagine that a prosecutor chemical in violation of this with poor judgment might institute an absurd prosecution is subchapter or subchapter II or, in the not a basis to declare that the statute's plain language must case of an exportation, in violation be disregarded. The bankruptcy court had before it evidence of this subchapter or subchapter II or that Debtors derive from 65% to 95% of their business from of the laws of the country to which marijuana growers. (See Parts III.B & III.C, below.) Notably, it is exported[.] Debtors do not argue that it would be absurd to prosecute a business if it knows that 65% to 95% of its sales will go toward manufacturing a controlled substance. Turning to the first Crooks inquiry—shockingly gross As for the second Crooks inquiry—evidence of Congress's absurdity—Debtors note that the bankruptcy court “did obviously contrary intent—Debtors offer nothing. However, not point to any specific transaction in which [they] sold in a separate context that the Court will address below equipment to a customer.” (ECF No. 27 at 25.) Debtors seem (Part III.A.5), Debtors argue that the statute's specific to be saying § 843(a)(7) must be construed to require proof mention of equipment such as a three-neck round-bottom that the person who bought, e.g., hydroponic equipment, used flask, and its use of verbs such as “distribute” and it to grow marijuana. Without such a requirement, Debtors “manufacture,” “denote[ ] Congress'[s] intent to target say, persons selling equipment, materials, and listed chemicals to methamphetamine manufacturers.” (Id. at 28.) Debtors say this is “supported by the legislative history,” but they cite section 843(a)(7) could serve to turn none. (Id.) In any event, to the extent this can be construed as any business into a criminal with a a Crooks argument, the alleged focus on methamphetamine single transaction. If an individual is not “something to make plain the intent of Congress that walked into a Home Depot and the letter of the statute is not to prevail.” 282 U.S. at 60, 51 the cashier had reasonable cause S.Ct. 49. to believe the shovel would be used in a marijuana growing *8 Finally, the mens rea of § 843(a)(7) is “knowing, operation based on statements by intending, or having reasonable cause to believe, that [the the customer, by virtue of selling equipment, chemical, product, or material in question] will that individual a shovel, the Home be used to manufacture a controlled substance.” The Tenth

Circuit has construed identical language in the statute's an intimate partner of such person immediately preceding paragraph, 21 U.S.C. § 843(a)(6), or child of such intimate partner or which makes it a crime person, or engaging in other conduct that would place an intimate partner in reasonable fear of bodily injury to to possess any three-neck round- the partner or child. bottom flask, tableting machine, encapsulating machine, or gelatin capsule, or any equipment, 18 U.S.C. § 922(d)(8). The legitimate interest in prohibiting chemical, product, or material (and therefore dissuading) the mere sale or transfer of which may be used to manufacture firearms in such circumstances is beyond question, without a controlled substance or listed any need to wait and see if the firearm gets used. chemical, knowing, intending, or having reasonable cause to believe, The difference in this case, of course, is that a majority of that it will be used to manufacture voters in Colorado (and several other states) have decided a controlled substance or listed that one among many Schedule I controlled substances— chemical in violation of this marijuana—poses no threat worthy of criminal prohibition. subchapter or subchapter II. Reasonable minds may differ on that question, but the fact that the federal government can enforce the Controlled Substances Act in a manner that many Coloradans would disagree with In that context, the Tenth Circuit held that all three mental does not “shock the general moral or common sense.” Crooks, states—knowing, intending, or having reasonable cause to 282 U.S. at 60, 51 S.Ct. 49. believe—are subjective, with “reasonable cause to believe” meaning something “akin to actual knowledge.” United States 5. Vagueness v. Truong, 425 F.3d 1282, 1289 (10th Cir. 2005) (internal [10] Debtors further argue that “[s]ection 843(a)(7) is so quotation marks omitted). vague as to fail to put a person of ordinary intelligence on notice that his otherwise lawful conduct, such as selling As the bankruptcy court recognized, there is no reason to gardening supplies, is illegal.” (ECF No. 27 at 28.) See also believe that the Tenth Circuit's interpretation of § 843(a)(6) Johnson v. United States, ––– U.S. ––––, 135 S. Ct. 2551, would not also apply to § 843(a)(7). See Way to Grow, 597 2556, 192 L.Ed.2d 569 (2015) (“Our cases establish that B.R. at 127 & n.137. In this light, the Court finds nothing the Government violates [the Fifth Amendment due process “shock[ing to] the general moral or common sense,” Crooks, clause] by taking away someone's life, liberty, or property 282 U.S. at 60, 51 S.Ct. 49, that an individual or business under a criminal law so vague that it fails to give ordinary could be prosecuted for selling an item, knowing it will be people fair notice of the conduct it punishes ....”). In this used to commit a criminal act—whether or not the criminal context, Debtors note that some of the statute's language act happened. appears directed at methamphetamine manufacture. (ECF No. 4 The lack of “moral shock” is fairly obvious in other contexts. 27 at 28.) For example, it is *9 The Court disagrees that § 843(a)(7) is void for vagueness. Its language indeed mentions specific and unique items, but it also encompasses “any equipment, chemical, unlawful for any person to sell or product, or material which may be used to manufacture a otherwise dispose of any firearm controlled substance or listed chemical, knowing, intending, or ammunition to any person or having reasonable cause to believe, that it will be knowing or having reasonable cause used to manufacture a controlled substance or listed to believe that such person * * chemical” (emphasis added). This fairly provides notice to the * is subject to a court order ordinary person. To the extent “reasonable cause to believe” that restrains such person from might pose a problem (and the Court expresses no opinion harassing, stalking, or threatening

WESTLAW © 2020 Thomson Reuters. No claim to original110 U.S. Government Works. 10 In re Way to Grow, Inc., --- B.R. ---- (2019) about that), the Tenth Circuit's “akin to actual knowledge” first time by the bankruptcy court in its dismissal order. (ECF gloss overcomes it. Truong, 425 F.3d at 1289. Accordingly, No. 27 at 18.) Debtors' vagueness argument fails.

Had the Debtors been provided 6. Proof of Specific Transactions with notice that Inniss intended to Finally, Debtors argue that a § 843(a)(7) violation can only be argue that section 843(a)(7) applied, proven through “evidence of specific transactions” in which each Debtor could have presented the defendant knew that the item being sold would be used to additional legal argument regarding manufacture a controlled substance. (ECF No. 27 at 29–36.) how and why section 843(a)(7) does The bankruptcy court cited no such evidence, but this Court not apply. The Debtors could also disagrees with Debtors that such evidence was required under have presented evidence including the circumstances. testimony from customers about the use to which the equipment [11] The question before the bankruptcy court was whether and materials purchased at [Way Debtors' business model and profitability relied on actions to Grow] stores was put, the use that could be prosecuted as a violation of § 843(a)(7). In of hydroponic equipment, and the other words, the bankruptcy court's inquiry was ultimately legal crops grown by customers. prospective, not retrospective. That is why the bankruptcy The Debtors could also have court first asked whether Debtors' business model necessarily presented additional evidence to placed it in a position of violating federal law, see Way further emphasize the fact that Pure to Grow, 597 B.R. at 123–32, and then asked whether [Agro] is a holding company and bankruptcy proceedings could nonetheless be saved by does not distribute any equipment. Debtors “sever[ing] all ties to their marijuana customers,” Id. at 132. Unlike a prosecutor, the bankruptcy court needed no evidence of specific criminal transactions to sustain its (Id. at 18.) findings on these matters. *10

As presented in the opening brief, this is still not an argument B. Evidence as to Each Debtor for plain error review, even though the Court previously called Debtors out for failing to argue as much. (See ECF No. 20 1. Bankruptcy Court's Treatment of “Debtors” as a Group at 7.) Debtors' first mention of plain error review comes in Debtors argue that, even if the bankruptcy court correctly their reply brief (ECF No. 32 at 12–14), and therefore could found that § 843(a)(7) might be a basis for cause to dismiss be deemed forfeited. bankruptcy proceedings, the bankruptcy court erroneously lumped all three Debtors together when the evidence almost In sum, Debtors are treading on thin ice. Debtors refused to exclusively focused on Way to Grow's activities. Thus, say argue for plain error until it was too late for Inniss to respond. Debtors, at least Pure Agro's and Green Door's bankruptcy Moreover, the Court is not convinced that Debtors would petitions should not have been dismissed because the have tailored their evidentiary presentations any differently evidence that they are violating § 843(a)(7) is insufficient. had they known that § 843(a)(7) would be at issue, not just (ECF No. 27 at 18–24.) 5 aiding and abetting. The aiding and abetting accusation gave Debtors every incentive to present all the same evidence As noted above (Part II.C), the Court rejected this argument they now say they were precluded from presenting. And, as a basis to grant a stay pending appeal because nothing in from the Court's review of the hearing transcripts, the parties the record showed that Debtors had argued below for separate continually focused on the questions of what Debtors sell and treatment. In their opening merits brief, Debtors attempt to what they know about how their customers use their products. explain this by arguing that the focus of the evidentiary These are the same questions the parties would have explored hearing, as they saw it, was aiding and abetting under 18 if § 843(a)(7) had been part of their preparations. U.S.C. § 2, while 21 U.S.C. § 843(a)(7) was raised for the

However, viewed generously, the Court can see how looking concentrated marijuana derivative”; and (v) he knew the at the case through an aiding and abetting lens might have real names of customers that used aliases when buying caused Pure Agro to think less about its separateness from products from Way to Grow, and he further knew that its subsidiaries than it might have if it had known ahead those customers were dispensaries and grow operations. of time that the bankruptcy court would be considering Id. at 129–30. § 843(a)(7), which requires manufacturing, distributing, exporting, or importing tangible items—activities that a • Since at least 2016, Way to Grow participated in the holding company like Pure Agro usually does not perform. Cannabis Cup, “a cannabis industry trade show and the From that perspective, there is slightly more merit to Debtors' world's biggest marijuana grow competition.” Id. at 130. argument, at least as applied to Pure Agro, although there • At the Cannabis Cup and similar events, Way to Grow is still the question of whether Debtors forfeited their has distributed self-branded swag such as “lighters and opportunity to argue for plain error. rolling papers,” and has contributed prize money to be awarded to the winner of the grow-off competition. Id. [12] Ultimately, the Court finds that it need not decide whether the bankruptcy court erred by failing to discuss the • The manager of Way to Grow's Boulder store testified three Debtors separately, nor whether Debtors forfeited that that: (i) “he, and all of his co-workers, were themselves argument. The Court can affirm on any basis supported by marijuana growers who bought supplies from [Way the record. See SEC v. Chenery Corp., 318 U.S. 80, 88, 63 to Grow] before becoming employees”; (ii) “[mo]st S.Ct. 454, 87 L.Ed. 626 (1943) (“[I]n reviewing the decision of [his] interactions with customers have been about of a lower court, it must be affirmed if the result is correct cannabis”; (iii) Way to Grow “choose[s] products based although the lower court relied upon a wrong ground or gave a on favorability of use in marijuana cultivation”; (iv) “the wrong reason.” (internal quotation marks omitted)). There is ‘trim bags’ and ‘bubble bags’ sold by [Way to Grow] ample basis in the record that Way to Grow's and Green Door's are specifically intended for use with cannabis”; (v) “[a]s business models depend on activities that could be prosecuted recently as August 2018, [Way to Grow] engaged in under § 843(a)(7), and there is likewise ample evidence that cross-promotions with dispensaries at local grow-offs”; Pure Agro involves itself in Way to Grow's and Green Door's and (vi) “as much as 95% of customers in his store are business in a manner that could subject it to prosecution for using [its] products to grow marijuana.” Id. aiding and abetting their criminal activities. • The manager of Way to Grow's Fort Collins store testified that: (i) “ ‘everybody just assumes’ customers 2. Way to Grow talking generally about help with plants are talking about At least as to Way to Grow, Debtors do not challenge marijuana plants”; (ii) Way to Grow has a reputation for the bankruptcy court's conclusion that there was “ample being an expert in cannabis growing; (iii) he has visited evidence” that, in the language of § 843(a)(7), Way to Grow customers' cannabis growing facilities; (iv) “[a] list of at least had “ ‘reasonable cause to believe’ the equipment approved products for use in cannabis cultivation is [it] sell[s] to at least some of [its] customers will be used made available in the store”; (v) “[c]ustomers sometimes to manufacture marijuana.” Way to Grow, 597 B.R. at 129. bring marijuana plants, or, more commonly, photographs And the evidence before the bankruptcy court was otherwise of marijuana grow operations, to [Way to Grow's] stores, overwhelming. For example: and [its] employees ‘typically’ offer products to those customers based on those photographs”; and (vi) “the *11 • Inniss testified that: (i) he built up Way to Grow ‘vast majority’ of [Way to Grow's] customers” grow to service the marijuana industry; (ii) the “whole thesis” cannabis. Id. of Pure Agro's acquisition of Way to Grow “was to combine Byrd's California marijuana-related operations • In an e-mail dated June 28, 2018 (three days after with [Way to Grow's] operations in Colorado”; (iii) Way Inniss filed his motion to dismiss), Way to Grow's to Grow sells products that “would be cost-prohibitive vice president of operations instructed store managers for use in cultivating any crop except marijuana, because to remove “anything ‘MJ related in your stores’ ” and marijuana is the highest yielding cash crop which can “to ‘not discuss MJ directly with any customers [or] be grown”; (iv) Way to Grow “sell[s] so-called ‘bubble allow customers to bring anything plant related into your bags’ which are specifically used to make ‘water hash,’ a stores.’ ” Id. at 131.

Accordingly, the bankruptcy court did not err, much less • Inniss testified that Pure Agro acquired Way to Grow to clearly err, in finding as a matter of fact that Way to Grow increase Pure Agro's dominance in the cannabis industry. “know[s] .. that it [is selling products that] will be used to Way to Grow, 597 B.R. at 129. manufacture a controlled substance.” 21 U.S.C. § 843(a)(7). • Pure Agro's website quotes Byrd as follows: “We are the picks and shovels play for what we're calling the Green 3. Green Door Rush.” 6 (ECF No. 31-1 at 10.) [13] The evidence specifically as to Green Door was not as fully developed. However, the bankruptcy court credited • Pure Agro's website approvingly quotes a BusinessWire Inniss's testimony that Green Door—described as “Byrd's characterization of the Way to Grow acquisition as California marijuana-related operations”—was operating the follows: “With the merger of Way to Grow completed same type of business as Way to Grow. Way to Grow, 597 B.R. in January 2016, PureAgro is now the leading one-stop at 129. Moreover, Debtors' opening merits brief before this solution for indoor plant, produce and cannabis growers Court admits that Green Door “operated in a similar manner” in Colorado and California.” (Id. at 9; see also ECF No. to Way to Grow. (ECF No. 27 at 10.) Accordingly, given the 23-4 at 372 (Byrd's endorsement of this quote as “a true evidence before the bankruptcy court about Way to Grow and statement”).) the evidence that Green Door was simply a California-based • Pure Agro's website quotes a characterization of iteration of the same type of business, the bankruptcy court itself published in the Cannabis Business Times as a did not clearly err in finding as a matter of fact that Green “pioneer[ ] of the hydroponics and indoor agriculture Door “know[s] .. that it [is selling products that] will be used industry for the past 20 years.” (ECF No. 31-1 at 12.) to manufacture a controlled substance.” 21 U.S.C. § 843(a) (7). • Pure Agro issued a press release on November 1, 2016, datelined “Los Angeles & Fort Collins, Colo.” The press release describes Way to Grow and Crop 4. Pure Agro Supply—the latter of which was “[s]pun out of Way to *12 [14] [15] Pure Agro is a holding company that Grow's operations” as a “wholesale operating division, owns Way to Grow, Green Door, and another (non-debtor) selling directly and exclusively to large commercial entity called Crop Supply. Although Inniss points to hearing growers.” The press release quotes Byrd as saying, “Our testimony in which Byrd speaks of Pure Agro “sell[ing]” current focus and primary growth initiatives are aligned things such as dirt and hydroponic gardening supplies (see with serving the fast-growing legal cannabis industry.” ECF No. 31 at 26), there appears to be no serious dispute The press release goes on to describe the business that Byrd was speaking loosely and that Pure Agro, of opportunity in light of the many states legalizing itself, sells nothing. But that does not mean that Pure Agro cannabis. (Id. at 25–27.) is insulated from potential prosecution. Again, “Whoever commits an offense against the United States or aids, abets, • At the evidentiary hearing, Byrd confirmed his knowledge counsels, commands, induces or procures its commission, that certain dispensaries and cannabis growers were is punishable as a principal.” 18 U.S.C. § 2(a). Liability customers of Pure Agro's subsidiaries. (ECF No. 23-4 at requires an underlying crime (supplied here by the subsidiary 418–19.) Debtors' actions) and “willfully associat[ing] [oneself] with the criminal venture and seek[ing] to make the venture • Byrd testified that Crop Supply was losing money but “it's succeed through some action of [one's] own.” Leos-Quijada, all a rollup so we can have a profit on one sub entity 107 F.3d at 794. and a loss on another.” (Id. at 361–62.) Elaborating, John Thompson, Pure Agro's head of finance, testified that The evidence before the bankruptcy court was enough Pure Agro, Crop Supply, and Way to Grow shared a to support a finding that Pure Agro aids and abets its single bank account that allowed for transfers between subsidiaries' violations of federal law. For example: the companies. (Id. at 497.)

Finally, the Court notes that Debtors' failure to argue for distinct treatment in the bankruptcy court is further evidence

WESTLAW © 2020 Thomson Reuters. No claim to original113 U.S. Government Works. 13 In re Way to Grow, Inc., --- B.R. ---- (2019) that they view themselves as distinct on paper but not in the bankruptcy court did not clearly err in relying on the purpose. managers' estimates.

In sum, Pure Agro “willfully associat[es] [itself] with the Debtors further argue that the bankruptcy court criminal venture and seek[s] to make the venture succeed inappropriately fixated on Debtors' sales of hydroponic through some action of [its] own.” Leos-Quijada, 107 F.3d at equipment, whereas “soil, containers, and nutrients were and 794. Indeed, Pure Agro's purpose is to support its subsidiaries are the principal items sold in terms of product volume and in their efforts to sell to customers whom the subsidiaries and revenue.” (ECF No. 27 at 37.) Debtors request that the case Pure Agro know to be using the products to grow marijuana. be remanded for the bankruptcy court to consider the “actual For this reason, the bankruptcy court's decision as to Pure mix of products” sold. (Id.) Agro is affirmed. It is true that, at one point, the bankruptcy court stated, “Debtors have already acquired a venerable reputation for C. Ability to Reorganize expertise in hydroponic marijuana growing, and it is difficult *13 [16] The bankruptcy court heard testimony from one to imagine how Debtors could prevent customers from Way to Grow manager that 95% of his store's customers continuing to patronize Debtors' stores because of this were using Way to Grow's products to grow marijuana, and reputation.” Way to Grow, 597 B.R. at 132. But this was part from another store manager that the “vast majority” of his of the bankruptcy court's alternative reason for finding no customers were doing likewise. Way to Grow, 597 B.R. at reasonable prospect of reorganization, i.e., that it would be 130. The bankruptcy court heard testimony from Byrd that difficult to stop marijuana growers from returning to Debtors' “this figure [was] closer to 65%.” Id. at 130 n.154. Weighing stores. The Court need not opine on this alternative reason this evidence, the bankruptcy court concluded, “Whether because the primary reason—the percentage of customers that marijuana-related customers account for 65% or 95% of seek out Debtors for marijuana-growing supplies—is enough Debtors' revenue, eliminating all such revenue would be by itself to support the bankruptcy court's finding. devastating to the Debtors. It is inconceivable Debtors could terminate any sales to known marijuana cultivators and still Finally, Debtors say that the bankruptcy court “never made operate profitably.” Id. at 132. any determination as to whether any customer was growing” a cannabis plant for purposes of human consumption, as Debtors challenge this finding. Debtors' first argue that the compared to the now-legal purpose of producing hemp. bankruptcy court relied mostly on evidence from Way to (ECF No. 27 at 38.) This argument relies on the Agriculture Grow managers (and not witnesses from Pure Agro or Green Improvement Act of 2018, Pub. L. No. 115-334, which Door) about the centrality of marijuana to Way to Grow's the President signed into law on December 20, 2018— business. (Id. at 36.) But the evidence as a whole shows that all shortly after Appellants filed this appeal. Among many other three Debtors developed their business specifically to service changes, this law lifted the federal ban on commercial and marijuana growers and, tellingly, Debtors failed to introduce industrial hemp production and removed hemp from Schedule any evidence to the contrary during the four-day hearing. The I so long as it contains no more than 0.3% of THC (the bankruptcy court did not clearly err in applying its finding to active ingredient in marijuana) by dry weight. See id. §§ all three Debtors. 10113, 12619. Debtors say that “[t]he legalization of hemp means that [they] could reorganize based upon the hemp Debtors next argue that the store managers merely offered market.” (ECF No. 27 at 39.) “guesses” of how many customers used store products to grow marijuana, and that “the managers acknowledged that *14 [17] Debtors cite nothing in the record to support this this conclusion was speculation, and that they had no personal contention. Apparently this argument was never advanced knowledge of what their customers were growing.” (ECF No. to the bankruptcy court. This Court does not opine on 27 at 36–37.) Debtors cite nothing in the record to support whether the timing of the Agriculture Improvement Act's these characterizations of the managers' testimony, and they passage excuses Debtors' failure to develop a proper record are otherwise inconsistent with the testimony summarized or to advance the argument. The Court only holds that the by the bankruptcy court that the managers knew their stores bankruptcy court did not err, much less clearly err, by failing were selling products for use by marijuana growers to to address this argument, which was never presented to it and grow marijuana. See Way to Grow, 597 B.R. at 130. Thus,

could not have been a potential basis for relief until after the 2. The Clerk shall enter judgment in favor of Appellee and bankruptcy court issued its decision. against Appellants, and shall terminate this case; and

3. Appellee shall have his costs incurred in this Court, if IV. CONCLUSION any, upon compliance with D.C.COLO.LCivR 54.1. For the reasons set forth above, the Court ORDERS as follows: All Citations 1. The judgment of the bankruptcy court is AFFIRMED; --- B.R. ----, 2019 WL 6332541

Footnotes 1 The record on appeal has been filed in a disorganized fashion. (See ECF Nos. 23, 26.) Also, attached to their merits briefs, the parties have filed separate appendices of record excerpts, each with a set of page numbers that differs from the record—while sometimes still citing the record, rather than their appendices, in their briefs. For simplicity when citing to the record in these circumstances, the Court will cite directly to the CM/ECF docket number and page number where the cited material can be found, regardless of whether it is characterized as a part of the record or an appendix. Also, for matters not in dispute, the Court will cite to the parties' briefs where the appropriate record citations may be found. All ECF page citations, whether to the record or to a brief, are to the page number in the CM/ECF header, which rarely matches the document's internal pagination. 2 No party makes any argument about the possibility of converting the jointly administered Chapter 11 cases to a Chapter 7 proceeding, nor the possibility of appointing a trustee or examiner. Accordingly, like the parties, the Court will ignore these portions of § 1112(b)(1). For purposes of this dispute, the only relevant portion of § 1112(b)(1) is its authorization to “dismiss a case ... for cause.” 3 Some courts have held that lack of good faith is grounds for dismissal independent from a dismissal for “cause” under § 1112(b)(1). See 7 Collier on Bankruptcy ¶ 1112.07[1] (Richard Levin & Henry J. Sommer eds., 16th ed.). But, “[i]n general, the requirements of good faith and cause do overlap, and what is sufficient to demonstrate a lack of good faith is also probably sufficient to demonstrate cause.” Id. ¶ 1112.07[5]. Accordingly, the Court need not explore whether its holding is justified independent of §§ 1112(b)(1) and 1129(a)(3). Furthermore, bankruptcy decisions throughout the country have explored other potential bases for holding that a bankruptcy court cannot grant relief to a marijuana-based business. See, e.g., Garvin, 922 F.3d at 1036 (suggesting that operating a marijuana-based business could be cause for dismissal as “gross mismanagement of the [bankruptcy] estate” under 11 U.S.C. § 1112(b)(4)(B)); In re Olson, 2018 WL 989263, at *4–6 (9th Cir. BAP Feb. 5, 2018) (surveying various approaches); Way to Grow, 597 B.R. at 120–23 (same). The Court finds that inability to propose a good-faith reorganization plan provides cause to dismiss under § 1112(b)(1), and so the Court need not express any opinion about alternative bases for dismissal. 4 Debtors further note that hydroponic equipment is not on a Drug Enforcement Administration list of products and materials specifically associated with clandestine drug manufacturing. (Id.) It is not clear what relevance this has to whether § 843(a)(7) is too vague to be understood by the ordinary person. 5 Save for their argument that there must be evidence of specific transactions, which the Court has rejected immediately above, Debtors do not argue that the evidence against Way to Grow was insufficient. 6 As aptly explained by Investopedia, “pick and shovel play” is a metaphor derived from the persons who sold equipment to gold diggers during the California gold rush. It is “an investment strategy that invests in the underlying technology needed to produce a good or service instead of in the final output. It is a way to invest in an industry without having to endure the risks of the market for the final product.” Investopedia, “Pick-And-Shovel Play,” at https://www.investopedia.com/terms/ p/pick-and-shovel-play.asp (last accessed Sept. 16, 2019).

1 2 3 4 UNITED STATES BANKRUPTCY COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 In re 7 LUTHER AND LYNDY WRIGHT, No. 07-10375 8 Debtor(s). ______/ 9 Memorandum re Marijuana Cultivation and Chapter 13 10 ______11 Debtors Luther and Lyndy Wright cultivate marijuana for sale to medical clinics. Their business is 12 perfectly legal under California law and the debtors obey all state laws and pay taxes just like any other 13 business owners. They have proposed a Chapter 13 plan which relies upon income from their cultivation. 14 Unfortunately for them, marijuana cultivation is still a federal crime. The U.S. Trustee and the Chapter 13 15 trustee have objected to their plan. The U.S. Trustee also seeks dismissal, arguing that the debtors are not 16 eligible for Chapter 7. 17 In order to have a plan confirmed, the debtors must show, pursuant to § 1326(a)(3) of the 18 Bankruptcy Code, that their plan is proposed in good faith and not by any means forbidden by law. While the 19 court has no problem finding that the Wrights have filed their plan in good faith, the court interprets the section 20 as barring confirmation of a plan which relies on an activity forbidden by any law. Since federal law makes 21 their business a crime, it is no saving grace that the business is lawful under state law. 22 The court finds the U.S. Trustee’s arguments regarding the unavailability of Chapter 7 to be both 23 flawed and premature. The mere fact that a trustee cannot liquidate the debtor’s assets does not make the 24 debtor ineligible for Chapter 7 relief. In a non-individual case, inability to liquidate an estate may well render a 25 Chapter 7 case pointless and subject to dismissal. However, in an individual Chapter 7 case there are two 26 purposes: liquidation of an estate and discharge of a debtor. The ability to liquidate an estate is not a

Case: 07-10375 Doc# 32 Filed: 08/03/07116 Entered: 08/03/07 15:05:58 Page 1 of 2 1 prerequisite to a discharge. In any event, this discussion is moot until and unless the debtors seek relief in 2 Chapter 7. 3 For the foregoing reasons, confirmation will be denied. The case will be dismissed on the tenth day 4 after entry of an appropriate order unless the debtors have converted the case to Chapter 7 or proposed a 5 plan which does not rely on illegal activity. The motion of the U.S. Trustee will be denied without prejudice. 6 The Chapter 13 trustee shall submit an appropriate form of order. 7 8 Dated: August 3, 2007 9 10 Alan Jaroslovsky 11 U.S. Bankruptcy Judge 12 S 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Case: 07-10375 Doc# 32 Filed: 08/03/07117 Entered: 08/03/07 15:05:58 Page 2 of 2 11 U.S. Code § 1129 - Confirmation of plan | U.S. Code | US Law | LII / L... Page 1 of 1

11 U.S. Code § 1129. Confirmation of plan _U.S. Code cNotes

(a) The court shall confirm a plan only if all of the following requirements are met:

(1) The plan complies with the applicable provisions of this title.

(2) The proponent of the plan complies with the applicable provisions of this title.

(3) The plan has been proposed in good faith and not by any means forbidden by law.

(4) Any payment made or to be made by the proponent, by the debtor, or by a person issuing securities or acquiring property under the plan, for services or for costs and expenses in or in connection with the case, or in connection with the plan and incident to the case, has been approved by, or is subject to the approval of, the court as reasonable.

118 https://www.law.cornell.edu/uscode/text/11/1129 1/16/2020 11 U.S. Code § 1112 - Conversion or dismissal | U.S. Code | US Law | LII ... Page 1 of 2

11 U.S. Code § 1112. Conversion or dismissal _U.S. Code cNotes

(a) The debtor may convert a case under this chapter to a case under chapter 7 of this title unless—

(1) the debtor is not a debtor in possession;

(2) the case originally was commenced as an involuntary case under this chapter; or

(3) the case was converted to a case under this chapter other than on the debtor’s request.

(b)

(1) Except as provided in paragraph (2) and subsection (c), on request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.

(2) The court may not convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter if the court finds and specifically identifies unusual circumstances establishing that converting or dismissing the case is not in the best interests of creditors and the estate, and the debtor or any other party in interest establishes that—

119 https://www.law.cornell.edu/uscode/text/11/1112 1/16/2020 11 U.S. Code § 1112 - Conversion or dismissal | U.S. Code | US Law | LII ... Page 2 of 2

(A) there is a reasonable likelihood that a plan will be confirmed within the timeframes established in sections 1121(e) and 1129(e) of this title, or if such sections do not apply, within a reasonable period of time; and

(B) the grounds for converting or dismissing the case include an act or omission of the debtor other than under paragraph (4)(A)—

(i) for which there exists a reasonable justification for the act or omission; and

(ii) that will be cured within a reasonable period of time fixed by the court.

120 https://www.law.cornell.edu/uscode/text/11/1112 1/16/2020 11 U.S. Code § 707 - Dismissal of a case or conversion to a case under cha... Page 1 of 1

(a) The court may dismiss a case under this chapter only after notice and a hearing and only for cause, including—

(1) unreasonable delay by the debtor that is prejudicial to creditors;

121 https://www.law.cornell.edu/uscode/text/11/707 1/16/2020 11 U.S. Code § 1307 - Conversion or dismissal | U.S. Code | US Law | LII ... Page 1 of 2

(c) Except as provided in subsection (f) of this section, on request of a party in interest or the United States trustee and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause, including—

(1) unreasonable delay by the debtor that is prejudicial to creditors;

(2) nonpayment of any fees and charges required under chapter 123 of title 28;

(3) failure to file a plan timely under section 1321 of this title;

(4) failure to commence making timely payments under section 1326 of this title;

(5) denial of confirmation of a plan under section 1325 of this title and denial of a request made for additional time for filing another plan or a modification of a plan;

(6) material default by the debtor with respect to a term of a confirmed plan;

(7) revocation of the order of confirmation under section 1330 of this title, and denial of confirmation of a modified plan under section 1329 of this title;

(8) termination of a confirmed plan by reason of the occurrence of a condition specified in the plan other than completion of payments under the plan;

(9) only on request of the United States trustee, failure of the debtor to file, within fifteen days, or such additional time as the court may allow, after the filing of the petition commencing such case, the information required by paragraph (1) of section 521(a);

122 https://www.law.cornell.edu/uscode/text/11/1307 1/16/2020 11 U.S. Code § 1307 - Conversion or dismissal | U.S. Code | US Law | LII ... Page 2 of 2

(10) only on request of the United States trustee, failure to timely file the information required by paragraph (2) of section 521(a); or

(11) failure of the debtor to pay any domestic support obligation that first becomes payable after the date of the filing of the petition.

123 https://www.law.cornell.edu/uscode/text/11/1307 1/16/2020 11 U.S. Code § 1325 - Confirmation of plan | U.S. Code | US Law | LII / L... Page 1 of 2

(a) Except as provided in subsection (b), the court shall confirm a plan if—

(1) The plan complies with the provisions of this chapter and with the other applicable provisions of this title;

(2) any fee, charge, or amount required under chapter 123 of title 28, or by the plan, to be paid before confirmation, has been paid;

(3) the plan has been proposed in good faith and not by any means forbidden by law;

(4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date;

(5) with respect to each allowed secured claim provided for by the plan—

(A) the holder of such claim has accepted the plan;

(B)

(i) the plan provides that—

(I) the holder of such claim retain the lien securing such claim until the earlier of—

(aa) the payment of the underlying debt determined under nonbankruptcy law; or

(bb) discharge under section 1328; and

(II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law;

124 https://www.law.cornell.edu/uscode/text/11/1325 1/16/2020 11 U.S. Code § 1325 - Confirmation of plan | U.S. Code | US Law | LII / L... Page 2 of 2

(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and

(iii) if—

(I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and

(II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan; or

(6) the debtor will be able to make all payments under the plan and to comply with the plan;

125 https://www.law.cornell.edu/uscode/text/11/1325 1/16/2020 View Document Page 1 of 1

VIEW DOCUMENT The Arizona Revised Statutes have been updated to include the revised sections from the 54th Legislature, 1st Regular Session. Please note that the next update of this compilation will not take place until after the conclusion of the 54th Legislature, 2nd Regular Session, which convenes in January 2020.

DISCLAIMER This online version of the Arizona Revised Statutes is primarily maintained for legislative drafting purposes and reflects the version of law that is effective on January 1st of the year following the most recent legislative session. The official version of the Arizona Revised Statutes is published by Thomson Reuters.

12-1241. Power of superior court to appoint receiver

The superior court or a judge thereof may appoint a receiver to protect and preserve property or the rights of parties therein, even if the action includes no other claim for relief.

126 https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ar... 1/16/2020 View Document Page 1 of 1

12-1242. Application for appointment of receiver; verification; service; notice of hearing; restraining order pending hearing

An application for the appointment of a receiver shall be in writing, supported by affidavit and served upon the adverse party, together with reasonable notice of the time of hearing. The adverse party may file counteraffidavits, and the counteraffidavits, with such testimony as the court admits, shall be considered on hearing the application. The court may restrain the adverse party from removing, secreting or otherwise disposing of the property to the injury of the applicant, pending hearing the application for appointment of a receiver.

127 https://www.azleg.gov/viewdocument/?docName=https://www.azleg.gov/ar... 1/16/2020 36-2804 - Registration and certification of nonprofit medical marijuana dis... Page 1 of 2

36-2804. Registration and certification of nonprofit medical marijuana dispensaries

(Caution: 1998 Prop. 105 applies)

A. Nonprofit medical marijuana dispensaries shall register with the department.

B. Not later than ninety days after receiving an application for a nonprofit medical marijuana dispensary, the department shall register the nonprofit medical marijuana dispensary and issue a registration certificate and a random 20-digit alphanumeric identification number if:

1. The prospective nonprofit medical marijuana dispensary has submitted the following:

(a) The application fee.

(b) An application, including:

(i) The legal name of the nonprofit medical marijuana dispensary.

(ii) The physical address of the nonprofit medical marijuana dispensary and the physical address of one additional location, if any, where marijuana will be cultivated, neither of which may be within five hundred feet of a public or private school existing before the date of the nonprofit medical marijuana dispensary application.

(iii) The name, address and date of birth of each principal officer and board member of the nonprofit medical marijuana dispensary.

(iv) The name, address and date of birth of each nonprofit medical marijuana dispensary agent.

128 https://www.azleg.gov/ars/36/02804.htm 1/16/2020 36-2804 - Registration and certification of nonprofit medical marijuana dis... Page 2 of 2

(c) Operating procedures consistent with department rules for oversight of the nonprofit medical marijuana dispensary, including procedures to ensure accurate record-keeping and adequate security measures.

(d) If the city, town or county in which the nonprofit medical marijuana dispensary would be located has enacted zoning restrictions, a sworn statement certifying that the registered nonprofit medical marijuana dispensary is in compliance with the restrictions.

2. None of the principal officers or board members has been convicted of an excluded felony offense.

3. None of the principal officers or board members has served as a principal officer or board member for a registered nonprofit medical marijuana dispensary that has had its registration certificate revoked.

4. None of the principal officers or board members is under twenty-one years of age.

C. The department may not issue more than one nonprofit medical marijuana dispensary registration certificate for every ten pharmacies that have registered under section 32-1929, have obtained a pharmacy permit from the Arizona board of pharmacy and operate within the state except that the department may issue nonprofit medical marijuana dispensary registration certificates in excess of this limit if necessary to ensure that the department issues at least one nonprofit medical marijuana dispensary registration certificate in each county in which an application has been approved.

D. The department may conduct a criminal records check in order to carry out this section.

129 https://www.azleg.gov/ars/36/02804.htm 1/16/2020 44-1031 - Effect of assignment for the benefit of creditors; acknowledgme... Page 1 of 1

44-1031. Effect of assignment for the benefit of creditors; acknowledgment and recording; invalidity of assignments not made in accordance with this article

A. Every assignment made by an insolvent debtor, or in contemplation of insolvency, for the benefit of his creditors, shall provide, except as otherwise provided in this article, for a distribution of all his real and personal property other than that which is by law exempt from execution, among all his creditors in proportion to their respective claims. However the assignment is made or expressed, it shall have such effect and shall be construed to pass all such property, whether or not specified therein.

B. Every assignment for the benefit of creditors shall be acknowledged and recorded in the manner provided by law for conveyances of real or other property.

C. Assignments for the benefit of creditors under the common law are declared contrary to the public policy of the state and are abolished, and all assignments for the benefit of creditors are void and of no force and effect unless made in accordance with the provisions of this article.

130 https://www.azleg.gov/ars/44/01031.htm 1/16/2020 View Document - Arizona Court Rules Page 1 of 2

THOMSON REUTERS WESTLAW Arizona Court Rules

Home Table of Contents

Rule 66. Receivers Arizona Revised Statutes Annotated Rules of Civil Procedure for the Superior Courts of Arizona

Arizona Revised Statutes Annotated Rules of Civil Procedure for the Superior Courts of Arizona (Refs & Annos) VIII. Provisional and Final Remedies; Special Proceedings

16 A.R.S. Rules of Civil Procedure, Rule 66

Rule 66. Receivers

Currentness

(a) Application; Service; Notice; Restraining Order.

(1) Application, Response, and Hearing. A party seeking the appointment of a receiver must file an application for the receiver's appointment, accompanied by an affidavit attesting to the facts supporting the application. Within 10 days after being served, the adverse party may file a response accompanied by one or more affidavits attesting to facts relevant to the application. Except as provided in Rule 66(a)(3), the court must hold a hearing on the application. At the hearing, it may consider testimony and other evidence presented by the parties.

(2) Service. Service must be made on the adverse party in the same manner that a summons and pleading are served under Rule 4, 4.1, or 4.2, as applicable. The court may not consider an application that has not been served on the adverse party unless:

(A) at least 10 days after filing the application, the applicant files an affidavit showing that all reasonable efforts have been made to serve the adverse party, and that personal service on the party cannot be made within Arizona or by direct service outside of Arizona; or

(B) the applicant shows that substantial cause exists for appointing a receiver before the adverse party is served.

(3) Appointment Without Notice. If a party applies for appointment of a receiver without notice, the court may either grant the application or, if the adverse party is available to be served, order the applicant to serve the adverse party and set a hearing on the application to be held no later than 10 days after the order's entry.

(4) Bond. If the court grants an application for appointment of a receiver without notice, it must require--and the applicant must file--a bond in an amount the court fixes, with such surety as the court approves. The bond must be conditioned to indemnify the adverse party for costs and damages occasioned by the seizure, taking, and detention of the adverse party's property.

(5) Rule 65's Applicability. The court may not consider an application for a receivership under this rule if Rule 65 applies.

(b) Appointment; Oath; Bond; Certificate.

(1) Appointment. Except as stated in this rule, the court may not appoint as receiver a party, an officer or employee of a party, an attorney for a party, or a person interested in the action. The court, however, may appoint as receiver an employee of a party, an officer of a corporate party, or a person otherwise interested in the action, if:

(A) the court finds that the property has been abandoned or that the receiver's duties will consist chiefly of physically preserving the property, collecting rents, or maturing, harvesting, and disposing of crops growing on it;

(B) notice is provided in a manner the court finds adequate; and

(2) Bond, Oath, and Certificate of Appointment. Before performing the prescribed duties, a receiver must file a bond for the court to approve. The bond must be in the amount set forth in the receiver's order of appointment, and must be conditioned on the receiver faithfully discharging his or her duties in the action and obeying the court's orders. The receiver must make an oath to the same effect, which must be endorsed on the bond. Upon the court's approval of the bond and the receiver making the required oath, the clerk must deliver a certificate of appointment to the receiver. The certificate must contain a description of the property involved in the action.

131 https://govt.westlaw.com/azrules/Document/N2A666F40893F11E690E48A... 1/16/2020 View Document - Arizona Court Rules Page 2 of 2

(1) Powers. A receiver may commence and defend actions, subject to the court's control and supervision. A receiver may take and keep possession of the property, receive rents, collect debts, and perform such other duties respecting the property as the court orders.

(2) Suspension and Removal. The court may suspend a receiver at any time and may, after providing reasonable notice, remove a receiver and appoint another.

(3) Termination. Any party may move to terminate a receivership. Unless the parties stipulate otherwise, the court must hold a hearing on the motion no sooner than 10 days after the motion's service. In scheduling the hearing, the court may order the receiver to file and serve a final account and report, and may require any objecting party to file and serve written objections. At the hearing, the court may take evidence as is appropriate and may enter orders as are just concerning the receivership's termination, including orders regarding the receiver's fees and costs.

(4) Equitable Principles Govern. If applicable, principles of equity govern all matters relating to the appointment of receivers, their powers, duties and liabilities, and the court's power.

(d) Dismissal. An action in which the court has appointed a receiver may not be dismissed except by court order.

Credits Added Sept. 2, 2016, effective Jan. 1, 2017.

Editors' Notes

COMMENT

2017 Amendment to Rule 66(a)

Rule 66(a) previously allowed an application for receiver to be included in a verified complaint or made by separate verified application. Amended Rule 66(a) no longer permits this. A request for receiver must be filed as a separate application and must be accompanied by a supporting affidavit.

16 A. R. S. Rules Civ. Proc., Rule 66, AZ ST RCP Rule 66 Current with amendments received through 11/1/19

132 https://govt.westlaw.com/azrules/Document/N2A666F40893F11E690E48A... 1/16/2020 21 U.S. Code § 802 - Definitions | U.S. Code | US Law | LII / Legal Inform... Page 1 of 1

(16)

(A) Subject to subparagraph (B), the term “marihuana” means all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin.

(B) The term “marihuana” does not include—

(i) hemp, as defined in section 1639o of title 7; or

(ii) the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination

133 https://www.law.cornell.edu/uscode/text/21/802 1/16/2020 21 U.S. Code § 841 - Prohibited acts A | U.S. Code | US Law | LII / Legal I... Page 1 of 1

(a) UNLAWFUL ACTS Except as authorized by this subchapter, it shall be unlawful for any person knowingly or intentionally—

(1) to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance; or

(2) to create, distribute, or dispense, or possess with intent to distribute or dispense, a counterfeit substance.

134 https://www.law.cornell.edu/uscode/text/21/841 1/16/2020 Section 843 Page 1 of 1

SUBCHAPTER I — CONTROL AND ENFORCEMENT

Part D — Offenses And Penalties

§843. Prohibited acts C

(a) Unlawful acts

It shall be unlawful for any person knowingly or intentionally—

(1) who is a registrant to distribute a controlled substance classified in schedule I or II, in the course of his legitimate business, except pursuant to an order or an order form as required by section 828 of this title;

(2) to use in the course of the manufacture, distribution, or dispensing of a controlled substance, or to use for the purpose of acquiring or obtaining a controlled substance, a registration number which is fictitious, revoked, suspended, expired, or issued to another person;

(3) to acquire or obtain possession of a controlled substance by misrepresentation, fraud, forgery, deception, or subterfuge;

(4)(A) to furnish false or fraudulent material information in, or omit any material information from, any application, report, record, or other document required to be made, kept, or filed under this subchapter or subchapter II of this chapter, or (B) to present false or fraudulent identification where the person is receiving or purchasing a listed chemical and the person is required to present identification under section 830(a) of this title;

(5) to make, distribute, or possess any punch, die, plate, stone, or other thing designed to print, imprint, or reproduce the trademark, trade name, or other identifying mark, imprint, or device of another or any likeness of any of the foregoing upon any drug or container or labeling thereof so as to render such drug a counterfeit substance;

(6) to possess any three-neck round-bottom flask, tableting machine, encapsulating machine, or gelatin capsule, or any equipment, chemical, product, or material which may be used to manufacture a controlled substance or listed chemical, knowing, intending, or having reasonable cause to believe, that it will be used to manufacture a controlled substance or listed chemical in violation of this subchapter or subchapter II of this chapter;

(7) to manufacture, distribute, export, or import any three-neck round-bottom flask, tableting machine, encapsulating machine, or gelatin capsule, or any equipment, chemical, product, or material which may be used to manufacture a controlled substance or listed chemical, knowing, intending, or having reasonable cause to believe, that it will be used to manufacture a controlled substance or listed chemical in violation of this subchapter or subchapter II of this chapter or, in the case of an exportation, in violation of this subchapter or subchapter II of this chapter or of the laws of the country to which it is exported;

(8) to create a chemical mixture for the purpose of evading a requirement of section 830 of this title or to receive a chemical mixture created for that purpose; or

(9) to distribute, import, or export a list I chemical without the registration required by this subchapter or subchapter II of this chapter.

(b) Communication facility

It shall be unlawful for any person knowingly or intentionally to use any communication facility in committing or in causing or facilitating the commission of any act or acts constituting a felony under any provision of this subchapter or subchapter II of this chapter. Each separate use of a communication facility shall be a separate offense under this subsection. For purposes of this subsection, the term "communication facility" means any and all public and private instrumentalities used or useful in the transmission of writing, signs, signals, pictures, or sounds of all kinds and includes mail, telephone, wire, radio, and all other means of communication.

(1) It shall be unlawful for any person to place in any newspaper, magazine, handbill, or other publications, any written advertisement knowing that it has the purpose of seeking or offering illegally to receive, buy, or distribute a Schedule \1\ I controlled substance. As used in this section the term "advertisement" includes, in addition to its ordinary meaning, such advertisements as those for a catalog of Schedule \1\ I controlled substances and any similar written advertisement that has the purpose of seeking or offering illegally to receive, buy, or distribute a Schedule \1\ I controlled substance. The term "advertisement" does not include material which merely advocates the use of a similar material, which advocates a position or practice, and does not attempt to propose or facilitate an actual transaction in a Schedule \1\ I controlled substance.

------\1\ So in original. Probably should not be capitalized. ------

(2)(A) It shall be unlawful for any person to knowingly or intentionally use the Internet, or cause the Internet to be used, to advertise the sale of, or to offer to sell, distribute, or dispense, a controlled substance where such sale, distribution, or dispensing is not authorized by this subchapter or by the Controlled Substances Import and Export Act [21 U.S.C. 951 et seq.].

(B) Examples of activities that violate subparagraph (A) include, but are not limited to, knowingly or intentionally causing the placement on the Internet of an advertisement that refers to or directs prospective buyers to Internet sellers of controlled substances who are not registered with a modification under section 823(f) of this title.

(i) merely advertises the distribution of controlled substances by nonpractitioners to the extent authorized by their registration under this subchapter; or

(ii) merely advocates the use of a controlled substance or includes pricing information without attempting to facilitate an actual transaction involving a controlled substance.

135 https://www.deadiversion.usdoj.gov/21cfr/21usc/843.htm 1/16/2020 Section 856 Page 1 of 1

Part D — Offenses And Penalties

§856. Maintaining drug-involved premises

(a) Unlawful acts

Except as authorized by this subchapter, it shall be unlawful to—

(1) knowingly open, lease, rent, use, or maintain any place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using any controlled substance;

(2) manage or control any place, whether permanently or temporarily, either as an owner, lessee, agent, employee, occupant, or mortgagee, and knowingly and intentionally rent, lease, profit from, or make available for use, with or without compensation, the place for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance.

136 https://www.deadiversion.usdoj.gov/21cfr/21usc/856.htm 1/16/2020 Section 881 Page 1 of 1

SUBCHAPTER I — CONTROL AND ENFORCEMENT

Part E — Administrative and Enforcement Provisions

§881. Forfeitures

(a) Subject property

The following shall be subject to forfeiture to the United States and no property right shall exist in them:

(1) All controlled substances which have been manufactured, distributed, dispensed, or acquired in violation of this subchapter.

(2) All raw materials, products, and equipment of any kind which are used, or intended for use, in manufacturing, compounding, processing, delivering, importing, or exporting any controlled substance or listed chemical in violation of this subchapter.

(3) All property which is used, or intended for use, as a container for property described in paragraph (1), (2), or (9).

(4) All conveyances, including aircraft, vehicles, or vessels, which are used, or are intended for use, to transport, or in any manner to facilitate the transportation, sale, receipt, possession, or concealment of property described in paragraph (1), (2), or (9).

(5) All books, records, and research, including formulas, microfilm, tapes, and data which are used, or intended for use, in violation of this subchapter.

(6) All moneys, negotiable instruments, securities, or other things of value furnished or intended to be furnished by any person in exchange for a controlled substance or listed chemical in violation of this subchapter, all proceeds traceable to such an exchange, and all moneys, negotiable instruments, and securities used or intended to be used to facilitate any violation of this subchapter.

(7) All real property, including any right, title, and interest (including any leasehold interest) in the whole of any lot or tract of land and any appurtenances or improvements, which is used, or intended to be used, in any manner or part, to commit, or to facilitate the commission of, a violation of this subchapter punishable by more than one year's imprisonment.

(8) All controlled substances which have been possessed in violation of this subchapter.

(9) All listed chemicals, all drug manufacturing equipment, all tableting machines, all encapsulating machines, and all gelatin capsules, which have been imported, exported, manufactured, possessed, distributed, dispensed, acquired, or intended to be distributed, dispensed, acquired, imported, or exported, in violation of this subchapter or subchapter II of this chapter.

(10) Any drug paraphernalia (as defined in section 863 of this title).

(11) Any firearm (as defined in section 921 of title 18) used or intended to be used to facilitate the transportation, sale, receipt, possession, or concealment of property described in paragraph (1) or (2) and any proceeds traceable to such property.

137 https://www.deadiversion.usdoj.gov/21cfr/21usc/881.htm 1/16/2020 12/2/2019 Ethical Issues in Representing Clients in the Cannabis Business: “One toke over the line?” July 02, 2019 FEATURE Ethical Issues in Representing Clients in the Cannabis Business: “One toke over the line?”

By Dennis A. Rendleman