1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

FILED

FEB 05 2018

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

NOTFOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. NV-17-1168-LTiF

)

PATRICIA G. OLSON, ) Bk. No. 3:17-bk-50081-BTB

)

Debtor. )

______________________________)

)

PATRICIA G. OLSON, )

)

Appellant, )

)

v. ) M E M O R A N D U M*

)

WILLIAM ALBERT VAN METER, )

Chapter 13 Trustee; )

CODY BASS; CITY OF SOUTH )

LAKE TAHOE; UNITED STATES OF )

AMERICA; U.S. BANK, N.A., )

)

Appellees. )

______________________________)

Argued and Submitted on December 1, 2017

at Reno, Nevada

Filed - February 5, 2018

Appeal from the United States Bankruptcy Court

for the District of Nevada

Honorable Bruce T. Beesley, Bankruptcy Judge, Presiding

_________________________

Appearances: Anne J. Williams of the Law Offices of J. Craig

Demetras argued for Appellant Patricia G. Olson;

Seth Joseph Adams of Woodburn & Wedge argued for

Appellee Cody Bass.

_________________________

*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

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Before: LAFFERTY, TIGHE,** and FARIS, Bankruptcy Judges.

Memorandum by Judge Lafferty

Concurrence by Judge Tighe

The Debtor is 92 years old, legally blind, and resides in an

assisted living facility. She sought chapter 131 relief to stop

foreclosure of her commercial real property. One of the tenants

at that property operated a marijuana dispensary on the premises

and continued to pay rent to Debtor postpetition. Debtor’s plan

called for her to sell the commercial real property to pay off

all creditors. At the hearing on the motion to sell and reject

the lease with the tenant, the bankruptcy court dismissed the

case sua sponte on the ground that Debtor’s postpetition

acceptance of rents from the dispensary business was an ongoing

criminal violation that disqualified her from bankruptcy relief.

Because the bankruptcy court did not make adequate findings

for us to discern the standard under which it concluded that

dismissal was mandatory, we VACATE and REMAND.

FACTS2

Prepetition, Debtor Patricia G. Olson was the general

**Hon. Maureen A. Tighe, U.S. Bankruptcy Judge for the

Central District of California, sitting by designation.

1Unless specified otherwise, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

2The 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).

-2-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

partner of Olson Bijou Center, L.P., a California limited

partnership (“OBC”). OBC owned real property on Lake Tahoe

Boulevard in South Lake Tahoe, California, known as the Olson

Bijou Shopping Center (the “Shopping Center Property”).

Beginning in January 2013, Appellee Cody Bass began leasing

space in the Shopping Center Property from OBC; although the

record includes only an unsigned copy of the lease, the signature

block on the lease indicates that it was to be signed by Debtor’s

son, Patrick Olson, as manager of OBC.3 The lease expressly

authorized Mr. Bass to operate a “dispensary.”4 Pursuant to that

authority, Mr. Bass operated at the leased premises Tahoe

Wellness Cooperative (“TWC”), a marijuana dispensary authorized

under California law. Both the operation of the dispensary

business and the leasing of the premises for such a business,

however, potentially violated the federal Controlled Substances

Act, 21 U.S.C. §§ 801-904 (“CSA”). The CSA classifies marijuana

as a controlled substance, 21 U.S.C. § 812, and 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;

3In 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.”

4The 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 quasigovernmental entity . . . .”

-3-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

(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. § 856(a).

In early 2016, Mr. Bass and OBC entered into a letter of

intent for Mr. Bass to purchase the Shopping Center Property for

$4.2 million; Mr. Bass made a $25,000 payment to Debtor’s

attorney pursuant to the letter of intent. Shortly thereafter,

Mr. Bass, OBC, and Debtor entered into an option agreement, which

expired on March 3, 2016. Mr. Bass tendered an additional

$50,000 to be applied to the purchase price if the option were

exercised. According to Mr. Bass’ declaration in support of his

opposition to the motion to sell, he gave notice on April 1,

2016, that he was exercising the option agreement. He asserted

that this notice was timely based on a First Amendment to Option

Agreement attached to his declaration, which extended the

deadline for exercising the option to April 4, 2016 and appears

to be signed by Debtor. But in Debtor’s second declaration in

support of pending motions, she stated that Mr. Bass came to her

assisted living facility on March 3, 2016, the day the option

agreement expired, and asked her to sign papers, but she did not

understand what she may have signed, and she believed Mr. Bass

misled her into “signing something.”5

5We 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

(continued...)

-4-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

OBC and Debtor did not perform under the option agreement,

and, in May 2016, Mr. Bass sued OBC, Debtor, and Mr. Olson in El

Dorado County Superior Court for damages and specific

performance.

The Shopping Center Property was encumbered by a deed of

trust in favor of U.S. Bank, N.A. In August 2016 U.S. Bank

recorded a notice of default, and in December 2016 it recorded a

notice of sale. The foreclosure sale was set for February 1,

2017.

On January 30, 2017, Debtor filed a chapter 13 petition,

which stayed both the foreclosure and the Bass litigation. That

same day, she filed a quitclaim deed transferring OBC’s interest

in the Shopping Center Property to herself individually. 

Mr. Bass continued to pay rent postpetition to Debtor or her

counsel.

About a month after the bankruptcy filing, the bankruptcy

court approved a stipulation between Debtor and U.S. Bank for the

use of cash collateral for Debtor’s ordinary operating expenses

and maintenance of the Shopping Center Property as well as

assisted living expenses and health insurance, through April

5(...continued)

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.

-5-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2017. In exchange, Debtor granted U.S. Bank a postpetition

replacement lien on all rents generated from the Shopping Center

Property and agreed to make adequate protection payments of

$4,000 per month. According to the stipulation, at that time

expected rental income was $16,220 per month, including TWC’s

monthly rental payment of $10,200. In early May 2017, the court

approved another cash collateral stipulation extending the

agreement to use cash collateral through July 31, 2017 and

modifying the budget to exclude the rent from TWC. There is no

evidence in the record to indicate whether the postpetition rents

paid by Mr. Bass were used to make payments pursuant to the

initial cash collateral stipulation; other than Debtor’s

counsel’s oral representation that the May 2017 rent payment was

being held in a safe in his office, the record does not show what

happened to those funds at all.

Debtor’s proposed chapter 13 plan called for monthly

payments of $150 for 12 months and $2,100 for 48 months. The

plan also provided that Debtor would sell the Shopping Center

Property within six months of plan confirmation and use the net

proceeds to pay all administrative, priority, and unsecured

claims.

In April 2017, Debtor filed a motion to sell free and clear

under § 363(f) the Shopping Center Property and the adjacent

property, which she also owned, for $3 million. Among the

conditions of the sale of the Shopping Center Property were

(i) court approval of the rejection or termination of Mr. Bass’

lease and the commencement of eviction proceedings by Debtor; and

(ii) court-ordered rejection, termination, or voiding of the

-6-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

option agreement with Mr. Bass. Debtor also filed a motion to

reject the lease and the option agreement with Mr. Bass.6 In her

declaration in support of the motion to reject, Debtor stated

that she had entered into the lease with Mr. Bass in January 2013

and that Mr. Bass “currently operates a medical marijuana

dispensary at 3443 Lake Tahoe Blvd[.]” In a subsequent

declaration filed May 11, 2017, Debtor further testified:

1. I am 92-years [sic] old and legally blind. I

live in an assisted living facility in Sparks, Nevada.

. . . .

9. At times prior to the filing of this case, my

son, Patrick Olson, acted and served as my

attorney-in-fact. In doing so, Patrick managed most of

my financial affairs, which included the management of

949 Bal Bijou Road and 3443 Lake Tahoe Blvd. Patrick’s

duties included obtaining leases for the properties,

collecting rents and paying all expenses, such as the

secured mortgage payment to U.S. Bank, real property

taxes and insurance premiums.

10. In 2012, Patrick Olson, through Olson Bijou

Center L.P., leased space at 3443 Lake Tahoe Blvd. to

Cody Bass.

. . . .

15. I wish to end any involvement with Mr. Bass

and his 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 Lake Tahoe Blvd. I wish

only to terminate any dealings with Mr. Bass and to

sell my property and pay my creditors in full.

Mr. Bass opposed both motions. In his declaration in

support of his opposition to the motion to sell, Mr. Bass

6The 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-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

confirmed that he had been operating a marijuana dispensary on

the premises pursuant to the terms of his lease with OBC and that

he had paid rent to the Debtor postpetition.

Shortly thereafter, the chapter 13 trustee filed a motion to

dismiss for failure to make plan payments and for failure to file

an amended plan. Mr. Bass also filed a motion to dismiss the

case on grounds that Debtor’s acceptance of rents from his

marijuana dispensary violated the CSA. Neither of those motions

were heard because they were mooted by the bankruptcy court’s sua

sponte dismissal of Debtor’s case.

At the initial hearing on the motion to sell and motion 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 to study

the relevant authorities. At the continued hearing, the court

heard additional argument but concluded, based on its

interpretation of relevant case law, that because Debtor had

continued to receive rent postpetition, the case had to be

dismissed:

I think it’s a crime for Ms. Olson to be accepting

rents from an illegal operation, so I am dismissing

this case. . . . My finding is this debtor is leasing

property for an unlawful purpose under federal law,

although lawful under state law . . . and has continued

to accept rents during the course of her bankruptcy.

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

explained:

[I]f the debtor has committed a crime during the course

-8-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

of the bankruptcy and continued for several months to

commit a crime during the course of the bankruptcy, I

think that is a basis for not providing relief to the

debtor. Had the debtor, prior to filing bankruptcy or

not during the bankruptcy had not committed the crime

of taking money from a marijuana operation, I would

feel differently. But that’s not what happened here. 

Because you don’t, in my opinion, get to go through

five or six months of a bankruptcy knowingly receiving

illegal proceeds and then say, oh, I’m not going to

take those anymore, I want to sell the property now, so

I get to play here. I don’t think that’s correct.

Id. at 7:17-8:3. The bankruptcy court entered its sua sponte

order dismissing the case on May 31, 2017; the court also granted

a stay pending appeal. Debtor timely appealed.

JURISDICTION

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.

ISSUE

Whether the bankruptcy court abused its discretion in

dismissing Debtor’s 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 if its factual findings are clearly erroneous. 

TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th

Cir. 2011).

DISCUSSION

Ordinarily, a bankruptcy court grants or denies relief based

-9-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

on a specific provision in the Code. Here, the bankruptcy court

did not specify what Code section or other authority it relied

upon in dismissing Debtor’s case. The court concluded,

apparently based on case law from other jurisdictions, that

Debtor’s postpetition receipt of rental payments from a tenant

that operated a marijuana dispensary on property she owned was

(i) a violation of the CSA that (ii) constituted grounds for

dismissal of the case. The legal basis for dismissal could have

been bad faith under § 1307(c), but the bankruptcy court made no

bad faith finding and did not engage in the totality of the

circumstances analysis required for dismissal under that Code

section.

Alternatively, the bankruptcy court may have been acting

pursuant to its inherent power to “issue any order, process, or

judgment that is necessary or appropriate to carry out the

provisions of this title.” § 105(a). But, if acting pursuant to

its inherent powers, the court could act only “within the

confines of the Bankruptcy Code.” Law v. Seigel, 134 S. Ct.

1188, 1194-95 (2014) (citations omitted). And where a statute

adequately addresses the conduct at issue, the court’s inherent

powers should be invoked only when that statute does not fully

address the situation at hand. See Chambers v. NASCO, Inc., 501

U.S. 32, 50 (1991) (“[I]f in the informed discretion of the

court, neither the statute nor the Rules are up to the task, the

court may safely rely on its inherent power [in imposing a

sanction for bad faith litigation conduct].”).

But the bankruptcy court did not articulate the legal basis

for its ruling or make findings to support its conclusions that

-10-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

the CSA was being violated and that that violation was grounds

for dismissal. When a court imposes the harsh penalty of

dismissal in circumstances such as those presented here, it is

imperative that it state with clarity and precision its factual

and legal bases for doing so.

The standard for dismissal of a chapter 13 case is set forth

in § 1307(c). That section provides that on request of a party

in interest and after notice and a hearing, the bankruptcy court

may convert a chapter 13 case to chapter 7, or may dismiss a

case, whichever is in the best interests of creditors and the

estate, for “cause.” § 1307(c).7 Section 1307(c) sets forth a

non-exclusive list of factors that constitute “cause” for

conversion or dismissal.8 In dealing with questions of

conversion and dismissal, the bankruptcy court engages in a twostep process: “First, it must be determined that there is ‘cause’

to act. Second, once a determination of ‘cause’ has been made, a

choice must be made between conversion and dismissal based on the

7Although 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.

8Those 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.

-11-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

‘best interests of the creditors and the estate.’” Nelson v.

Meyer (In re Nelson), 343 B.R. 671, 675 (9th Cir. BAP 2006).

Although not listed, bad faith is cause for dismissal. 

Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir.

1999). In determining bad faith, the bankruptcy court is to

apply a totality of the circumstances analysis, considering

(1) whether the debtor misrepresented facts in her petition or

plan, unfairly manipulated the Bankruptcy Code, or otherwise

filed her chapter 13 petition or plan in an inequitable manner;

(2) the debtor’s history of filings and dismissals; (3) whether

the debtor only intended to defeat state court litigation; and

(4) whether egregious behavior is present. Id.

On appeal, Debtor assumes the bankruptcy court dismissed her

case on grounds of bad faith by arguing that the bankruptcy court

abused its discretion in not considering the totality of the

circumstances, especially the fact that Debtor was using the

bankruptcy to sever her ties with Mr. Bass’ business. But the

bankruptcy court did not invoke § 1307(c), nor did it explicitly

find bad faith.

The bankruptcy court stated that it had “looked at the

cases,” but did not articulate any rules drawn from those cases

that applied to the facts before it. The case law addressing

facts such as those presented here is sparse, and there is no

controlling authority in the Ninth Circuit.

Some courts have held that, to the extent estate assets are

used for or generated by the operation of a federally prohibited

marijuana business, a trustee or debtor in possession may not

administer those assets without violating federal law. Arenas v.

-12-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

U.S. Tr. (In re Arenas), 535 B.R. 845, 852 (10th Cir. BAP 2015);

In re Medpoint Mgmt., LLC, 528 B.R. 178, 184-85 (Bankr. D. Ariz.

2015), vacated in part, Medpoint Mgmt., LLC v. Jensen (In re

Medpoint Mgmt., LLC), BAP No. AZ-15-1130-KuJaJu, 2016 WL 3251581

(9th Cir. BAP Jun. 3, 2016); In re Johnson, 532 B.R. 53, 56-57

(Bankr. W.D. Mich. 2015);9 In re Rent-Rite Super Kegs W., Ltd.,

484 B.R. 799, 810 (Bankr. D. Colo. 2012). The bankruptcy court

here made no finding, however, that the trustee would be

administering the proceeds of an illegal business, and there is

no evidence in the record that the rents were to be used to fund

the plan.

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 is otherwise no indicia of an attempt to abuse

the bankruptcy process. In re Arenas, 535 B.R. at 852-53; In re

Rent-Rite Super Kegs W., Ltd., 484 B.R. at 809. 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

9In 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.

-13-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

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 a federally

prohibited medical marijuana business had unclean hands and could

not seek relief from the bankruptcy court).

The bankruptcy court here made no finding of bad faith or

unclean hands. Further, it concluded that it was a crime for

Debtor to be accepting rents from Mr. Bass’ business without

making any findings showing that all the elements of a CSA

violation had been established (such as the requirement that the

conduct be “knowing”).

The foregoing cases suggest possible reasons for the court’s

decision, but without specific findings and conclusions, we

cannot determine whether or how the court found those cases

applicable to the facts of this case, nor can we adequately

evaluate the propriety of the bankruptcy court’s ruling.

Accordingly, on remand, the bankruptcy court should

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.

CONCLUSION

For the reasons set forth above, we VACATE and REMAND.

Concurrence begins on next page.

-14-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

TIGHE, Bankruptcy Judge, CONCURRING.

I concur in the memorandum and write separately to emphasize

(1) the importance of evaluating whether the Debtor is actually

violating the Controlled Substances Act and (2) the need for the

bankruptcy court to explain its conclusion that dismissal was

mandatory under these circumstances. With over twenty-five

states allowing the medical or recreational use of marijuana,

courts increasingly need to address the needs of litigants who

are in compliance with state law while not excusing activity that

violates federal law. A finding explaining how a debtor violates

federal law or otherwise provides cause for dismissal is

important to avoid incorrectly deeming a debtor a criminal and

denying both debtor and creditors the benefit of the bankruptcy

laws.

As the memorandum details, there are a number of situations

where the federal prohibition on marijuana distribution prevented

debtors from reorganizing or liquidating under federal bankruptcy

laws. Typically, these were cases where the debtor sought to

continue to distribute marijuana postpetition or where a trustee

would be asked to accept proceeds of a drug-related business,

situations where federal law would clearly be violated. See,

e.g., In re Arenas, 535 B.R. 845 (debtors themselves grew and

sold marijuana); In re Rent-Rite Super Kegs W., Ltd., 484 B.R.

799 (debtor’s ongoing postpetition leases with marijuana-growing

tenant exposed debtor to criminal liability and primary asset to

forfeiture).

This Debtor’s plan did not necessarily require the rental

income from the dispensary to fund the proposed payments. It

-1-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

provided for minimal plan payments until a sale motion could be

filed and the Debtor’s real property sold. The sale of Debtor’s

real property would have been simply a liquidation of legal

estate assets. In fact, but for the marijuana-related proceeds,

the sale of real property to fund a plan is a common scenario

because of the ability in bankruptcy to sell property subject to

a bona fide dispute free and clear of a lien. See § 363(f)(4).

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

the facts required for criminal liability is needed. Section

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, 774

(9th Cir. 1991). A violation of section 856(a) also requires a

showing that a primary or principal use of the premises is for

drug distribution or manufacture. See United States v. Mancuso,

718 F.3d 780, 794-96 (9th Cir. 2013). Any prosecution of this

crime would require a showing that Debtor knew that Mr. Bass

leased the property to operate a marijuana dispensary, and that

she intended to allow that use.

The Debtor’s personal knowledge is an especially critical

inquiry for an elderly, blind woman residing in assisted living

with an attorney-in-fact in charge of the lease. Although Debtor

stated in her second declaration in support of the motion to

reject the lease that Bass was operating a medical marijuana

dispensary, the record does not indicate when Debtor became aware

of this. She stated in that declaration that she did not want to

-2-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

be involved in leasing to a marijuana business.

Any prosecution of 21 U.S.C. § 856(a)(2) would need to prove

beyond a reasonable doubt that Debtor herself “knowingly and

intentionally” leased the property where the marijuana is

distributed. See Elonis v. United States, 135 S. Ct. 2001, 2009

(2015) (general rule is that a guilty mind is a necessary element

in the proof of every crime); Morissette v. United States, 342

U.S. 246, 252 (1952) (“wrongdoing must be conscious to be

criminal”). Debtor’s son’s knowledge in acting for her cannot be

imputed to Debtor for purposes of showing criminal knowledge and

intent. Nor can Mr. Bass’ intent and knowledge be imputed to the

Debtor.

Bankruptcy courts have historically played a role in

providing for orderly liquidation of assets, equal payment to

creditors, and resolution of disputes that otherwise would take

many years to resolve. Although 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.1 I believe this focus on specific

federal violations along with the further analysis required by

the lead memorandum properly address the challenge of a marijuana

related case.

1Cf. 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).

-3-