Court Opinion

ID: 4246632
Source: CourtListenerOpinion
Date Created: 2018-02-20 22:00:42.964619+00
Date Added: 2024-06-11T14:44:06.707300
License: Public Domain

FILED
 1                         NOT FOR PUBLICATION           FEB 05 2018
                                                     SUSAN M. SPRAUL, CLERK
 2                                                     U.S. BKCY. APP. PANEL
                                                       OF THE NINTH CIRCUIT
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No.      NV-17-1168-LTiF
                                   )
 6   PATRICIA G. OLSON,            )      Bk. No.      3:17-bk-50081-BTB
                                   )
 7                  Debtor.        )
     ______________________________)
 8                                 )
     PATRICIA G. OLSON,            )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )      M E M O R A N D U M*
11                                 )
     WILLIAM ALBERT VAN METER,     )
12   Chapter 13 Trustee;           )
     CODY BASS; CITY OF SOUTH      )
13   LAKE TAHOE; UNITED STATES OF )
     AMERICA; U.S. BANK, N.A.,     )
14                                 )
                    Appellees.     )
15   ______________________________)
16                  Argued and Submitted on December 1, 2017
                                 at Reno, Nevada
17
                            Filed - February 5, 2018
18
              Appeal from the United States Bankruptcy Court
19                      for the District of Nevada
20        Honorable Bruce T. Beesley, Bankruptcy Judge, Presiding
                         _________________________
21
     Appearances:     Anne J. Williams of the Law Offices of J. Craig
22                    Demetras argued for Appellant Patricia G. Olson;
                      Seth Joseph Adams of Woodburn & Wedge argued for
23                    Appellee Cody Bass.
                           _________________________
24
25
26        *
           This disposition is not appropriate for publication.
27   Although it may be cited for whatever persuasive value it may
     have (see Fed. R. App. P. 32.1), it has no precedential value.
28   See 9th Cir. BAP Rule 8024-1.
 1   Before:   LAFFERTY, TIGHE,** and FARIS, Bankruptcy Judges.
 2   Memorandum by Judge Lafferty
     Concurrence by Judge Tighe
 3
 4        The Debtor is 92 years old, legally blind, and resides in an
 5   assisted living facility.   She sought chapter 131 relief to stop
 6   foreclosure of her commercial real property.   One of the tenants
 7   at that property operated a marijuana dispensary on the premises
 8   and continued to pay rent to Debtor postpetition.   Debtor’s plan
 9   called for her to sell the commercial real property to pay off
10   all creditors.   At the hearing on the motion to sell and reject
11   the lease with the tenant, the bankruptcy court dismissed the
12   case sua sponte on the ground that Debtor’s postpetition
13   acceptance of rents from the dispensary business was an ongoing
14   criminal violation that disqualified her from bankruptcy relief.
15        Because the bankruptcy court did not make adequate findings
16   for us to discern the standard under which it concluded that
17   dismissal was mandatory, we VACATE and REMAND.
18                                  FACTS2
19        Prepetition, Debtor Patricia G. Olson was the general
20
21        **
           Hon. Maureen A. Tighe, U.S. Bankruptcy Judge for the
22   Central District of California, sitting by designation.
          1
23         Unless specified otherwise, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
24
          2
           The parties did not include all relevant documents in their
25   excerpts of record. We have thus exercised our discretion to
26   review relevant imaged documents from the bankruptcy court’s
     electronic docket. See O’Rourke v. Seaboard Sur. Co. (In re E.R.
27   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
28   (9th Cir. BAP 2003).

                                     -2-
 1   partner of Olson Bijou Center, L.P., a California limited
 2   partnership (“OBC”).    OBC owned real property on Lake Tahoe
 3   Boulevard in South Lake Tahoe, California, known as the Olson
 4   Bijou Shopping Center (the “Shopping Center Property”).
 5        Beginning in January 2013, Appellee Cody Bass began leasing
 6   space in the Shopping Center Property from OBC; although the
 7   record includes only an unsigned copy of the lease, the signature
 8   block on the lease indicates that it was to be signed by Debtor’s
 9   son, Patrick Olson, as manager of OBC.3    The lease expressly
10   authorized Mr. Bass to operate a “dispensary.”4    Pursuant to that
11   authority, Mr. Bass operated at the leased premises Tahoe
12   Wellness Cooperative (“TWC”), a marijuana dispensary authorized
13   under California law.    Both the operation of the dispensary
14   business and the leasing of the premises for such a business,
15   however, potentially violated the federal Controlled Substances
16   Act, 21 U.S.C. §§ 801-904 (“CSA”).     The CSA classifies marijuana
17   as a controlled substance, 21 U.S.C. § 812, and makes it unlawful
18   to
19        (1) knowingly open, lease, rent, use, or maintain any
          place, whether permanently or temporarily, for the
20        purpose of manufacturing, distributing, or using any
          controlled substance;
21
22        3
           In Debtor’s declaration in support of the motion to reject
23   lease, she stated that she believed the lease “agreements” were
     taken from her residence by government law enforcement
24   authorities in May 2015. In Debtor’s second declaration in
     support of the motions to sell and to reject, she stated,
25   “[t]here is no signed lease agreement between Mr. Bass and me.”
26        4
           The lease also required Mr. Bass to “comply with all
27   statutes, codes, ordinances, orders, rules and regulations of any
     Federal, California, municipal or other governmental or quasi-
28   governmental entity . . . .”

                                      -3-
 1        (2) manage or control any place, whether permanently or
          temporarily, either as an owner, lessee, agent,
 2        employee, occupant, or mortgagee, and knowingly and
          intentionally rent, lease, profit from, or make
 3        available for use, with or without compensation, the
          place for the purpose of unlawfully manufacturing,
 4        storing, distributing, or using a controlled substance.
 5   21 U.S.C. § 856(a).
 6        In early 2016, Mr. Bass and OBC entered into a letter of
 7   intent for Mr. Bass to purchase the Shopping Center Property for
 8   $4.2 million; Mr. Bass made a $25,000 payment to Debtor’s
 9   attorney pursuant to the letter of intent.   Shortly thereafter,
10   Mr. Bass, OBC, and Debtor entered into an option agreement, which
11   expired on March 3, 2016.   Mr. Bass tendered an additional
12   $50,000 to be applied to the purchase price if the option were
13   exercised.   According to Mr. Bass’ declaration in support of his
14   opposition to the motion to sell, he gave notice on April 1,
15   2016, that he was exercising the option agreement.   He asserted
16   that this notice was timely based on a First Amendment to Option
17   Agreement attached to his declaration, which extended the
18   deadline for exercising the option to April 4, 2016 and appears
19   to be signed by Debtor.   But in Debtor’s second declaration in
20   support of pending motions, she stated that Mr. Bass came to her
21   assisted living facility on March 3, 2016, the day the option
22   agreement expired, and asked her to sign papers, but she did not
23   understand what she may have signed, and she believed Mr. Bass
24   misled her into “signing something.”5
25
          5
26         We include these “facts” merely to provide some context for
     the proceedings before the bankruptcy court, and for no other
27   purpose. And we should be particularly circumspect in this
     instance, in which we remand after determining that the
28                                                      (continued...)

                                     -4-
 1        OBC and Debtor did not perform under the option agreement,
 2   and, in May 2016, Mr. Bass sued OBC, Debtor, and Mr. Olson in El
 3   Dorado County Superior Court for damages and specific
 4   performance.
 5        The Shopping Center Property was encumbered by a deed of
 6   trust in favor of U.S. Bank, N.A.     In August 2016 U.S. Bank
 7   recorded a notice of default, and in December 2016 it recorded a
 8   notice of sale.   The foreclosure sale was set for February 1,
 9   2017.
10        On January 30, 2017, Debtor filed a chapter 13 petition,
11   which stayed both the foreclosure and the Bass litigation.       That
12   same day, she filed a quitclaim deed transferring OBC’s interest
13   in the Shopping Center Property to herself individually.
14   Mr. Bass continued to pay rent postpetition to Debtor or her
15   counsel.
16        About a month after the bankruptcy filing, the bankruptcy
17   court approved a stipulation between Debtor and U.S. Bank for the
18   use of cash collateral for Debtor’s ordinary operating expenses
19   and maintenance of the Shopping Center Property as well as
20   assisted living expenses and health insurance, through April
21
22        5
           (...continued)
23   bankruptcy court neither articulated the legal basis for its
     decision sua sponte to dismiss this case, nor identified with
24   precision the facts which it must have determined, or upon which
     it might have relied, under any cognizable theory, in dismissing
25   the case. Accordingly, we neither make any determination
26   concerning what appear to be disputed facts, nor “weigh” any such
     facts, nor determine credibility, nor even, indeed, opine
27   regarding what facts might be relevant under the
     as-yet-undetermined legal standard to be applied by the
28   bankruptcy court on remand.

                                     -5-
 1   2017.   In exchange, Debtor granted U.S. Bank a postpetition
 2   replacement lien on all rents generated from the Shopping Center
 3   Property and agreed to make adequate protection payments of
 4   $4,000 per month.   According to the stipulation, at that time
 5   expected rental income was $16,220 per month, including TWC’s
 6   monthly rental payment of $10,200.      In early May 2017, the court
 7   approved another cash collateral stipulation extending the
 8   agreement to use cash collateral through July 31, 2017 and
 9   modifying the budget to exclude the rent from TWC.     There is no
10   evidence in the record to indicate whether the postpetition rents
11   paid by Mr. Bass were used to make payments pursuant to the
12   initial cash collateral stipulation; other than Debtor’s
13   counsel’s oral representation that the May 2017 rent payment was
14   being held in a safe in his office, the record does not show what
15   happened to those funds at all.
16        Debtor’s proposed chapter 13 plan called for monthly
17   payments of $150 for 12 months and $2,100 for 48 months.     The
18   plan also provided that Debtor would sell the Shopping Center
19   Property within six months of plan confirmation and use the net
20   proceeds to pay all administrative, priority, and unsecured
21   claims.
22        In April 2017, Debtor filed a motion to sell free and clear
23   under § 363(f) the Shopping Center Property and the adjacent
24   property, which she also owned, for $3 million.     Among the
25   conditions of the sale of the Shopping Center Property were
26   (i) court approval of the rejection or termination of Mr. Bass’
27   lease and the commencement of eviction proceedings by Debtor; and
28   (ii) court-ordered rejection, termination, or voiding of the

                                       -6-
 1   option agreement with Mr. Bass.    Debtor also filed a motion to
 2   reject the lease and the option agreement with Mr. Bass.6       In her
 3   declaration in support of the motion to reject, Debtor stated
 4   that she had entered into the lease with Mr. Bass in January 2013
 5   and that Mr. Bass “currently operates a medical marijuana
 6   dispensary at 3443 Lake Tahoe Blvd[.]”     In a subsequent
 7   declaration filed May 11, 2017, Debtor further testified:
 8             1.   I am 92-years [sic] old and legally blind. I
          live in an assisted living facility in Sparks, Nevada.
 9
          . . . .
10
               9.   At times prior to the filing of this case, my
11        son, Patrick Olson, acted and served as my
          attorney-in-fact. In doing so, Patrick managed most of
12        my financial affairs, which included the management of
          949 Bal Bijou Road and 3443 Lake Tahoe Blvd. Patrick’s
13        duties included obtaining leases for the properties,
          collecting rents and paying all expenses, such as the
14        secured mortgage payment to U.S. Bank, real property
          taxes and insurance premiums.
15
               10. In 2012, Patrick Olson, through Olson Bijou
16        Center L.P., leased space at 3443 Lake Tahoe Blvd. to
          Cody Bass.
17
          . . . .
18
               15. I wish to end any involvement with Mr. Bass
19        and his illegal business. I do not want to use money
          from Mr. Bass to fund my Chapter 13 Plan. I don’t want
20        to sell my property to Mr. Bass and do not want to
          finance his purchase of 3343 Lake Tahoe Blvd. I wish
21        only to terminate any dealings with Mr. Bass and to
          sell my property and pay my creditors in full.
22
23        Mr. Bass opposed both motions.     In his declaration in
24   support of his opposition to the motion to sell, Mr. Bass
25
26        6
           The City of South Lake Tahoe (the “City”) filed a joinder
27   in the motion to reject on the ground that Mr. Bass’ permit to
     operate the dispensary had expired and had not been renewed
28   because the Debtor had not provided her written consent.

                                       -7-
 1   confirmed that he had been operating a marijuana dispensary on
 2   the premises pursuant to the terms of his lease with OBC and that
 3   he had paid rent to the Debtor postpetition.
 4        Shortly thereafter, the chapter 13 trustee filed a motion to
 5   dismiss for failure to make plan payments and for failure to file
 6   an amended plan.   Mr. Bass also filed a motion to dismiss the
 7   case on grounds that Debtor’s acceptance of rents from his
 8   marijuana dispensary violated the CSA.   Neither of those motions
 9   were heard because they were mooted by the bankruptcy court’s sua
10   sponte dismissal of Debtor’s case.
11        At the initial hearing on the motion to sell and motion to
12   reject, the bankruptcy court questioned whether it could
13   authorize the sale, given that the Debtor had been accepting
14   rents from leasing a marijuana dispensary; the parties argued the
15   issue, and the court continued the matter for a few days to study
16   the relevant authorities.   At the continued hearing, the court
17   heard additional argument but concluded, based on its
18   interpretation of relevant case law, that because Debtor had
19   continued to receive rent postpetition, the case had to be
20   dismissed:
21        I think it’s a crime for Ms. Olson to be accepting
          rents from an illegal operation, so I am dismissing
22        this case. . . . My finding is this debtor is leasing
          property for an unlawful purpose under federal law,
23        although lawful under state law . . . and has continued
          to accept rents during the course of her bankruptcy.
24
25   Hr’g Tr. (May 22, 2017) at 6:4-5; 22-25.   In response to a
26   request for clarification from Debtor’s counsel, the court
27   explained:
28        [I]f the debtor has committed a crime during the course

                                     -8-
 1        of the bankruptcy and continued for several months to
          commit a crime during the course of the bankruptcy, I
 2        think that is a basis for not providing relief to the
          debtor. Had the debtor, prior to filing bankruptcy or
 3        not during the bankruptcy had not committed the crime
          of taking money from a marijuana operation, I would
 4        feel differently. But that’s not what happened here.
          Because you don’t, in my opinion, get to go through
 5        five or six months of a bankruptcy knowingly receiving
          illegal proceeds and then say, oh, I’m not going to
 6        take those anymore, I want to sell the property now, so
          I get to play here. I don’t think that’s correct.
 7
 8   Id. at 7:17-8:3.   The bankruptcy court entered its sua sponte
 9   order dismissing the case on May 31, 2017; the court also granted
10   a stay pending appeal.   Debtor timely appealed.
11                               JURISDICTION
12        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
13   §§ 1334 and 157(b)(2)(A).   We have jurisdiction under 28 U.S.C.
14   § 158.
15                                   ISSUE
16        Whether the bankruptcy court abused its discretion in
17   dismissing Debtor’s chapter 13 case.
18                            STANDARD OF REVIEW
19        We review a bankruptcy court’s dismissal of a chapter 13
20   case for abuse of discretion.   Ellsworth v. Lifescape Med.
21   Assoc., P.C. (In re Ellsworth), 455 B.R. 904, 914 (9th Cir. BAP
22   2011).   A bankruptcy court abuses its discretion if it applies
23   the wrong legal standard, misapplies the correct legal standard,
24   or if its factual findings are clearly erroneous.
25   TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th
26   Cir. 2011).
27                                DISCUSSION
28        Ordinarily, a bankruptcy court grants or denies relief based

                                      -9-
 1   on a specific provision in the Code.       Here, the bankruptcy court
 2   did not specify what Code section or other authority it relied
 3   upon in dismissing Debtor’s case.       The court concluded,
 4   apparently based on case law from other jurisdictions, that
 5   Debtor’s postpetition receipt of rental payments from a tenant
 6   that operated a marijuana dispensary on property she owned was
 7   (i) a violation of the CSA that (ii) constituted grounds for
 8   dismissal of the case.   The legal basis for dismissal could have
 9   been bad faith under § 1307(c), but the bankruptcy court made no
10   bad faith finding and did not engage in the totality of the
11   circumstances analysis required for dismissal under that Code
12   section.
13        Alternatively, the bankruptcy court may have been acting
14   pursuant to its inherent power to “issue any order, process, or
15   judgment that is necessary or appropriate to carry out the
16   provisions of this title.”   § 105(a).      But, if acting pursuant to
17   its inherent powers, the court could act only “within the
18   confines of the Bankruptcy Code.”       Law v. Seigel, 134 S. Ct.
19   1188, 1194-95 (2014) (citations omitted).       And where a statute
20   adequately addresses the conduct at issue, the court’s inherent
21   powers should be invoked only when that statute does not fully
22   address the situation at hand.    See Chambers v. NASCO, Inc., 501
23   U.S. 32, 50 (1991) (“[I]f in the informed discretion of the
24   court, neither the statute nor the Rules are up to the task, the
25   court may safely rely on its inherent power [in imposing a
26   sanction for bad faith litigation conduct].”).
27        But the bankruptcy court did not articulate the legal basis
28   for its ruling or make findings to support its conclusions that

                                      -10-
 1   the CSA was being violated and that that violation was grounds
 2   for dismissal.   When a court imposes the harsh penalty of
 3   dismissal in circumstances such as those presented here, it is
 4   imperative that it state with clarity and precision its factual
 5   and legal bases for doing so.
 6        The standard for dismissal of a chapter 13 case is set forth
 7   in § 1307(c).    That section provides that on request of a party
 8   in interest and after notice and a hearing, the bankruptcy court
 9   may convert a chapter 13 case to chapter 7, or may dismiss a
10   case, whichever is in the best interests of creditors and the
11   estate, for “cause.”   § 1307(c).7     Section 1307(c) sets forth a
12   non-exclusive list of factors that constitute “cause” for
13   conversion or dismissal.8   In dealing with questions of
14   conversion and dismissal, the bankruptcy court engages in a two-
15   step process: “First, it must be determined that there is ‘cause’
16   to act.   Second, once a determination of ‘cause’ has been made, a
17   choice must be made between conversion and dismissal based on the
18
          7
19         Although that statute requires a request by a party in
     interest or the United States trustee, the bankruptcy court may
20   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).
21   Additionally, despite § 1307's requirement of notice and a
22   hearing, due process is satisfied if the impacted party has had
     an opportunity to be heard. See id. at 870 (noting that the
23   concept of notice and a hearing is flexible and depends on what
     is appropriate in the circumstances). Debtor does not argue that
24   her due process rights were violated, nor does she dispute that
     the court had the authority to sua sponte dismiss the case.
25
          8
26         Those enumerated factors include: unreasonable delay by the
     debtor that is prejudicial to creditors; failure to commence
27   making timely payments; denial of confirmation of a plan; and
     material default by the debtor with respect to a term of a
28   confirmed plan.

                                     -11-
 1   ‘best interests of the creditors and the estate.’”   Nelson v.
 2   Meyer (In re Nelson), 343 B.R. 671, 675 (9th Cir. BAP 2006).
 3        Although not listed, bad faith is cause for dismissal.
 4   Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir.
 5   1999).   In determining bad faith, the bankruptcy court is to
 6   apply a totality of the circumstances analysis, considering
 7   (1) whether the debtor misrepresented facts in her petition or
 8   plan, unfairly manipulated the Bankruptcy Code, or otherwise
 9   filed her chapter 13 petition or plan in an inequitable manner;
10   (2) the debtor’s history of filings and dismissals; (3) whether
11   the debtor only intended to defeat state court litigation; and
12   (4) whether egregious behavior is present.    Id.
13        On appeal, Debtor assumes the bankruptcy court dismissed her
14   case on grounds of bad faith by arguing that the bankruptcy court
15   abused its discretion in not considering the totality of the
16   circumstances, especially the fact that Debtor was using the
17   bankruptcy to sever her ties with Mr. Bass’ business.    But the
18   bankruptcy court did not invoke § 1307(c), nor did it explicitly
19   find bad faith.
20        The bankruptcy court stated that it had “looked at the
21   cases,” but did not articulate any rules drawn from those cases
22   that applied to the facts before it.   The case law addressing
23   facts such as those presented here is sparse, and there is no
24   controlling authority in the Ninth Circuit.
25        Some courts have held that, to the extent estate assets are
26   used for or generated by the operation of a federally prohibited
27   marijuana business, a trustee or debtor in possession may not
28   administer those assets without violating federal law.    Arenas v.

                                    -12-
 1   U.S. Tr. (In re Arenas), 535 B.R. 845, 852 (10th Cir. BAP 2015);
 2   In re Medpoint Mgmt., LLC, 528 B.R. 178, 184-85 (Bankr. D. Ariz.
 3   2015), vacated in part, Medpoint Mgmt., LLC v. Jensen (In re
 4   Medpoint Mgmt., LLC), BAP No. AZ-15-1130-KuJaJu, 2016 WL 3251581
 5   (9th Cir. BAP Jun. 3, 2016); In re Johnson, 532 B.R. 53, 56-57
 6   (Bankr. W.D. Mich. 2015);9 In re Rent-Rite Super Kegs W., Ltd.,
 7   484 B.R. 799, 810 (Bankr. D. Colo. 2012).   The bankruptcy court
 8   here made no finding, however, that the trustee would be
 9   administering the proceeds of an illegal business, and there is
10   no evidence in the record that the rents were to be used to fund
11   the plan.
12        Some courts have held that a bankruptcy filing or a plan of
13   reorganization proposed by a debtor who is involved in an illegal
14   enterprise is not in good faith, even where the debtor does not
15   have a subjective bad motive, is in legitimate need of bankruptcy
16   relief, and there is otherwise no indicia of an attempt to abuse
17   the bankruptcy process.   In re Arenas, 535 B.R. at 852-53; In re
18   Rent-Rite Super Kegs W., Ltd., 484 B.R. at 809.   Related to the
19   good faith analysis, some courts have concluded that a debtor
20   engaged in an illegal business who seeks bankruptcy relief comes
21   into court with unclean hands and is not eligible for relief.     In
22
          9
23         In In re Johnson, the bankruptcy court acknowledged the
     problems created when a debtor who operates a marijuana business
24   that is legal under state law seeks bankruptcy relief, noting
     that continued operation of the marijuana business would result
25   in the court and the trustee tacitly supporting the debtor’s
26   criminal enterprise. 532 B.R. at 56-57. Nevertheless, the court
     ruled that it would permit the debtor to remain in chapter 13 on
27   the condition that he stop engaging in the marijuana business.
     Id. at 58. The bankruptcy court here explicitly disagreed with
28   this approach.

                                    -13-
 1   re Rent-Rite Super Kegs W., Ltd., 484 B.R. at 807; cf. In re
 2   Medpoint Mgmt., LLC, 528 B.R. at 186-87 (petitioning creditors
 3   who knew the putative debtor was engaged in a federally
 4   prohibited medical marijuana business had unclean hands and could
 5   not seek relief from the bankruptcy court).
 6        The bankruptcy court here made no finding of bad faith or
 7   unclean hands.   Further, it concluded that it was a crime for
 8   Debtor to be accepting rents from Mr. Bass’ business without
 9   making any findings showing that all the elements of a CSA
10   violation had been established (such as the requirement that the
11   conduct be “knowing”).
12        The foregoing cases suggest possible reasons for the court’s
13   decision, but without specific findings and conclusions, we
14   cannot determine whether or how the court found those cases
15   applicable to the facts of this case, nor can we adequately
16   evaluate the propriety of the bankruptcy court’s ruling.
17        Accordingly, on remand, the bankruptcy court should
18   articulate the findings that led it to determine that Debtor was
19   violating the CSA and what legal standard it relied upon in
20   dismissing the case.
21                               CONCLUSION
22        For the reasons set forth above, we VACATE and REMAND.
23
24                    Concurrence begins on next page.
25
26
27
28

                                    -14-
 1   TIGHE, Bankruptcy Judge, CONCURRING.
 2        I concur in the memorandum and write separately to emphasize
 3   (1) the importance of evaluating whether the Debtor is actually
 4   violating the Controlled Substances Act and (2) the need for the
 5   bankruptcy court to explain its conclusion that dismissal was
 6   mandatory under these circumstances.   With over twenty-five
 7   states allowing the medical or recreational use of marijuana,
 8   courts increasingly need to address the needs of litigants who
 9   are in compliance with state law while not excusing activity that
10   violates federal law.   A finding explaining how a debtor violates
11   federal law or otherwise provides cause for dismissal is
12   important to avoid incorrectly deeming a debtor a criminal and
13   denying both debtor and creditors the benefit of the bankruptcy
14   laws.
15        As the memorandum details, there are a number of situations
16   where the federal prohibition on marijuana distribution prevented
17   debtors from reorganizing or liquidating under federal bankruptcy
18   laws.   Typically, these were cases where the debtor sought to
19   continue to distribute marijuana postpetition or where a trustee
20   would be asked to accept proceeds of a drug-related business,
21   situations where federal law would clearly be violated.    See,
22   e.g., In re Arenas, 535 B.R. 845 (debtors themselves grew and
23   sold marijuana); In re Rent-Rite Super Kegs W., Ltd., 484 B.R.
24   799 (debtor’s ongoing postpetition leases with marijuana-growing
25   tenant exposed debtor to criminal liability and primary asset to
26   forfeiture).
27        This Debtor’s plan did not necessarily require the rental
28   income from the dispensary to fund the proposed payments.    It

                                     -1-
 1   provided for minimal plan payments until a sale motion could be
 2   filed and the Debtor’s real property sold.      The sale of Debtor’s
 3   real property would have been simply a liquidation of legal
 4   estate assets.   In fact, but for the marijuana-related proceeds,
 5   the sale of real property to fund a plan is a common scenario
 6   because of the ability in bankruptcy to sell property subject to
 7   a bona fide dispute free and clear of a lien.      See § 363(f)(4).
 8        If, on remand, the basis for dismissal is the court’s
 9   concern that Debtor committed a crime by receiving postpetition
10   rent derived from a marijuana business, an explicit finding of
11   the facts required for criminal liability is needed.      Section
12   856(a)(2) of Title 21 prohibits a person with a premises from
13   knowingly and intentionally allowing its use for the purpose of
14   distributing drugs.   United States v. Tamez, 941 F.2d 770, 774
15   (9th Cir. 1991).   A violation of section 856(a) also requires a
16   showing that a primary or principal use of the premises is for
17   drug distribution or manufacture.       See United States v. Mancuso,
18   718 F.3d 780, 794-96 (9th Cir. 2013).      Any prosecution of this
19   crime would require a showing that Debtor knew that Mr. Bass
20   leased the property to operate a marijuana dispensary, and that
21   she intended to allow that use.
22        The Debtor’s personal knowledge is an especially critical
23   inquiry for an elderly, blind woman residing in assisted living
24   with an attorney-in-fact in charge of the lease.      Although Debtor
25   stated in her second declaration in support of the motion to
26   reject the lease that Bass was operating a medical marijuana
27   dispensary, the record does not indicate when Debtor became aware
28   of this.   She stated in that declaration that she did not want to

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 1   be involved in leasing to a marijuana business.
 2        Any prosecution of 21 U.S.C. § 856(a)(2) would need to prove
 3   beyond a reasonable doubt that Debtor herself “knowingly and
 4   intentionally” leased the property where the marijuana is
 5   distributed.    See Elonis v. United States, 135 S. Ct. 2001, 2009
 6   (2015) (general rule is that a guilty mind is a necessary element
 7   in the proof of every crime); Morissette v. United States, 342
 8   U.S. 246, 252 (1952) (“wrongdoing must be conscious to be
 9   criminal”).    Debtor’s son’s knowledge in acting for her cannot be
10   imputed to Debtor for purposes of showing criminal knowledge and
11   intent.   Nor can Mr. Bass’ intent and knowledge be imputed to the
12   Debtor.
13        Bankruptcy courts have historically played a role in
14   providing for orderly liquidation of assets, equal payment to
15   creditors, and resolution of disputes that otherwise would take
16   many years to resolve.   Although debtors connected to marijuana
17   distribution cannot expect to violate federal law in their
18   bankruptcy case, the presence of marijuana near the case should
19   not cause mandatory dismissal.1    I believe this focus on specific
20   federal violations along with the further analysis required by
21   the lead memorandum properly address the challenge of a marijuana
22   related case.
23
24
25        1
           Cf. Northbay Wellness Grp., Inc. v. Beyries, 789 F.3d 956,
26   960-61 (9th Cir. 2015) (bankruptcy court abused its discretion by
     failing to conduct the balancing test required by doctrine of
27   unclean hands, and instead determining that unclean hands applied
     solely because the creditor had engaged in marijuana
28   distribution).

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