Court Opinion

ID: 4393438
Source: CourtListenerOpinion
Date Created: 2019-05-02 18:00:31.954005+00
Date Added: 2024-06-11T14:52:00.650278
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

GREGORY M. GARVIN, Acting United          No. 18-35119
States Trustee for Region 18,
                           Appellant,        D.C. No.
                                          3:17-cv-05516-
                 v.                            BHS

COOK INVESTMENTS NW, SPNWY,
LLC; COOK INVESTMENTS NW,                   OPINION
FERN, LLC; COOK INVESTMENTS
NW, LLC; COOK INVESTMENTS NW,
DARR, LLC; COOK INVESTMENTS
NW, ARL, LLC,
                       Appellees.

      Appeal from the United States District Court
        for the Western District of Washington
      Benjamin H. Settle, District Judge, Presiding

       Argued and Submitted December 3, 2018
                Seattle, Washington

                      Filed May 2, 2019

   Before: Susan P. Graber, M. Margaret McKeown,
         and Morgan Christen, Circuit Judges.

              Opinion by Judge McKeown
2            GARVIN V. COOK INVESTMENTS NW

                          SUMMARY *

                           Bankruptcy

    The panel affirmed the district court’s decision affirming
the bankruptcy court’s order confirming the second amended
Chapter 11 plan of five real estate holding companies.

    One of the debtors leased property to a company that
used the property to grow marijuana. The United States
trustee objected that the lease violated federal drug law, and
so the plan was unconfirmable under 11 U.S.C. § 1129(a)(3)
because it was proposed by means forbidden by law.

   The panel held that § 1129(a)(3) directs bankruptcy
courts to police the means of a reorganization plan’s
proposal, not its substantive provisions. The panel affirmed
confirmation of the plan because it was not proposed by any
means forbidden by law.

                           COUNSEL

Sonia Carson (argued) and Mark B. Stern, Appellate Staff;
Annette L. Hayes, Acting United States Attorney; Joseph H.
Hunt, Assistant Attorney General; Civil Division, United
States Department of Justice, Washington, D.C.; Wendy
Cox, Trial Attorney; P. Matthew Sutko, Associate General
Counsel; Ramona D. Elliott, Deputy Director/General

    *
      This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
            GARVIN V. COOK INVESTMENTS NW                   3

Counsel; Department of Justice, Executive Office for United
States Trustees, Washington, D.C.; for Appellant.

James L. Day (argued) and Aditi Paranjpye, Bush Kornfeld
LLP, Seattle, Washington, for Debtors-Appellees.

                         OPINION

McKEOWN, Circuit Judge:

    Facing insolvency, five real estate holding companies
owned and managed by Michael Cook (collectively, “Cook”
or the “Cook companies”) sought Chapter 11 protection.
Cook’s foray into Chapter 11 was by most standards a
resounding success.       It culminated with the Second
Amended Joint Debtors’ Plan of Reorganization (“Amended
Plan”), which paid all creditors in full and provided for Cook
to continue as a going concern. The Amended Plan was
confirmed by the bankruptcy court.

    But now the United States Trustee (“Trustee”) asks that
the Amended Plan go up in smoke, because one of the Cook
companies leases property to N.T. Pawloski, LLC (“Green
Haven”), which uses the property to grow marijuana. The
Trustee complains that, even if Green Haven’s business
complies with Washington law, the lease itself violates
federal drug law. The Trustee reasons that this violation
proves the Amended Plan was “proposed . . . by . . . means
forbidden by law” and is thus unconfirmable under
11 U.S.C. § 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
4           GARVIN V. COOK INVESTMENTS NW

appeal rests on a straightforward question of statutory
interpretation rather than on any conflict between federal and
state drug laws. We affirm confirmation of the Amended
Plan because it was not proposed “by any means forbidden
by law.”

                        BACKGROUND

    Cook Investments NW, DARR, LLC (“Cook DARR”),
one of the Cook companies, owns commercial real estate in
Darrington, Washington (the “Darrington Property”). Cook
DARR leased the Darrington Property to two tenants, one of
which was Green Haven. The lease with Green Haven (the
“Green Haven Lease”) provides that Green Haven will use
the Darrington Property exclusively as a marijuana
establishment. Although Green Haven appears to be in
compliance with Washington law, the Green Haven Lease
puts Cook in violation of the federal Controlled Substances
Act, 21 U.S.C. §§ 801–971, which prohibits “knowingly . . .
leas[ing] . . . any place . . . for the purpose of manufacturing,
distributing, or using any controlled substance,” id.
§ 856(a)(1).

    In 2009, one of the Cook companies defaulted on a loan
from Columbia State Bank. The loan was secured by Cook’s
real estate holdings, including the Darrington Property. The
bank won default judgments against Cook in state court.
Although Cook and the bank reached forbearance
agreements, Cook failed to fulfill the agreements’ terms.
The bank then obtained state-court orders appointing
receivers for Cook’s properties. At that point, all of the
Cook companies filed Chapter 11 bankruptcy petitions,
which the bankruptcy court ordered jointly administered.

   The Trustee filed a motion to dismiss Cook DARR’s
Chapter 11 case, asserting that the Green Haven Lease
            GARVIN V. COOK INVESTMENTS NW                  5

constituted gross mismanagement and thus cause to dismiss
under 11 U.S.C. § 1112(b). The bankruptcy court denied the
motion to dismiss, but with leave to renew at the plan
confirmation hearing.

    Cook filed the Amended Plan, which provides for
repayment of all creditors’ claims in full and for Cook to
continue as a going concern.           The Amended Plan
incorporates by reference an earlier Chapter 11 Plan
Agreement between Cook and Columbia State Bank, but in
the Amended Plan Cook rejected the Green Haven lease and
structured the plan so that his monthly obligations would be
paid without revenue from Green Haven. Cook’s counsel
also explained at argument that, pursuant to the Amended
Plan, Cook’s other tenants pay their rent directly to
Columbia State Bank in satisfaction of its claim, while Green
Haven rents were presumably paid directly to Cook.

    The bankruptcy court confirmed the Amended Plan, over
the Trustee’s objection that it violated § 1129(a)(3)’s
requirement that a plan be “proposed in good faith and not
by any means forbidden by law.” The Trustee was the only
objector; Cook’s creditors fully supported the Amended
Plan, which satisfactorily provided for their repayment.
Because the Trustee failed to renew its motion to dismiss at
the confirmation hearing, the district court affirmed the
denial of the motion to dismiss Cook DARR’s case.
Following confirmation, the Trustee moved for a stay, but
the district court denied the request. As a result, Cook has
continued to make payments pursuant to the Amended Plan
during the pendency of this appeal. The unsecured creditors
have been repaid and the secured creditor, Columbia State
Bank, is in the process of being repaid.
6           GARVIN V. COOK INVESTMENTS NW

                         ANALYSIS

    On appeal, the Trustee first challenges the bankruptcy
court’s refusal to dismiss Cook DARR under § 1112(b) for
“gross mismanagement of the estate.”            11 U.S.C.
§ 1112(b)(4)(B). We need not decide the merits of this issue
because, like the district court, we conclude the Trustee
waived the argument by failing to renew its motion to
dismiss.

     The bankruptcy court initially denied the motion to
dismiss but explicitly invited the Trustee to renew the
motion at the plan confirmation hearing. The Trustee chose,
at its peril, not to do so. As the district court put it: “The
Trustee failed to renew the motion or subsequently raise the
gross mismanagement argument. Although the Debtors fail
to raise waiver, it seems to be plain error for this Court to
reverse the bankruptcy court’s denial when the Trustee failed
to renew its motion.” This failure was especially significant
because it meant the bankruptcy court had no opportunity to
consider whether the claimed gross mismanagement had
been “cured.” As a consequence, neither the bankruptcy
court, nor the district court, nor this court could properly
determine the applicability of the exception to dismissal for
“unusual circumstances.” See 11 U.S.C. § 1112(b)(2)
(exception to dismissal for unusual circumstances applies
only if, inter alia, cause for dismissal “will be cured within
a reasonable period of time”); cf. Walsh v. Nev. Dep’t of
Human Res., 471 F.3d 1033, 1037 (9th Cir. 2006) (holding
that a claim raised in the complaint was waived when it was
not re-raised in response to a motion to dismiss, because “the
district court had no reason to consider the contention that
              GARVIN V. COOK INVESTMENTS NW                              7

the claim . . . could not be dismissed” (internal quotation
marks omitted)). 1

    We therefore turn to the issue of confirmation. To be
confirmed, the Amended Plan had to satisfy § 1129(a),
which provides that “[t]he court shall confirm a plan only if”
sixteen enumerated requirements are met. The third
requirement is that “[t]he plan has been proposed in good
faith and not by any means forbidden by law.” 11 U.S.C.
§ 1129(a)(3). Only the second prong is at issue here.
Because it appears that Cook continues to receive rent
payments from Green Haven, which provides at least
indirect support for the Amended Plan, the Trustee asserts
that it was “proposed . . . by . . . means forbidden by law.”
11 U.S.C. § 1129(a)(3).

    We determine de novo the proper interpretation of
§ 1129(a)(3). See Tighe v. Celebrity Home Entm’t, Inc. (In
re Celebrity Home Entm’t, Inc.), 210 F.3d 995, 997 (9th Cir.
2000) (reviewing de novo the bankruptcy court’s
interpretation of the Bankruptcy Code). Whether the
Amended Plan was confirmable depends on whether
§ 1129(a)(3) forbids confirmation of a plan that is proposed
in an unlawful manner as opposed to a plan with substantive
provisions that depend on illegality, an issue of first
impression in the Ninth Circuit.

   Like the First Circuit Bankruptcy Appellate Panel, we
conclude that § 1129(a)(3) directs courts to look only to the
proposal of a plan, not the terms of the plan. Irving Tanning
    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.”).
8           GARVIN V. COOK INVESTMENTS NW

Co. v. Me. Superintendent of Ins. (In re Irving Tanning Co.),
496 B.R. 644, 660 (B.A.P. 1st Cir. 2013). This reading
accords with both the statutory text, which does not refer to
the substance of the plan, and the weight of persuasive
authority. See In re Gen. Dev. Corp., 135 B.R. 1002, 1007
(Bankr. S.D. Fla. 1991) (“Courts addressing the issue have
uniformly held that Section 1129(a)(3) does not require that
the contents of a plan comply in all respects with the
provisions of all nonbankruptcy laws and regulations.”
(internal quotation marks omitted)).

    It is true that some bankruptcy courts have accepted the
Trustee’s interpretation. In concluding that a bankruptcy
case should be dismissed “[b]ecause a significant portion of
the Debtor’s income [wa]s derived from an illegal activity,”
the Bankruptcy Court of Colorado stated that “§ 1129(a)(3)
forecloses any possibility of this Debtor obtaining
confirmation of a plan that relies in any part on income
derived from a criminal activity.” In re Rent-Rite Super
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
manner of the plan’s proposal.” Irving Tanning, 496 B.R.
at 660.

    Turning to the statute, the phrase “not by any means
forbidden by law” modifies the phrase “[t]he plan has been
proposed.” An interpretation that reads the words “has been
proposed” out of the second prong of the requirement would
be grammatically nonsensical, i.e., “The plan has been . . .
not by any means forbidden by law.” Moving the reference
to illegality to before “proposed” fares no better, i.e., “The
plan, not by any means forbidden by law, has been proposed
in good faith.” The Trustee’s position would require us to
rewrite the statute completely, rather than resort to its clear
              GARVIN V. COOK INVESTMENTS NW                              9

meaning. See Duncan v. Walker, 533 U.S. 167, 174 (2001)
(“It is our duty to give effect, if possible, to every clause and
word of a statute.” (internal quotation marks omitted)).

    A contrary interpretation not only renders the words “has
been proposed” meaningless, but makes other provisions of
§ 1129(a) redundant. For example, § 1129(a)(1) requires
that “[t]he plan complies with the applicable provisions of
this 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 of the Bankruptcy Code specifically. 2

     We do not believe that the interpretation compelled by
the text will result in bankruptcy proceedings being used to
facilitate legal violations. To begin, absent waiver, as in this
case, courts may consider gross mismanagement issues
under § 1112(b). And confirmation of a plan does not
insulate debtors from prosecution for criminal activity, even
if that activity is part of the plan itself. In re Food City, Inc.,
110 B.R. 808, 812 (Bankr. W.D. Tex. 1990). There is thus
no need to “convert the bankruptcy judge into an
ombudsman without portfolio, gratuitously seeking out
possible ‘illegalities’ in every plan,” a result that would be
“inimical to the basic function of bankruptcy judges in
bankruptcy proceedings.” 3 Id.

    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
10            GARVIN V. COOK INVESTMENTS NW

   Because the Amended Plan was lawfully proposed, the
Bankruptcy Court correctly concluded that it met the
requirements of 11 U.S.C. § 1129(a).

     AFFIRMED.

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.