564 B.R. 77
Bankr. S.D. Florida2017Background
- Debtor ARM Ventures, LLC owns a commercial property in Miami Beach; Ocean Bank holds first mortgage and obtained state-court judgments (including attorney fees) and scheduled foreclosure sales before the Chapter 11 filing.
- Debtor filed Chapter 11 the day before a scheduled third foreclosure sale; Ocean Bank moved to dismiss for bad faith under 11 U.S.C. § 1112(b) or, alternatively, for relief from the automatic stay.
- Debtor proposed a plan (and amended plans) that initially depended on revenue from a medical-marijuana–related tenant (Modern Pharmacy / Pharmaquick) to fund plan payments to creditors, including Ocean Bank.
- Ocean Bank argued the filing was a bad-faith delay tactic and that any plan funded by marijuana sales is unconfirmable because marijuana remains illegal under federal law.
- The court found many Phoenix Piccadilly bad-faith factors present (single asset, few employees, foreclosure imminence, core dispute with secured creditor) and concluded a plan funded by marijuana income was speculative and unconfirmable under federal law.
- Court denied dismissal (to protect non-insider unsecured creditors) but granted conditional relief from stay; ordered debtor to file within 14 days a plan not dependent on marijuana income or face conversion to chapter 7; set conditions and timing for foreclosure sale if no compliant plan filed.
Issues
| Issue | Ocean Bank's Argument | Debtor's Argument | Held |
|---|---|---|---|
| Whether chapter 11 should be dismissed for bad faith filing | Filing was timed solely to delay foreclosure and constituted bad faith under §1112(b) | Filing aimed to reorganize the leasing business and secure future tenants; lack of counsel at prior filings explained timing | Dismissal denied (without prejudice); court found subjective and objective bad-faith indicia but kept case to protect unsecured creditors |
| Whether plan relying on marijuana-derived income is confirmable | Plan is unconfirmable because marijuana remains illegal under federal law; confirmation would require court/estate actors to facilitate criminal activity | Proposed tenant will seek state and federal approvals; plan is feasible once licenses obtained | Plan based on marijuana income is unconfirmable and objectively speculative; reliance on marijuana income supports a finding of bad faith |
| Whether automatic stay relief should be granted to allow foreclosure to proceed | Stay relief appropriate given bad-faith filing and unconfirmable plan | Opposed; seeks to use bankruptcy process to pursue reorganization | Stay relief granted conditionally: debtor given 14 days to file a non-marijuana-funded plan; foreclosure may not be set earlier than 75 days if compliant plan is filed; if no plan, bank may reset sale per state law |
| Legality of debtor’s adequate protection payments (source concerns) | Payments may derive from marijuana sales and thus be unlawful/forfeitable | Payments are regular adequate protection; debtor later confirmed payments were not from marijuana sales | Bank may accept adequate protection payments if not derived from illegal marijuana sales; limited 2004 exam showed payments were not from marijuana sales |
Key Cases Cited
- Albany Partners, Ltd. v. Westbrook, 749 F.2d 670 (11th Cir. 1984) (bad-faith filing test and factors for dismissal under §1112(b))
- Phoenix Piccadilly, Ltd. v. Life Ins. Co. of Virginia, 849 F.2d 1393 (11th Cir. 1988) (list of subjective factors for bad-faith dismissal)
- Natural Land Corp. v. Fontana (In re Natural Land Corp.), 825 F.2d 296 (11th Cir. 1987) (bad-faith filing and dismissal principles)
- United Sav. Ass’n of Texas v. Timbers of Inwood Forest Associates, 484 U.S. 365 (1988) (reorganization requires reasonable possibility of success within a reasonable time)
- In re Rent-Rite Super Kegs W. Ltd., 484 B.R. 799 (Bankr. D. Colo. 2012) (plan or case unconfirmable/convertible when funded by state-legal but federally illegal marijuana business)
- In re Jerry L. Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015) (chapter 13 case problematic where debtor’s ongoing marijuana business would force estate fiduciaries to violate federal law)
- In re Arenas, 535 B.R. 845 (10th Cir. BAP 2015) (chapter 7/13 dismissal where debtors’ income derived from federally illegal marijuana activity made administration and confirmation unlawful)