514 B.R. 887
Bankr.D. Colo.2014Background
- Debtors Howard and Mrs. Arenas jointly own commercial property in Denver; one unit is used by Mr. Arenas to cultivate marijuana and the other is leased to a dispensary (DPG).
- Mr. Arenas holds Colorado state licenses for cultivation and distribution; he has no federal authorization under the Controlled Substances Act (CSA).
- Mrs. Arenas is disabled; her lawful monthly income (~$3,000) is substantially less than the couple’s total reported income, which includes revenues from the cannabis business and the DPG lease.
- The United States Trustee moved to dismiss the Chapter 7 case under 11 U.S.C. § 707(a); the Debtors sought to convert to Chapter 13 under 11 U.S.C. § 706(a).
- The court found the Debtors’ possession/operation of premises used to grow and distribute Schedule I marijuana and Mr. Arenas’ cultivation violated the CSA, creating criminal exposure under federal law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Chapter 7 case should be dismissed under § 707(a) for cause | UST: Estate administration would require Trustee to possess/handle premises and marijuana, forcing commission of federal crimes; thus dismissal is required | Debtors: State-licensed operations are lawful under Colorado law; case should not be dismissed | Granted — dismissal under § 707(a) is warranted because estate administration would inextricably involve federal criminal violations |
| Whether Debtors may convert Chapter 7 to Chapter 13 under § 706(a) | Debtors: Conversion should be allowed; Chapter 13 would enable reorganization and preserve property | UST: Any Chapter 13 plan would be funded by proceeds of federally illegal activity, making a confirmable plan impossible | Denied — conversion barred because Debtors cannot propose a confirmable plan funded by lawful means; conversion would be futile |
| Whether a Chapter 13 plan could be confirmed under § 1325(a)(3) (good faith / not by means forbidden by law) | Debtors: Plan could be proposed in good faith despite state legality | UST: Plan would depend on income derived from CSA violations (cultivation and leasing to dispensary), so it is “by means forbidden by law” and not in good faith | Held that § 1325(a)(3) requires examining lawfulness of means; plan cannot be confirmed because execution would rely on income from federal crimes |
| Constitutional challenge to federal CSA under Tenth Amendment | Debtors: CSA infringes state sovereignty and conflicts with Colorado legalization | UST / Court: Raich and other precedent uphold CSA enforcement power under Commerce Clause; Tenth Amendment claim foreclosed | Rejected — Raich controls; CSA valid under Commerce Clause and does not violate the Tenth Amendment |
Key Cases Cited
- In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (Bankr. D. Colo.) (holding debtor's state-legal marijuana activities precluded bankruptcy relief because administration would involve federal crimes)
- Marrama v. Citizens Bank, 549 U.S. 365 (2007) (conversion may be denied where debtor is ineligible under target chapter because of cause to dismiss)
- Gonzales v. Raich, 545 U.S. 1 (2005) (Congress may regulate intrastate marijuana under the Commerce Clause)
- United States v. Oakland Cannabis Buyers’ Cooperative, 532 U.S. 483 (2001) (no medical necessity defense to CSA prohibitions on distribution)
- In re Cranmer, 697 F.3d 1314 (10th Cir.) (good-faith requirement under § 1325(a)(3) is a totality-of-the-circumstances inquiry)