610 B.R. 633
9th Cir. BAP2020Background
- Brigham and Carly Burton filed Chapter 13; they disclosed a 65% membership interest in Agricann, LLC, and other LLC interests; Mrs. Burton’s wages were the sole listed income to fund the plan.
- Agricann had been involved in cultivating and selling marijuana (legal under Arizona law but illegal under federal CSA) and was a plaintiff in state-court breach-of-contract suits seeking damages tied to marijuana cultivation/sales.
- Creditors raised eligibility and bad-faith concerns; Stratton Restoration filed a motion to convert and prompted an order to show cause about the Burtons’ ties to the marijuana industry.
- The Burtons asserted Agricann was defunct, that they would abandon their interest, and that litigation claims had no net value after contingency fees and litigation financing; they provided no documentary proof of worthlessness.
- The bankruptcy court found Agricann’s pending litigation sought recovery traceable to federally illegal activity, deemed any recovery part of the estate, and concluded administering such proceeds would involve the court/trustee in condoning illegal conduct; the court dismissed the Chapter 13 case.
- The BAP reviewed for abuse of discretion and affirmed dismissal because the Burtons failed to prove the litigation proceeds would not be estate assets derived from federally illegal activity.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether continuation of Chapter 13 required administration of proceeds traceable to federally illegal marijuana activity | Burtons: Agricann is defunct; litigation unlikely to yield net proceeds; plan funded only by Mrs. Burton’s wages | Trustee/Creditors: Agricann’s suits seek damages from marijuana contracts; any recovery would be proceeds of illegal activity and become estate property | Court: Agricann’s active litigation could produce proceeds derived from illegal activity; dismissal proper to avoid court/trustee administering such assets |
| Whether bankruptcy court abused discretion by ruling without an evidentiary hearing | Burtons: Credibility/findings required live evidence to resolve disputes about Agricann’s operations and claim value | Trustee: Record (pleadings, litigation status, spreadsheet) sufficed to show issue and lack of proof from Debtors | Court: No abuse; ruling based on undisputed fact that Agricann sued for marijuana-related contract damages and Debtors failed to meet burden to show no estate proceeds |
| Whether mere possession of interest in marijuana-related entity mandates dismissal or is per se bad faith | Burtons: Presence of marijuana connection does not automatically bar relief; other courts allowed conditional continuance | Trustee/Creditors: Ties may require dismissal when administration would involve illegal proceeds or other Code compliance problems | Court: Not per se rule; but here facts supported dismissal under §105(a) and §1307(c) because continuation likely required administering illegal proceeds |
| Whether Debtors’ plan could be confirmed if proceeds were not used to fund it | Burtons: Plan funded by wage income; Agricann proceeds not intended for plan | Trustee/Creditors: Potential litigation proceeds still become estate property and implicate trustee/court duties | Court: Irrelevant — potential for estate to include illegally derived proceeds justified dismissal absent proof otherwise |
Key Cases Cited
- Northbay Wellness Grp., Inc. v. Beyries, 789 F.3d 956 (9th Cir.) (marijuana presence near bankruptcy does not automatically bar relief)
- Garvin v. Cook Inv. NW, SPNWY, LLC, 922 F.3d 1031 (9th Cir.) (plan reliance on income indirectly tied to marijuana activity does not automatically violate §1129(a)(3))
- Arenas v. U.S. Tr., 535 B.R. 845 (10th Cir. BAP) (dismissal appropriate where trustee/court would be required to administer assets from illegal marijuana activity)
- In re Way to Grow, Inc., 597 B.R. 111 (Bankr. D. Colo.) (dismissal where continuation would involve administering proceeds of illegal activity)
- In re Medpoint Mgmt., LLC, 528 B.R. 178 (Bankr. D. Ariz.) (issues addressing petitioners and involvement with marijuana businesses and bankruptcy relief)
- In re Rent-Rite Super Kegs W. Ltd., 484 B.R. 799 (Bankr. D. Colo.) (conversion/dismissal concerns when estate administration would involve sites or proceeds tied to ongoing illegal activity)
- In re Johnson, 532 B.R. 53 (Bankr. W.D. Mich.) (court permitted chapter 13 continuation under conditions to cease illegal activity)