657 B.R. 505
1st Cir. BAP2024Background
- Scott H. Blumsack, employed at a legal (under state law) cannabis dispensary in Massachusetts, filed for Chapter 13 bankruptcy relief.
- His proposed Chapter 13 plan would have been funded by his wages from cannabis-related employment; his spouse’s separate income was also present but not shown to be segregated.
- The U.S. Trustee objected to confirmation and sought dismissal, arguing that funding a plan with proceeds tied to activities illegal under federal law (the Controlled Substances Act, CSA) failed good faith requirements.
- The bankruptcy court denied confirmation, refused to allow Blumsack to amend his plan, and dismissed the case—holding that employment in the cannabis industry categorically bars bankruptcy relief.
- Blumsack appealed, contending the denial was improper and the good faith analysis was overly rigid.
Issues
| Issue | Blumsack’s Argument | U.S. Trustee’s Argument | Held |
|---|---|---|---|
| Does employment in cannabis bar Ch. 13 relief? | Employment alone shouldn't bar relief; review totality | Any plan funded by proceeds of illegal activity is bad faith | Bankruptcy court erred by categorical bar, but here dismissal proper |
| Was the plan proposed in good faith? | Good faith should consider more than the funding source | Plan's funding from illegal activity is per se bad faith | Plan not proposed in good faith due to funding source |
| Should Blumsack be allowed to modify his plan? | He could fund it with spouse’s non-cannabis income | No proof of segregation; modification would be futile | No abuse of discretion in denying chance to modify |
| Is dismissal under § 105 or based on judicial oath justified? | No, unless there’s abuse of process or fraud | Argued for broad authority to dismiss | Dismissal on those grounds not justified; affirmed on § 1307(c)(5) |
Key Cases Cited
- In re Arenas, 535 B.R. 845 (B.A.P. 10th Cir. 2015) (cannot confirm plan funded with proceeds from marijuana business, as would require trustee to administer illegal assets)
- In re Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015) (trustee and court cannot be compelled to oversee assets linked to federal crimes)
- Burton v. Maney (In re Burton), 610 B.R. 633 (B.A.P. 9th Cir. 2020) (bankruptcy relief unavailable where plan funding is traceable to marijuana-related activities)
- In re Puffer, 674 F.3d 78 (1st Cir. 2012) (good faith under § 1325 is governed by totality of the circumstances, not bright-line rules)
- In re McGinnis, 453 B.R. 770 (Bankr. D. Or. 2011) (denial of confirmation where plan relied on marijuana-related income)