Scott H Blumsack, 647 B.R. 584

Background

Debtor Scott H. Blumsack filed a Chapter 13 petition; Schedule I listed employment in retail cannabis (budtender) and later as general manager at TYCA Green, a cannabis producer/retailer.
Debtor has no ownership interest in his employers; earns roughly $75,000/year and supervises retail, production, wholesale and staff at the Clinton facility.
Trustee moved to dismiss and objected to confirmation, arguing Debtor’s job duties constitute ongoing violations of the federal Controlled Substances Act (CSA) and therefore the case/plan lack good faith and would require administering proceeds of illegal activity.
Debtor argued (1) he is a mere employee, not an owner; (2) plan funding could come from spouse’s retirement funds or spouse’s non-cannabis wages; and (3) past and present engagement in non-bankruptcy law violations is not per se disqualifying.
The court found by a preponderance of the evidence that the Debtor’s past and current duties involved distributing/possessing cannabis and aiding/abetting/conspiring in CSA offenses, denied plan confirmation for lack of good faith, and dismissed the case under 11 U.S.C. § 1307(c) and § 105 for cause and abuse of process.

Issues

Issue	Trustee's Argument	Debtor's Argument	Held
Do Debtor’s employment duties violate federal criminal law (CSA and related statutes)?	Debtor’s dispensing, supervision, production and managerial activities constitute distribution/possession with intent, aiding/abetting and conspiracy under federal law.	Employment is as a mere employee; no ownership; many non-owner service providers would be implicated if employment alone barred relief.	Court: Yes — by preponderance Debtor’s duties violated 21 U.S.C. §§ 841, 844, 856 and implicated 18 U.S.C. § 2 and 21 U.S.C. § 846.
Is the Chapter 13 plan "proposed in good faith" under 11 U.S.C. § 1325(a)(3) and was the filing in good faith under § 1325(a)(7)?	Funding the plan with wages derived from ongoing federal crimes defeats objective good faith and is a means forbidden by law.	Plan proposal was made in good faith; §1325(a)(3) focuses on manner of proposal; trustee already accepted some payments; can amend to use spouse’s non-cannabis income.	Court: No — objectively lacks good faith; plan confirmation denied under §§ 1325(a)(3) and (a)(7).
Can a Chapter 13 trustee administer plan payments derived from wages earned through ongoing CSA violations?	Trustee would be required to administer proceeds of illegal activity; that is impermissible and court oversight would support a criminal enterprise.	Trustee already accepted payments; historical analogues show courts have administered funds connected to illegal activity; amendment to use spouse’s income could avoid the issue.	Court: Trustee cannot be compelled to administer estate while Debtor continues federally illegal activity; plan funded by such wages cannot be confirmed.
Is dismissal appropriate under 11 U.S.C. § 1307(c) or under the court’s equitable powers (abuse of process/§ 105)?	Cause exists because confirmation is impossible, lack of good faith equates to cause, and continuance would support a continuing federal crime; amendment would be futile while Debtor continues illegal activity.	Trustee failed to prove bad faith under Gonzalez-Ruiz factors; dismissal is unnecessary if Debtor substitutes spouse’s non-cannabis income.	Court: Dismissal is warranted — Trustee met burden; cause exists under § 1307(c) (including §1307(c)(5)); dismissal also proper under § 105 as abuse of process.

Key Cases Cited

In re Way to Grow, Inc., 610 B.R. 338 (D. Colo. 2019) (discussing federal criminal exposure for marijuana-related businesses)
United States v. Gil, 58 F.3d 1414 (9th Cir. 1995) (conspiracy and aiding/abetting principles under federal drug laws)
In re Irving Tanning Co., 496 B.R. 644 (B.A.P. 1st Cir. 2013) (construction of "proposed in good faith and not by any means forbidden by law" language)
Ne. Patients Grp. v. United Cannabis Patients & Caregivers of Me., 45 F.4th 542 (1st Cir. 2022) (commerce-clause decision addressing cannabis regulation context)
In re Cwnevada LLC, 602 B.R. 717 (Bankr. D. Nev. 2019) (bankruptcy cases proceeding despite non-bankruptcy law violations)
In re Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015) (dismissal where debtor continued marijuana operations; court cannot aid criminal enterprise)
In re Rent-Rite Super Kegs W. Ltd., 484 B.R. 799 (Bankr. D. Colo. 2012) (court refusal to enforce Bankruptcy Code protections for ongoing CSA violations)
Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007) (§1307(c) "cause" is not limited to enumerated examples)
Grogan v. Garner, 498 U.S. 279 (1991) (no constitutional right to bankruptcy discharge)
Berliner v. Pappalardo (In re Puffer), 674 F.3d 78 (1st Cir. 2012) (totality-of-the-circumstances test for good faith in Chapter 13)