In the bankruptcy case, In re Olson, 2018 WL 989263 (B.A.P. 9th Cir. Feb. 5, 2018), the Bankruptcy Appellate Panel (BAP) for the Ninth Circuit overturned the dismissal of a bankruptcy case. The case had been dismissed based on the lower court’s belief that the landlord debtor was receiving rental income from a marijuana dispensary.
The significance of the decision is its ruling that a bankruptcy cannot be dismissed simply because of the mere presence of a marijuana business or proceeds related to such business. Instead, under Olson, the dismissal of a bankruptcy must be supported by specific factual findings that demonstrate that the debtor violated federal law or that the bankruptcy trustee would be required to administer proceeds of an illegal business, since dispensing marijuana is still unlawful under federal statutes.
In Olson, a landlord (92 years of age and legally blind) owned a shopping center in which a legally operating marijuana dispensary was one of his tenants. Facing foreclosure of the property, as well as ongoing litigation with the dispensary tenant, the debtor filed a Chapter 13 bankruptcy case. The debtor continued to collect rent from the dispensary tenant and proposed a Chapter 13 plan of reorganization that included the sale of the shopping center within six months of confirmation of the plan.
Before the plan could be confirmed, the bankruptcy court sua sponte dismissed the bankruptcy case because the debtor was receiving “illegal proceeds” by “leasing property for an unlawful purpose under federal law, although lawful under state law.” The debtor appealed based on the argument that the bankruptcy court abused its discretion by dismissing the case.
The Ninth Circuit agreed and the BAP found that the bankruptcy court failed to articulate its legal basis for dismissing the case with “clarity and precision.” The BAP noted that the bankruptcy court did not make any findings supporting its conclusion that the debtor violated the Controlled Substances Act by accepting the dispensary’s rent. The lower court never made any findings that the debtor acted in bad faith; that the rents were to be used to fund the plan; or that the trustee would be administering the proceeds of an illegal business.
A concurring opinion written by Judge Maureen A. Tighe stated that “[w]ith over twenty-five states allowing the medical or recreational use of marijuana, courts increasingly need to address the needs of litigants who are in compliance with state law while not excusing activity that violates federal law.” Judge Tighe added further “the presence of marijuana near the [bankruptcy] case should not cause mandatory dismissal.”
Olson’s holding demonstrates the conflict between the Controlled Substances Act and marijuana programs legal under state law. But it also demonstrates the necessity for landlords to prudently consider leasing property to businesses that dispense cannabis. Especially since any potential relief under federal bankruptcy law may, therefore, be limited.
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