In a 2011 opinion, Judge Alley ruled that a debtor who filed a Chapter 13 Bankruptcy Plan to be funded from profits derived from the cultivation and sale of medical marijuana could not be confirmed as such business activities were illegal under federal law. See In re McGinnis, 453 B.R. 770 (Bankr. D. Or. 2011). A recent Ninth Circuit decision, however, casts doubt on the continued validity of that case.
In Garvin v. Cook Investments, ___ F.3d ___ (9th Cir. 2019), a Chapter 11 debtor leased property to a company to be used exclusively as a marijuana establishment. Despite the fact that debtor’s proposed plan of reorganization proposed to pay all creditors in full, the U.S. Trustee objected to the Debtor’s proposed plan, pursuant to 11 U.S.C §1129(a)(3), which requires that a plan be “proposed in good faith and not by any means forbidden by law.” Notwithstanding the fact that many states have legalized marijuana, its cultivation and use remains illegal under federal law. See 21 U.S.C. §812 et. seq. The Bankruptcy Court confirmed debtor’s plan; the U.S. Trustee appealed.
The issue before the Ninth Circuit was whether was whether §1129(a)(3) forbids confirmation of a plan that is proposed in an unlawful manner as opposed to a plan with substantive provisions that depend on illegality. In affirming the Bankruptcy Court, the Ninth Circuit focused on the precise language of the statute, which requires that a plan be proposed in good faith, and not by any means forbidden by law. In essence, the Ninth Circuit made a distinction between the proposal of the plan (i.e., did it comply with the requirements of the Bankruptcy Code?) as opposed to the substantive provisions of the plan.
To be certain, the Ninth Circuit did note that “confirmation of a plan does not insulate debtors from prosecution for criminal activity, even if that activity is part of the plan itself.” Bankruptcy judges, however, are not to be making decisions on the legality of debtors’ business operations, “gratuitously seeking out possible ‘illegalities’ in every plan.”
This post is intended to be purely informational in nature, and cannot be considered legal advice. If you have questions related to bankruptcy, please call our office at (503) 545-1061 (Portland bankruptcy) or (541) 972-3351 (Eugene bankruptcy) to schedule a free initial consultation.