Now that about half the states have some form of legal marijuana sales, Bankruptcy Appellate Panel Judge Maureen A. Tighe of Woodland Hills, Calif., wrote a concurring opinion saying that the court should not reflexively dismiss a bankruptcy just because there is marijuana on the premises.
The debtor was a blind, 92-year-old woman living in an assisted living facility. She owned a small shopping center where one of the tenants was a marijuana dispensary operating legally under state law but not federal law. She filed a chapter 13 petition to halt foreclosure and sell the property.
Sua sponte, the bankruptcy judge dismissed the case because the debtor had received post-petition rent from the dispensary. The unanimous Ninth Circuit Bankruptcy Appellate Panel reversed and remanded on Feb. 5, because the bankruptcy judge had not made adequate findings of fact and stated legal conclusions indicating the grounds for dismissal.
Judge Tighe’s concurring opinion is noteworthy. Before dismissing, she explained that the bankruptcy court must find that the debtor is violating the federal Controlled Substances Act. She noted that the debtor’s plan “did not necessarily require rental income” from the dispensary.
Rather, the plan called for selling the shopping center and using the proceeds to pay creditors in full. In the meantime, the debtor intended to reject the lease and evict the dispensary.
Judge Tighe focused on 21 U.S.C. § 856(a)(2), which prohibits someone from knowingly and intentionally allowing property to be used for the distribution of drugs. The criminal statute also requires a showing that the primary or principal use of the property is for the distribution of drugs.
Judge Tighe explained why the debtor had not necessarily violated criminal law.
To violate the law, she said, there must be evidence that the debtor herself knew that the tenant operated a dispensary or that she intentionally allowed that use.
The debtor’s son was her attorney-in-fact and managed the shopping center. Judge Tighe said the record did not show when the debtor became aware of the illegal activities. In addition, she said, her son’s knowledge could not be imputed to the debtor.
In sum, Judge Tighe said that “the presence of marijuana near the case should not cause mandatory dismissal.” Her opinion suggests that a debtor might escape dismissal by refusing to accept rent from a marijuana business after filing and move to reject a lease. A problem could arise if the marijuana operator exercises the right under Section 365(h) to remain in possession after rejection.
Judge Tighe was sitting on the BAP by designation.