Marijuana Business Magazine August 2019

Marijuana Business Magazine | August 2019 102 R b NK U TC P Y a A recent appellate court ruling opened federal bankruptcy protection just a crack to cannabis-related ancillary firms. In early May, the 9th U.S. Circuit Court of Appeals, which heard the case in Seattle, affirmed a Chapter 11 bankruptcy reorganization plan of an investment company that received rent on one of its Washington state properties from a licensed marijuana grower. The case involved Cook Investments NW, a limited liability company that owns several properties in Washington state and filed for bankruptcy protection in November 2016. The U.S. Trustee had argued that the plan should not have been confirmed because one of the properties was being operated in a manner forbidden by federal law. Cook Investments, the trustee noted, initially proposed a reorganization plan that listed a commercial lease with N.T. Pawloski, doing business as Green Haven, a licensed marijuana cultivator. The reorganization contemplated generating $64,000 per month in revenue from all of Cook Investments’ properties, including $10,000 from Green Haven. Cook Investments then indicated it would reject the Green Haven lease and filed an amended reorganization plan without mention of Green Haven. The trustee argued that Cook Investments had no legal grounds for terminating its lease with Green Haven and that “all signs indicate” Green Haven would remain on the premises and continue to cultivate marijuana. “That the lease and the illegally derived funds are no longer mentioned in the plan does not obviate their existence,” the trustee wrote. The bankruptcy court disagreed with the trustee and confirmed the reorganization; on appeal, the 9th Circuit agreed with the lower court. The appeals court, according to legal experts, based its decision on a narrow interpretation of the federal bankruptcy code. In particular, the court looked only at whether the reorganization was proposed in good faith and not forbidden by law, not whether the specific terms of the plan might violate federal law. Legal experts took the decision as good news for cannabis-related businesses, noting it would become precedent-setting for the bankruptcy courts within the jurisdiction, which covers seven Western states and Hawaii. But bankruptcy courts in other jurisdictions haven’t been so kind to the opinion. In late May, a federal bankruptcy court in the Eastern District of Michigan ruled against a debtor in a somewhat similar situation and heavily criticized the 9th Circuit Court opinion at the same time. That Chapter 11 bankruptcy case involved Basrah Custom Design, a Detroit firm that makes and installs custom cabinets. Basrah filed for protection under federal bankruptcy law in December 2018, nine days after losing a state court case over terms of a 2016 lease and property purchase agreement with a licensed medical marijuana operator. The U.S. Trustee argued that Basrah pursued the bankruptcy protection with “unclean hands”—that it wanted to obtain a better cannabis-related deal than provided by the 2016 lease and state court decision. Basrah argued that it wanted to get out from under the lease to the MMJ operator and reorganize the custom cabinet business at its existing location. The court, however, dismissed the bankruptcy filing, ruling that the company’s owner, Weaam Nocha, filed for bankruptcy protection “for the sole purpose of evading” the state court decision that ordered him to sell the property to the MMJ business for $1.2 million. Instead, the judge wrote, Nocha was trying to rent or sell his property for a higher price to another MMJ dispensary operator, or use the property to operate a dispensary himself, which the court noted he had started to do with family members before the state court decision. In summary, the judge said that Nocha filed for bankruptcy protection “solely for his own benefit—a benefit that depends on activity that is illegal under the CSA (Controlled Substances Act).” – Jeff Smith Ancillary Firms Find a Sliver of Hope FOR PUBLICATION UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT G REGORY M.G ARVIN , Acting United States Trustee for Region 18, Appellant , v. C OOK I NVESTMENTS NW,SPNWY, LLC;C OOK I NVESTMENTS NW, F ERN ,LLC;C OOK I NVESTMENTS NW,LLC;C OOK I NVESTMENTS NW, D ARR ,LLC;C OOK I NVESTMENTS NW,A RL ,LLC, Appellees. No. 18-35119 D.C. No. 3:17-cv-05516- BHS OPINION Appeal from the United States District Court for the Western District of Washington Benjamin H. Settle, District Judge, Presiding Argued and Submitted December 3, 2018 Seattle, Washington Filed May 2, 2019 Before: Susan P. Graber, M. Margaret McKeown, and Morgan Christen, Circuit Judges. Opinion by Judge McKeown