Green Hands Aren’t Unclean Hands: 9th Circuit BAP Retreats from Mandatory Dismissal in Marijuana Cases

A 92-year-old landlord who leased a storefront to a marijuana dispensary will receive a new hearing after a court dismissed her bankruptcy case on the grounds that acceptance of rent payments from the dispensary disqualified her from bankruptcy relief. Last month, a Bankruptcy Appellate Panel for the 9th Circuit remanded the Chapter 13 case after finding that the Court did not adequately detail a bad faith finding and, therefore, did not support its conclusion that the debtor violated federal law (namely, the Controlled Substances Act).

The landlord, Patricia Olson, owned a shopping center in Lake Tahoe, California, and, in 2013, began leasing space to Tahoe Wellness Cooperative, a state-licensed dispensary. However, the CSA makes it illegal to knowingly lease a property for the purpose of distributing marijuana. At the initial hearing to authorize the sale of the shopping center, the Bankruptcy Court for the District of Nevada took issue with the fact that Ms. Olson had continued to accept rent payments from the dispensary during her bankruptcy proceedings. The Court went so far as to say that Ms. Olson committed a crime by leasing to a business operation deemed illegal under the CSA. Accordingly, the Court concluded that Ms. Olson’s alleged violation of the CSA constituted grounds for immediate dismissal.

In the context of a marijuana business, bankruptcy courts commonly dismiss cases if they find that debtors have sought bankruptcy in bad faith or that they have “unclean hands” (involvement in an illegal business bars them from relief). Some courts have held that simply being involved in an illegal business constitutes bad faith or that they are barred from bankruptcy relief on the theory of unclean hands. In Ms. Olson’s case, the Court did not explicitly cite either reason for her disqualification.

On appeal, a Bankruptcy Appellate Panel took a more lenient approach, as it backed away from automatic disqualification of marijuana cases. The BAP found that a court cannot merely rely on the CSA to dismiss a case without articulating the cause for dismissal. While it may seem slight, the BAP’s departure from automatic dismissal means that, in future cases, bankruptcy courts will have to make substantive factual and legal findings to dismiss marijuana cases. For example, rather than automatic dismissal, the Court may have to determine whether the dispensary rents were to be used to fund Ms. Olson’s Chapter 13 plan.

Concurring in the opinion, Judge Tighe noted that courts must consider the fact that over half of the states have legalized either recreational or medical marijuana. The expansion of the industry, therefore, requires that courts take into account a debtor’s compliance with state law. Tighe explained that, “while debtors connected to marijuana distribution cannot expect to violate federal law, the presence of marijuana near the case should not cause mandatory dismissal.” Requiring courts to articulate a legal basis for dismissal, instead of allowing automatic disqualification, may serve as a safeguard for debtors involved in marijuana businesses. The BAP’s finding is, at the very least, a recognition of the rapidly growing cannabis industry.