The intersection between Bankruptcy Law and Marijuana Law

In In re Patricia G. Olson, 3:17-bk-50081-BTB (Bankr. D. Nev. 2017), the debtor was 92 years old, legally blind, and a resident of an assisted living facility. She filed bankruptcy to stop foreclosure on a commercial property in Lake Tahoe, California, that provided her with income arising, in part, from a tenant that served as a marijuana dispensary. The Debtor’s plan called for her to sell the commercial real property to pay off all creditors, but the bankruptcy court on its own motion dismissed the case on the ground that Debtor’s postpetition acceptance of rents from the dispensary business was an ongoing criminal violation that disqualified her from bankruptcy relief. according to the bankruptcy court the sale of marijuana was a crime under federal law (even though legal under state law):

[I]f the debtor has committed a crime during the course of the bankruptcy and continued for several months to commit a crime during the course of the bankruptcy, I think that is a basis for not providing relief to the debtor. Had the debtor, prior to filing bankruptcy or not during the bankruptcy had not committed the crime of taking money from a marijuana operation, I would feel differently. But that’s not what happened here. Because you don’t, in my opinion, get to go through five or six months of a bankruptcy knowingly receiving illegal proceeds and then say, oh, I’m not going to take those anymore, I want to sell the property now, so I get to play here. I don’t think that’s correct.

On appeal, the Ninth Circuit Bankruptcy Appellate panel vacated the dismissal and remanded the case for additional findings. The appellate court was particularly interested in further findings as to whether the dismissal was on bad faith grounds or something similar. The appellate court specifically noted that other bankruptcy courts had dismissed cases on bad faith grounds when the debtor was engaged in an illegal activity, citing Arenas v. U.S. Tr. (In re Arenas), 535 B.R. 845, 852 (10th Cir. BAP 2015) (a bankruptcy filing or a plan of reorganization proposed by a debtor who is involved in an illegal enterprise is not in good faith, even where the debtor does not have a subjective bad motive, is in legitimate need of bankruptcy relief, and there is otherwise no indicia of an attempt to abuse the bankruptcy process).