Cannabis, Commercial Real Estate and Bankruptcy: A Case Study in Competing Priorities

marijuana bankruptcy lease
Personal bankruptcy circumstances have been tough, when hashish is concerned.

A the latest unpublished final decision out of the Ninth Circuit Personal bankruptcy Appellate Panel presents an intriguing set of details and a final decision that may well depart a person questioning which way the bankruptcy courts could possibly be headed in the period of legalized hashish. An elderly Nevada resident owned some professional residence at a purchasing mall in South Lake Tahoe, and experienced been leasing it for quite a few years to a medicinal hashish dispensary (the lease exclusively licensed the tenant to function a “dispensary”). After quite a few years of state-legal operations, an argument arose more than an alleged selection agreement to acquire the residence, and the tenant sued to force a sale of the residence. The financial institution holding the mortgage loan recorded a default shortly thereafter and commenced foreclosures proceedings.

The operator then submitted for Chapter 13 bankruptcy, which is a type of debt reorganization that will allow a debtor to spend creditors on a court docket-authorised payment plan. Her proposed plan termed for her to market off the professional residence occupied by the dispensary but continue on renting it in the meantime, so she submitted a motion to reject the lease and the selection agreement, and proposed a payment plan that involved supplying the financial institution rental profits from the dispensary. The metropolis also joined in, asking the court docket to reject the lease on the grounds that the tenant’s allow to function the dispensary experienced expired because of to the owner’s failure to give published consent (a great plug for which include a landlord cooperation clause in professional hashish leases).

The tenant fired back again with an intriguing strategy: he moved to dismiss the bankruptcy petition entirely on the grounds that the owner’s acceptance of his hashish dispensary’s lease payments violated the federal Controlled Substances Act (CSA). None of the motions have been read, however, because the decreased bankruptcy court docket made a decision to dismiss the petition on its very own, declaring that the operator experienced “committed a crime” by accepting lease from the dispensary whilst the bankruptcy case was pending.

On attractiveness, the bankruptcy appellate panel vacated the decreased court’s final decision and remanded, because the court docket experienced unsuccessful to articulate any findings or legal foundation justifying the summary that the operator was violating the CSA and that violation was grounds for dismissal. The appellate panel in its viewpoint discussed the significance of developing knowledge and intent to lease the residence for cannabis cultivation in buy to prove a CSA violation by an operator, and in change to use that violation as a foundation for rejecting a bankruptcy petition. In sum, the appellate panel highlighted the large bar that a court docket should very clear to be equipped to use accepting hashish rents as a explanation to deny a residence owner’s bankruptcy petition, even have been the rents are accepted just after the petition was submitted.

While the owner’s bankruptcy case may well have lived to battle a further working day, almost nothing about the case invalidates the CSA or even precludes using it as grounds for dismissing a bankruptcy petition. But the case highlights the ongoing conflict that federal courts are confronting because of to the position of state-legal hashish as remaining federally unlawful. The lesson of the case is nicely framed in the concurring viewpoint: “With more than twenty-5 states enabling the health-related or leisure use of cannabis, courts more and more require to tackle the desires of litigants who are in compliance with state legislation whilst not excusing exercise that violates federal legislation.”

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