In re Blumsack
| Decision Date | 17 January 2023 |
| Docket Number | 21-40248-EDK |
| Parties | In re: SCOTT H. BLUMSACK, Debtor |
| Court | United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts |
Before the Court is a "Motion to Dismiss Chapter 13 Case and Objection to Confirmation of Debtor's Chapter 13 Plan" (the "Motion") filed by the United States trustee (the "Trustee") and the Debtor's opposition to the Motion which raise issues of apparent first impression. The debtor in this Chapter 13 bankruptcy case Scott H. Blumsack (the "Debtor"), is employed by a marijuana[1] dispensary and proposes to use his wages from that employment to fund a Chapter 13 plan of reorganization. While other reported bankruptcy cases have addressed various issues involving the intersection of marijuana businesses and bankruptcy law, the Court has found none that involve facts directly on point to those here. In determining whether the Court should grant the Trustee's Motion and dismiss the case or deny confirmation of the Debtor's proposed Chapter 13 plan, the Court must determine whether there is "cause" and/or a lack of "good faith" within the meaning of the United States Bankruptcy Code, notwithstanding the fact that neither term is defined by the Code.[2] For the reasons set forth herein the Court concludes that, under the specific facts presented confirmation of the Debtor's Chapter 13 plan must be denied and the Debtor's bankruptcy case will be dismissed.
The Debtor commenced this case on April 1, 2021 by filing a voluntary petition under Chapter 13 of the Bankruptcy Code. On Schedule I, the Debtor listed his occupation as "Sales" at "Green Star Herbal," a retail cannabis dispensary. In September 2021, the Trustee filed the Motion presently before the Court, primarily seeking dismissal of the case, but also objecting to confirmation of the Debtor's proposed Chapter 13 plan. The Debtor opposed the Motion. The Court conducted an evidentiary hearing on March 11, 2022, at which only the Debtor testified.
As of September 2021 and at the time of trial, the Debtor no longer worked for Green Star Herbal, but was employed by TYCA Green, Inc. d/b/a Society Cannabis Co. ("TYCA Green"), a retailer, wholesaler, and producer of cannabis products. TYCA Green has a cultivation license, but its cultivation program is not currently underway, so it procures raw cannabis from outside the company which it uses to produce its own product lines. TYCA Green's products include (1) vaporizer cartridges filled with cannabis concentrate produced in-house; (2) cannabis edibles; and (3) pre-rolled, smokable products. As of December 2021, the Debtor was the general manager of a TYCA Green facility located in Clinton, Massachusetts. The Debtor is involved in all of the different business sectors at the Clinton facility, including retail, wholesale, production, marketing, and human resources. The Debtor is one of three on the Clinton facility's management team, which includes the Debtor, the chief executive officer, and the chief operating officer. The Debtor supervises the sixteen full-time employees at the Clinton facility. The Debtor set up the retail operation at the Clinton facility and manages all aspects of the retail operation. The Debtor is licensed under Massachusetts law to dispense cannabis products, and he often covers shifts in the retail operation. The Debtor does not have any ownership interest in TYCA Green, nor has he been promised any. The Debtor is not aware of any profit-sharing plan in the business. The Debtor's paystubs indicate that he earns $75,000 per year.
The Debtor testified that, during the pandemic, his spouse accessed retirement funds and deposited what the Debtor believed to be more than $70,000 initially into their joint checking account and then transferred funds to a savings account. The Debtor testified that, in lieu of using the Debtor's wages to fund the Chapter 13 plan, the plan payments could instead be made from the retirement funds.
Through the Motion and in the Trustee's post-trial brief, the Trustee has argued both that the Debtor's case should be dismissed and that the proposed Chapter 13 plan cannot be confirmed because the Debtor's activities in connection with his employment violate federal law. While Massachusetts state law permits the retail distribution of marijuana, the Trustee notes that marijuana is a Schedule I controlled substance under the federal Controlled Substances Act of 1970, 21 U.S.C. §§ 801 et seq. (the "CSA"), it remains a "federal crime 'to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance,'" In re Way to Grow, Inc., 610 B.R. 338, 344 (D. Colo. 2019), and it also remains a crime to aid and abet violations of the CSA, id. (quoting 18 U.S.C. § 2(a)).
According to the Trustee, the fact that the Debtor has no ownership interest in TYCA Green is immaterial, as the Debtor's managerial activities (including the marketing and retail dispensing of cannabis products) violate the CSA. The Trustee notes that liability under the CSA is broadly defined and extends not only to owners of marijuana-related businesses, but also to those persons who possess or dispense marijuana or who assist or conspire with a person or entity to violate the CSA. See 21 U.S.C. §§ 841, 846; 18 U.S.C. § 2. The Trustee, citing to United States v. Gil, 58 F.3d 1414, 1423 (9th Cir. 1995), says that the Debtor has engaged in such a conspiracy, and violates federal criminal law, by knowingly agreeing to engage in the business of distributing marijuana with the intent to further that distribution.
With respect to confirmation of the Debtor's proposed Chapter 13 plan, the Trustee contends that the Debtor cannot demonstrate that the Chapter 13 plan was proposed in good faith and not by any means forbidden by law as required by § 1325(a)(3) and cannot demonstrate that the filing of the petition was in good faith as required by § 1325(a)(7). Rejecting the Debtor's assertion that this case is distinguishable because the Debtor is a "mere employee" and the argument that the Chapter 13 trustee would not be administering illegal assets, but simply the Debtor's wages, the Trustee maintains that because the Debtor's wages are earned by activities that constitute violations of federal law (and those wages are property of the bankruptcy estate under § 1306), the Debtor cannot meet the good faith requirements for confirmation under either § 1325(a)(3) or (7). The Trustee argues that, regardless of the Debtor's personal motives for seeking bankruptcy relief, the Debtor cannot demonstrate objective good faith in filing the case or proposing a Chapter 13 plan because confirmation of the Chapter 13 plan would necessarily require the Chapter 13 trustee to administer proceeds derived from the Debtor's illegal activities and would require the Court to approve and oversee the administration of "illegal assets."
The Trustee also argues that the Chapter 13 plan cannot be confirmed because it has been proposed by a "means forbidden by law" within the meaning of § 1325(a)(3), as the plan would be funded with money obtained through activities that violate federal law. The Trustee asks this Court to reject the holding in Irving Tanning Co. v. Me. Superintendent of Ins. (In re Irving Tanning Co.), where the court - interpreting an identical confirmation requirement under § 1129(a)(3)) - held that the statutory language "focuses not on the terms of the plan and its means of implementation but on the manner in which the plan 'has been proposed.'" 496 B.R. 644, 660 (B.A.P. 1st Cir. 2013). The Trustee instead urges the Court to follow the reasoning in In re Manchester Oaks Homeowners Ass'n, Inc., 2014 WL 961167, 11-12, No. 11-10179-BFK (Bankr. E.D. Va. Mar. 12, 2014), and hold that, because the Debtor's plan relies on funding from illegal activities, the plan cannot be confirmed because it is proposed by a "means forbidden by law."
More importantly, the Trustee argues, for the foregoing reasons, not only should confirmation of the Chapter 13 plan be denied, but the case must be dismissed pursuant to § 1307(c)(5) because the Court could not confirm any plan filed in this case, and the Debtor is therefore ineligible to be a Chapter 13 debtor. Noting that the enumerated grounds constituting "cause" justifying dismissal under § 1307(c) are not exhaustive, the Trustee also says that cause for dismissal exists here because continuance of the Chapter 13 case would require the Chapter 13 trustee to administer proceeds from illegal activities. Furthermore, although the Debtor now offers to propose a plan that relies solely on the spouse's income, that option is not available because the Debtor's wages were commingled with his spouse's. Finally, the Trustee says the Court could not find that the case was filed in good faith and the case should be dismissed, as the Court should not countenance allowing the Debtor to continue his participation in an enterprise that violates federal criminal law while simultaneously enjoying the benefits of federal bankruptcy law.
In his initial opposition to the Motion, the Debtor took issue with the Trustee's representation that the Debtor is committing federal crimes. The Debtor further posited that the Trustee's position in this case is untenable because the Trustee's argument, in the Debtor's view suggests that any employee of a marijuana-involved business, including a warehouse attendant who stacks boxes or a web designer, is committing a crime. Further, the Debtor says that, given the marijuana industry's contribution to a...
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