In re Rent–Rite Super Kegs W. Ltd., 12–31592 HRT.

Decision Date19 December 2012
Docket NumberNo. 12–31592 HRT.,12–31592 HRT.
PartiesIn re RENT–RITE SUPER KEGS WEST LTD., Debtor.
CourtUnited States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

OPINION TEXT STARTS HERE

Jeffrey Weinman, Mark A. Larson, Patrick D. Vellone, Denver, CO, for Debtor.

ORDER ON MOTION TO DISMISS

HOWARD R. TALLMAN, Chief Judge.

This case comes before the Court on Secured Creditor VFC Partners 14 LLC's Motion to Dismiss (docket # 31) (the “Motion”).

The Debtor's business involves a continuing violation of the federal Controlled Substances Act. See21 U.S.C. §§ 801–904. Debtor candidly acknowledges that it derives roughly 25% of its revenues from leasing warehouse space to tenants who are engaged in the business of growing marijuana. This activity—arguably legal 1 under Colorado law—forms the basis for the instant Motion filed by VFC Partners 14 LLC (“VFC”). VFC seeks dismissal of this case under the “clean hands doctrine” and argues that Debtor's activities, which the Court finds to be illegal under federal law, make it unworthy of the equitable protection of the bankruptcy court. In addition, VFC argues that Debtors' case was filed in bad faith and should be dismissed on that basis.

At the preliminary hearing on November 27, 2012, the parties confined their arguments to the legal issue of whether the case must be dismissed under the clean hands doctrine.

I. FACTUAL BACKGROUND2

1. This case was filed on October 18, 2012.

2. The Debtor owns a warehouse building located at 3850 to 3900 E. 48th Avenue, Denver, Colorado (the “Warehouse”). Debtor values the property at $2.3 million.

3. On July 22, 2005, Debtor executed a promissory note to Commercial Federal Bank, FSB, in the face amount of $1.8 million (the “Note”). That obligation is secured by a Deed of Trust, Assignment of Rents and Security Agreement dated April 6, 2001, and modified on July 22, 2005, granting Commercial Federal a lien on the Debtor's Warehouse including rents and personal property (the “Deed of Trust”).

4. On December 21, 2011, the Note and Deed of Trust were assigned to VFC.

5. Approximately 25% of the Debtor's income is produced from leasing space in the Debtor's Warehouse to tenants who use that space for the cultivation of marijuana.

II, DISCUSSION
A. Debtor's Business Operations Violate the Controlled Substances Act

For the reasons that follow, the Court concludes that the Debtor engages in conduct that, while legal under Colorado law, violates the federal Controlled Substances Act (“CSA”).

The CSA has been described by the United States Supreme Court as “a lengthy and detailed statute creating a comprehensive framework for regulating the production, distribution, and possession of five classes of ‘controlled substances.’ Gonzales v. Raich, 545 U.S. 1, 24, 125 S.Ct. 2195, 162 L.Ed.2d 1 (2005). Under the CSA, marijuana is classified as a Schedule I controlled substance. 21 U.S.C. § 812 Schedule I(c)(10). When a substance is placed on Schedule I, that represents a legislative judgment that [t]he drug or other substance has a high potential for abuse; ... [t]he drug or other substance has no currently accepted medical use in treatment in the United States; [and] ... [t]here is a lack of accepted safety for use of the drug or other substance under medical supervision.” 21 U.S.C. § 812(b)(1). “Under the CSA, any person who seeks to manufacture, distribute, or possess a Schedule I controlled substance must apply for and obtain a certificate of registration from the Drug Enforcement Agency (DEA).” Monson v. Drug Enforcement Admin., 522 F.Supp.2d 1188, 1192 (D.N.D.2007) (citing 21 U.S.C. §§ 822–23). At hearing, the Debtor did not argue that any of its tenants, whose operations are at issue here, are operating under DEA approval.

Under § 856 of the CSA, it is a federal crime to

manage or control any place, ... as an owner, ... and knowingly and intentionally rent, lease, profit from, or make available for use, with or without compensation, the place for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance.

21 U.S.C. § 856(a)(2).3

Debtor freely admits that it leases Warehouse space to tenants who use the space for the cultivation of marijuana. The Court, therefore, finds that the Debtoris engaged in an ongoing criminal violation of the federal Controlled Substances Act.

The Debtor argues the law is in flux. Under state law in Colorado, it is legal to cultivate and distribute marijuana for medical purposes. Colo. Const. art. XVIII, § 14; Colo.Rev.Stat. §§ 12–43.3–101 to –1001. Voters recently took marijuana legalization a step further and passed, by referendum, Amendment 64 to the Colorado Constitution, which legalizes the recreational production and sale of marijuana and possession of up to one ounce of marijuana. Colo. Const. art. XVIII, § 16.

That there is a sharp difference between state and federal law where the growing of marijuana is concerned does not make the controlling law unsettled or ambiguous. The Debtor cannot reasonably argue that legalization of marijuana cultivation on the state level nullifies the provisions of the CSA.

The Court has considered the extent to which it is necessary to determine whether the CSA preempts the provisions of Colorado state law under the Supremacy Clause of the United States Constitution. U.S. Const., art. VI, cl. 2. The Supremacy Clause provides that federal law “shall be the supreme Law of the Land ... any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” Id. This case does not present an issue of federal preemption.

The United States Supreme Court has had many opportunities to construe the Supremacy Clause. It recently said that

Congress may, of course, expressly pre-empt state law, but [e]ven without an express provision for preemption, we have found that state law must yield to a congressional Act in at least two circumstances.” First, “state law is naturally preempted to the extent of any conflict with a federal statute.” Second, we have deemed state law pre-empted “when the scope of a [federal] statute indicates that Congress intended federal law to occupy a field exclusively.”

Kurns v. Railroad Friction Products Corp., ––– U.S. ––––, 132 S.Ct. 1261, 1265–66, ––– L.Ed.2d –––– (2012) (quoting Crosby v. National Foreign Trade Council, 530 U.S. 363, 372, 120 S.Ct. 2288, 147 L.Ed.2d 352 (2000); Freightliner Corp. v. Myrick, 514 U.S. 280, 115 S.Ct. 1483, 131 L.Ed.2d 385 (1995)).

Here, Congress has expressly disclaimed any intention to preempt state police powers in the CSA by occupying the field with respect to the area of recreational drug use. It provides that

No provision of this subchapter shall be construed as indicating an intent on the part of the Congress to occupy the field in which that provision operates, including criminal penalties, to the exclusion of any State law on the same subject matter which would otherwise be within the authority of the State, unless there is a positive conflict between that provision of this subchapter and that State law so that the two cannot consistently stand together.

21 U.S.C. § 903. Section 903 removes any concerns with respect to field preemption and explicitly restricts any question of preemption to those cases where a “positive conflict” exists between the provisions of the CSA and state law. A “positive conflict” my be found to exist between state law and federal law where “it is impossible for a private party to comply with both state and federal requirements, or where state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”

Sprietsma v. Mercury Marine, a Div. of Brunswick Corp., 537 U.S. 51, 64, 123 S.Ct. 518, 154 L.Ed.2d 466 (2002) (internal quotation marks and citations omitted).

But conflict preemption is not an issue here. Colorado constitutional amendments for both medical marijuana, Colo. Const. art. XVIII, § 14, and the more recent amendment legalizing marijuana possession and usage generally, Colo. Const. art. XVIII, § 16, both make it clear that their provisions apply to state law only.4 Absent from either enactment is any effort to impede the enforcement of federal law. See, e.g., Ter Beek v. City of Wyoming, 297 Mich.App. 446, 823 N.W.2d 864 (Mich.Ct.App.2012) (Concluding that Michigan Medical Marijuana Act did not hinder enforcement of federal CSA because it only granted immunity from prosecution under state law).

Federal preemption is not an issue because no part of the Colorado law must give way in order for federal authorities to fully enforce the CSA. The fact that there is a difference in legislative philosophy creates no conflict that requires an analysis of federal preemption under the Supremacy Clause. That marijuana cultivation may not be criminally prosecuted under the laws of the state of Colorado is simply of no consequence and has no bearing on the Court's finding that Debtor's business operation constitutes a continuing criminal violation of the federal Controlled Substances Act.

Debtor points out that federal authorities have never notified it that it is in violation of the law and that it has never been charged or convicted of any federal or state crime. But the fact that a violator is never charged, tried or convicted does not change the fact that the crime has been committed.

In light of Colorado's laws and constitutional amendment legalizing marijuana, federal prosecutors may well choose to exercise their prosecutorial discretion and decline to seek indictments under the CSA where the activity that is illegal on the federal level is legal under Colorado state law. Be that as it may, even if the Debtor is never charged or prosecuted under the CSA, it is conducting operations in the normal course of its business that violate federal criminal law. See, e.g., U.S. v. Stacy, 734 F.Supp.2d 1074, 1078–81 (S.D.Cal.2010) (criminal defendant cannot rely on public statements of non-prosecution policy issued by administration officials...

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