Bankruptcy Case Involving Marijuana Related Business

Garvin v. Cook Investments NW, SPNWY, LLC, 922 F.3d 1031 (9th Cir. 2019). The U.S. Trustee argued that a chapter 11 plan was “proposed by …means forbidden by law” because one of five debtors’ income was from lease of its real property to a marijuana grower.  Debtors and property were located in Washington state in which marijuana is legal.  Leasing property to a marijuana grower is illegal under federal law.  The debtors proposed a plan providing for payment of their creditors’ claims in full and, in turn, creditors fully supported the plan.  The U.S. Trustee objected to confirmation because it asserted that the plan was “proposed by…means forbidden by law,” thus not satisfying the requirement of 11 U.S.C. § 1129(a)(3).  The bankruptcy court overruled the objection and confirmed the plan, and the district court affirmed.  On appeal, the Ninth Circuit affirmed, holding that 1129(a)(3) requires that the debtor comply with the law in how it proposes the plan, not that the terms of the plan comply with nonbankruptcy law in all respects.  This case suggests that, while the bankruptcy courts may generally still be inaccessible to most marijuana businesses, there may be some marijuana “adjacent” businesses that can benefit from bankruptcy relief.