In an earlier update, we told you about an appeal pending in the U.S. Court of Appeals for the Ninth Circuit that would decide whether a landlord receiving rent from someone involved in the state-legal cannabis industry could ever confirm a plan of reorganization under chapter 11 of the Bankruptcy Code. On May 2, 2019, the Ninth Circuit published its decision. It affirmed the lower courts because receiving rent from a cannabis business does not violate the Bankruptcy Code’s prohibition on plans proposed “by any means forbidden by law.”
In Garvin, the Office of the United States Trustee (an arm of the U.S. Department of Justice) argued that a landlord could not confirm a plan of reorganization under chapter 11 of the Bankruptcy Code because the landlord leased property to a tenant engaged in the cannabis business. The bankruptcy court disagreed and confirmed the landlord’s plan of reorganization. After an appeal by the U.S. trustee, the district court affirmed, and the U.S. trustee appealed again, this time to the Ninth Circuit.
In its opinion, the Ninth Circuit relied on the plain language of section 1129(a)(3) of the Bankruptcy Code, which states that a bankruptcy court shall only confirm a plan if the plan “has been proposed in good faith and not by any means forbidden by law.” The Ninth Circuit held that section 1129(a)(3) “directs courts to look only to the proposal of a plan, not the terms of the plan. . . . This reading accords with both the statutory text, which does not refer to the substance of the plan, and the weight of persuasive authority.” Since, in this case, the plan itself had not been proposed by any means forbidden by law (such as procedural irregularities or other improprieties in the proposal itself), the plan did not violate section 1129(a)(3).
Although the Ninth Circuit relied on the plain text of the statute, it also observed that its interpretation was good policy. The Ninth Circuit rejected the notion that a bankruptcy court should be converted into “an ombudsman without portfolio, gratuitously seeking out possible illegalities in every plan.” Its decision would not allow debtors to exploit the Bankruptcy Code to facilitate lawbreakers because debtors could still be prosecuted if they were deemed to have engaged in criminal activity, and bankruptcy courts retain the authority to consider whether estates are being grossly mismanaged by debtors, such as debtors’ participation in illegal activity.
This decision is good news for cannabis businesses and those dealing with them. It is binding on all courts within the Ninth Circuit and is persuasive authority in other jurisdictions.