Patterson Belknap Webb & Tyler LLP: Patterson Belknap Webb & Tyler LLP: Bankruptcy Court Won’t Dabble in Case Concerning a Marijuana Business

Patterson Belknap Webb & Tyler LLP

“[E]nsnared between his involvement in a business that is legal under the laws of Arizona but illegal under federal law,” one debtor’s chapter 13 petition was recently dismissed due to his undisputed violations of the Controlled Substances Act.

In November 2020, Arizonan voters supported a ballot initiative legalizing recreational use of marijuana.  Of course, Arizonans needed a place to buy the newly-legalized substance, and retail marijuana dispensaries emerged to meet the demand.  Like many other retail businesses, those dispensaries needed suppliers, who in turn needed manufacturers, who themselves needed to procure equipment.

Debtor Ryan Michael Mayer is president and a significant shareholder of Rosinbomb, a Nevada corporation with its principal place of business in Phoenix.  Rosinbomb manufactures and sells “organic extraction presses utilizing a combination of heat and pressure to generate organic concentrates.”  Rosinbomb sells two products and associated accessories, the “Rosinbomb Rocket” and the “M-60.”

Facing significant debt, Mayer filed a chapter 13 petition in the U.S. Bankruptcy Court for the District of Arizona.  Creditor Steven Varela—who had won a judgment against Mayer in Washington state court as a result of Mayer’s illegal sale of Rosinbomb stock—moved to dismiss the petition given Mayer’s involvement in an industry that is illegal under federal law.  The bankruptcy trustee and the U.S. trustee joined Mr. Varela’s motion.

Pursuant to 11 U.S.C. § 1307(c), a court may dismiss a chapter 13 case for “cause.”  The U.S. Court of Appeals for the Ninth Circuit has held that “§ 1307’s flexible cause standard, coupled with the abuse of discretion standard of review on appeal, gives bankruptcy courts the authority to dismiss a debtor’s case in which marijuana-related business activity is present.”  However, “the mere presence of marijuana near a bankruptcy case does not automatically prohibit a debtor from bankruptcy relief.”  In re Mayer, 2022 Bankr. LEXIS 256 (D. Ariz.).

At the initial hearing in the case, the court questioned the parties as to what point a debtor’s connection to marijuana becomes too attenuated to require dismissal.  But in its opinion, the court declined to draw a hard line.  While Mayer did not directly sell marijuana, he operated a company that sold equipment to others to manufacture cannabis-containing products.  The connection in the case was close enough given the strong and exclusive links between Rosinbomb—from which the debtor derived all his income—and the marijuana business—which remains illegal under federal law.

While Mayer argued that Rosinbomb’s presses could be used to extract oils from various materials (e.g., peanuts or lavender), he could not evidence any non-marijuana-related sales.  In fact, the M-60 press was marketed exclusively to commercial marijuana “rosin” producers.  “Rosin” is a solid form of “resin,” created by heating and pressurizing fresh resin.  Rosin is used in printer ink, varnishes, adhesives, and other household products.  Rosin created from cannabis resin, however, creates a concentrated form of marijuana, “commonly referred to as ‘dabs.’”  See In re Mayer, 2022 Bankr. LEXIS 256 at n.20 (D. Ariz.).

Given the court’s skepticism of using profits derived from Rosinbomb to make chapter 13 plan payments, Mayer alternatively argued that he could fund a proposed payment plan through an expected inheritance and sales related to a newly-formed CBD business.  However, pending litigation tying up the inheritance (which was of an unclear amount) made that source of funding too tenuous for the court to accept.  Further, the CBD business was unproven, having no record of sales.

Because Mayer’s income was completely derived from Rosinbomb, and Rosinbomb’s entire business involved the production of drug manufacturing equipment (in violation of the Controlled Substances Act), the court found cause to dismiss Mayer’s bankruptcy petition, concluding that “[u]nless and until federal law and Arizona law align to permit Rosinbomb’s Machines to legally generate marijuana rosin, Debtor may not seek bankruptcy protection.”  We will continue to monitor for any such alignment between federal law and the increasing number of states legalizing marijuana and associated businesses, including New York.

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