It was only a matter of time before the budding state laws legalizing marijuana use ran up against the federal government’s treatment of the drug as a controlled substance – and what better place for the two sides to meet than in a bankruptcy case involving a 92-year-old blind debtor?  In In re Olson, 2018 WL 989263 (B.A.P. 9th Cir. Feb. 5, 2018), the debtor owned a small shopping center in which one of the tenants was a marijuana dispensary operating legally under state law.  In an effort to halt foreclosure of the property, she filed a chapter 13 petition.  However, the debtor’s plan never made it to confirmation – the bankruptcy court, relying on hazy legal justification, sua sponte dismissed the case because the debtor had received post-petition rent from the dispensary.

In a unanimous opinion, the Ninth Circuit Bankruptcy Appellate Panel reversed and remanded the lower court’s decision, finding that the bankruptcy judge had not made adequate findings of fact and stated legal conclusions indicating the grounds for dismissal.  In a noteworthy concurring opinion, Judge Maureen A. Tighe emphasized the importance of determining whether the debtor was actually violating the Controlled Substances Act.  As Judge Tighe found, the debtor’s plan did not necessarily require rental income from the dispensary to fund the payments – instead, the debtor’s sale of the property would have funded the payments.

Notwithstanding the debtor receiving rental payments from the operation of a legal marijuana dispensary, Judge Tighe explained why the debtor had not necessarily violated criminal law.  Focusing on 21 U.S.C. § 856(a)(2), the judge explained that the criminal statute requires a showing that the primary or principal use of the property is for the distribution of drugs.  Because the debtor’s son (who also acted as her attorney-in-fact) managed the shopping center, there was no evidence presented that the debtor was aware of the drug-related activities.  The judge concluded that “the presence of marijuana near the case should not cause mandatory dismissal.”  On remand, it will be interesting to see whether the bankruptcy judge reverses his position or manages to find supporting authority to justify his reasoning.