FILED
                                                                JAN 14 2020
                        ORDERED PUBLISHED
                                                            SUSAN M. SPRAUL, CLERK
                                                              U.S. BKCY. APP. PANEL
                                                              OF THE NINTH CIRCUIT



           UNITED STATES BANKRUPTCY APPELLATE PANEL
                     OF THE NINTH CIRCUIT

In re:                                          BAP No. AZ-19-1126-LTaF

BRIGHAM A. BURTON, a/k/a Kent                   Bk. No. 2:18-bk-04571-BMW
Burton and CARLY RAE BURTON,

                  Debtors.

BRIGHAM A. BURTON, a/k/a Kent
Burton; CARLY RAE BURTON,

                  Appellants,

v.                                              OPINION

EDWARD JOHN MANEY, Chapter 13
Trustee; STRATTON RESTORATION,
LLC,

                  Appellees.

             Submitted Without Argument on November 21, 2019

                             Filed – January 14, 2020

               Appeal from the United States Bankruptcy Court
                         for the District of Arizona

     Honorable Brenda Moody Whinery, Chief Bankruptcy Judge, Presiding
Appearances:        Appellants Brigham A. Burton, a/k/a Kent Burton, and
                    Carly Rae Burton, pro se on brief; Ross M. Mumme, Esq.
                    on brief for Appellee Edward J. Maney, Chapter 13
                    Trustee.



Before: LAFFERTY, TAYLOR, and FARIS, Bankruptcy Judges.

LAFFERY, Bankruptcy Judge:

                                 INTRODUCTION

      Brigham and Carly Rae Burton appeal the bankruptcy court’s

dismissal of their chapter 131 case. The Burtons own the majority interest in

Agricann, LLC (“Agricann”), an entity that was engaged in cultivating and

selling marijuana, which, while legal under Arizona law, violated federal

law. In response to the bankruptcy court’s order to show cause why the

case should not be dismissed based on the Burtons’ interest in Agricann,

the Burtons asserted that Agricann was no longer operating and was not

being relied upon to fund the Burtons’ chapter 13 plan. Agricann, however,

was a plaintiff in at least two state court lawsuits in which it sought

recovery of damages for breach of contracts related to growing and selling

marijuana. The Burtons asserted that recovery from those lawsuits was


      1
      Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.

                                           2
unlikely, but the bankruptcy court rejected this assertion as not credible

and concluded that any recovery from those lawsuits would be derived

from conduct that is illegal under federal law. Accordingly, allowing the

case to continue would likely require the court and the trustee to become

involved in such illegal conduct.

       Because the Burtons did not provide sufficient evidence that the

potential litigation proceeds would not materialize, requiring the court and

the trustee to become involved in their administration, the bankruptcy

court did not abuse its discretion in dismissing the Burtons’ case.

       We AFFIRM.

                            FACTUAL BACKGROUND

       The Burtons filed a chapter 13 petition in April 2018. On their original

Schedule A/B, they disclosed interests in four limited liability companies,

all with unknown values, including a 65 % membership interest in

Agricann, of which Mr. Burton was a manager and its president. They also

listed a pending claim belonging to Agricann against Natural Remedy

Patient Center LLC, described as a breach of contract action, also with an

unknown value. They later amended Schedule A/B to disclose additional

ownership interests in other LLCs.2


       2
       The other LLC membership interests included on original and amended
Schedule A/B were as follows: (1) a 70% interest in 363, LLC; (2) a 100% interest in 363
Business Alliance, LLC; (3) a 50% interest in Natural Agriculture, LLC; and (4) a 100%
                                                                             (continued...)

                                            3
       According to original and amended Schedule I, Mr. Burton was

unemployed during the pendency of the bankruptcy case. All Schedule I

income was attributed to Ms. Burton’s wages from her employment.

Schedule J showed a monthly net income of $458.80, with which the

Burtons proposed to fund their chapter 13 plan.3

       Postpetition, Agricann sued Total Accountability Systems I, Inc. and

Cannabis Research Group in state court. Both lawsuits sought damages for

breach of contracts under which Agricann was to cultivate, grow, and sell

medical marijuana.

       Although the Burtons proposed three different chapter 13 plans

during the approximately one year their case was pending, they were

unsuccessful in getting a plan confirmed.4


       2
        (...continued)
interest in Carly Rae Burton, PLLC. The Burtons also listed entities that they had owned
but which they contended were “inactive, insolvent and [had] no assets.” Those entities
were: Zyrax, LLC, Burton Partners, LLC, Eleava, LLC, B&B Businesses, LLC, Nestaba,
LLC. Finally, they disclosed a “de minimus” (less than 20%) interest in Twenty Sixth
Ave Ventures, LLC.
       3
        We have exercised our discretion to review the bankruptcy court’s electronic
docket and pleadings. See O'Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 

, 957–58 (9th Cir. 1989); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 

, 233 n.9 (9th Cir. BAP 2003).
       4
       The Burtons’ Second Amended Plan filed January 6, 2019, drew an objection
from creditor Kevin Erdmann on grounds of: (1) lack of good faith; and (2) failure to
pledge all disposable income (based on an allegation that Debtors had not disclosed
income from their business entities). The chapter 13 trustee, John Maney (“Trustee”),
                                                                           (continued...)

                                             4
      On May 29, 2018, creditor Stratton Restoration filed a motion to

convert, in which it argued that there was cause to convert the bankruptcy

case to chapter 7. It contended that the Burtons were ineligible for chapter

13 relief because their debts exceeded the limitations under § 109(e), based

on Stratton’s $2.4 million unsecured claim arising from state court breach

of contract litigation, which the Burtons had not included on their

schedules. It also argued that the Burtons filed their case in bad faith

because, among other things, Mr. Burton derived income from a marijuana

business that was illegal under federal law.

      At the preliminary hearing on the motion to convert held on March 5,

2019, the bankruptcy court raised its concerns regarding the Burtons’

alleged connections to the marijuana industry. After that hearing, the court

issued an order to show cause (“OSC”) requiring the Burtons to appear and

show cause why their case should not be dismissed due to their ownership

interest in, and deriving income from, an entity involved in the marijuana

industry.




      4
        (...continued)
filed an Evaluation and Recommendation indicating that the plan was not ready for
confirmation for numerous reasons, including the unresolved Erdmann objection and
the fact that the Debtors’ general unsecured debts of $2.5 million reflected on the claims
register were well over the chapter 13 debt limits. Trustee also required Debtors to
provide documentation of a value for all of the Debtors’ businesses listed on amended
Schedule B.

                                            5
       The Burtons filed a response to the OSC, verified by Mr. Burton’s

declaration, in which they disputed having an interest in an entity involved

in the marijuana industry. They stated that Agricann went out of business

in 2016 and had generated no income since then. As such, they claimed

they did not currently derive income from any entity involved in the

marijuana industry. Although they acknowledged that Agricann was a

party to litigation, they stated they did not expect to receive any proceeds

from such litigation due to a contingency fee agreement with the attorney

handling the litigation and a litigation financing lien on any recovery. The

Burtons also stated their intention to abandon from the estate their interest

in Agricann, after which they would divest themselves of their interest in

that entity. Finally, they asserted that the sole source of funding for the

chapter 13 plan would be Mrs. Burton’s employment income. The

following day, they filed a motion to compel abandonment of their interest

in Agricann.5


       5
         Attached to the motion to compel abandonment (but not included with the
response to the OSC) was a spreadsheet entitled “Agricann, LLC Financial Information”
that purported to show the expected recovery from the litigation. Although difficult to
decipher, the spreadsheet does not seem to support the Burtons’ assertion that the
litigation is worthless. The spreadsheet shows, as of March 2019, a potential gross
recovery of $31,285,273.45, reduced to a net of $18,771,164.07 after deducting a 40 %
contingency fee, with a litigation loan balance of $15,731,993.03. This leaves a final net
figure of over $3 million. The spreadsheet then projects that the litigation loan balance
would be nearly $21 million by June 2019, but there is no explanation or backup
documentation regarding the source of these figures. In any event, the bankruptcy court
                                                                               (continued...)

                                             6
      Trustee and Stratton Restoration each filed responsive briefs in which

they argued that the case should be dismissed given the Burtons’

involvement in the medical marijuana industry.

      The bankruptcy court held a preliminary hearing on the OSC on

April 3, 2019. The court stated that it did not expect to resolve the matter

without an evidentiary hearing.6 The court noted that there were other

entities owned by the Burtons and that there was no evidence regarding

whether those businesses were also involved in the marijuana business.7

The bankruptcy court heard argument from the Burtons’ counsel as well as

counsel for Trustee, Stratton Restoration, creditor Kevin Erdmann, creditor


      5
       (...continued)
never ruled on the motion to compel abandonment.
      6
        On the eve of the hearing, Stratton Restoration had filed a 35-page (including
exhibits) document entitled “Creditor Stratton Restoration, LLC’s Supplemental
Evidence Regarding Debtors’ Bad Faith Filings,” to which it attached documents that it
argued showed that (1) Mr. Burton has an interest in an entity called Green Tree
Alliance, LLC (which had paid the Burtons’ chapter 13 counsel’s fees), which had been
set up using other LLCs so as to hide the Burtons’ interest in that entity; and (2) the
Burtons had set up a GoFundMe page during the bankruptcy case that explicitly told
donors that due to their bankruptcy, the Burtons could not receive funds directly and so
funds would go to a member of their church who had agreed to be the “Shepard [sic] of
the funds.”
      7
       In fact, there was evidence that the Burtons held an interest in another entity
that was involved in the marijuana business. Stratton Restoration attached to its
response to the OSC a copy of a deposition transcript from a January 30, 2017, judgment
debtor exam in state court litigation between Mr. Erdmann and the Burtons, in which
Mr. Burton testified that Natural Agriculture, LLC, in which Debtors held a 50%
membership interest, was engaged in the medical marijuana business.

                                           7
Kerry Lechner, and the United States Trustee. The Burtons’ counsel

represented that the Debtors were not currently involved in the cannabis

industry and were “willing to get out of the Agricann business entirely.”

Counsel for Trustee noted that the Burtons had provided no evidence of

the value of the Agricann lawsuit other than a “one-page self-serving

spreadsheet” and no evidence regarding the litigation financing agreement.

Trustee’s counsel also pointed out that there were questions regarding

whether the Burtons had disclosed all their interests in business entities

and sources of income, which raised concerns about the Burtons’ good

faith.

         At the May 6, 2019 final hearing on the OSC, the bankruptcy court

delivered its oral ruling. The court stated that it had determined it did not

need to hold an evidentiary hearing because the record before it was

sufficient for it to rule. It found that dismissal was appropriate under the

circumstances because, despite the assertion that Agricann was no longer

in the medical marijuana business, it was seeking recovery in the state

court litigation

         of funds attributable to contracts under which it was to serve as
         a cultivator, grower, holder, deliverer, and/or seller of
         marijuana. Any recovery from the litigation would be derived
         from conduct that is illegal under federal law. Any
         distributions from Agricann to its members, specifically the
         Debtors, would also be derived from illegal conduct. The
         Debtors assert that the Agricann litigation has no value.


                                         8
      However, this assertion is not credible given that the litigation
      continues to be pursued. These cases are still active and
      pending.

            Given the nature[] of Agricann’s business, which was
      clearly involvement in the marijuana industry, neither a case
      trustee, nor these Debtors, can sell or liquidate the 65 percent
      ownership interest in Agricann, which is property of this estate
      through the bankruptcy case. This would necessitate the Court
      and the Trustee’s involvement in condoning the illegal activity.

Hr’g Tr. (May 6, 2019) at 13:21-14:13.

      The bankruptcy court entered an order dismissing the case, and the

Burtons timely appealed.

                                JURISDICTION

      The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(1) and (b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.

                                     ISSUE

      Whether the bankruptcy court abused its discretion in dismissing the

Burtons’ chapter 13 case.

                          STANDARD OF REVIEW

      We review a bankruptcy court’s dismissal of a chapter 13 case for

abuse of discretion. Ellsworth v. Lifescape Med. Assoc., P.C. (In re Ellsworth),

, 914 (9th Cir. BAP 2011). A bankruptcy court abuses its

discretion if it applies the wrong legal standard, misapplies the correct

legal standard, or makes factual findings that are illogical, implausible, or


                                         9
without support in inferences that may be drawn from the facts in the

record. See TrafficSchool.com, Inc. v. Edriver Inc., 

, 832 (9th Cir.

2011) (citing United States v. Hinkson, 

, 1262 (9th Cir. 2009) (en

banc)).

                                 DISCUSSION

      In recent years, numerous states have legalized the medical and

recreational use of marijuana. Marijuana, however, remains a Schedule I

controlled substance under the federal Controlled Substances Act, 21 U.S.C.

§§ 801-904 (“CSA”). The CSA prohibits, among other things, the

manufacture, distribution, dispensing of, or possession with intent to

manufacture, distribute, or dispense, a controlled substance. 21 U.S.C.

§ 841(a). As a result, a bankruptcy filing by an individual or entity with ties

to a marijuana business raises difficult issues regarding how involved the

debtor may be in that business and still be permitted to seek relief under

the Code. The case law continues to evolve, and few bright line rules have

emerged from decisions published to date. One principle seems implicit in

the case law, however: the mere presence of marijuana near a bankruptcy

case does not automatically prohibit a debtor from bankruptcy relief. Olson

v. Van Meter (In re Olson), BAP No. NV-17-1168-LTiF, 

, at *7

(9th Cir. BAP Feb. 5, 2018) (Tighe, J., concurring) (citing Northbay Wellness

Grp., Inc. v. Beyries, 

, 960–61 (9th Cir. 2015)); cf. Garvin v. Cook

Inv. NW, SPNWY, LLC, 

(9th Cir. 2019) (affirming bankruptcy


                                        10
court’s confirmation of a chapter 11 plan where the plan derived indirect

support from rental income from a lessor engaged in a marijuana growing

business).8 Instead, a bankruptcy court must be explicit in articulating its

legal and factual bases for dismissal in cases involving marijuana. See In re

Olson, 

at *6 (remanding for the bankruptcy court to

“articulate the findings that led it to determine that Debtor was violating

the CSA and what legal standard it relied upon in dismissing the case.”).

       Several courts have held that a bankruptcy case must be dismissed if

the continuation of the case would require the court, trustee, or debtor in

possession to administer assets that are illegal under the CSA or that

constitute proceeds of activity criminalized by the CSA. Arenas v. U.S. Tr.

(In re Arenas), 

, 853 (10th Cir. BAP 2015); In re Way to Grow, Inc.,

, 120 (Bankr. D. Colo. 2018), aff’d, No. 18-cv-3245-WJM, 

(D. Colo. Sept. 18, 2019); In re Medpoint Mgmt., LLC, 

, 184-85 (Bankr. D. Ariz. 2015), vacated in part, Medpoint Mgmt., LLC v.


       8
        The sole issue before the Ninth Circuit in Garvin was whether the plan at issue
violated § 1129(a)(3)’s requirement that a chapter 11 plan be proposed “not by any
means forbidden by law.” The Circuit held that § 1129(a)(3) directs courts to look only
to the proposal of a plan, not its terms. 

(citing Irving Tanning Co.
v. Me. Superintendent of Ins. (In re Irving Tanning Co.), 

, 660 (1st Cir. BAP
2013)). The Circuit specifically rejected the notion that § 1129(a)(3) forecloses
confirmation of a plan that relies on income from criminal activity, as held by some
bankruptcy courts considering whether to dismiss a case based on a debtor’s
involvement in the marijuana business. 

acknowledged that there may be
consequences arising from a debtor's connections with criminal activity, but denial of
confirmation under § 1129(a)(3) is not one of them. See 

                                             11
Jensen (In re Medpoint Mgmt., LLC), 

(9th Cir. BAP June 3,

2016); In re Johnson, 

, 56-57 (Bankr. W.D. Mich. 2015). Cf. In re

Rent-Rite Super Kegs W. Ltd., 

, 810 (Bankr. D. Colo. 2012) (noting

that, where a chapter 11 debtor rented warehouse space to tenants who

were growing marijuana, conversion of the case would require the trustee

to be responsible for a site where continuing criminal conduct is taking

place, raising a question of feasibility of chapter 7 estate administration).

       Additionally, some courts have held that a bankruptcy filing or a

plan of reorganization proposed by a debtor who is involved in an illegal

enterprise is not in good faith, even where the debtor does not have a

subjective bad motive, is in legitimate need of bankruptcy relief, and there

are no other indicia of an attempt to abuse the bankruptcy process. In re

; see also In re Rent-Rite Super Kegs W. 

.9 Related to the good faith analysis, some courts have concluded that

a debtor engaged in an illegal business who seeks bankruptcy relief comes

into court with unclean hands and is not eligible for relief. In re Rent-Rite

Super Kegs W. 

; cf. In re Medpoint Mgmt., 

(petitioning creditors who knew the putative debtor was engaged in




       9
       The Ninth Circuit appears to have rejected this line of reasoning, at least as it
pertains to plan confirmation. See 

n.3 (noting that the good faith
confirmation requirement pertains to a plan’s proposal, not its contents).

                                            12
a federally prohibited medical marijuana business had unclean hands and

could not seek relief from the bankruptcy court).

      The reported decisions also illustrate that the nature and extent of

debtors’ involvement in the marijuana business can vary widely. Compare

In re 

(where the debtor grew and sold marijuana and

leased premises to a marijuana dispensary), with In re Rent-Rite Super Kegs

W. 

(where the debtor derived about 25% of its income

from leasing space to a marijuana grower). The connection between the

debtors’ illegal business and the bankruptcy case can also vary: some

debtors attempt to reorganize and continue their marijuana-related

business, see In re Way to Grow, 

, while other debtors

wish to use the bankruptcy process to sever their connection to the

business, see In re Olson, 

at *3 (where the debtor declared,

“I wish only to terminate any dealings with [a marijuana dispensary

tenant] and to sell my property and pay my creditors in full.”).

      We believe that the stated reluctance in this Circuit to adopt per se

bright-line rules requiring the immediate disposition of bankruptcy cases

in which marijuana activity is present, and the flexible cause standard

under § 1307(c), coupled with the abuse of discretion standard of review on

appeal, give bankruptcy courts appropriate latitude to deal with these

variations.




                                       13
      Against this backdrop, the bankruptcy court dismissed the Burtons’

chapter 13 case pursuant to §§ 105(a) and 1307(c), finding that their

ownership interest in Agricann constituted “cause” for dismissal10 because

the continuation of the case would likely require the trustee or the court to

become involved in administering the proceeds of the Agricann litigation,

which the court implicitly found would be tainted as proceeds of an illegal

business. The bankruptcy court did not err in this finding, nor did it abuse

its discretion in dismissing the case on those grounds.

      Moreover, the court sufficiently articulated the legal and factual bases

for its ruling. It is undisputed that the Burtons own an interest in Agricann,

an entity that was engaged in a business that is illegal under federal law,

and that interest became property of the estate when they filed their

chapter 13 petition. Whether Agricann is currently actively engaged in

growing or selling marijuana is irrelevant, given that Agricann is a plaintiff

in litigation seeking to recover damages consisting at least in part of profits

lost as a result of breaches of contracts related to the growing and selling of

marijuana. As such, any proceeds received from the litigation would

represent profits from a business that is illegal under federal law.




      10
         Trustee assumes on appeal that the bankruptcy court dismissed the case for bad
faith. To the contrary, the bankruptcy court made no bad faith finding, instead
determining that the Burtons’ connection with the marijuana business in the
circumstances presented here was itself “cause” for dismissal.

                                          14
         The Burtons contend that the bankruptcy court should have held an

evidentiary hearing to determine the true nature of Agricann’s operations

and the value of the Burtons’ interest in that entity, arguing that there was

no evidence that it was involved in any of the activities prohibited by the

CSA. But the bankruptcy court did not err in ruling on the evidence it had

before it. It based its ruling on the undisputed fact that Agricann, in which

the Burtons held a membership interest, was a plaintiff in litigation seeking

recovery for breaches of contract relating to growing and selling marijuana.

The Burtons point to no disputed material factual issue, nor do they

describe any evidence they would have presented to resolve any such

issue.

         In response to the court’s OSC, the Burtons needed to produce

evidence to satisfy the court that its ownership interest in Agricann was not

cause for dismissal. The Burtons did not do so.11 With respect to the value

of the litigation, they provided only a foundationless, conclusory, and

equivocal statement that they did not expect to receive any proceeds from

the Agricann litigation after payment of a contingency fee and repayment

of a litigation loan. This statement was far from a categorical denial that the



         11
         We note that the bankruptcy court found not credible the Burtons’ assertion
that Agricann’s litigation claims were worthless. Ordinarily, credibility determinations
are not proper absent an evidentiary hearing. However, we interpret the bankruptcy
court’s credibility determination (to which the Burtons do not assign error) as a finding
that the Burtons did not meet their burden of proof.

                                            15
claims had value, and the Burtons provided no details or documentary

evidence to support it. While we cannot agree with the bankruptcy court’s

blanket assertion that Agricann’s pursuit of these claims was indicative, per

se, that they had value, in light of Agricann’s undoubted legal obligation

under the litigation funding agreement fully to pursue the claims, we

discern no evidentiary support in the record for the Burtons’ assertions that

the litigation would not result in their receipt of any litigation proceeds.

      The Burtons’ next arguments misconstrue the court’s ruling. They

argue that the bankruptcy court erred in concluding that they were

involved in any business activities that violated the CSA, such as

manufacturing, distributing, or dispensing marijuana. They also contend

that dismissal was not warranted because they did not propose to fund

their plan with proceeds generated by the illegal marijuana business. But

the court’s ruling was not based on those factors; its concern was that any

litigation recovery entering the bankruptcy estate would constitute

proceeds from a federally prohibited business, regardless of whether or not

the business was still engaged in activities prohibited by the CSA.

      The Burtons also argue that the bankruptcy court was not required to

dismiss their case, citing In re Johnson and In re McGinnis, 

(Bankr. D. Or. 2011). In Johnson, the bankruptcy court permitted a debtor to

remain in chapter 13 on condition that he discontinue growing, selling, and

transferring marijuana and cease using property of the estate to further the


                                       16
marijuana 

. And in McGinnis, the court stated that if

the debtor could propose a plan meeting the requirements of the

bankruptcy code, it was prepared to allow its 

.

      But the Burtons read too much into these cases. Although it is true

that a bankruptcy court has broad discretion in deciding whether to

dismiss a case, a particular court’s signal that it might permit a case to

continue under certain circumstances does not create a rule that all

bankruptcy courts must, in every instance, permit a debtor with ties to the

marijuana business to stay in bankruptcy. To the extent a court has

discretion to decline to dismiss such a case, that result would seem

appropriate only if the case were otherwise in compliance with the Code

and rules. Here, there were numerous unresolved issues that would have

supported dismissal but that did not arise out of the Burtons’ connections

with the marijuana business. For example, the Burtons’ eligibility for

chapter 13 was called into question when Stratton Restoration filed a proof

of claim for $2.4 million, and, although the case was pending over a year,

the Burtons had failed to propose a confirmable plan.

      Finally, the Burtons argue that Congress deliberately chose not to

impose limitations on the ability of medical marijuana businesses to file for

bankruptcy. In support, they point to § 362(b)(23), which excepts from the

automatic stay an eviction action seeking possession of a residential

property where the tenant is engaging in the illegal use of controlled


                                       17
substances. This argument was not raised before the bankruptcy court, and

in any event reflects a complete misreading of the cited statute. We need

not address it further. Roberts v. Erhard (In re Roberts), 

, 881 (9th

Cir. BAP 2005).

                                CONCLUSION

      The Burtons failed to demonstrate that their ties to Agricann would

not result in proceeds of an illegal business becoming part of the

bankruptcy estate, requiring the trustee and the court to administer assets

that constitute proceeds of activity criminalized by the CSA. Under the

facts presented, the bankruptcy court did not abuse its discretion in

dismissing the case for that reason. Accordingly, we AFFIRM.




                                        18