Laurel M. Isicoff, Chief United States Bankruptcy Judge
This matter came before me on December 8, 2016, at 1:30 p.m. upon Ocean Bank's Motion for Entry of an Order (I) Dismissing the Debtor's Chapter 11 Case or, Alternatively, (II) Granting Relief from the Automatic Stay (the "Motion") (ECF #55). Having considered the pleadings,
Ocean Bank holds a first mortgage that is secured by the building and land that make up the Commercial Property. (Ex. 2 p. 27-43). Ocean Bank and the Debtor have had a relationship for over a decade and Ocean Bank served as the primary lender and depository in regards to a series of United States Small Business Administration Loans ("SBA Loans") and non-SBA guaranteed loans made to the Debtor and its affiliates.
On April 20, 2010, the Debtor and its affiliates filed a state court lawsuit raising several lender liability claims against Ocean Bank.
On August 16, 2012, the state court entered summary judgment in favor of Ocean
Final judgment awarding Ocean Bank attorney fees in an amount of $841,099.03 was entered in the state court on February 19, 2015. (Ex. 8). The Debtor unsuccessfully appealed that judgment to the Third District Court of Appeal. (Ex. 9). The state court set a foreclosure sale in accordance with the February, 2015, judgment for May 31, 2016. (Ex. 10). The night before the sale, the Debtor removed the state court case to the United States District Court which removal cancelled the foreclosure sale. (Ex. 11). Soon thereafter, the case was remanded to the state court (Ex. 13) and a second foreclosure sale was set for July 28, 2016. (Ex. 15).
The night before the second foreclosure sale, the Debtor removed the case to federal court again. (Ex. 16). The foreclosure sale was, again, automatically cancelled. (Ex. 17). The District Court remanded the case to state court and in its remand order enjoined the Debtor from any further removal of the state court case. (Ex. 18).
The third foreclosure sale was set for October 5, 2016. (Ex. 21). In the days leading up to the third sale, the Debtor filed multiple emergency motions in the state court to delay the October 5 sale. (Exs. 22, 24, 25). The state court judge denied the motions and further ordered that "no further Motions to Cancel the Sale or Motions for Reconsideration will be entertained by the Court prior to tomorrow's sale date." (Ex. 27). The day before the third foreclosure sale, the Debtor filed this Chapter 11 case. (ECF #1).
Shortly after the Debtor filed its petition, Ocean Bank filed this Motion arguing that the case should be dismissed for cause under 11 U.S.C. § 1112(b)(1) because the case was filed in bad faith. Ocean Bank argues that the Debtor's bad faith is evidenced by the Debtor's repeated attempts to stop the foreclosure sale by using procedures in both the state and federal court and using the bankruptcy court as a last resort when the prior procedures did not yield the Debtor's desired results. (ECF #55).
At the hearing on the Motion, the Debtor acknowledged that the timing of the filing was unfortunate, but was really due to the fact that the Debtor was acting without advice of bankruptcy counsel when all those prior actions occurred. This argument is unpersuasive. The Debtor's principal is a lawyer, and also apparently the author of most, if not all, of the pleadings that were filed in the proceedings leading up to the case, and the author, or co-author of some of the pleadings that have been filed in this case.
Nonetheless, the Debtor urges that it filed bankruptcy with the intention of reorganizing its business, which business the Debtor alleges currently consists of leasing portions of the Commercial Property to its affiliates — Pharmaquick, LLC ("Pharmaquick"), Rosenbaum International Law Firm, P.A., and Bonino Investment Group, LLC; and adding another tenant — its affiliate Modern Pharmacy, LLC ("Modern Pharmacy").
At the December 8 hearing Ocean Bank argued that, in addition to the Phoenix Piccadilly factors that it raised in the Motion, the Plan provided further support for dismissal since the Plan is based on income generated from marijuana. Ocean Bank pointed out that every court in the country that has dealt with a plan funded in whole or in part by the sale of marijuana has refused to confirm the plan. The Debtor responded that its proposed tenant, later revealed to be Modern Pharmacy, is going to apply for all the appropriate licenses under state and federal law necessary to sell medical marijuana, making its plan confirmable. At the hearing the Debtor also stated that Modern Pharmacy and Pharmaquick are already selling some kind of marijuana based drugs.
At the conclusion of the hearing on December 8, I directed the Debtor to file an amended plan that either did not depend on marijuana as an income source, or better addressed several shortfalls with the plan structure. I also ordered the Debtor and Ocean Bank to file memoranda of law on the marijuana issue if the amended plan was going to rely on marijuana income. The Debtor then filed its First Amended Chapter 11 Plan of Reorganization (the "Amended Plan")(ECF #97). The Amended Plan continues to rely on income generated from medical marijuana to make plan payments, including payments to Ocean Bank tied to the amount of income generated from the marijuana business.
11 U.S.C. § 1112 lays out a non-exclusive list of reasons a court should consider dismissal of a chapter 11 case, including "for cause".
The Eleventh Circuit in Phoenix Piccadilly, Ltd. v. Life Insurance Co. of Virginia (In re Phoenix Piccadilly, Ltd.), 849 F.2d 1393 (11th Cir. 1988), listed a number of subjective factors in determining whether a dismissal for bad faith is appropriate. The factors include whether:
Phoenix Piccadilly, 849 F.2d at 1384-95.
The Debtor has only one asset
In determining whether dismissal is appropriate due to lack of good faith I may also consider whether the Debtor has the ability to reorganize itself. See In re North Redington Beach Associates, Ltd., 91 B.R. 166, 169 (Bankr. M.D. Fla. 1988). If after considering the economic realities of the Debtor's situation, I believe that there is no realistic chance for the Debtor to successfully reorganize, the case should be dismissed. In re Albany Partners, Ltd., 749 F.2d at 674. See also In re Natural Land Corp., 825 F.2d 296 (11th Cir. 1987). Accord 11 U.S.C. § 1112(b)(4)(J).
The Debtor argues that it will be able to prove feasibility at confirmation. Modern Pharmacy, the proposed tenant, has apparently applied for both state and federal approval to cultivate and sell marijuana; however, Modern Pharmacy has yet to have its applications granted (ECF #118).
In In re Rent-Rite Super Kegs W. Ltd., 484 B.R. 799, 809 (Bankr. D. Colo. 2012), the court ruled it would dismiss or convert the debtor's chapter 11 case because the debtor derived 25% of its revenues from leasing space to a tenant who was engaged in growing marijuana in a business legal under state law, but which business did not have DEA approval. The court noted that even if there were no good faith requirement in section 1129, the court could not confirm a plan that relied on income derived from a criminal activity.
In In re Jerry L. Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015) the U.S. Trustee filed a motion to dismiss the chapter 13 case of a debtor whose income was derived partially from the cultivation and sale of marijuana to three patients to whom he also provided caregiver services. The debtor, who was licensed to grow and sell marijuana under state law grew the marijuana in his home. The debtor also had social security income which income he testified was the source of his chapter 13 payments to the chapter 13 trustee. The court held that, notwithstanding that the debtor's payments were from an "untainted" source, the debtor's continuing operation of a marijuana business, even if the income were segregated, would require the court, the trustee, and even the debtor (who under chapter 13 retains property of the estate)
In In re Arenas, 535 B.R. 845 (10th Cir. BAP 2015), a chapter 7 case was filed by a state-licensed marijuana grower and his wife, whose income also included lease income from a state licensed marijuana dispensary. The U.S. Trustee filed a motion to dismiss the case on the basis that the chapter 7 trustee could not administer the assets — it would be a violation of federal law to which the trustee is subject. In response the debtors filed a motion to convert the case to a case under chapter 13 which motion the bankruptcy court denied. The bankruptcy court ruled that because the debtors' plan would have been funded from an activity illegal under Federal
Even if the Debtor was otherwise of "pure mind and heart" when this case was filed, the very fact that the Amended Plan is based on income derived from the sale of marijuana can be deemed "bad faith". In Arenas the B.A.P. affirmed the bankruptcy court's finding that, notwithstanding that the debtors appeared "to be sincere and credible" and "their motives in seeking bankruptcy relief were not improper", nonetheless, "[i]t is objectively unreasonable for them to seek Chapter 13 relief whether their intentions are kindly or not" and, therefore, the B.A.P. upheld the bankruptcy court's finding of bad faith. 535 B.R. at 852-53. Accord In re Jerry L. Johnson, 532 B.R. at 53.
The Debtor argues that Modern Pharmacy should have a good chance of approval under the new Florida law because two of its principals already have licenses to handle Scheduled substances. However, in addition to the fact that whether Modern Pharmacy will be approved by the State of Florida to manufacture or sell medical marijuana is highly speculative (the rules and regulations haven't even been adopted yet), it is also irrelevant.
In each case where the court has denied confirmation or dismissed a case stemming from funding dependent in whole or in part from marijuana, the marijuana source of funding was legal under the relevant state law. The issue is whether Modern Pharmacy would be approved under Federal law to manufacture or sell marijuana. As of now, in all the years that marijuana has been explored as an option for treatment, only the University of Mississippi has ever received approval by the Federal government to grow, harvest, and store bulk marijuana and purified elements of marijuana for use by researchers. Thus it is highly unlikely, and at a minimum, at this juncture an extremely remote possibility, that the Debtor will receive approval from the Federal government.
In sum, in order to confirm the Amended Plan, the Debtor would face several hurdles including (a) proving by confirmation that Modern Pharmacy's business operation would be legal under both state and federal law and (b) proving that the income stream from the medical marijuana
It is not necessary to wait until a confirmation hearing. First, the Debtor cannot rid itself of the taint of the bad faith filing. See In re Natural Land Corp., 825 F.2d at 296; Albany Partners, 749 F.2d at 670. Second, the Amended Plan is based on an enterprise illegal under Federal law, and therefore one that I cannot confirm because the Debtor cannot satisfy the requirements of 11 U.S.C. § 1129(a)(3). Third, the Amended Plan is highly speculative. As the United States Supreme Court held in a slightly different context, effective reorganization means "there must be `a reasonable possibility of a successful reorganization within a reasonable time.'" United Savings Ass'n of Texas v. Timbers of Inwood Forest, 484 U.S. 365, 376, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988).
So, it is clear that this case is ripe for dismissal — both for subjective bad faith and objective bad faith; however, there is significant non-insider unsecured debt and I am not convinced at this juncture that dismissal is in the best interests of those creditors. It appears this case should remain in bankruptcy. So the motion to dismiss is DENIED.
Ocean Bank alternatively argues that, at a minimum it is entitled to relief from stay. I agree. While I may have determined that, notwithstanding the multiple indicia of bad faith, dismissal is not immediately appropriate, I nonetheless find that those same factors warrant stay relief. See Natural Land Corp., 825 F.2d at 296.
In addition, Ocean Bank, who has been receiving adequate protection payments
Nonetheless, due to the Debtor's bad faith in filing this case and the Debtor's inability or unwillingness to propose a confirmable plan, Ocean Bank is granted relief from stay subject to the conditions set forth below.
Based on the foregoing it is ORDERED AS FOLLOWS:
11 U.S.C. § 1112(b)(4).
