“[E]trapped between his involvement in a business legal under Arizona laws but illegal under federal law,” a debtor’s Chapter 13 petition was recently denied due to his undisputed violations of law. on controlled substances.
In November 2020, Arizona voters backed a ballot initiative legalizing the recreational use of marijuana. Of course, Arizonans needed a place to buy the newly legalized substance, and retail marijuana dispensaries sprung up to meet the demand. Like many other retail businesses, these dispensaries needed suppliers, who in turn needed manufacturers, who themselves had to source materials.
Debtor Ryan Michael Mayer is chairman and significant shareholder of Rosinbomb, a Nevada company with its principal place of business in Phoenix. Rosinbomb manufactures and sells “biological extraction presses using a combination of heat and pressure to generate organic concentrates”. Rosinbomb sells two related products and accessories, the “Rosinbomb Rocket” and the “M-60”.
Faced with a large debt, Mayer filed a Chapter 13 petition in the United States Bankruptcy Court for the District of Arizona. Creditor Steven Varela – who had obtained judgment against Mayer in a Washington state court following Mayer’s illegal sale of Rosinbomb stock – asked for the motion to be dismissed given Mayer’s involvement in an industry illegal under federal law. The trustee in bankruptcy and the US trustee joined Mr. Varela’s motion.
Pursuant to 11 USC § 1307(c), a court may dismiss a Chapter 13 case for “cause.” The United States Court of Appeals for the Ninth Circuit has ruled that “the flexible cause standard of § 1307, coupled with the standard of abuse of appellate discretion, gives bankruptcy courts the power to dismiss the a debtor’s case in which commercial activity related to marijuana is present. .” However, “the mere presence of marijuana near a bankruptcy filing does not automatically bar a debtor from receiving bankruptcy relief.” In re Mayer, 2022 Bankr. LEXIS 256 (D. Arizona).
During the initial hearing of the case, the court asked the parties at what point a debtor’s connection to marijuana becomes too attenuated to require a dismissal. But in his view, the court refused to draw a hard line. Although Mayer did not directly sell marijuana, he operated a business that sold equipment to others to make cannabis-containing products. The nexus in the case was close enough given the close and exclusive ties between Rosinbomb – from which the debtor derived all of its income – and the marijuana trade – which remains illegal under federal law.
Although Mayer argued that Rosinbomb presses could be used to extract oils from various materials (e.g. peanuts or lavender), he could not prove any sales unrelated to marijuana. In fact, the M-60 press was marketed exclusively to commercial marijuana “rosin” growers. “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. However, rosin created from cannabis resin creates a concentrated form of marijuana, “commonly referred to as ‘dabs'”. See In re Mayer, 2022 Bankr. LEXIS 256 at n.20 (D. Arizona).
Given the court’s skepticism that profits from Rosinbomb would be used to make Chapter 13 plan payments, Mayer alternatively argued that he could fund a proposed payment plan through a related expected inheritance and sales. to a newly created CBD business. However, ongoing litigation tying up the inheritance (which was of an uncertain amount) made this source of funding too tenuous for the court to accept. Also, the CBD business was unproven, having no sales record.
Since Mayer’s income came entirely from Rosinbomb and all of Rosinbomb’s business involved the production of drug manufacturing equipment (in violation of the Controlled Substances Act), the court found a ground to dismiss Mayer’s bankruptcy petition, concluding that “[u]Unless and until federal law and Arizona law align to allow Rosinbomb machines to legally generate marijuana rosin, the debtor cannot seek bankruptcy protection. We will continue to monitor any alignment between federal law and the growing number of states legalizing marijuana and associated businesses, including New York.