You Can’t Go Bankrupt if It’s Illegal

10.07.2015

By Joan E. Collier

Well, this is an interesting turn of events. The U.S. Bankruptcy Court in Arizona recently held that if a debtor’s business is illegal under federal law, the creditor can’t file an involuntary bankruptcy petition against the debtor.

Here’s the story.

Mike Danzer of 7511 IRA Investments, LLC, Jason Jensen, and Robert Brown filed an involuntary chapter 7 petition against Medpoint Management, LLC back in October 2014.

Medpoint Management oversaw the operations of Arizona Nature’s Wellness (ANW), an Arizona nonprofit entity that holds an Arizona Department of Health Services-issued Dispensary Certificate. The Certificate allows ANW to operate the “Bloom”-branded medical marijuana dispensary under the Arizona Medical Marijuana Act (AMMA).

AMMA requires that all state-registered dispensaries “be operated on a not-for-profit basis,” and that dispensaries’ bylaws “contain such provisions relative to the disposition of revenues and receipts to establish and maintain [their] nonprofit character.” A.R.S. § 36-2806(A). The result has been a proliferation of for-profit dispensary-management entities, allowing the dispensaries themselves to maintain their nonprofit nature.

Medpoint is an Arizona LLC with two members: Ask Nice Twice, LLC (ANT), and Here Is Now, LLC (HIN). ANT is the manager of Medpoint. Yuri Downing is the sole owner of both ANT and HIN, and Medpoint’s statutory agent. Medpoint first came into contact with ANW when Medpoint purchased a 100 percent membership interest in Tier Management, LLC (Tier) from Danzer. At the time, TIER has a Cultivation and Dispensary Services Agreement with ANW

Got it?

Under the terms of the sale agreement, Tier, then controlled by Medpoint/Downing, continued servicing ANW.

But ANW terminated the Medpoint Service Agreement on May 27, 2014, saying it was dissatisfied with Medpoint’s performance under the service agreement. Things went downhill from there, with people loaning money back and forth. Medpoint defaulted on the loans, and the petitioners noted above sued to force it into Chapter 7.

Medpoint’s argument against the suit was that a bankruptcy trustee cannot lawfully administer a bankruptcy estate’s marijuana-related assets without violating the Controlled Substances Act (CSA).
 
In a similar case in Arizona (In re Arenas, 514 B.R. 887, 891–892 (Bankr. D. Colo. 2014)) the court held that “the inevitable illegality of the trustee’s administration of illegal estate assets constituted cause to dismiss.”

The petitioning creditors in the Arizona case denied that Medpoint was engaged in any illegal activity, noting that the Colorado case and other cited in Medpoint’s argument involved operating dispensaries or growers. Medpoint, they said, was merely a management company. It had a Federal Tax ID number and banked at Wells Fargo.

The court didn’t buy it. It dismissed the bankruptcy petition, basing its ruling on several points. It noted: “The Court observes, without deciding, that it is quite possible that Medpoint’s IP and the IP licensing revenues could be seized or forfeited, and that Medpoint could be or could have been guilty of facilitation of a crime under the CSA. … The Court finds that the prospects of a possible forfeiture or seizure of Medpoint’s assets poses an unacceptable risk to a chapter 7 estate and to a chapter 7 trustee.”

The takeaway? If you don’t want to end up in bankruptcy court, one alternative is to make sure your operation is illegal.

(Read more Work Comp Nation blogs here.)

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