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In re Cook Investments NW, SPNY, LLC

United States District Court, W.D. Washington, Tacoma

March 26, 2018

In re COOK INVESTMENTS NW, SPNWY, LLC., et al., Debtors,
v.
COOK INVESTMENTS NW, SPNWY, LLC., et al., Appellees. GREGORY M. GARVIN, Acting United States Trustee for Region 18, Appellant,

          ORDER DENYING TRUSTEE'S MOTION TO STAY

          BENJAMIN H. SETTLE, UNITED STATES DISTRICT JUDGE.

         This matter comes before the Court on the motion to stay judgment pending appeal filed by Appellant Gregory Garvin, Acting United States Trustee for Region 18, (“Trustee”). Dkt. 18. The Court has considered the pleadings filed in support of and in opposition to the appeal and the remainder of the file and hereby denies the motion for the reasons stated herein.

         I. PROCEDURAL AND FACTUAL BACKGROUND

         On November 21, 2016, Cook Investments NW, SPNWY, LLC filed a Chapter 11 voluntary petition in the Western District of Washington United States Bankruptcy Court. Dkt. 12, Excerpts of Record (“ER”) at 2. On December 15, 2016, the bankruptcy court ordered joint administration of related bankruptcy cases joining the voluntary bankruptcy petitions of Cook Investments NW, DARR, LLC (“Darrington”); Cook Investments NW, FERN, LLC; Cook Investments NW, LLC (“Cook Investments”); and Cook Investments NW, ARL, LLC (collectively, with Cook Investments NW, SPNWY, LLC, referred to as “Debtors”). ER 43-44.

         Michael Cook owns and manages the Debtors. In 2006, Cook Investments secured a loan from Columbia State Bank (“Bank”). Mr. Cook personally guaranteed the loan and the note was also secured by Debtors' properties. Each of the four debtors, exclusive of Cook Investments, owns a commercial business property. Cook Investments defaulted on the loan, the Bank obtained a judgment against Cook Investments, and the Bank sought to enforce the judgment forcing the Debtors to file for bankruptcy protection.

         In 2015, Darrington leased part of its property to N.T. Pawloski LLC, d\b\a Green Haven. The lease term is for five years with an option to renew for an additional five years and requires Green Haven to pay $10, 000 per month. Relevant to the appeal, Green Haven is a state-licensed grower of marijuana and the lease prohibits Green Haven from using the premises for any purpose other than growing marijuana.

         On January 18, 2017, the Trustee moved to dismiss the petition for cause. ER 45- 51. The Trustee argued that the petition should be dismissed for gross mismanagement of the estate because leasing premises to an entity that grows marijuana violates the Controlled Substances Act, 21 U.S.C. § 801 et seq. Id. On March 9, 2017, the bankruptcy court denied the motion with leave to renew because Debtors asserted that they could propose a plan that specifically rejected the Green Haven lease. ER 139-145.

         On March 28, 2017, Debtors filed a second amended plan of reorganization (“Plan”). ER 155-72.

         On April 3, 2017, Debtors filed a motion for order authorizing rejection of unexpired lease requesting that the bankruptcy court reject the Green Haven lease. ER 173-76.

         On April 27, 2017, the Trustee filed an objection to the Plan arguing that “any confirmation order and related plan injunctions entered in this case would tacitly promote ongoing criminal conduct” regardless of whether the Plan accepted or rejected the Green Haven lease. ER 193-99. The Trustee sought rejection of the Plan because it did “not meet the confirmation requirements of 11 U.S.C. § 1129(a)(3).” ER 194. Section 1129(a)(3) requires that the “plan has been proposed in good faith and not by any means forbidden by law.” On May 22, 2017, the bankruptcy court granted the motion to reject the Green Haven lease and deemed the lease “rejected pursuant to Bankruptcy Code § 365(a), effective immediately.” ER 200-201.

         On June 21, 2017, the bankruptcy court confirmed the Plan. ER 234-243. In confirming the Plan, the bankruptcy court considered the interpretation of § 1129(a)(3). The bankruptcy court rejected Debtors' narrow interpretation of the section where a bankruptcy court “should not look to the content of the plan at all in analyzing compliance” with the code. ER 239. Instead, the bankruptcy court concluded that, “when [it] is presented with an undisputed, known criminal violation, the Court cannot ignore [the violation] and fail to consider whether [the court] is confirming a plan that is premised on known illegal behavior.” ER 241. Under this interpretation of § 1129(a)(3), the bankruptcy court found and concluded as follows:

Debtors are presenting a plan based on income of all other Debtors. Payments under the plan will be made from non-marijuana related income. The lease to Green Haven is not only not assumed in the Second Amended Plan, it has been specifically rejected. The secured creditor has agreed to its treatment, and unsecured creditors are to be paid in full within five months of confirmation. The Court concludes Debtors' Plan is proposed “in good faith and not by any means forbidden by law” as required by Section 1129(a)(3).

         ER 242. This appeal followed.

         On July 27, 2017, the Trustee filed a motion to stay the confirmation pending appeal. Dkt. 5. The Trustee argued that “section 1129(a)(3) of the Bankruptcy Code prohibits the confirmation of a chapter 11 plan that invites the violation of federal criminal law” and that courts of equity should not be used to “facilitate illegal conduct.” Id. at 8. On August 24, 2017, the Court denied the ...


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