In re CWNevada LLC

602 B.R. 717

IN RE: CWNEVADA LLC, Debtor.

Case No.: 19-12300-MKN

United States Bankruptcy Court, D. Nevada.

Date: May 15, 2019

Filed June 03, 2019

Michael D. Mazur, Mazur & Brooks, A P.L.C., Las Vegas, NV, for Debtor.

ORDER REGARDING CREDITOR 4FRONT ADVISORS LLC'S MOTION TO DISMISS BANKRUPTCY PETITION OR, ALTERNATIVELY, MOTION FOR RELIEF FROM THE AUTOMATIC STAY TO ALLOW RECEIVERSHIP AND CONTEMPT PROCEEDINGS TO CONTINUE¹

Honorable Mike K. Nakagawa, United States Bankruptcy Judge

On May 15, 2019, the court heard Creditor 4Front Advisors LLC's Motion to Dismiss Bankruptcy Petition or, Alternatively, Motion for Relief from the Automatic Stay to Allow Receivership and Contempt Proceedings to Continue ("Dismissal Motion"). The appearances of counsel were noted on the record. After arguments were presented, the matter was taken under submission.

BACKGROUND

On April 16, 2019, a voluntary petition for Chapter 11 reorganization ("Petition") was filed by CWNevada LLC ("Debtor"). (ECF No. 1). Attached to the Petition is a "Resolution Authorizing Bankruptcy" that identifies BCP Holding 7, LLC ("BCP Holding") as managing member of the Debtor, and that authorizes BCP Holding to seek Chapter 11 relief for the Debtor. The Petition filed on behalf of the Debtor is signed by Brian C. Padgett ("Padgett") as manager of BCP Holding, and by Michael D. Mazur, as the Debtor's general counsel.

The voluntary Petition is a "skeleton" petition inasmuch as it is not accompanied by a schedule of assets and liabilities ("Schedules"), a statement of financial affairs (SOFA"), or any of the initial information required to obtain bankruptcy relief. Moreover, the Petition is not accompanied by a "creditor matrix" setting forth the names and addresses of the Debtor's creditors. The Petition is accompanied by an unsigned List of Creditors Who Have the 20 Largest Unsecured Claims and Are Not Insiders ("20 List"). (ECF No. 4). Only ten creditors are identified on the 20 List.²

On the same day the skeleton Petition and 20 List were filed, a Notice of Chapter 11 Bankruptcy Case ("Bankruptcy Notice") was issued by the clerk of the court informing creditors that a meeting of creditors would be held on May 16, 2019. (ECF No. 3). Because a creditor matrix was never filed by the Debtor, it appears that the Bankruptcy Notice was served only on the creditors appearing on the 20 List. (ECF No. 12).

On April 17, 2019, an Ex Parte Application for Order Authorizing Rule 2004 Examination ["2004 Exam"] of Brian C. Padgett ("2004 Exam Request") was filed by The CIMA Group, LLC ("CIMA Group"). (ECF No. 8). On April 19, 2019, the clerk of the court signed an order granting the request pursuant to Local Rule 5075(a)(2)(L) because the 2004 Exam Request sought to conduct the examination more than fourteen days later and did not include a request for production of documents ("CIMA 2004 Order"). (ECF No. 10). On the same date, CIMA Group filed a 2004 Exam notice which included a Subpoena for Rule 2004 Examination ("2004 Subpoena") that required the witness to produce various documents. (ECF No. 11).³

On April 23, 2019, 4Front Advisors LLC ("4Front") filed the instant Dismissal Motion seeking dismissal of the Chapter 11 case based on Section 305(a)(1),⁴ or, Section 1112(b).⁵ In the alternative, 4Front seeks relief from the automatic stay under Section 362(d) to allow it to proceed with collection activities under non-bankruptcy law. Numerous documents are attached to the Dismissal Motion and marked as exhibits "1" through "24." (ECF No. 18). In support of the Dismissal Motion, 4Front filed the declarations of Kris Krane ("Krane Declaration")⁶ and Cory L. Braddock ("Braddock Declaration").⁷ (ECF Nos. 20 and 21).⁸

On April 25, 2019, a combined joinder in the Dismissal Motion was filed on behalf of Highland Partners NV LLC, MI-CW Holdings NV Fund 2 LLC, and MI-CW Holdings LLC (collectively "Highland Partners"), as well as by Green Pastures Fund, LLC Series 1 (CWNevada, LLC), Jakal Investments, LLC, Green Pastures Group, LLC, Jonathan S. Fenn Revocable Trust, and Growth Properties, LLC (collectively "Green Pastures"). (ECF No. 26). In support of that combined joinder ("Highland Joinder"), Highland Partners and Green Pastures filed the declarations of David J. Malley, Esq. ("Malley Declaration"), Christopher R. Miltenberger, Esq. ("Miltenberger Declaration"), and Brandon Kanitz ("Kanitz Declaration"). (ECF Nos. 27, 28, and 29).

On April 26, 2019, a joinder in the Dismissal Motion was filed on behalf of Timothy Smits Van Oyen ("Van Oyen"). (ECF No. 37).

On May 2, 2019, a joinder in the Dismissal Motion was filed on behalf of MC Brands, LLC ("MC Brands"). (ECF No. 47).

On May 7, 2019, a limited joinder in the Dismissal Motion was filed on behalf of The CIMA Group ("CIMA Joinder"), to which is attached copies of three documents marked as exhibits "1" through "3." (ECF No. 50).

On May 7, 2019, Debtor filed an opposition to the Dismissal Motion ("Opposition") to which is attached four documents marked as exhibits "A" through "D." (ECF No. 51). The Opposition is supported by the Declaration of Brian C. Padgett ("Padgett Declaration"). (ECF No. 52). On the same date, Debtor filed oppositions to the Highland Joinder, as well as the joinders filed by Van Oyen and MC Brands. (ECF Nos. 54 and 55).

On May 8, 2019, Debtor filed an opposition to the CIMA Joinder ("Additional Opposition"). (ECF No. 56).

On May 8 and May 9, 2019, Debtor filed a request for judicial notice ("RJN") of numerous documents marked as exhibits "A" through "O." (ECF Nos. 57 and 60). Exhibits "A" through "J" apparently consist of copies of the "Register of Actions" or list of docket entries for proceedings of public record pending in State Court, and in this bankruptcy court.⁹ Exhibits "K" through "O" consist of documents that were not, until now, of public record.¹⁰

On May 13, 2019, 4Front filed a reply in support of the Dismissal Motion ("4Front Reply"), to which is attached five documents marked as Exhibits "A" through "E." (ECF No. 68). On the same date, Highland Partners filed a reply in support of the Highland Joinder ("Highland Reply"). (ECF No. 69). On the same date, CIMA Group filed a reply in support of the CIMA Joinder ("CIMA Reply"), to which is attached a single document marked as exhibit "1." (ECF No. 71).¹¹

DISCUSSION

Debtor is in the business of cultivating, producing, and distributing medical and recreational marijuana ("Marijuana Business"). See Padgett Declaration at ¶¶ 4-5. It also is in the business of producing and distributing products that contain cannabidiol ("CBD") which apparently are used, inter alia , to treat epilepsy ("CBD Business"). Id. at ¶ 6. Debtor apparently operates or once operated marijuana cultivation, production, or dispensary facilities at up to five Nevada locations: three in Las Vegas, one in North Las Vegas, and one in Pahrump. See CWNevada Investor Update, February 2016, attached as Exhibit "1" to Dismissal Motion, at pages 13-17; see also Benchmark Insurance Company - Workers Compensation and Employers Liability Insurance, 04/26/2019 to 04/26/2020, attached as Exhibit "N" to RJN and as Exhibit "A" to Opposition. Debtor's health plan coverage apparently encompasses 54 subscribers. See Health Plan of Nevada Bill Statement for May 2019, attached as Exhibit "M" to RJN and as Exhibit "B" to Opposition. Debtor apparently made a payment of $ 81,850 to the Nevada Department of Taxation ("NDOT") on April 23, 2019. See Marijuana Tax Return dated March 29, 2019, attached as Exhibit "K" to RJN and as Exhibit "D" to Opposition.¹²

Debtor's business operations apparently are authorized under Nevada law.¹³ Debtor's Marijuana Business is prohibited under federal law by provisions of the Controlled Substances Act, 21 U.S.C. § 841(a)(1) and 21 U.S.C. § 812(c), Schedule I(c)(10) [Marihuana] and Schedule I(c)(17) [Tetrahydrocannibinols].¹⁴ Debtor's CBD Business, however, may no longer be prohibited under federal law as a result of the Agriculture Improvement Act of 2018, Pub. L. 115-334, 132 Stat. 4490.

The Agriculture Improvement Act became effective on December 20, 2018, when the bill was signed into law. The Act amended the term "Marihuana" under the Controlled Substances Act to exclude hemp "as defined under section 1639o of Title 7." See 21 U.S.C. § 802(16)(B). The Act also amended Schedule I(c)(17) of the Controlled Substances Act to exclude from the definition of "Tetrahydrocannabinols" the "tetrahydrocannabinols in hemp (as defined under section 1639o of Title 7)." See 21 U.S.C. § 812(c), Schedule I(c)(17). Under 7 U.S.C. § 1639o(1), the term hemp "means the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannibinol concentration of not more than 0.3 percent on a dry weight basis." (Emphasis added.) Because products derived from hemp plants containing restricted concentrations of tetrahydrocannabinols ("THC"), which is the active ingredient in marijuana, are no longer in violation of the Controlled Substances Act, the Food and Drug Administration ("FDA") apparently will assume a regulatory role for such products.¹⁵

Under these circumstances, the portion of the Debtor's operations devoted to the Marijuana Business appears to be in violation of federal law, while the portion devoted to the CBD Business might be excluded from the Controlled Substances Act if the CBD products sold by the Debtor are derived from the type of hemp permitted under federal law. Notwithstanding its operations of these two businesses in accordance with Nevada law, Debtor apparently defaulted on payment of many of its obligations, including the claim of 4Front. Before 4Front's Receivership Application could be heard by the State Court, however, Debtor filed its voluntary Chapter 11 Petition.

No one disputes that the Debtor is a limited liability company...