In re Mayer

1

In re Ryan Michael Mayer, Debtor.

No. 2:21-bk-06572-DPC

United States Bankruptcy Court, D. Arizona

January 31, 2022

(Not for Publication - Electronic Docketing ONLY)^[1]

Chapter 13 Proceedings

UNDER ADVISEMENT RULING RE: MOTION TO DISMISS DEBTOR'S CASE PER 11 U.S.C. §§ 1307(c) AND 105(a)

Daniel P. Collins, Bankruptcy Judge

Ryan Michael Mayer ("Debtor") filed this chapter 13 on August 25, 2021 ("Petition Date"). On September 23 2021, Creditor Steven Varela ("Varela") filed a Motion to Dismiss Debtor's case ("Dismissal Motion") for "cause" under 11 U.S.C §§ 1307(c)^[2] and 105(a) on the grounds Debtor's ownership interest in, and sole source of income from, a marijuana-related business violated the Federal Controlled Substance Act ("CSA").^[3] The chapter 13 trustee Edward Maney ("Trustee"), joined the Dismissal Motion.^[4] The Office of the United States Trustee ("UST"), through Elizabeth Amorosi, filed a Statement of Position supporting the dismissal of Debtor's chapter 13 case.^[5] The Court held oral argument on the Dismissal Motion on October 19, 2021 ("Initial Hearing").^[6] At the continued hearing on November 23, 2021 ("Continued Hearing"), Debtor suggested he could fund a full-payment chapter 13 plan through legally obtained assets.^[7]

Having heard the parties' arguments and having reviewed their briefs, this Court now holds Debtor's case must be dismissed. Debtor's only reliable assets from which he could fund a chapter 13 plan come from a business whose operations violate the CSA. Debtor has not shown this Court evidence of any non-CSA violative assets which could support a viable or feasible chapter 13 plan. The Dismissal Motion is hereby granted.

I. BACKGROUND

A. Debtor's Bankruptcy Filings.

Debtor filed his Schedules and Chapter 13 Plan on September 9, 2021.^[8] Debtor is the President of Rosinbomb, a Nevada corporation ("Rosinbomb").^[9] As of the Petition Date, Debtor had served as Rosinbomb's President for six years.^[10] According to Debtor's Schedule I, Debtor's sole source of income is his $7, 500 monthly salary from Rosinbomb.^[11]

Debtor's Schedule A/B lists 11 million shares of restricted common stock in Rosinbomb. The value of that stock was not identified.^[12] On the Petition Date, Rosinbomb's stock was listed for $1.40 per share on the Over-the-Counter Market.^[13] According to Rosinbomb's Quarterly Report ending June 30, 2021, Debtor held 28 percent of Rosinbomb's outstanding common stock.^[14]

B. Rosinbomb's Business Operations.

Rosinbomb, formerly known as Maverick Technology Solutions Inc., is a Nevada corporation with its principal place of business in Phoenix, Arizona.^[15] Rosinbomb is authorized to conduct business in Arizona but engages in business nationwide.^[16]

Rosinbomb manufactures and sells organic extraction presses utilizing a combination of heat and pressure to generate organic concentrates.^[17] Rosinbomb's product lines consist of two extraction presses-the "Rosinbomb Rocket" and the "M-60" (collectively the "Machines")-and associated relevant accessories.^[18] Rosinbomb's Machines are primarily used to extract and process marijuana rosin. ^[19] Marijuana, including its rosin, is listed as a Schedule I drug under the CSA.^[20]

Although Debtor asserts Rosinbomb's Machines are also used to extract oils from various materials such as peanuts and lavender, Debtor failed to show any sales going to federally legal businesses, despite the Court's request.^[21] At the meeting of creditors, Debtor testified that at least 30 percent of Rosinbomb's sales were attributable to the M-60 Model, which is marketed exclusively to commercial marijuana rosin producers.^[22]Debtor further acknowledged that Rosinbomb's Machines were not only sold direct-to-consumer but at marijuana dispensaries and marijuana grow operations.^[23] Rosinbomb's website, advertisements, investor solicitation materials, and Machines' instructions all target the marijuana industry.^[24] One article featured by Weedmaps.com^[25] deemed the Rosinbomb Rocket "one of the best personal use rosin presses on the market."^[26] In another article spotlighting Rosinbomb's feature in Weedmaps.com, Rosinbomb's CEO described Rosinbomb "[a]s the global leader in solventless rosin press technology."^[27] Rosinbomb's website also includes testimonials from experts and entrepreneurs in the marijuana industry about the Machines' application to marijuana rosin.^[28] Rosinbomb's company spokesperson is Tommy Chong, a legendary figure in the marijuana industry.^[29]

C. The Parties' Arguments.

At the Initial Hearing, Varela and the Trustee argued Debtor's case was not filed in good faith because Debtor's ownership interest and sole source of income (collectively the "Assets") derived from the manufacture and sale of "drug paraphilia" in violation of the CSA.^[30] The Trustee further argued he would be exposed to liability under 18 U.S.C. § 2(a) and forfeiture under 21 U.S.C. § 853(c) by accepting chapter 13 plan payments from Debtor where such payments derived from Rosinbomb's federally illegal operations.^[31] Debtor responded proposing that he could fund a chapter 13 plan through an expected inheritance ("Inheritance") from his deceased father's estate.^[32] At the Continued Hearing, Debtor disclosed the Inheritance was subject to ongoing state court litigation.^[33] Debtor did not have any information relating to the amount of the Inheritance or when it would come to fruition.^[34] Given the uncertainty of the Inheritance, Debtor filed an Amended Plan proposing to fund the Amended Plan with income generated by a newly formed business- Mayer Enterprise, LLC ("Mayer Enterprise").^[35] Debtor formed Mayer Enterprise after the Initial Hearing.^[36] Unlike Rosinbomb, Mayer Enterprise would market and sell an extraction press specifically designed to extract cannabidiol (CBD) from hemp plants.^[37] Debtor claims this business would not violate the CSA.^[38]

The UST and Varela maintained that the Court should dismiss Debtor's case because Mayer Enterprise has no financial track record, and the Inheritance was the subject of ongoing litigation.^[39] The Trustee argued that, despite Debtor's proposal to fund his Amended Plan through legal sources, Debtor could not segregate his CSA violative Assets from any legally obtained income.^[40]

II. JURISDICTION

The Court has jurisdiction over this bankruptcy case and the prospect of dismissing this case pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(A).

III. ISSUE

A. Where Debtor's ownership interest in and sole regular source of income derives from Rosinbomb, does this income source violate the CSA?

B. Is Debtor capable of funding a chapter 13 plan through non-CSA violative assets?

IV. ANALYSIS

A. Debtor's Income is Rooted in a Business Which Violates the CSA.

Pursuant to § 1307(c), a court may dismiss a chapter 13 case for "cause." Section 1307(c) sets forth a nonexclusive list of factors that constitute "cause" for dismissal.^[41] In In re Burton, the 9th Circuit Bankruptcy Appellate Panel ("BAP") held that § 1307's flexible "cause" standard, "coupled with the abuse of discretion standard of review on appeal," gives bankruptcy courts the authority to dismiss a debtor's case in which marijuana-related business activity is present.^[42] However, the 9th Circuit BAP has made clear that "the mere presence of marijuana near a bankruptcy case does not automatically prohibit a debtor from bankruptcy relief."^[43]

1. The Controlled Substance Act.

Under § 843(a)(7) of the CSA, it is a federal crime to "manufacture" or "distribute" any "equipment, chemical, product or material which may be used to manufacture a controlled substance . . . knowing, intending, or having reasonable cause to believe that it will be used to manufacture a controlled substance . . ."^[44]

The CSA also makes it unlawful for any person to offer or sell "drug paraphernalia," which is defined as any equipment or product "use[d] in manufacturing . . . producing, processing . . . or otherwise introducing . . . a controlled substance."^[45]Section 863(e) of Title 21 of the United States Code sets forth a nonexclusive list of factors that a court may consider when determining whether an item constitutes "drug paraphernalia," including: (1) instructions, advertisements, and descriptive materials accompanying the product; (2) expert testimony concerning the product's use; (3) how the product is displayed for sale; (4) the scope of the product's legitimate use in the community; and (5) the ratio of sales of the product to the total sales of the business enterprise.^[46]

There is no genuine dispute that Rosinbomb manufactures and sells "drug paraphernalia" in violation of the CSA.^[47] Here, the instructions, advertisements, and other descriptive materials accompanying Rosinbomb's Machines focus exclusively on the Machines' application to rosin.^[48] Second, the "Ask the Expert" section of Rosinbomb's website includes only testimonials promoting the Machines' use in the marijuana industry.^[49] Although Debtor argues Rosinbomb's Machines may be used in other industries, such as the peanut and lavender industry, Debtor failed to present the Court with evidence of any sales in other industries.^[50]

Even if the Court were to find that Rosinbomb's Machines do not constitute "drug paraphernalia," Rosinbomb is also violating § 843(a)(7) of the CSA. There is no dispute that Rosinbomb has "knowledge" that customers use the Machines to manufacture rosin. Rosinbomb most certainly has "reasonable cause to believe" its Machines are used for such purpose, given that Rosinbomb's website and marketing materials solely promote use of the Machines in the marijuana industry.^[51]

This Court finds Rosinbomb's business operations violate the CSA...