Way to Grow, Inc. v. Inniss (In re Way to Grow, Inc.)

610 B.R. 338

IN RE: WAY TO GROW, INC., Pure Agrobusiness, Inc., Green Door Agro, Inc., Debtors.

Way to Grow, Inc., et al., Appellants,

v.Corey Inniss, Appellee.

Civil Action No. 18-cv-3245-WJM

Bankruptcy Case Nos. 18-14330-MER

18-14333-MER

18-14334-MER

United States District Court, D. Colorado.

Signed September 18, 2019

Keri Lynn Riley, Lee Moss Kutner, Kutner Brinen, P.C., Denver, CO, for Appellants.

Annette Wanlass Jarvis, Dorsey & Whitney, LLP-Salt Lake City, Salt Lake City, UT, Gregory Scot Tamkin, Andrea Ahn Wechter Dorsey & Whitney, LLP, Denver, CO, for Appellee.

ORDER AFFIRMING DECISION OF BANKRUPTCY COURT

William J. Martinez, United States District Judge

Way to Grow, Inc. ("Way to Grow"), Pure Agrobusiness, Inc. ("Pure Agro"), and Green Door Agro, Inc. ("Green Door") (together, "Debtors"), appeal the bankruptcy court's decision to dismiss their Chapter 11 petitions "for cause" given that Debtors' business relies on selling equipment and supplies to persons and entities growing marijuana, and Debtors know that the equipment and supplies will be used to grow marijuana. Such conduct is legal under the laws of Colorado and California, where Debtors operate, but remains illegal under federal law.

For the reasons explained below, this Court affirms the bankruptcy court as to Way to Grow and Green Door for the reasons explained by the bankruptcy court. As to Pure Agro, the Court also affirms, but for a slightly different reason evident in the record.

I. STANDARD OF REVIEW

In reviewing a bankruptcy court's decision, the district court normally functions as an appellate court, reviewing the bankruptcy court's legal conclusions de novo and its factual findings for clear error. 28 U.S.C. § 158(a) ; In re Warren , 512 F.3d 1241, 1248 (10th Cir. 2008).

II. BACKGROUND¹

A. Origins of the Dispute

Appellee Corey Inniss ("Inniss") founded Way to Grow in Fort Collins in 2002 and eventually opened six more retail stores throughout Colorado. In re Way to Grow , Inc., 597 B.R. 111, 115 (Bnkr. D. Colo. 2018). In Debtors' words, Way to Grow's business model was "to market its stores as garden centers and carry high-end soil, nutrients, lights, and equipment to grow plants in both an indoor and outdoor setting." (ECF No. 27 at 7.)

In 2014, a man named Richard Byrd (not a party here) founded and became CEO of Pure Agro, which operates as a holding company. (Id. at 8.) In 2015, Pure Agro "acquired [Green Door], a Los Angeles-based hydroponic and gardening retail store." (Id. )

In January 2016, Inniss sold Way to Grow to Pure Agro for $25 million, with $2.5 million paid upfront and the remaining $22.5 million coming by way of a promissory note in Inniss's favor, secured by each Debtor's property (then-existing and after-acquired), accounts receivable, and inventory. Id. Inniss also received 12,500 shares of Pure Agro's common stock, amounting to a little more than 21% of Pure Agro's outstanding shares. Id.

Way to Grow's "operations ... remained largely unchanged" after Pure Agro's acquisition, "continu[ing] to market and sell high-end nutrients, soil, and equipment for growing plants in a soil-based or water-based medium." (Id. at 10.) Green Door "operated in a similar manner, selling similar products and gardening supplies in a retail setting." (Id. )

Sometime in 2017, Debtors defaulted on the promissory note. (Id. at 10–11.) Debtors blame Inniss (who continued as a consultant) and his ex-father-in-law (who became CEO of Pure Agro) for this default, accusing them of "inappropriate activities designed to strip the future cash flow away from [Way to Grow] and into their own pockets." (Id. ) In any event, in April 2018, Inniss filed a lawsuit in Larimer County (Colorado) District Court on his own behalf, and derivatively on behalf of Pure Agro, to appoint a receiver over Debtors. Way to Grow , 597 B.R. at 115.

B. Bankruptcy Proceedings

Before the state court could rule on Inniss's request for a receiver, each Debtor filed a Chapter 11 bankruptcy petition, and the three petitions were jointly administered. See Id. at 114. Debtors soon moved the bankruptcy court for permission to spend cash collateral to meet ongoing business expenses, representing that they "generally sell equipment for indoor hydroponic gardening and related supplies.... While the hydroponic gardening equipment may [be] and is used for many types of crops, the Debtors' future business expansion plan is tied to the growing cannabis industry which is heavily reliant on hydroponic gardening." (ECF No. 23-1 at 53.) But Debtors were quick to add, somewhat inconsistently, that they "do not own or do business with cannabis." (Id. )

The bankruptcy court did not rule on this motion before Inniss, appearing as a secured creditor, filed a motion asking the bankruptcy court to abstain in favor of the Larimer County receivership action, or to dismiss the petitions altogether. (ECF No. 27-1 at 32.) Regarding dismissal, Inniss argued, among other things, that the bankruptcy court should dismiss Debtors' petitions "for cause" under 11 U.S.C. § 1112(b) (discussed in detail below in Part III.A) because there was

no possibility of reorganization within a reasonable time as proceeds from the sale of the Debtors' products come from cannabis companies who violate federal law....

* * *

The Debtors' businesses are not the kind that can meet 11 U.S.C. § 1129(a)(3)'s good faith requirement [also discussed Part III.A] for confirming a plan because their sale of supplies and equipment to cannabis growers taints revenue and places assets at risk of forfeiture and seizure under federal law.

(ECF No. 27-1 at 56, 58.) Through later briefing, it became clear that the criminal prohibition Inniss believed Debtors were violating was the federal aiding and abetting statute, 18 U.S.C. § 2 —more specifically, that Debtors were aiding and abetting the growing of marijuana, which is prohibited under the Controlled Substances Act (sometimes referred to in the record as the "CSA"). (ECF No. 27-1 at 287–94.)

The bankruptcy court eventually held a four-day evidentiary hearing on these allegations. See Way to Grow , 597 B.R. at 114. It rejected the argument that Debtors could be found guilty of aiding and abetting a Controlled Substances Act violation. Id. at 123–27. The court reasoned that the evidence did not show the proper mens rea , namely, "shar[ing] the same intent as their customers to violate the CSA and willfully associat[ing] themselves with their customers' criminal ventures." Id. at 126. But the bankruptcy court went on to examine whether Debtors could be found guilty of violating 21 U.S.C. § 843(a)(7). See Id. at 127–32. As described in more detail below, this statute criminalizes selling goods with knowledge that they will be used to manufacture controlled substances.

No party had raised § 843(a)(7) as a potential basis for criminal liability. Regardless, the bankruptcy court found "ample evidence" that Debtors—referred to collectively—knew they were selling products that their customers would use to grow marijuana, which would be a violation of the statute. Id. at 129. Accordingly, the court agreed with Inniss that cause existed to dismiss Debtors' bankruptcy proceedings.

The bankruptcy court then asked whether Debtors could change their business model "to sever all ties to their marijuana customers," and thereby avoid dismissal. Id. at 132. The court found that sales to marijuana growers were such an important part of Debtors' business that it was "inconceivable" Debtors could "still operate profitably" without selling to those customers. Id. Thus, "[t]o prevent this Court from violating its oath to uphold federal law, under the specific facts of this case, the Court sees no practical alternative to dismissal." Id.

Finally, the bankruptcy court concluded by showing its full understanding of the real-world consequences of its ruling:

The result in this case may be viewed by many as inequitable. The Debtors are insolvent, and their business could benefit significantly from reorganization under the Bankruptcy Code. The Debtors likely did not seek bankruptcy relief in bad faith on a subjective standard. But for the marijuana issue, this would be a relatively run-of-the-mill Chapter 11 proceeding. As stated, even following those courts which have crafted alternatives to dismissal when debtors were violating the CSA would produce no practical or efficient alternative to dismissal in this case. At bottom, if the result in this case is unjust, Congress alone has power to legislate a solution.

Ironically, if Inniss, as the party arguing Debtors are violating federal law, wrests control of the Debtors back from Byrd in the [Larimer County lawsuit], he will almost certainly continue, and perhaps expand, the Debtors' ongoing marijuana-related operations. This irony is not lost on the Court but provides no legal basis for an alternate outcome. The Court casts no aspersions upon the Debtors or their businesses. The result in this case is dictated by federal law, which this Court is bound to enforce.

Id. at 133.

C. Motion to Stay Pending Appeal

Debtors immediately appealed to this Court and moved to stay the bankruptcy court's judgment pending appeal. (ECF No. 9.) Among Debtors' arguments was that the bankruptcy court improperly imputed the activities of Way to Grow to the other two Debtors, which was particularly problematic as to Pure Agro because it is a holding company that does not sell anything, so it arguably could not violate § 843(a)(7). (Id. ¶¶ 19–21.)

The Court denied the motion to stay pending appeal, for various reasons. (ECF No. 20.) As to Debtors' argument that the bankruptcy court erred by not distinguishing between Debtors for purposes of § 843(a)(7), the Court held that Debtors were not likely to succeed on the merits of this argument because nothing in the record showed that they argued to the bankruptcy court that the evidence was insufficient as to any particular one of them. (Id. at 6–7.) Moreover, Debtors had...