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In re Burton

United States Bankruptcy Appellate Panel of the Ninth Circuit

January 14, 2020

In re: BRIGHAM A. BURTON, a/k/a Kent Burton and CARLY RAE BURTON, Debtors.
v.
EDWARD JOHN MANEY, Chapter 13 Trustee; STRATTON RESTORATION, LLC, Appellees. BRIGHAM A. BURTON, a/k/a Kent Burton; CARLY RAE BURTON, Appellants,

          Submitted Without Argument on November 21, 2019

          Appeal from the United States Bankruptcy Court for the District of Arizona Honorable Brenda Moody Whinery, Chief Bankruptcy Judge, Presiding

          Appellants Brigham A. Burton, a/k/a Kent Burton, and Carly Rae Burton, pro se on brief; Ross M. Mumme, Esq. on brief for Appellee Edward J. Maney, Chapter 13 Trustee.

          Before: LAFFERTY, TAYLOR, and FARIS, Bankruptcy Judges.

          OPINION

          LAFFERY, BANKRUPTCY JUDGE.

         INTRODUCTION

         Brigham and Carly Rae Burton appeal the bankruptcy court's dismissal of their chapter 13[1] case. The Burtons own the majority interest in Agricann, LLC ("Agricann"), an entity that was engaged in cultivating and selling marijuana, which, while legal under Arizona law, violated federal law. In response to the bankruptcy court's order to show cause why the case should not be dismissed based on the Burtons' interest in Agricann, the Burtons asserted that Agricann was no longer operating and was not being relied upon to fund the Burtons' chapter 13 plan. Agricann, however, was a plaintiff in at least two state court lawsuits in which it sought recovery of damages for breach of contracts related to growing and selling marijuana. The Burtons asserted that recovery from those lawsuits was unlikely, but the bankruptcy court rejected this assertion as not credible and concluded that any recovery from those lawsuits would be derived from conduct that is illegal under federal law. Accordingly, allowing the case to continue would likely require the court and the trustee to become involved in such illegal conduct.

         Because the Burtons did not provide sufficient evidence that the potential litigation proceeds would not materialize, requiring the court and the trustee to become involved in their administration, the bankruptcy court did not abuse its discretion in dismissing the Burtons' case.

         We AFFIRM.

         FACTUAL BACKGROUND

         The Burtons filed a chapter 13 petition in April 2018. On their original Schedule A/B, they disclosed interests in four limited liability companies, all with unknown values, including a 65 % membership interest in Agricann, of which Mr. Burton was a manager and its president. They also listed a pending claim belonging to Agricann against Natural Remedy Patient Center LLC, described as a breach of contract action, also with an unknown value. They later amended Schedule A/B to disclose additional ownership interests in other LLCs.[2]

         According to original and amended Schedule I, Mr. Burton was unemployed during the pendency of the bankruptcy case. All Schedule I income was attributed to Ms. Burton's wages from her employment. Schedule J showed a monthly net income of $458.80, with which the Burtons proposed to fund their chapter 13 plan.[3]

         Postpetition, Agricann sued Total Accountability Systems I, Inc. and Cannabis Research Group in state court. Both lawsuits sought damages for breach of contracts under which Agricann was to cultivate, grow, and sell medical marijuana.

         Although the Burtons proposed three different chapter 13 plans during the approximately one year their case was pending, they were unsuccessful in getting a plan confirmed.[4]

         On May 29, 2018, creditor Stratton Restoration filed a motion to convert, in which it argued that there was cause to convert the bankruptcy case to chapter 7. It contended that the Burtons were ineligible for chapter 13 relief because their debts exceeded the limitations under § 109(e), based on Stratton's $2.4 million unsecured claim arising from state court breach of contract litigation, which the Burtons had not included on their schedules. It also argued that the Burtons filed their case in bad faith because, among other things, Mr. Burton derived income from a marijuana business that was illegal under federal law.

         At the preliminary hearing on the motion to convert held on March 5, 2019, the bankruptcy court raised its concerns regarding the Burtons' alleged connections to the marijuana industry. After that hearing, the court issued an order to show cause ("OSC") requiring the Burtons to appear and show cause why their case should not be dismissed due to their ownership interest in, and deriving income from, an entity involved in the marijuana industry. The Burtons filed a response to the OSC, verified by Mr. Burton's declaration, in which they disputed having an interest in an entity involved in the marijuana industry.

         They stated that Agricann went out of business in 2016 and had generated no income since then. As such, they claimed they did not currently derive income from any entity involved in the marijuana industry. Although they acknowledged that Agricann was a party to litigation, they stated they did not expect to receive any proceeds from such litigation due to a contingency fee agreement with the attorney handling the litigation and a litigation financing lien on any recovery. The Burtons also stated their intention to abandon from the estate their interest in Agricann, after which they would divest themselves of their interest in that entity. Finally, they asserted that the sole ...


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