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Problem 6

CANNA-BIS Plan Get Confirmed?

In 2006, Cheech Chong, Jr., opened Munchies 420 Sammy’s (“Munchies”) in Sarasota, Florida. Munchies is a late-night eatery that specializes in specialties sandwiches. Its best-selling sandwich is called the ‘Fat Sandy’ which is a roll with two cheese burgers, mac-n-cheese, chicken fingers, onion hoops, spuds, and mozzarella sticks. In 2010, Munchies purchased the commercial property where it operates at 6639 Superior Avenue, Sarasota, Florida 34231. 

In 2016, Munchies executed a $650,000 line of credit note secured by the previously paid off Superior Avenue property in favor of Siesta Key Bank to remodel the Superior Avenue location kitchen, and open a second and third location. Munchies leased space for the second location from Mary Juana, Inc. The second location space is located in Good Buds Plaza which also is home to Herb’s Healing, a medical marijuana dispensary, Puff Daddy’s Market, a smoke shop, and the administrative offices for Mary Juana, Inc., the owner and landlord of Good Buds Plaza. Mary Juana, Inc. shares the administrative office with its subsidiary, Tincture Bell, a Florida medical marijuana licensee and the operator of Herb’s Healing. The second location is very profitable and the most successful location. A large part of this success is from the patrons of Herb’s Healing visiting after treatments to order food. 

Munchies leased the third location space from a local craft beer brewery, Suds, not Buds (“Suds”). It initially performed well, but sales plummeted after the brewery opened its own kitchen and another restaurant named Better Sandwiches opened up across the street. Munchies was able to keep pace with all three locations and the loan until there was a fire in Puff Daddy’s Market that spread to Munchies’ next door unit and shut down the Munchies kitchen for over three months while Puff Daddy’s, the landlord, insurance representatives, and contractors figured out the costs to repair and who would pay. During this time, Munchies fell four (4) payments behind on its $5,700.00 a month lease payment on its second and $4,400.00 a month lease payment on the third location, incurred debt with food vendors of $125,000, and fell six (6) months behind on the $7,547.05 a month line of credit payments to Siesta Key Bank. The kitchen in the Good Buds location was repaired, but Munchies could not catch up on the resulting debt and Siesta Key Bank filed a foreclosure lawsuit. In response. Munchies filed a chapter 11 bankruptcy to gain relief and get back on track. 

Munchies chapter 11 bankruptcy plan proposes the following treatment for creditors using future profits from the Superior and Good Buds Plaza locations, and settlement funds payable to Munchies as a part of a settlement of the lease dispute from Mary Juana, Inc., and Puff Daddy’s Market:

  • Rejection of the lease for the third location next to the brewery
  • 85% payment of the unsecured creditor claims to be paid within the first year 
  • 75% payment of the pre-petition lease payments due, and full payment of the lease rejection claim capped to a year of lease payments by Section 502(b)(6) of Suds to be paid within three years
  • No payment is proposed to Mary Juana, Inc. for past due rent as Mary Juana, Inc. agreed to waive the amounts due in exchange for assumption of the lease, and agreement to global settlement of all claims against Mary Juana, Inc. and Puff Daddy’s Market for $35,000.00
  • Cure the arrearage owed to Siesta Key Bank within five years

All the creditors voted in favor of the proposed plan with the exception of Suds. Suds filed an objection to the plan’s confirmation and filed a separate Motion to Dismiss “for cause” under 11 U.S.C. §1112(b) based on the debtor not being eligible for bankruptcy protection based on its connection with the marijuana industry and the plan not being meeting the good faith requirement since the plan contemplates payment to creditors using settlement funds derived from a marijuana affiliated source. The U.S. Trustee filed its own Motion to Dismiss mirror many of the same objections. How do you rule?

Question 1

Is the bankruptcy judge required to determine whether Mary Juana, Inc. is violating federal law as a part of the confirmation process?

Question 2

Are the settlement funds from Mary Juana, Inc. that partially fund the payments to creditors, proceeds from illegal activity?

Question 3

Should Munchies case be dismissed for cause based on the plan providing payment to creditors using settlement funds from Mary Juana, Inc.?

Question 4

So, is Munchies’ plan confirmable?

Additional Documents

Fla, Const. art. X, §29

11 U.S.C. §1112

11 U.S.C. §1129

21 U.S.C. §802 Controlled Substances Act ( 21 U.S.C. 802 )

21 U.S.C. § 843 Prohibited acts C

21 U.S.C. § 856

The Controlled Substances Act, 21 U.S.C. §§101

In re Way to Grow, Inc., 597 B.R. 111 (Bankr. D. Colo. 2018).

In re ARM Ventures, LLC, 564 B.R. 77 (Bankr. S.D. Fla. 2017).

Kenney v. Helix TCS, Inc., No. 18-1105 (10th Cir. Sep. 20, 2019).

Teaching Notes