In the 9th Circuit case of Garvin vs. Cook, 922 F.3d 1031 (9th Cir. 2019) the BAP affirmed the bankruptcy court’s order confirming a chapter 11 plan, over the objection of the United States Trustee, who objected because one of the chapter 11 debtors leased property to a tenant who grew marijuana. The objection was that the chapter 11 debtor planned to use income from that lease to fund the plan. The United States Trustee argued the lease violated federal drug law – namely, the Controlled Substances Act – therefore the plan was unconfirmable under Section 1129(a)(3) because it was proposed by means forbidden by law.
The Nineth Circuit overruled the objection and confirmed the chapter 11 plan. It concluded that Section 1129(a)(3) directs bankruptcy courts to police the means of a reorganization plan’s proposal, not its substantive provisions. The panel specifically found that the payment plan was not proposed was not forbidden by law, despite the alleged violations of federal law by the third party tenant. In other words, it found the Trustee did not show that the plan “will result in bankruptcy proceedings being used to facilitate legal violations.”