Judge Talks Rule Changes, Marijuana Legalization

The speaker for the November 2018 meeting of the Bankruptcy Section was none other than the Western District’s very own chief judge, Hon. Scott W. Dales.

Judge Dales graciously braved snowy roads to meet with section members for lunch at the Cooley Center. Lunch for the attendees was (grudgingly) supplied by Norm Witte of Witte Law Offices, PLLC.

Judge Dales first discussed procedural issues, including some changes to the Federal Rules of Bankruptcy Procedure. The rules have been modified to make it easier to deal with changing secured creditor payments in Chapter 13 cases. He discussed proofs of service and the importance of indicating both who was served and how they were served (i.e., snail mail or ECF). He also emphasized that the US Trustee’s Office likes to be served with a number of things and that it’s a good idea to actually follow the rules on this one. Apparently, the judge is still on his “due process” kick. I’ve heard this Constitution thing is a passing fad, but not from him.

Judge Dales also talked about some changes to the rules relating to final judgments, and the necessity of judgments being entered as separate, um, judgments without a lot of explanation as to the grounds for the judgment (that being appropriate in things called “opinions”). Under Fed. R. Bankr. P. 7058, apparently this is required. If you file a motion for entry of a default judgment, he needs an order granting the motion and a separate judgment as well.

If you’re still reading, then you persevered through the boring procedural stuff, and we can go on to the more interesting topic that comes now that Michigan voters decided to legalize recreational marijuana. The judge discussed the consequences of the growing marijuana economy in Michigan and its impact on bankruptcy practitioners and attorneys in general.

One problem attorneys are confronted with when dealing with clients in the marijuana industry is that, notwithstanding changes to state law, marijuana continues to be a Schedule 1 controlled substance under the Federal Controlled Substances Act. Judge Dales has previously ruled that a medical marijuana grower is not eligible for Chapter 13 relief because, while the activity may be legal under state law, under federal law it is a criminal enterprise. See In re Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015). The question becomes more complicated when it involves someone who is a mere employee of such a business, perhaps one who is not even aware that the sale of marijuana under federal law is illegal.

Judge Dales raised a separate concern regarding attorneys being asked to give legal advice to those who have or are forming business related to marijuana sale and distribution. Because under federal law the marijuana industry is a criminal enterprise, an attorney giving advice, forming an entity, collecting receivables or otherwise engaging in normal business law activities might be considered acting in furtherance of that criminal enterprise. This has implications both from the standpoint of potential conspiracy claims and the attorney/client privilege, which does not apply when an attorney is acting in furtherance of criminal activity. Judge Dales related that the US Trustee’s office has taken the position that the Chapter 7 and 13 trustees cannot administer property related in any way to marijuana production and sale, including not only the plants but equipment and real estate.

On that happy note, Judge Dales bid us adieu.