In re Basrah Custom Design, Inc.

• Decision Date: 21 May 2019
• Docket Number: Case No. 18-56801
• Citation: 600 B.R. 368
• Parties: IN RE: BASRAH CUSTOM DESIGN, INC., Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

600 B.R. 368

IN RE: BASRAH CUSTOM DESIGN, INC., Debtor.

Case No. 18-56801

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed May 21, 2019

Stuart Sandweiss, Metro Detroit Bankruptcy Law Group, Southfield, Michigan, Attorney for Debtor.

Sean M. Cowley, Office of the United States Trustee, Detroit, Michigan, Attorney for Daniel M. McDermott, United States Trustee.

Bryan Marcus, Bryan D. Marcus, P.C., Royal Oak, Michigan, Attorney for MJCC 8 Mile, LLC.

OPINION REGARDING THE UNITED STATES TRUSTEE'S MOTION TO DISMISS, THE DEBTOR'S MOTION TO REJECT LEASE, AND THE MOTION BY MJCC 8 MILE, LLC FOR RELIEF FROM STAY

Thomas J. Tucker, United States Bankruptcy Judge

I. Introduction

Among other things, this Chapter 11 case raises the question whether the Debtor's entanglement with a medical marijuana dispensary business, which business is illegal under federal criminal law but not necessarily illegal under Michigan law, requires the dismissal of this federal bankruptcy case. The Court concludes that dismissal is required.

This case came before the Court on March 6, 2019, for a hearing on three motions, namely: (1) the United States Trustee's motion to dismiss this case (Docket # 30, the "Dismissal Motion"); (2) the motion by the Debtor entitled "Debtor's Motion to Reject Executory Lease with MJCC 8 Mile, LLC" (Docket # 37, the "Lease Rejection Motion"); and (3) the motion by MJCC 8 Mile, LLC for relief from the automatic stay (Docket # 43, the "Stay Relief Motion").

After the hearing, after obtaining leave of Court to do so,¹ the Debtor filed a supplemental brief in further support of its position on the pending motions, and the United States Trustee and MJCC 8 Mile, LLC filed responses to the Debtor's supplemental brief.² The Court has reviewed those post-hearing papers filed by the parties.

The Court has considered all of the oral and written arguments of the parties, and all of the briefs and exhibits filed by the parties. For the reasons stated in this opinion, the Court will deny the Debtor's Lease Rejection Motion, grant the United States Trustee's Dismissal Motion, and deny the Stay Relief Motion as moot.

II. Jurisdiction

This Court has subject matter jurisdiction over this bankruptcy case and this contested matter under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), 157(b)(2)(G), and 157(b)(2)(O).

This proceeding also is "core" because it falls within the definition of a proceeding "arising under title 11" and of a proceeding "arising in" a case under title 11, within the meaning of 28 U.S.C. § 1334(b). Matters falling within either of these categories in § 1334(b) are deemed to be core proceedings. See Allard v. Coenen (In re Trans–Industries, Inc. ), 419 B.R. 21, 27 (Bankr. E.D. Mich. 2009). This is a proceeding "arising under title 11" because it is "created or determined by a statutory provision of title 11," see id. , including Bankruptcy Code §§ 1112, 365, and 362. And this is a proceeding "arising in" a case under title 11, because it is a proceeding that "by [its] very nature, could arise only in bankruptcy cases." See id. at 27.

III. Discussion

A. Background

The Debtor filed this Chapter 11 bankruptcy case on December 16, 2018.³ The Debtor is a Michigan corporation that "is in the business of manufacturing and installing custom cabinets[.]"⁴ The Debtor occupies and uses two conjoined buildings, located at 7451 and 7461 West 8 Mile Road, Detroit, Michigan. That real estate (the "Nocha Property") is owned by Weaam Nocha, who is the President and sole shareholder of the Debtor.⁵ It is undisputed that the Debtor is not, and never has been, an owner of the Nocha Property.⁶

B. The November 16, 2016 Lease, and the Debtor's pre-petition state court litigation with MJCC 8 Mile, LLC

Before filing this bankruptcy case, the Debtor, Weaam Nocha, and others were defendants in a state court lawsuit filed by MJCC 8 Mile, LLC, captioned MJCC 8 Mile, LLC v. Basrah Custom Design, Inc., et al. , Case No. 17-001663 (Wayne County, Michigan Circuit Court) (the "State Court Lawsuit").

In the State Court Lawsuit, MJCC 8 Mile, LLC ("MJCC") claimed to have the right to possession of the Nocha Property under a written lease, which lease also gave MJCC an option to purchase the Nocha Property. MJCC sought enforcement of that lease and the purchase option. The lease was executed on November 16, 2016, and is referred to in this Opinion as the "November Lease" or the "November 2016 Lease." A copy of the November Lease appears in the record of this case as Exhibit 1 to the brief filed by the Debtor on February 8, 2019.⁷

The November Lease named the Debtor as the "Landlord" and MJCC as the "Tenant," and it was signed on November 16, 2016 by Weaam Nocha for the Debtor, as "Its Owner," and by MJCC.

Under the November Lease, MJCC leased the part of the Nocha Property located at 7461 West 8 Mile Road, for an initial term of 5 years, renewable by MJCC for 6 additional 5-year terms.⁸ During that lease term, MJCC also had the option to lease the adjacent part of the Nocha Property, located at 7451 West 8 Mile Road, also for an initial term of 5 years, renewable by MJCC for 3 additional 5-year terms.⁹ The November Lease also gave MJCC an option to purchase the Nocha Property, for $ 1.2 million.¹⁰

It is undisputed, and was clearly understood by all parties at the time of the signing of the November Lease, that MJCC's purpose in entering into the November Lease was to use the Nocha Property to operate a medical marijuana dispensary. And this is clear from the face of the November Lease. For example, the document stated that "[t]he Premises will be used for a licensed medical marijuana dispensary (the ‘Designated Use ’) and for no other purpose whatsoever."¹¹ And the initial 5-year term of the Lease was to begin "on the date Tenant receives approval from the City of Detroit for its Designated Use[.]"¹²

The defendants in the State Court Lawsuit were the Debtor, Weaam Nocha, Rafaa Nocha (Weaam Nocha's wife, a/k/a Rafaa Dawood), Holden Dawood (the Nochas's son), and DMCC, LLC (a limited liability company formed by the defendants). All of the defendants jointly defended against MJCC's claims, and opposed the efforts of MJCC to obtain possession of or purchase the Nocha Property. One of their primary defenses was that MJCC "fraudulently tricked" Weaam Nocha into signing the November Lease.¹³

It is undisputed that in seeking relief in the State Court Lawsuit, and in now seeking stay relief in this Court, MJCC has sought possession and ownership of the Nocha Property, in order to use that property as a medical marijuana dispensary. Such a marijuana business apparently would not violate Michigan law, but as discussed below, it would violate federal criminal law.

C. The State Court Decision

The State Court Lawsuit went to trial, and on December 7, 2018, the state court found for MJCC, in a lengthy written opinion and order, entitled "Finding of Facts and Conclusions of Law" (the "State Court Decision"). A copy of the State Court Decision appears in the record of this case as Exhibit 4 to the Debtor's brief filed on February 8, 2019.¹⁴

As discussed in Part III.D of this Opinion, below, the findings and conclusions of the State Court Decision are binding in this Court, on the Debtor, Weaam Nocha, and MJCC, under the doctrine of collateral estoppel. For this reason, and because they are important to this Court's decision on the pending motions, the Court will describe the state court's findings and conclusions in detail.

In the State Court Decision, the state court found and concluded, among other things, that:

• Weaam Nocha was not tricked or fraudulently induced into signing the November Lease;¹⁵

• at the time the November Lease was signed, the Nocha Property was owned solely by Weaam Nocha;¹⁶

• Weaam Nocha signed the November Lease as an agent of the Debtor, and the Debtor in turn signed the November Lease as agent of and on behalf of the owner of the property at issue, Weaam Nocha;¹⁷

• the November Lease, including the purchase option it contains, is valid and enforceable by MJCC;¹⁸

• the term of the November Lease began on November 10, 2016, and MJCC's right to exclusive possession of the Nocha Property began on November 26, 2016.¹⁹

The State Court Decision found that the Nocha Property is one of the very few properties located within the City of Detroit that is available and suitable for conducting a medical marijuana dispensary. The state court found that "there are very few fully compliant properties in the City [of Detroit]" where one can "open a medical marijuana dispensary."²⁰ This is "due to the tight restrictions imposed by Detroit's Medical Marijuana Zoning Ordinance."²¹ But the Nocha Property is such an available property — as the state court put it, the property is "in the ‘green zone.’ "²²

The state court also found that the efforts by Weaam Nocha, the Debtor, and the other defendants to avoid enforcement of the November Lease, including its purchase option, were motivated by a desire to make more money from the Nocha Property, either by (1) renting or selling the Nocha Property to MJCC, or someone else in the medical marijuana business, for a higher rent or a higher sale price than the $ 1.2 million price set by the purchase option in the November Lease; or (2) using the property to open and operate a marijuana dispensary themselves.

The State Court Decision described, in detailed findings:²³

• how Weaam Nocha and his wife, Rafaa, continually demanded more money from MJCC for the lease or purchase of the Nocha Property, even after the November Lease was signed, demanding, for example, an increase in rent from the $ 5,000.00 per month in the November Lease²⁴ to $ 7,500.00 per month, and demanding $ 1.5 million to sell the property to MJCC instead of the $ 1.2 million agreed to in the November Lease's purchase option;²⁵

• how MJCC refused the Nochas's

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