In re Basrah Custom Design, Inc., 600 B.R. 368

Background

Debtor Basrah Custom Design, Inc. (a Michigan cabinet-maker) filed Chapter 11 nine days after losing a state-court judgment enforcing a November 16, 2016 lease that gave MJCC 8 Mile, LLC possession and an option to buy the Nocha Property to operate a licensed medical-marijuana dispensary.
The state court found the November Lease valid, that Debtor signed only as agent for owner/sole shareholder Weaam Nocha, and awarded MJCC the option to purchase the property for $1.2 million; MJCC elected to close under that option.
The Debtor moved to reject the November Lease under 11 U.S.C. § 365; MJCC sought relief from the automatic stay; the U.S. Trustee moved to dismiss under 11 U.S.C. § 1112(b).
Under Michigan collateral-estoppel rules (applied via 28 U.S.C. § 1738), the state-court findings are binding in the bankruptcy case.
The court held the November Lease is not a lease “of the debtor” because the Debtor acted only as agent for property owner Nocha, so the Debtor cannot assume or reject the lease under § 365.
Because the contested property would be used to operate a medical-marijuana dispensary (illegal under the federal Controlled Substances Act), the court found the Debtor (and its principal) had unclean hands and that cause existed to dismiss the Chapter 11 case; dismissal was ordered with a two-year bar to refiling and MJCC’s stay-relief motion was denied as moot.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Debtor may reject the November 2016 lease under § 365	Debtor: it may reject the lease to disentangle from the marijuana business and reorganize its cabinet business	MJCC/UST: Debtor is not the real party in interest; lease is of Nocha, the owner	Denied — lease is not "of the debtor"; Debtor signed only as agent for owner, so § 365 does not permit assumption/rejection by Debtor
Whether the bankruptcy case should be dismissed for cause under § 1112(b) because of involvement with marijuana activity	UST: Case filed to evade state judgment and to aid Nocha in pursuing property use that violates federal CSA; unclean hands and continuing federal-law violations justify dismissal	Debtor: Case aims to reorganize Debtor's legitimate cabinet business and disentangle from lease; not seeking to further marijuana activity	Granted — cause found: unclean hands and continuing federal-law conflict; dismissal with two-year refiling bar
Whether the court can grant stay relief to MJCC to enforce state-court judgment and obtain possession	MJCC: stay relief needed to obtain possession and close purchase to operate dispensary	Debtor/UST: granting stay would assist a party seeking to engage in activity illegal under federal law	Moot — denied as moot after dismissal (court also indicated reluctance to grant stay relief because doing so could facilitate federal-law violations)
Preclusive effect of state-court findings	MJCC/UST: state-court findings bind parties and foreclose contrary factual claims in bankruptcy	Debtor: appealed state decision but contested facts in bankruptcy	Held — collateral estoppel applies under Michigan law and 28 U.S.C. § 1738; state findings binding absent reversal on appeal

Key Cases Cited

Gonzales v. Raich, 545 U.S. 1 (Sup. Ct.) (CSA classifies marijuana as Schedule I and federal law prohibits manufacture/distribution even when state law permits)
In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (Bankr. D. Colo.) (dismissal warranted where debtor profited from tenants engaged in marijuana activity; federal court cannot enforce Bankruptcy Code to aid ongoing CSA violations)
Arenas v. United States Trustee (In re Arenas), 535 B.R. 845 (10th Cir. B.A.P.) (Chapter 7 dismissal affirmed for debtors engaged in marijuana operations; bankruptcy relief unavailable for ongoing CSA violations)
In re Way to Grow, Inc., 597 B.R. 111 (Bankr. D. Colo.) (dismissal where debtors sold equipment knowingly used to cultivate marijuana and business model violated CSA)
Garvin v. Cook Invs. NW, 922 F.3d 1031 (9th Cir.) (narrow holding on § 1129(a)(3) — means of proposing a plan vs. substantive plan provisions; does not resolve § 1112(b) dismissal question)
Convenient Food Mart No. 144, Inc. v. Convenient Indus. of Am., Inc. (In re Convenient Food Mart No. 144, Inc.), 968 F.2d 592 (6th Cir.) (even a debtor’s limited possessory interest in property can be protected by the automatic stay)