In re No Rust Rebar, Inc.

1

In re: No Rust Rebar, Inc., Debtor.

No. 21-12188-PDR

United States Bankruptcy Court, S.D. Florida, Fort Lauderdale Division

August 29, 2022

MEMORANDUM OPINION ON ORDER GRANTING MOTION TO COMPROMISE CONTROVERSY

Peter D. Russin, Judge United States Bankruptcy Judge.

This matter came before the Court on August 17, 2022, on the Trustee's Motion to Compromise Controversy (the "Settlement Motion").^[1] Following the hearing and upon review of the Settlement Motion and the related Objection,^[2] the Court granted the Settlement Motion. ^[3] This memorandum opinion clarifies and explains the Court's ruling.

Background^[4]

In January 2015, Don Smith founded No Rust Rebar, Inc. to manufacture structural reinforcement products that do not rust. No Rust contracted to purchase industrial real estate in Pompano Beach, Florida, but after placing a nonrefundable deposit, did not have the funds necessary to close on the Property. No Rust agreed to assign its right to purchase the Property to Green Tech Development, LLC. In January 2016 Green Tech bought the Property and No Rust remained in possession. No Rust asserts Green Tech provided it with an oral option to purchase the Property, but Green Tech contends there was no such option. Both parties agree that there is no signed written agreement memorializing the purported option. In November 2016, Smith sought to exercise No Rust's purported option by filing a Notice of Election to Purchase Real Property, but Green Tech refused to sell. Less than a month later, No Rust sued Green Tech for specific performance; Green Tech countered seeking No Rust's ejectment and damages for civil trespass (collectively, the "Property Dispute").

No Rust is not Smith's only entity, and many of his other entities conduct business and/or store personal property in the Property. These entities include Raw Energy Materials Corp., Raw, LLC, Rock Rebar, Inc., Smith Boat Designs, Inc. Raw Materials Corp., and Global Energy Sciences, LLC. Further, Smith has a personal and professional relationship with Elina Jenkins, and her entities-Basalt World Corp. and Yellow Turtle Design, LLC-also operate out of the Property.

On March 5, 2021, No Rust filed this Chapter 11. Shortly thereafter, No Rust removed the Property Dispute which remains pending.^[5] Green Tech filed a conditional proof of claim in the case (the "Claim") of nearly $2 million, $300,000.00 of which is secured by a bond posted in state court as part of the Property Dispute (the "Bond"). In November 2021, No Rust objected to the Claim. In May 2022, the Court converted the case from a Chapter 11 to a Chapter 7, and the Trustee was appointed. The Court converted the case for many reasons, including Smith's commingling of No Rust's assets with his personal assets and assets owned by his other entities, thereby creating an incurable conflict of interest with respect to investigating in good faith the Estate's interest in various potential fraudulent transfer, preferential transfer, and avoidance actions.^[6]

Since her appointment, the Trustee has apparently worked to identify the Estate's assets and the best prospects for recovery. The Trustee promptly visited the Property and determined that certain hazardous materials needed to be removed. Shortly thereafter, the Trustee requested permission to abandon any remaining personal property of the Estate on the Property and dispose of any remaining personal property not belonging to the Estate, including that which belong to Smith's and Jenkins's other entities. The Trustee's Motion to Abandon further explained that the request was based on her desire to settle the dispute with Green Tech. The Court granted that request. In early August 2022, the following filed claims in this case: Don Smith, Global Energy Sciences, Raw Energy Materials, and Yellow Turtle Design (the "Objecting Creditors").

The Settlement Motion

The Proposed Settlement seeks to resolve all issues between the Estate and Green Tech. Its cornerstone includes a sale of the Property that resolves the Property Dispute. The minimum bid for the sale of the Property under the Proposed Settlement and the related bidding procedures is $3,000,000.00.^[7] The net proceeds of the sale, after paying all closing fees and resolving all unpaid liens, will be distributed as follows:

Amount

Green

Tech Estate

$0.00-$1,000,000.00

100%

0%

$1,000,000.01-$1,500,000.00

65%

35%

$1,500,000.01+

50%

50%

At the hearing, the Trustee noted that the expected total recovery for the Estate under the Proposed Settlement if the Property is sold for $3,000,000.00 is approximately $500,000.00, of which approximately $320,000.00 would result from the sale. The additional funds result from Green Tech's agreement to pay the remaining value of the Bond (approximately $182,000.00) to the Estate regardless of the results of the sale (the "Net Cash Bond").^[8] Green Tech would otherwise be entitled to the entirety of the Net Cash Bond if, as expected by the Trustee, it were to prevail in the Property Dispute.

In exchange, the Estate agreed to provide Green Tech with a $2,500,000.00 allowed general unsecured claim based, at least in part, on its "substantial contribution . . . during the nearly 15-month course of the Chapter 11 phase of this case, which contribution has materially advanced the litigation prospects of the Estate." The Trustee explained that the proposed claim for Green Tech includes a substantial contribution administrative claim to which she believes Green Tech would be entitled. Under the Proposed Settlement, Green Tech has agreed to voluntarily subordinate that claim and incorporate it into a single general unsecured claim. The Proposed Settlement further provides Green Tech, based again on its substantial contribution, with a 33% share of all actual gross recoveries of potential insider and affiliate litigation. However, due to concerns that such a provision may violate the legal distribution scheme of § 726, Green Tech and the Estate agreed to sever this clause from the Proposed Settlement. The Court, therefore, need not consider whether providing Green Tech with such a distribution is appropriate.

The Objection & Counterproposal

The Objecting Creditors argue that (1) the Court cannot approve the settlement because it violates § 363 and the § 726 priority rules, and (2) providing Green Tech with a $2,500,000.00 claim without requiring it to prove that claim, including the supposed substantial contribution claim, is improper and not in the best interests of the Estate.^[9] The morning of the hearing, the Objecting Creditors submitted exhibits that, for a variety of reasons, are not evidence and cannot be considered by the Court.^[10] See Bankr. S.D. Fla. Local Rule 9070-1(A)(1).

The Objecting Creditors also submit their own Counterproposal under which the Objecting Creditors would pay the Estate $200,000.00 in exchange for:

(1) all of the Estate's rights related to the Property Dispute, including any potential interest in the Property itself; (2) an assignment of all claims, known or unknown, against Green Tech and its related entities; and

(3) an assignment of any fraudulent transfer, preferential transfer, or avoidance actions against all third parties, including the Objecting Creditors and all the related entities associated with Smith and Jenkins.

According to the Objecting Creditors, their Counterproposal is superior to the Proposed Settlement because it "guarantees prompt and full payment to all legitimate non-insider creditors and all administrative expenses, promptly, and not dependent upon the sale price of the subject property without incurring additional administrative expenses."

Analysis

Settlement motions are considered under Fed.R.Bankr.P. 9019. However the Objecting Creditors' arguments under § 363 and under the § 503 priority rules and § 726 distribution scheme must be considered before the Court can determine the appropriateness of the Proposed Settlement under Rule 9019 because, if the Proposed Settlement violates the Bankruptcy Code, the Court may not have the authority to approve it.

I. 11 U.S.C. § 363

11 U.S.C. § 363 does not prevent approval of the Proposed Settlement. Under § 363(b), the Trustee may sell property of the Estate. At the hearing, the Trustee clarified that the Proposed Settlement contemplates the sale of two separate and distinct interests in the Property: (1) Green Tech's fee simple interest and (2) the Trustee's equitable interest. Here, Green Tech holds title to the Property and the Estate holds an equitable interest based on the assertions in the Property Dispute as provided in the schedules of assets filed by the Debtor. The Objecting Creditors argue that the Property is not property of the estate because Green Tech is the record title holder and, therefore, it cannot be sold under § 363. They do not mention the Estate's equitable interest.

A. The Estate's Equitable Interest

One can hardly contest that the Estate's equitable interest can be sold under § 363. Under § 541(a)(1), property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." No Rust (at the time controlled by Smith) scheduled an equitable interest resulting from the purported option, the existence of which is currently disputed by Green Tech in the Property Dispute.^[11] Smith, having asserted that No Rust holds this equitable interest, cannot now dispute it. Through the Proposed Settlement, Green Tech agrees to allow the Trustee to sell whatever option rights it may have in the Property alongside Green Tech's fee simple interest, to provide the buyer with clear title. As property of the estate, the equitable interest may be sold under § 363.

This...