Palmetto State Armory, LLC v. IKON WEAPONS, LLC, 650 B.R. 670

Background:

Ikon Weapons (Debtor) entered into two purchase agreements with Palmetto State Armory (PSA) in mid-2021 for large shipments of AK-47 kits; PSA paid roughly $4.5 million in two transactions (half up front on the first deal and 20% on the second).
Debtor’s principal, Suliban Deaza, made repeated representations about availability, demilling, and shipment; later admissions and other evidence showed many misrepresentations about whether kits had been cut or viewed.
Debtor claims three containers at the Port of Charleston ("Container Goods") were shipped to it by AC Unity and do not contain the Product PSA contracted for; PSA inspected the containers and agreed their contents differed from the Product.
PSA filed an adversary proceeding and moved for a temporary restraining order / preliminary injunction to enjoin sale of the Container Goods (or to have them consigned to PSA). Venue transferred to this Court; hearing was held and record developed.
The Court denied the requested preliminary injunction, concluding PSA failed to make a clear showing it is likely to succeed on the merits (title, earmarking, resulting/constructive trust, and tracing), and therefore failed the Winter/Real Truth factors.

Issues:

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether full payment under the contract transferred title to the Container Goods	PSA: payment of the purchase price transferred title to the Product and therefore to goods in Debtor’s possession	Debtor: Container Goods are not the Product sold to PSA; title did not transfer as the containers do not contain contracted Product	Held: Title did not transfer — Container Goods are not the contracted Product, so payment did not convey title to them
Applicability of the earmarking doctrine	PSA: funds it paid were effectively used to acquire the Container Goods or otherwise intended for that purpose	Debtor/AC Unity: PSA did not loan money to Debtor to pay a specific creditor for these containers; AC Unity asserts ownership/claim	Held: Earmarking inapplicable — doctrine narrowly construed and PSA did not show funds were used to buy the Container Goods
Claim for constructive/ resulting trust, equitable lien, or equitable title (including tracing)	PSA: Debtor’s fraud/misrepresentations and payments justify a constructive/resulting trust over Debtor’s assets (including Container Goods)	Debtor: Containers were acquired from AC Unity; PSA cannot trace its funds to these containers; remedies at law exist; no fiduciary relationship	Held: PSA failed to show likelihood of success — insufficient evidence of wrongful conduct tied to acquisition of Container Goods, lack of tracing under LIBR, no equitable lien intent, and adequate legal remedies; constructive trust not warranted
Preliminary injunction prerequisites (irreparable harm, balance of equities, public interest)	PSA: would suffer irreparable loss and be unable to recover if the goods are sold	Debtor/estate: injunction would harm estate and other creditors; economic loss is typically reparable; Debtor intends to reorganize	Held: PSA did not satisfy remaining Winter/Real Truth factors — irreparable harm not shown, equities favor estate, public policy favors reorganization

Key Cases Cited

Winter v. Nat. Res. Def. Council, 555 U.S. 7 (2008) (preliminary injunction standard requires clear showing across four factors)
Benisek v. Lamone, 138 S. Ct. 1942 (2018) (injunctive relief is extraordinary and not awarded as of right)
Real Truth About Obama, Inc. v. Fed. Election Comm'n, 575 F.3d 342 (4th Cir. 2009) (articulating four-factor injunction test in Fourth Circuit)
In re ESA Envtl. Specialists, Inc., 709 F.3d 388 (4th Cir. 2013) (describing earmarking doctrine and narrow construction)
In re Dameron, 155 F.3d 718 (4th Cir. 1998) (tracing and lowest intermediate balance rule in constructive trust claims)
Butner v. United States, 440 U.S. 48 (1979) (property rights in bankruptcy determined by state law)
In re Omegas Group, Inc., 16 F.3d 1443 (6th Cir. 1994) (expressing caution about imposing constructive trusts in bankruptcy)
In re Greenbelt Rd. Second Ltd. P'ship, 39 F.3d 1176 (4th Cir.) (constructive trust and bankruptcy priority concerns)