Slott, Chapter 7 Trustee v. Smith, 23-01082

No Rust Rebar, Inc. (“No Rust”) filed for bankruptcy under Subchapter V of Chapter 11, but the case was later converted to Chapter 7 due to mismanagement and commingling of assets by principal Don Smith.
Smith operated No Rust alongside several closely related entities (“the Family”), including RAW, all of which shared assets and operations without clear corporate separateness.
During the bankruptcy, RAW sold 10 million shares of PayMeOn stock for $1,212,121 and the proceeds were wired directly to Don Smith personally, without court authorization or disclosure.
The Chapter 7 Trustee moved for and obtained substantive consolidation of No Rust and the Family entities, making their assets part of the bankruptcy estate as of the original petition date.
The Trustee sought to avoid and recover the $1.2 million transfer to Smith as an unauthorized postpetition transfer under 11 U.S.C. §§ 549 and 550.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the $1.2M transfer was property of the estate	The stock was owned by RAW, which was consolidated into No Rust; proceeds are property of the estate	RAW was the owner; No Rust had no interest in the stock or proceeds	Transfer involved estate property due to consolidation or RAW being No Rust’s d/b/a
Was the transfer postpetition and unauthorized?	Transfer occurred after petition date; no court approval was sought	Substantive consolidation occurred after transfer; lack of notice, so transfer should not count as postpetition	Transfer was postpetition and unauthorized—effective date is retroactive to petition date
Is Smith liable as the initial transferee under § 550?	Smith directly received proceeds, had dominion and control	Smith claims to be a mere conduit and/or entitled to § 550(b) defenses	Smith was initial transferee; defenses unavailable due to lack of value, good faith, or lack of knowledge
Should retroactive consolidation apply?	Retroactive effect needed due to commingling and justified by record	Application is unfair and amounts to involuntary bankruptcy for RAW	Retroactive substantive consolidation valid and affirmed on appeal

Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment standard)
Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (summary judgment factual dispute standard)
Eastgroup Props. v. Southern Motel Ass’n, Ltd., 935 F.2d 245 (retroactive substantive consolidation standard)
Martinez v. Hutton (In re Harwell), 628 F.3d 1312 (definition of initial transferee under § 550)
Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890 (dominion and control test for transferee status)
Butner v. United States, 440 U.S. 48 (property interests in bankruptcy determined under state law)
In re Augie/Restivo Baking Co., Ltd., 860 F.2d 515 (effects of substantive consolidation on assets and liabilities)