In re No Rust Rebar, Inc.

• Decision Date: 23 May 2022
• Docket Number: Case No. 21-12188-PDR
• Citation: 641 B.R. 412
• Parties: IN RE: NO RUST REBAR, INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Florida

641 B.R. 412

IN RE: NO RUST REBAR, INC., Debtor.

Case No. 21-12188-PDR

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

Signed May 23, 2022

Kevin C. Gleason Esq., Kevin C. Gleason Esq., Hollywood, FL, for Debtor.

ORDER CONVERTING CASE TO CHAPTER 7

Peter D. Russin, United States Bankruptcy Judge

Green Tech Development, LLC has asked the Court to either remove the principal of the Debtor or convert this case from a Chapter 11 to a Chapter 7.¹ The Court held a four-day evidentiary hearing on these matters. For the reasons that follow, the Court finds cause to convert the case or remove No Rust as the debtor in possession, and that conversion is in the best interest of the estate and its creditors.

Findings of Fact

In the 1980s, while operating a boat manufacturing and design business, Don Smith came into the possession of a significant amount of basalt fibers. Smith became fascinated with the material and believed that he could use it to create a replacement for traditional structural reinforcement products, such as rebar, with the advantage that basalt does not rust. However, Smith never patented the process and chose to maintain it in his own head because he was worried that he did not have the means to defend a patent. When the idea of using basalt fibers as structural reinforcement became less financially viable due to the crash of the housing market in the mid 2000s, Smith shifted his focus to the energy sector and founded Raw Energy Materials, Inc. ("REM"), which used basalt fibers to create products for the wind industry.²

REM struggled because it was unable to manufacture basalt fibers itself and its product was large, expensive, and time consuming to produce. Smith, therefore, turned his interest back to manufacturing and selling structural reinforcement products, particularly rebar, made from basalt fibers. At a Christmas party in 2014, Smith met Robert Bryan, who was fascinated by Smith's idea. In January 2015, following a $1.2 million investment from Bryan, No Rust Rebar, Inc. ("No Rust") was born. Though Bryan put no specific restrictions on Smith's use of the funds, he assumed they would be used exclusively for the benefit of No Rust and that the company's additional funding needs for things like research and development would be minimal.³

No Rust initially needed to secure a manufacturing facility. Bryan suggested that No Rust buy a $3 million property he owned in Georgia. Smith declined. Instead, Smith was interested in a foreclosed industrial facility in Pompano Beach, Florida that contained office space, meeting rooms, and an industrial facility, but required significant repairs and maintenance (the "Property"). Bryan suggested he could purchase the Property and No Rust could lease it from him. Again, Smith declined. In July 2015, against the wishes of Bryan, No Rust contracted to purchase the Property for $450,000 and paid a non-refundable $50,000 deposit that allowed it to occupy the premises and begin maintenance and repairs immediately. Bryan, angry that he had been seemingly squeezed out of the deal for the Property, refused to provide No Rust with any further funding. Without additional investment from Bryan, No Rust lacked the funds to close and risked losing both the Property and its $50,000 deposit.⁴

Desperate for a solution, Smith turned to a friend, Joan Saperstein, for help. Saperstein created a new entity, Green Tech Development, LLC ("Green Tech") to which No Rust agreed to assign its right to purchase the Property. No Rust contends that consideration for the assignment included an option to purchase the Property from Green Tech, but Green Tech contends there was no such option. Both parties agree that there is no signed written agreement memorializing the purported option. In January 2016, Green Tech bought the Property and No Rust remained in possession.⁵

No Rust needed permits and a business license before it could begin manufacturing operations on the Property. Though No Rust filled out the applications, it needed Green Tech, as the owner of the Property, to sign them. For reasons that remain unclear, Green Tech refused. According to Smith, Green Tech's refusal was part of a concerted effort by associates of Green Tech to extort him into taking out a $10 million loan.⁶

In May 2016, No Rust executed, but never recorded, a $400,000 mechanics lien against the Property in favor of another company Smith had recently created, Raw Materials Corp. ("RMC"). RMC was created by Smith in September 2015 to provide fiber and resin packages to his entities and also operated out of the Property. When pressed about why RMC received the mechanics lien, Smith acknowledged it was "protection" for his entities to make the Property "less enticing" to Green Tech. Shortly thereafter, Smith listed "No Rust Rebar, Inc." both as a fictitious name of RMC and as a d/b/a on RMC's bank account. Smith testified he did this so he could transfer checks made payable to No Rust to RMC when he, in his discretion, believed doing so was appropriate.⁷

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 (the "Property Dispute").⁸

In December 2016, Smith founded Raw, LLC ("Raw"), which served as a holding company. Then, in January 2017, Smith reinstated an older entity, Global Energy Sciences, LLC ("GES"), to hold his intellectual property, including the trademark and brand licenses associated with his basalt rebar product. However, it appears No Rust paid the bills for at least some of GES's intellectual property and, at least once, transferred a patent to GES for no consideration. No Rust is obligated to pay GES $200/day ($73,000 annually) for a license to produce basalt rebar, though Smith testified that payment has not been required recently given No Rust's financial situation.⁹

In February 2017, Smith used various entities to complete a deal with PayMeOn, Inc. ("PayMeOn"), a publicly traded company interested in the sale of Smith's basalt rebar (the "PayMeOn Deal"). Under the agreement, PayMeOn received an exclusive license to sell basalt rebar in Florida and the Caribbean. No Rust provided two machines, basalt fibers, and finished inventory to help close the deal, but in return received no consideration. RMC, however, received $2.4 million in cash and Raw received 10 million shares in PayMeOn.¹⁰ In short, in exchange for No Rust's assets and No Rust losing its right to sell basalt rebar in Florida and the Caribbean, RMC received millions of dollars, Raw received millions of shares in a publicly traded company, and No Rust received nothing. Smith, however, contends that No Rust lost nothing because it was not presently selling product anyway and ultimately received reasonably equivalent value for the transaction in the form of new equipment and machinery.¹¹

In 2019, the electric company cut the Property's power due to a split of the power source from the contiguous property; power has not been restored but a generator has provided some power. Since then, No Rust and the other entities operating from the Property have been severely limited in their ability to conduct any business at all.¹² Given that the Property is presently unusable for manufacturing and No Rust's rights to it were in dispute, No Rust could have chosen to lease another Property or take some other action to ramp up its prospective core business. However, Smith testified, in his business judgment, that was too expensive and not in No Rust's best interests.¹³

In September 2020, RMC registered "Raw, LLC" as a fictitious name. No explanation has been provided for this action. On March 5, 2021, No Rust registered "Raw, LLC" as a fictitious name. No explanation has been provided for this action either.¹⁴

On March 5, 2021, No Rust filed a voluntary bankruptcy petition under Subchapter V of Chapter 11 of the Bankruptcy Code.¹⁵ There are irregularities in No Rust's Schedules, including:¹⁶

1. RMC's checking account is not listed in the Schedules even though "No Rust Rebar, Inc." is listed as a d/b/a on the account and the account was open on the Petition Date. According to Smith, the failure to include the account was not a mistake because, despite being listed as a d/b/a on the account, No Rust has no interest in the account.¹⁷

2. The 2020 tax returns provide that No Rust is due nearly $492,000 from RMC, but No Rust did not list that accounts receivable as an asset in the Schedules. When pressed, Smith was unable to provide a sufficient explanation for what the debt due to No Rust is for or why it was not included in the Schedules but did acknowledge it should have been.¹⁸

3. The 2020 tax returns showed that No Rust had no inventory, but No Rust scheduled some inventory on the Schedules. Smith explained that the inventory was not listed based on any consideration of corporate documentation but was rather determined by walking around the building (which holds other corporate entities’ assets) and identifying certain pieces of inventory to include.¹⁹

4. No Rust scheduled a $129,250 debt owed to Smith's sister resulting from a loan she gave to Smith personally in 2005, roughly a decade before No Rust was incorporated. Smith states he agreed to carry the debt into No Rust because No Rust "is the entity that came to fruition out of [her] original seed monies."²⁰

Shortly after the Petition Date, on March 29, 2021, No Rust removed several actions from state court to this Court, including the Property Dispute.²¹ The Court denied cross motions for summary judgment in the Property Dispute and the matter remains pending.²²

There are only six total claims in this case. Two are related to the Property Dispute: (1) Green Tech asserts a $1.95 million claim arising from damages related...