Donald Smith, et al v. Sonya Slott, et al
- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- 24-13383 (11th Circuit, Jun 01,2026) Published
- Tag(s):
-
- Ruling:
- Relying on the harmless error standard in Rule 9005, the court bypassed the issue of whether a bankruptcy court may order the substantive consolidation of two or more entities without the commencement of an adversary proceeding. The court then affirmed the substantive consolidation standards found in Eastgroup Properties v. Southern Motel Ass’n, 935 F.2d 245, 249–50 (11th Cir. 1991), and held that the evidentiary standards for substantive consolidation had been satisfied at a hearing to determine whether to convert the debtor's case to a Chapter 7 proceeding.
- Procedural context:
- The debtor's four affiliates appealed an order of the bankruptcy court directing the substantive consolidation of four of the debtor's affiliates with the debtor's Chapter 7 bankruptcy estate.
- Facts:
- No Rust Rebar, Inc., which was owned and operated by Donald Smith, filed a Chapter 11 petition in 2021. When a creditor moved to convert No Rust Rebar's case to a Chapter 7 proceeding, the bankruptcy court held a four-day evidentiary hearing at which Smith gave extensive testimony.
Smith's testimony established that he owned and operated four other entities that, collectively with No Rust Rebar, operated as an integrated business operation. Smith's testimony established that (1) none of the entities, including the debtor, complied with corporate formalities, (2) the entities all operated from the same location, (3) Smith moved assets among the companies at his own discretion and without documentation regarding the nature of the transactions, and (4) the companies' assets were commingled.
The bankruptcy court then converted the No Rust Rebar case to a Chapter 7 proceeding and appointed a trustee. The trustee then moved to substantively consolidate the four affiliates with the No Rust Rebar bankruptcy estate. No creditor, including known creditors of the four affiliates, objected to the trustee's motion.
The four affiliates, each represented by No Rust Rebar's bankruptcy counsel, objected to the proposed substantive consolidation. The affiliates argued that substantive consolidation was improper unless initiated by an adversary proceeding and a separate evidentiary hearing. The bankruptcy court disagreed and ordered substantive consolidation.
The bankruptcy court allowed the affiliates to provide supplemental briefing on their objection and held a second hearing. The affiliates did not argue that the evidence was insufficient to support substantive consolidation or that a second evidentiary hearing would establish facts that would make substantive consolidation improper. Instead, the affiliates continued to argue that the substantive consolidation was procedurally improper.
- Judge(s):
- WILLIAM PRYOR, Chief Judge, and BRASHER and ABUDU, Circuit Judges
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