Smith v. Slott

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
CASE NO. 25-cv-60115-ALTMAN
DON SMITH,
Appellant,
v.
SONYA S. SLOTT,
Appellee.
_________________________/
ORDER AFFIRMING BANKRUPTCY COURT
Before us again is an appeal from In re No Rust Rebar, Inc., Case Nos. 21-12188 (the “Main
Bankruptcy Case”) and 23-01082 (the “Adversary Case”).1 This particular appeal comes to us from
the Adversary Case between Sonya Salkin Slott, the Chapter 7 Trustee for No Rust Rebar, Inc. (“No
Rust”), and Don Smith, the former principal of No Rust. In the Adversary Case, Smith requested
leave to amend his response to Slott’s Amended Complaint to add a declaratory-judgment
counterclaim. See generally Motion to Amend [Adv. Bankr. ECF No. 44]. Smith’s would-be-
counterclaim sought a declaration that Smith “did not commit fraud,” “was not dishonest,” and “was
not incompetent” “in his management of the debtor”—and that he “did not mismanage the debtor.”
Id. at 26. The Bankruptcy Court orally denied this relief for several reasons. See Transcript of Motion
Hearing dated January 2, 2025 (“Order Tr.”) [ECF No. 8] ¶ 16–21 (“[D]efendant’s proposed
counterclaim is an attempt to relitigate issues previously litigated and adjudicated in the Court’s May
1 While the relevant portions of the record were both transmitted to the District Court as a matter of
course, see Transmittal of Record [ECF No. 8], and provided by the Appellant, see Appendix to
Appellant’s Brief [ECF No. 14], we’ll refer directly to the underlying bankruptcy case dockets.
Citations to the Main Bankruptcy Case will be styled [Main Bankr. ECF No. X], and citations to the
Adversary Bankruptcy Case will be styled [Adv. Bankr. ECF. No. X].
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23rd, 2022, conversion order, and the July 12th, 2023 substantive consolidation order, and as such
amounts to nothing more than an impermissible collateral attack on both orders.”); see also id. at 12:10–
14 (“The Court is mindful that the pending appeal of the substantive Consolidation Order before the
11th Circuit deprives this Court of jurisdiction to enter orders that would affect or modify any issue
or matter on appeal.”).2 Smith timely filed this appeal.
Having carefully examined the briefs and the record—and for the reasons we outline below—
we AFFIRM the Bankruptcy Court’s Order.
T HE F ACTS
I. 	The Main Case
In our two prior orders in this case, we detailed the relevant circumstances of No Rust’s
bankruptcy action, see generally Smith v. Slott, 683 F. Supp. 3d 1331 (S.D. Fla. 2023) (Altman, J.), aff’d sub
nom., In re No Rust Rebar, Inc., 2025 WL 1743293 (11th Cir. June 24, 2025) (“Slott I”); Smith v. Slott, 754
F. Supp. 3d 1271 (S.D. Fla. 2024) (Altman, J.) (“Slott II”), so we’ll limit our discussion here to the Main
Bankruptcy Case orders that are most germane to this appeal—namely, the Order Converting Case to
Chapter 7 (the “Conversion Order”) [Main Bankr. ECF No. 193] and the Order Granting Trustee’s
Motion for Consolidation (the “Consolidation Order”) [Main Bankr. ECF No. 441].
a. 	The Conversion Order
On May 23, 2022, the Bankruptcy Court converted No Rust’s bankruptcy case from Chapter
11 to Chapter 7 (and appointed a trustee to manage the estate) because it found that a conversion
would be “in the best interest of the estate and its creditors.” Conversion Order at 1. The Bankruptcy
Court explained that it could only convert the case—and preclude No Rust from operating as debtor-
in-possession—“for cause,” and that sufficient cause included “fraud, dishonesty, incompetence, or
2 The Bankruptcy Court memorialized its oral ruling in a written Order Granting in Part and Denying
in Part Defendant’s Motion to Amend (the “Order”) [Adv. Bankr. ECF No. 58].
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gross mismanagement of the affairs of the debtor, either before or after the date of commencement
of the case . . . or for failure to perform the obligations of the debtor under a plan confirmed under
this subchapter.” Id. at 18. In its Conversion Order, the Bankruptcy Court found “cause” for the
conversion because Smith had commingled estate assets and liabilities with those of companies he
controlled in a haphazard asset soup he called the “Family.” See id. at 19 (“[T]he Family appears to
have been a group of commingled entities whose responsibilities, assets, and liabilities were constantly
shuffled to fit Smith’s needs or whims.”). “This commingling,” the Bankruptcy Court held, “resulted
from incompetence or gross mismanagement of No Rust’s affairs at best, and fraud or dishonesty at
worst, but most damningly created an incurable conflict between the interests of Smith and those of
the estate.” Ibid.; see also id. at 23 (“At best, Smith’s unusual business practices constitute prepetition
incompetence and gross mismanagement of the affairs of No Rust.” (citation omitted)); id. at 30
(“Smith’s prepetition failure to get a signed and written contract that includes an option to purchase
the Property constitutes incompetence or gross mismanagement.”).
Based on these findings (and others that aren’t relevant here), the Bankruptcy Court converted
the case to a Chapter 7 proceeding and appointed Slott to administer “all records and property of the
estate[.]” Id. at 32; see also Notice of Appointment of Trustee [Main Bankr. ECF No. 195].
b. 	The Consolidation Order
After her appointment as the Chapter 7 Trustee, Slott moved the Bankruptcy Court for an
order “substantively consolidating RMC, REM, GES, and RAW [(the ‘Smith Entities’)] . . . and their
assets and liabilities into th[e] Estate[.]” Motion to Substantively Consolidate Raw Materials Corp.,
Raw Energy Materials, Corp., Global Energy Sciences, LLC, and Raw, LLC into this Estate
(“Consolidation Motion”) [Main Bankr. ECF No. 385] at 1. After briefing from the parties, the
Bankruptcy Court granted the Consolidation Motion. See generally Consolidation Order. The
Bankruptcy Court explained that, under U.S. Supreme Court and Eleventh Circuit precedent,
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“[s]ubstantive consolidation can be applied to non-debtor third parties,” id. at 13, and found that the
applicable factors justified consolidation, see id. at 14–23. The court added that, “despite being
provided ample opportunity, the [Smith Entities] raised no substantive arguments in opposition to
consolidation or to contest the applicability of the[se] . . . factors.” Id. at 24. The Bankruptcy Court
also rejected the Smith Entities’ various procedural arguments. See Consolidation Order at 24–39.
Smith (and the Smith Entities) asked us to reverse the Consolidation Order for several
reasons—all of which we addressed and rejected. See Slott II, at 1311 (“After careful review, in sum,
we hereby ORDER and ADJUDGE that the Bankruptcy Court’s Order Granting the Trustee’s
Motion to Substantively Consolidate [ ] is AFFIRMED.”). Notably, Smith claimed on appeal “that
the Bankruptcy Court misapplied the law of collateral estoppel by entering a consolidation order based
on factual findings from [the Conversion Order] that involved a different legal issue and different parties.”
Id. at 1277 (emphasis in original); see also id. at 1305–06 (“The Appellants claim—as they did below—
that they were total strangers to the prior Conversion Order, had no representation in the prior
process, and had no opportunity to address factual and legal bases for merging their separate assets
into the bankruptcy estate.” (cleaned up)). In rejecting this argument, we explained that the Bankruptcy
Court could “apply collateral estoppel to a party who didn’t technically participate in the original
proceeding,” id. at 1306, and held that Smith and the Smith Entities were bound by the Conversion
Order’s findings, even though they weren’t (at that time) technically parties to the Main Bankruptcy
Case.
II. 	The Adversary Case
In 2023, Slott, as Chapter 7 Trustee, initiated an adversary proceeding in the No Rust matter
against Smith. See generally Adv. Bankr. Docket. The operative complaint in that action was filed on
August 2, 2023, and seeks to avoid certain post-petition transfers Smith had made. See generally
Amended Complaint [Adv. Bankr. ECF No. 14]. After an unsuccessful motion to dismiss, see Order
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Denying Defendant’s Motion to Dismiss [Adv. Bankr. ECF No. 20], Smith timely filed his Answer
and Affirmative Defenses to the Amended Complaint on October 11, 2023, see Answer and
Affirmative Defenses [Adv. Bankr. ECF No. 23]. The litigation between the parties proceeded
normally until December 2, 2024—over a year after Smith submitted his Answer—when Smith filed
a Motion to Amend his response to Slott’s Amended Complaint. See generally Motion to Amend.
In his Motion to Amend, Smith sought permission to add a counterclaim to his response.
Smith told the Bankruptcy Court that “[t]he Counterclaim is asserted due to the continuing negative
effect of the Conversion Order on Smith, personally. The suggestions in the Conversion Order that
Smith was incompetent or fraudulent has prevented him from going into any business ventures with
investors.” Id. at 2. Smith argued that the Bankruptcy Court’s “findings in the Conversion Order are
not binding upon him personally because he was not a direct party to the Conversion Order. Smith
did not have standing to appeal or seek reconsideration of the Conversion Order, so certain findings
therein may not be necessarily found against him in the Counterclaim.” Id. at 2.
Slott opposed this request. See generally Objections to Motion to Amend [Adv. Bankr. ECF No.
48]. In Slott’s view, the proposed counterclaim was merely “a transparent, bad faith effort” to attack
the Bankruptcy Court’s Conversion Order. See id. at 3. According to Slott, “Smith was the central figure
in the highly contested proceedings that led to the Conversion Order. He and his commingling of
both his various dominated businesses and his personal affairs is the ‘glue’ that holds the Conversion
Order together.” Id. at 4 (emphasis original). And (Slott said) Smith’s claim that he couldn’t appeal the
Conversion Order was frivolous. See ibid. (“As it was a main case order, and not an order in an
adversary proceeding, of course he is not a ‘named party,’ as there is no such thing in that context.
But to assert that he was not a ‘direct party’ to that contested matter is ludicrous. If anything, he was
the most direct party to that matter.” (emphasis original)); see also ibid. (“Moreover, in his personal
capacity, Smith has twice lost on this point before the District Court. Smith personally appealed the
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Green Tech settlement, along with others. In that appeal, the District Court [ ] expressly found the
findings of the Conversion Order binding on those appellants, which included Smith personally. . . .
What person other than Smith could have authorized such an appeal—or chosen not to pursue such?
There is no such other person. That choice was Smith’s and Smith’s alone.”).
The Bankruptcy Court agreed with Slott, denied Smith’s Motion to Amend, see Order at 2
(“The Motion is Denied in Part as to the counterclaim.”), and announced its oral ruling on January
2, 2025, see generally Order Tr. In that oral ruling, the Bankruptcy Court cited several grounds for its
denial of Smith’s request to add a counterclaim. Most importantly, the Bankruptcy Court found that
Smith’s proposed counterclaim was “nothing more than an impermissible collateral attack” on the
Conversion and Consolidation Orders, Order Tr. at 8:16–22, and that the factual findings
underpinning the Conversion Order precluded Smith’s declaratory-judgment counterclaim, which
expressly attacked those findings, see id. at 10.3 “The preclusive effect of the Conversion Order and its
factual findings,” the Bankruptcy Court explained, “are best viewed through the lens of res judicata, a
term that encompasses both claim preclusion and issue preclusion.” Id. at 10:15–19 (citing Taylor, 553
U.S. at 892). “Issue preclusion,” the Bankruptcy Court observed, “bars successive litigation of an issue
of fact or law actually litigated and resolved in a valid court determination essential to the prior
judgment, even if the issue occurs in the context of a different claim . . . . In other words, successive
re-litigation of essential issues of fact litigated and resolved in the Court’s conversion order, even if
the issue occurs in the context of a different claim, are barred.” Id. at 10:20–11:12. In the Bankruptcy
Court’s view, then, the doctrine of issue preclusion provided it with “specific and significant reason
to deny the debtor’s motion to amend its pleadings to include the proposed counterclaim. The
3 As we’ve said in a prior order, “[b]ecause the Conversion Order was never appealed, we accept its
findings as true.” Slott I, at 1340 n.5 (citing In re Cummings, 381 B.R. 810, 823 (S.D. Fla. 2007) (Gold,
J.)).
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declaratory relief sought by the defendant is barred by res judicata, and as such, the assertion of the
counterclaim, even if permissible, would prove futile.” Id. at 11:18–23. And the Bankruptcy Court
rebuffed out of hand Smith’s argument that he lacked standing to appeal the Conversion Order,
“expressly reject[ing] the idea that the former debtor-in-possession’s principal is a non-party to a
bankruptcy proceeding.” Id. at 12:5–7. Smith appealed, and this Order follows.
T HE L AW
District courts have “jurisdiction to hear appeals from final judgments, orders, and decrees . . .
of bankruptcy judges.” In re Charter Co., 778 F.2d 617, 621 (11th Cir. 1985) (quoting 28 U.S.C. § 158(a)).
“In reviewing bankruptcy court judgments, a district court functions as an appellate court. It reviews
the bankruptcy court’s legal conclusions de novo, but must accept the bankruptcy court’s factual
findings unless they are clearly erroneous.” In re JLJ Inc., 988 F.2d 1112, 1116 (11th Cir. 1993); see also
In re Gaddy, 851 F. App’x 996, 999 (11th Cir. 2021) (“A bankruptcy court abuses its discretion when it
either misapplies the law or bases its decision on factual findings that are clearly erroneous.”). “De novo
review requires the court to make a judgment independent of the bankruptcy court’s, without
deference to that court’s analysis and conclusions.” In re Piper Aircraft Corp., 244 F.3d 1289, 1295 (11th
Cir. 2001). And “[t]he bankruptcy court’s findings of fact are not clearly erroneous unless, in light of
all the evidence, we are left with the definite and firm conviction that a mistake has been made.” In re
Int’l Pharm. & Disc. II, Inc., 443 F.3d 767, 770 (11th Cir. 2005).
When a party may no longer amend its pleadings as a matter of course under Federal Rule of
Civil Procedure 15, a defendant may only amend its response with the opposing party’s written
consent, or the leave of the court. See FED. R. CIV. P. 15(a)(2).4 “Leave to amend should be freely
given, but a [ ] court can deny leave to amend the complaint when amendment would be futile.” Wade
4 Fed. R. Civ. P. 15 applies in an adversary bankruptcy proceeding. See FED. R. BANKR. P. 7015.
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v. Daniels, 36 F.4th 1318, 1328 (11th Cir. 2022) (citing Hall v. United Ins. Co. of Am., 367 F.3d 1255,
1262–63 (11th Cir. 2004)); see also Foman v. Davis, 371 U.S. 178, 182 (1962) (holding that leave to amend
should be “freely given” “[i]n the absence of . . . undue delay, bad faith or dilatory motive on the part
of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue
prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc.”
(emphasis added)).
A NALYSIS
The Bankruptcy Court denied Smith’s Motion to Amend because it found that his proposed
counterclaim was an impermissible collateral attack on the Conversion and Consolidation Orders—
and that it was thus barred by the doctrine of res judicata. See Order Tr. at 10:15–17 (“The preclusive
effect of the Conversion Order and its factual findings [on Smith’s proposed counterclaim] are best
viewed through the lens of res judicata[.]”). The Bankruptcy Court explained that Smith’s counterclaim
sought to re-litigate issues that had already been resolved—namely, whether he had acted
incompetently or fraudulently in his management of the debtor. See id. at 10:1–7 (“There can be no
doubt the foregoing facts at issue were essential to the Court’s determination, as the Conversion Order
was issued in response to the question presented, [ ] whether sufficient cause existed to remove the
Chapter V debtor as debtor-in-possession for cause, including [ ] fraud dishonesty, incompetence, or
gross mismanagement of the affairs of the debtor[.]”).
Issue preclusion “bars successive litigation of an issue of fact or law actually litigated and
resolved in a valid court determination essential to the prior judgment, even if the issue recurs in the
context of a different claim.” Taylor v. Sturgell, 553 U.S. 880, 892 (2008). Under federal common law,
issue preclusion has four elements: “(1) the issue at stake is identical to the one involved in the prior
litigation; (2) the issue was actually litigated in the prior suit; (3) the determination of the issue in the
prior litigation was a critical and necessary part of the judgment in that action; and (4) the party against
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whom the earlier decision is asserted had a full and fair opportunity to litigate the issue in the earlier
proceeding.” Miller’s Ale House, Inc. v. Boynton Carolina Ale House, LLC, 702 F.3d 1312, 1318 (11th Cir.
2012).
On appeal, Smith advances two attacks on the Bankruptcy Court’s finding that his proposed
counterclaim was barred by the doctrine of issue preclusion. First, he says that the fourth issue-
preclusion element isn’t satisfied here because he wasn’t a party to the Conversion Order. See
Appellant’s 	Brief 	at 	7 	(“The 	bankruptcy 	court 	fused 	Don 	Smith 	and 	the 	Debtor 	as 	one
notwithstanding the differences in their rights as of the entry of the Conversion Order[.]”); see also id.
at 11 (“As between the Conversion Order and the Counterclaim there is no identity of parties and no
identity of issues.” (emphasis added)). But we’ve already addressed and rejected this argument. See Slott
II, at 1305–1311; see also Appellee’s Response at 17 (“In the District Court Subcon Order, Judge
Altman spent some fifteen pages explaining why issue preclusion emanating from the Conversion Order
did indeed bind Smith and his fellow appellants there.” (emphasis original)). We won’t spill any more
ink on this issue and adopt everything we said on the subject in our lengthy discussion in Slott II.
Second, Smith contends that the Bankruptcy Court erred on the third element of issue
preclusion because (he says) the determination that he acted fraudulently and/or incompetently wasn’t
a critical and necessary part of the Conversion Order. See Appellant’s Brief at 11 (arguing that the
Conversion Order merely “speculat[ed] that Smith was either incompetent or fraudulent” and that this
language was “not a finding” of the Conversion Order” (emphasis original)); see also Appellant’s Reply
at 4–5 (“Smith is not attempting to re-litigate issues found in the Conversion Order in that there was
no finding that Smith committed any frauds, or was incompetent. That portion of the Conversion
Order is stated as alternative theories for conversion of the case from Chapter 11 to Chapter 7.”). We
disagree.
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As the Bankruptcy Court correctly observed in its Conversion Order, it could only convert
No Rust’s bankruptcy case from Chapter 11 to Chapter 7 if it had “sufficient cause” to do so.
Conversion Order at 18 (citing 11 U.S.C. §§ 1112(b)(1) & 1185(a)). Sufficient cause included “fraud,
dishonesty, incompetence, or gross mismanagement of the affairs of the debtor, either before or after
the date of commencement of the case . . . or [ ] failure to perform the obligations of the debtor under
a plan confirmed under this subchapter.” Ibid. And that’s exactly what the Bankruptcy Court found
had happened here. See id. at 19 (“This commingling resulted from incompetence or gross
mismanagement of No Rust’s affairs at best, and fraud or dishonesty at worst, but most damningly
created an incurable conflict between the interests of Smith and those of the estate. Accordingly,
conversion or removal of No Rust as debtor in possession is required.”). What’s more, the Bankruptcy
Court specifically determined that this finding was “essential to [its] determination” to convert the case.
Order Tr. at 10:1–3.5 And there can be no doubt that Smith’s (proposed) declaratory-judgment
counterclaim seeks to undo these exact findings—more than two years after the fact. See Motion to
Amend at 26 (“Smith respectfully requests that the Court enter a judgment in his favor against the
Trustee declaring that Smith: did not commit fraud in his management of the Debtor; did not grossly
mismanage the affairs of the Debtor; was not dishonest in his management of the Debtor; and was
not incompetent in his management of the Debtor.”).
But here’s the thing: Even if we agreed with Smith that issue preclusion doesn’t bar his proposed
counterclaim (we don’t), he utterly fails to address the Bankruptcy Court’s second reason for denying
his Motion to Amend—viz., his pending Eleventh Circuit appeal. In its oral ruling, the Bankruptcy
Court explained that, “assuming arguendo that the amendments were not disguised collateral attacks
5 For what it’s worth, Smith cites no authority for his view that the Bankruptcy Court erred in holding
that these findings were essential to the Conversion Order. See generally Appellant’s Brief; Appellant’s
Reply.
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on orders issued in the main case, the Court is mindful that the pending appeal of the substantive
Consolidation Order before the 11th Circuit deprives this Court of jurisdiction to enter orders that
would affect or modify any issue or matter on appeal, which would include any factual findings in the
Conversion Order relied upon by the Court in issuing its substantive Consolidation Order.” Order
Tr. at 12:8–16.
The Bankruptcy Court is of course correct that Smith’s proposed counterclaim, if successful,
would directly contradict the Conversion Order’s finding that Smith operated No Rust incompetently
(at best) and fraudulently or dishonestly (at worst). See Conversion Order at 19. And we agree that
Smith’s pending appeal of Slott II precludes the Bankruptcy Court from altering or amending the
Conversion Order, which forms the gravamen of the Main Bankruptcy Case. See In re Fontainebleau Las
Vegas Holdings, LLC, 2013 WL 1147443, at *4 (Bankr. S.D. Fla. Mar. 19, 2013) (Cristol, Bankr., J.)
(“[T]his Court lacks the jurisdiction to alter the Order while it remains on appeal to the Eleventh
Circuit.”); see also Markland v. Centro Grp., LLC, 2021 WL 1705754, at *6 (S.D. Fla. Mar. 24, 2021)
(Williams, J.), aff’d sub nom., In Re Centro Grp., LLC, 2021 WL 5158001 (11th Cir. Nov. 5, 2021) (“[A]
court may not alter or expand upon the judgment of an earlier order that is pending appeal, in the
context where subsequent action would alter the rights or obligations established by the previous
order.” (cleaned up)).6 Since Smith has totally failed to address this portion of the Bankruptcy Court’s
Order, see generally Appellant’s Brief; Appellant’s Reply, he’s forfeited any challenge he might’ve had to
it, see Douglas Asphalt Co. v. QORE, Inc., 657 F.3d 1146, 1152 (11th Cir. 2011) (“It is well settled that
issues not raised in the district court in the first instance are forfeited.”).
6 Smith’s pending appeal of Slott II directly implicates both the factual findings underpinning the
Conversion Order and our decision to allow the Bankruptcy Court to apply those findings to the
Consolidation Order. See Slott II, at 1311 (“We therefore agree with the Bankruptcy Court’s decision
to 	apply, 	in 	its 	consolidation 	analysis, 	the 	factual 	findings 	it 	made 	during 	the 	conversion
proceedings.”); see also Order Tr. at 10:12–14 (“The substantive Consolidation Order expressly adopts
relevant findings from the Conversion Order.” (cleaned up)).
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* 	* 	*
After careful review, therefore, we hereby ORDER and ADJUDGE that the Bankruptcy
Court’s Order Granting in part and Denying in part Smith’s Motion to Amend [Adv. Bankr. ECF No.
58] is AFFIRMED.
DONE AND ORDERED in the Southern District of Florida on January 14, 2026.
______________________________
ROY K. ALTMAN
UNITED STATES DISTRICT JUDGE
cc: 	counsel of record
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