In re Cansorb Industries Corporation, Case No.: 07-50041 (Bankr.M.D.N.C. 11/20/2009)

• Court: U.S. Bankruptcy Court — Middle District of North Carolina
• Writing for the Court: Thomas W. Waldrep
• Decision Date: 20 November 2009
• Docket Number: Adv. No.: 07-6072.,Case No.: 07-50041.
• Citation: In re Cansorb Industries Corporation, Case No.: 07-50041 (Bankr.M.D.N.C. 11/20/2009), Adv. No.: 07-6072., Case No.: 07-50041. (Bankr. M.D.N.C. Nov 20, 2009)
• Parties: IN RE: CANSORB INDUSTRIES CORPORATION, Debtor. C. EDWIN ALLMAN, III, TRUSTEE FOR THE BANKRUPTCY ESTATE OF CANSORB INDUSTRIES CORPORATION, Plaintiff, v. JOACHIM WAPPLER, CANSORB INDUSTRIES, INC., STEELMASTER INDUSTRIES, INC., 2070997 ONTARIO, INC., and DWIGHT L. CROWELL, III, in his capacity as substitute trustee on the Deed of Trust recorded in Book 652, Page 400 of the Rowan County Public Registry, Defendants.

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IN RE: CANSORB INDUSTRIES CORPORATION, Debtor C. EDWIN ALLMAN, III, TRUSTEE FOR THE BANKRUPTCY ESTATE OF CANSORB INDUSTRIES CORPORATION, Plaintiff, v. JOACHIM WAPPLER, CANSORB INDUSTRIES, INC., STEELMASTER INDUSTRIES, INC., 2070997 ONTARIO, INC., and DWIGHT L. CROWELL, III, in his capacity as substitute trustee on the Deed of Trust recorded in Book 652, Page 400 of the Rowan County Public Registry, Defendants.

Case No.: 07-50041.

Adv. No.: 07-6072.

United States Bankruptcy Court, M.D. North Carolina, Winston-Salem Division.

November 20, 2009.

MEMORANDUM OPINION

THOMAS W. WALDREP, Jr., Bankruptcy Judge

This matter came before the Court on July 20, 2009 upon the Defendants' Motion for Summary Judgment (the "Defendants' Motion") filed by Defendants Joachim Wappler, Cansorb Industries, Inc., Steelmaster Industries, Inc., and 2070997 Ontario, Inc. (collectively, the "Wappler Defendants") on June 12, 2009, and the Trustee's Motion for Summary Judgment (the "Plaintiff's Motion") filed by C. Edwin Allman, III (the "Plaintiff") on June 12, 2009. At the hearing, John H. Boddie appeared on behalf of the Wappler Defendants, Jeffrey E. Oleynik appeared on behalf of the Plaintiff, and Steven M. Russell appeared on behalf of Defendant Dwight L. Crowell, III, who does not support the Plaintiff's Motion or the Defendants' Motion.

The Plaintiff's complaint has seven causes of action: (1) improper foreclosure, (2) non-payment of surplus proceeds from the foreclosure sale to Cansorb Industries Corporation (the "Debtor"), (3) avoidance of fraudulent transfer pursuant to Section 548 of the Bankruptcy Code, (4) avoidance of fraudulent transfer of real property pursuant to Section 544(b) of the Bankruptcy Code and Sections 39-23.4 and 23.5 of the North Carolina General Statutes, (5) avoidance of fraudulent transfer of personal property pursuant to Section 544(b) of the Bankruptcy Code and Section 39-23.4 of the North Carolina General Statutes, (6) breach of fiduciary duty, and (7) unfair and deceptive trade practices pursuant to Chapter 75 of the North Carolina General Statutes. The Plaintiff moves for summary judgment on the first, third, and fourth causes of action. The Wappler Defendants move for summary judgment on the first, second, third, fourth, sixth, and seventh causes of action. After consideration of the Plaintiff's Motion, the Defendants' Motion, the pleadings, briefs, affidavits, and other documents filed in support of the two motions, the arguments of counsel, and the relevant law, the Court will deny both the Plaintiff's Motion and the Defendants' Motion.

I. JURISDICTION

The Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 151, 157 and 1334, and the General Order of Reference entered by the United States District Court for the Middle District of North Carolina on August 15, 1984. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), (H), and (O), which this Court has the jurisdiction to hear and determine.

II. PARTIES

Joachim Wappler ("Wappler") is a citizen and resident of Canada. Wappler is the majority shareholder of Cansorb Industries, Inc. ("Cansorb Canada") and Steelmaster Industries, Inc. ("Steelmaster"), and he is owner and president of 2070997 Ontario, Inc. ("Ontario"). Cansorb Canada, Steelmaster, and Ontario are Canadian corporations. The Debtor, Cansorb Industries Corporation, is a Nevada corporation and a wholly-owned subsidiary of Cansorb Canada. Dwight L. Crowell, III is the substitute trustee (the "Substitute Trustee") for the deed of trust recorded in Book 652, page 400 of the Rowan County, North Carolina Register of Deeds.

III. FACTS

In 1985, Cansorb Canada was incorporated in British Columbia, Canada. In 1987, Cansorb Canada incorporated the Debtor, making Cansorb Canada its parent company and sole shareholder. In the late 1980s, the Debtor purchased the assets of North Carolina Wood Fuels L.P. and began manufacturing feline litter products from recycled wood waste at a plant located at 555 Kesler Road, Cleveland, North Carolina (the "Property"). The Debtor's only means of revenue was through use of the Property. On December 1, 1989, William Kraigsley became the managing director of the Debtor and served in that capacity until November 2004. On December 13, 1989, Wappler acquired a controlling interest in Cansorb Canada. John S. Edmunds is an accountant who rendered tax and other accounting services to Wappler and the companies that Wappler owned or controlled from around 1980 to the present.¹

On December 28, 1989, the Debtor, Cansorb Canada, and Wappler entered into a loan agreement (the "Loan Agreement") whereby Wappler agreed to lend up to $500,000.00 to Cansorb Canada and the Debtor. The Loan Agreement had a maturity date of December 28, 1994. Pursuant to the Loan Agreement, Cansorb Canada agreed to execute a convertible debenture in favor of Wappler and to secure the loan with the assets of Cansorb Canada, and the Debtor agreed to execute a debenture in favor of Wappler and to secure the loan by the Debtor's assets.²

Also on December 28, 1989, Cansorb Canada executed a convertible debenture agreement (the "Convertible Debenture") whereby Cansorb Canada agreed to pay $500,000.00 to Wappler on or before December 28, 1994. The Convertible Debenture gave Wappler the right to convert all or part of the principal sum of $500,000.00 and interest into units consisting of common shares of Cansorb Canada. As security for the $500,000.00 advance, the Convertible Debenture provides that Cansorb Canada will pledge all of its properties, assets, and undertakings. The Convertible Debenture states that it is to be construed in accordance with the laws of the Province of British Columbia, Canada.

That same day, the Debtor apparently executed a promissory note (the "Promissory Note") in favor of Wappler in the amount of $500,000.00, with a maturity date of December 28, 1994. According to the Promissory Note, the Debtor pledged all of its "property, assets and undertakings" to secure "the interests of Joachim Wappler." The Promissory Note is not notarized; it has only a date ("December 28, 1989") and location ("Mississauga Ontario") in the same typeface as the rest of the two-paragraph document. Even though they were apparently executed on the same day, neither the Loan Agreement nor the Promissory Note references the other.

At some point, the Debtor executed a debenture agreement ("the Debenture") in favor of Wappler in the amount of $500,000.00, with a maturity date of December 28, 1994. The Debenture is signed but undated. However, on January 12, 1990, Kraigsley, the Debtor's managing director, caused the Debenture to be notarized. As security for the $500,000.00 advance, the Debenture provides that the Debtor will pledge the Property and all of its assets. The Debenture states that it is to be construed in accordance with the laws of the State of North Carolina. The Debenture makes reference to the Loan Agreement dated December 28, 1989, but it provides no conversion rights to Wappler.

On January 12, 1990, the Debtor executed a deed of trust (the "Deed of Trust") on the Property for the benefit of Wappler. Wappler signed the Deed of Trust as the President of the Debtor, and Kraigsley signed it as Secretary. That same day, the Deed of Trust was recorded in Book 652, page 400 of the Rowan County, North Carolina Register of Deeds. The Deed of Trust is a form. As part of the original language of the form, the Deed of Trust stated that it secured a "Promissory Note," but the words "Promissory Note" were crossed out where they first appeared in the form and the words "Convertible Debenture" were written above them, resulting in the Deed of Trust stating that the Debtor is indebted to WAPPLER in the amount of $500,000.00 "as evidenced by (sic) Convertible Debenture, the terms of which are incorporated herein by reference." Thereafter, when the words "Promissory Note" appeared in the form, they were not crossed out. In the very next sentence, the Deed of Trust states that the "final due date for payment of said Promissory Note, if not sooner paid, is December 28, 1994." In the next paragraph, the Deed of Trust references "attorneys fees as provided in the Promissory Note." The Deed of Trust makes no reference to the Debenture executed by the Debtor.

In December of 1989, Wappler made the first of several advances, although the actual recipient of such advances remains unclear. In April of 1990, Wappler converted $200,000.00 of the debt owed to him into 3,200,000 common shares of Cansorb Canada pursuant to the Convertible Debenture. In August of 1991, Wappler converted the remaining $300,000.00 of debt into 5,099,574 common shares of Cansorb Canada. Despite these conversions, Wappler continued to advance funds to either the Debtor or Cansorb Canada up until July 23, 2004. In total, Wappler advanced funds in excess of $500,000.00. Neither the Convertible Debenture nor the Debenture contains future advances provisions.

On May 1, 2003, the Debtor and Steelmaster entered into an agreement whereby the Debtor agreed to transfer certain equipment to Steelmaster in exchange for ongoing financial assistance. Wappler signed the agreement on behalf of both the Debtor and Steelmaster. By November 2004, the Debtor owned only the Property, inventory worth approximately $10,000.00, and accounts receivable totaling approximately $30,000.00.

On December 17, 2004, the Substitute Trustee sent Wappler an engagement letter so that the Substitute Trustee could represent him in a foreclosure on the Property. On December 22 2004, the Substitute Trustee initiated a foreclosure proceeding before the Rowan County Clerk of Superior Court (the "Clerk") entitled "In the Matter of the Proposed Foreclosure of a Deed of Trust Executed by Cansorb Industries Corp. in an Original Amount of $500,000.00 dated January 12, 1990 and Recorded in Book 652, Page 400 in...