In re Cornerstone Products, Inc.
| Decision Date | 30 September 2008 |
| Docket Number | Bankruptcy No. 05-43533.,Adversary No. 06-4235. |
| Citation | 416 B.R. 591 |
| Parties | In re CORNERSTONE PRODUCTS, INC., Debtor. William Herzog, as Trustee for the Cornerstone Creditors' Trust, Plaintiff, v. Stopol, Inc. and Stopol Auctions, LLC, Defendants, and Sundance General, LLC, Intervenor-Plaintiff, v. Stopol, Inc. and Stopol Auctions, LLC, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Texas |
Barbara L. Emerson, H. Len Musgrove, Bellinger & DeWolf, L.L.P., C. Ashley Ellis, Frank J. Wright, Wright Ginsberg Brusilow P.C. Dallas, TX, for Debtor.
This matter is before the Court following trial of the Complaint in Intervention filed by Sundance General, LLC and the Cross Complaint and Third Party Complaint filed by Stopol, Inc. and Stopol Auctions, LLC. The primary dispute between the parties is whether Stopol, Inc. and/or Stopol Auctions, LLC "fraudulently concealed" from the Debtor, Cornerstone Products, Inc., the existence of purchase orders from third party buyers for certain of the Debtor's equipment, thereby realizing "secret profits" by purchasing and then reselling certain machines on their own account. The Court, having considered the evidence presented at trial and the arguments of the parties, makes the following findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, as adopted and applied to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7052.
Cornerstone Products, Inc. ("Cornerstone" or the "Debtor") filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on July 5, 2005 (the "Petition Date").2 Cornerstone listed total assets of $50,163,347.61 and total liabilities of $55,957,181.08 in its bankruptcy schedules. Reggie Sullivan, Cornerstone's president, was a co-debtor with respect to several of Cornerstone's secured creditors, including the CIT Group Equipment Financing, Inc. ("CIT"), GE Capital Corporation ("GECC"), Key Equipment Finance ("Key") and Wells Fargo Equipment Finance, Inc. ("Wells Fargo"). Prior to Cornerstone's bankruptcy, Mr. Sullivan personally guaranteed Cornerstone's obligations to these and other secured creditors.
Cornerstone obtained authority to liquidate its assets, as detailed below, and filed a plan in which it proposed to distribute the proceeds from the liquidation of its assets. Cornerstone's auctioneer conducted an auction of Cornerstone's assets on February 8, 2006. On February 16, 2006, the Court entered an order confirming the Second Amended Plan of Liquidation for Cornerstone Products, Inc., as Modified (the "Plan").
The Cornerstone Creditors' Trust (the "Trust") was established pursuant to the Plan. The Trustee, William Herzog, was appointed as representative of the Trust. Article I of the Plan defines the "Trust Assets" as, among other things, "all Causes of Action." Article I of the Plan defines the term "Causes of Action," in pertinent part, as follows:
[A]ny and all claims, objections to claims, causes of action, cross claims or counterclaims held, or assertable by, the Debtor that have been or could have been brought on or after the Petition Date, including ... any and all claims, causes of action, counterclaims, demands, or controversies, against third parties on account of ... fraud, deceit, misrepresentation, ... conflicts of interest, ... breach of fiduciary duty, breach of any alleged special relationship, ... obligation of fair dealing, obligation of good faith....
Article XIII of the Plan provides that this Court retains exclusive jurisdiction to hear and determine all "Causes of Action." Article XIII further provides that, notwithstanding consummation of the Plan, this Court will retain jurisdiction "to hear and determine all controversies, suits and disputes that arise in connection with the interpretation, implementation, effectuation, consummation or enforcement" of the Plan and "to determine any dispute with any creditor or party in interest," among other things.
In addition to creating the Trust, the Plan provided that Mr. Sullivan would form "Sullivan Liquidations" to liquidate the collateral of First United Bank & Trust Company and First United Venture Capital Corporation (collectively, "FUB"). FUB held a senior lien on Cornerstone's manufacturing facility, machinery, equipment, molds, furniture and fixtures (except to the extent specifically pledged to another lender), and Mr. Sullivan had personally guaranteed Cornerstone's obligations to FUB. Sundance General, LLC ("Sundance") is the entity formed by Mr. Sullivan and referred to in the Plan as "Sullivan Liquidations."
On November 1, 2006, the Trustee initiated this adversary proceeding against Stopol, Inc., Stopol Auctions, LLC (together with Stopol, Inc. the "Stopol Entities"), and Neal Kruschke, Jr. The Trustee's Original Complaint included claims for breach of fiduciary duty, fraud, fraud by nondisclosure, negligent misrepresentation, exemplary damages, breach of contract, conspiracy, disgorgement and attorneys' fees. The Court subsequently granted Sundance leave to intervene in this adversary proceeding, and Sundance filed a Complaint in Intervention on March 9, 2007. In its Complaint in Intervention, Sundance asserted claims against the Stopol Entities and Mr. Kruschke for breach of contract, breach of fiduciary duty, fraud, conspiracy, negligent misrepresentation, and attorneys' fees. Sundance also asserted claims against the Trustee for declaratory judgment in its Complaint in Intervention.
On April 11, 2007, the Stopol Entities and Mr. Kruschke answered the Complaint in Intervention and asserted a Cross-Complaint and Third Party Complaint against Sundance and Reggie Sullivan. On May 30, 2007, Mr. Kruschke was dismissed from this adversary proceeding pursuant to an Agreed Order of Dismissal Without Prejudice. On May 31, 2007, the Trustee executed a document entitled "Assignment of Stopol Causes of Action" whereby the Trustee assigned to Sundance all of his right, title and interest in the claims asserted by the Trustee in this adversary proceeding.
Prior to bankruptcy, Cornerstone was in the business of designing, manufacturing and marketing plastic container products, including indoor and outdoor waste containers, storage totes and bins, laundry baskets and hampers, and commercial trash cans. FUB asserted claims against Cornerstone in the aggregate amount of approximately $8,694,930.51 in Cornerstone's bankruptcy case. In addition to Mr. Sullivan's guaranty, FUB's claims were secured by pre-petition liens in substantially all of Cornerstone's assets.
Shortly after the Petition Date, Cornerstone began the process of liquidating its assets to pay creditors. In October and November 2005, as part of the bankruptcy liquidation process, Mr. Sullivan discussed an auction of Cornerstone's assets with various entities and individuals, including the Stopol Entities and DoveBid, Inc. ("DoveBid"). DoveBid and the Stopol Entities submitted written auction proposals to Cornerstone. The key difference between the proposals by the Stopol Entities and DoveBid was the "buyer's premium" (i.e., a premium to be paid by purchasers of the Cornerstone's assets) included in DoveBid's proposal.
Cornerstone eventually selected the Stopol Entities as its auctioneer and pre-auction sales agent. Mr. Kruschke is the sole shareholder of Stopol, Inc. and the sole member of Stopol Auctions, LLC. Stopol, Inc., which Mr. Kruschke formed in 1990, buys and sells used machinery in the plastics industry. Stopol Auctions, LLC, which Mr. Kruschke formed in 2004 according to his trial testimony, is in the business of auctioning plastic processing machinery. The Stopol Entities are headquartered in Ohio and are experienced in the sale of plastics machinery. The Stopol Entities, however, had not previously conducted a bankruptcy auction or assisted in the bankruptcy liquidation process.
According to Mr. Kruschke, one of the main reasons Mr. Sullivan selected the Stopol Entities was because the Stopol Entities—unlike other auctioneers in the industry—had the ability not only to auction equipment through Stopol Auctions, LLC, but also to sell equipment through Stopol, Inc. Mr. Kruschke represented to Mr. Sullivan that he could obtain 20% more for some of Cornerstone's equipment by selling the equipment prior to the auction. Mr. Sullivan testified that it was important to him to sell as many of Cornerstone's assets for the highest price possible so as to limit his personal liability to FUB and other secured creditors based on his guarantees of Cornerstone's obligations.
Mr. Kruschke did not intend to market all of Cornerstone's assets to third party purchasers prior to the auction. Mr. Kruschke intended, instead, to purchase certain of Cornerstone's assets through Stopol, Inc. and then resell those assets to third parties. In or around November 2005, Mr. Sullivan and Mr. Kruschke discussed the possibility that Stopol, Inc. might buy some of Cornerstone's assets on its own account and then retain any profit from the sale to third parties. As discussed more fully below, Mr. Kruschke submitted a written proposal for the purchase of sixteen machines to Mr. Sullivan on November 14, 2005.
Mr. Sullivan, as the president of Cornerstone, Mr. Kruschke, as the CEO and president of Stopol, Inc., and Scott Mahalik, as auctioneer, signed an Auction/Liquidation Agreement on November 18, 2005.3 The Auction/Liquidation Agreement states in Paragraph 1(A) that "[t]his agreement is entered into by and between the above described Seller, Auctioneer (as defined below), and Stopol Inc." Mr. Kruschke testified that both Stopol, Inc. and Stopol Auctions, LLC were necessary parties to the...
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