Donaldson v. Bernstein , 104 F.3d 547 ( 1997 )

Opinions of the United
1997 Decisions States Court of Appeals
for the Third Circuit
1-14-1997
Donaldson v. Bernstein
Precedential or Non-Precedential:
Docket 96-3208
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 96-3208
DENNIS C. DONALDSON; MARION L. DONALDSON, his wife
v.
JOSEPH J. BERNSTEIN, ESQUIRE, TRUSTEE IN THE
CHAPTER 7 BANKRUPTCY ESTATE OF INSULFOAMS, INC.
DENNIS and MARION DONALDSON,
Appellants
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Civ. No. 95-01644)
Argued December 12, 1996
BEFORE: GREENBERG, ALITO, and ROTH, Circuit Judges
(Filed: January 14, 1997)
Donald R. Calaiaro (argued)
Calaiaro, Corbett & Bower
1105 Grant Building
Pittsburgh, PA 15219
Attorneys for Appellants
Charles E. Bobinis (argued)
Bernstein & Bernstein
1133 Penn Avenue
Pittsburgh, PA 15222
Attorneys for Appellee
OPINION OF THE COURT
GREENBERG, Circuit Judge.
I. FACTUAL AND PROCEDURAL HISTORY
1
This case is before this court on appeal from an order
of the district court entered April 1, 1996, which affirmed an
order of the bankruptcy court entered July 19, 1995, for the
reasons the bankruptcy court set forth in its opinion.
Insulfoams, Inc., the debtor, was incorporated in Pennsylvania in
1979 and was in the business of installing insulation for
commercial and industrial establishments. Defendants-appellants,
Dennis and Marion Donaldson, were Insulfoams' only shareholders,
directors and officers, and at least at one time, each owned half
of its stock. Dennis was Insulfoams' President and chief
executive officer and Marion was its chief financial officer.
According to the Donaldsons, Marion resigned her office and sold
her stock in Insulfoams on April 5, 1990. Br. at 15-16. The
Donaldsons, however, did not disclose the resignation and sale
until Dennis notified the Pennsylvania Department of State
Corporations Bureau in May 1994. In its opinion following the
trial, the bankruptcy court rejected the Donaldsons' contentions
that Marion had resigned and thus treated her as an officer of
Insulfoams at all times material to this action. In re
Insulfoams, 184 B.R. 694, 706-07 (Bankr. W.D. Pa. 1995).
Insulfoams filed a voluntary Chapter 11 bankruptcy
petition on April 24, 1989, and thereafter continued operations
as a debtor-in-possession. On October 26, 1989, Insulfoams filed
a disclosure statement and plan of reorganization. But, as the
bankruptcy court explained in its opinion, the court required
Insulfoams to file an amended disclosure statement indicating
whether the Donaldsons would make a future cash infusion into
2
Insulfoams. Insulfoams, 184 B.R. at 699. Consequently, on
December 28, 1989, Insulfoams filed an amended disclosure
statement which stated that "if in any month of this Plan, the
corporation is unable to afford the required monthly Plan payment
the principals, Dennis and Marion Donaldson will guarantee that
the payment is made by lowering their own salaries or by making a
capital infusion into the corporation from their own resources."
Supp. app. at 101.
The bankruptcy court approved the amended disclosure
statement on April 12, 1990, and confirmed Insulfoams' plan of
reorganization on May 24, 1990. The plan required Insulfoams to
pay its tax liabilities to the Internal Revenue Service ($29,893)
and the State of Pennsylvania ($6,346.74) in full, with interest,
over the first 20 months of the plan. Supp. app. at 85. The
Donaldsons were personally liable for these taxes. The plan
further provided that Insulfoams would pay the unsecured
creditors' claims (totaling $284,250) 30 cents on the dollar in
monthly payments running from the 21st month to the 72nd month of
the plan. Id. The court issued a final decree on April 2, 1991,
after Insulfoams represented that the plan had been substantially
consummated, and the clerk of the bankruptcy court closed the
case six months later on October 2, 1991.
On September 29, 1992, Insulfoams' largest unsecured
creditor filed a motion to compel it to make payments according
to the plan, alleging that Insulfoams had not made any payments
to the unsecured creditors after completing the payments to the
IRS and the State of Pennsylvania. Insulfoams admitted the
3
allegations, but claimed that adverse business conditions caused
it to miss the payments and indicated that it would meet its plan
obligations by December 15, 1992. In these circumstances, the
bankruptcy court postponed a hearing on the creditor's motion
until December 15, 1992, but at that time it found that
Insulfoams would not be able to make the required payments.
Consequently, the bankruptcy court reopened the case pursuant to
11 U.S.C. § 350(b) and converted it to a Chapter 7 proceeding
pursuant to 11 U.S.C. § 1112(b)(8).
The court appointed a trustee for Insulfoams on
December 22, 1992. On July 31, 1994, the trustee brought this
adversary proceeding in the bankruptcy court against the
Donaldsons, alleging that they obtained confirmation of the
reorganization plan under false pretenses, knowing that they
would not fund the plan after they paid the tax debts for which
they were personally liable. The trustee further charged that
the Donaldsons breached their fiduciary duties to Insulfoams by
diverting business opportunities from it to Hi-Tech Contractors,
Inc., another company they owned, for their personal benefit.
The trustee sought compensatory and punitive damages against the
Donaldsons.
The evidence at the trial showed that Hi-Tech was
founded in the mid-1980s and that Dennis Donaldson was its
principal. Hi-Tech was in the business of removing asbestos and
other hazardous materials, for which it, unlike Insulfoams, was
properly licensed and insured. Insulfoams and Hi-Tech leased
adjoining space in a building the Donaldsons owned and often used
4
the same employees and equipment. In 1992, Insulfoams had seven
contracts (totaling $181,098.69) for the removal of asbestos and
other hazardous materials which it subcontracted to Hi-Tech.
Insulfoams received $12,047.01 of the profits from these
contracts, while Hi-Tech received $29,672.62. Insulfoams, 184
B.R. at 702. In the circumstances, the bankruptcy court found
that the Donaldsons breached their fiduciary duties by diverting
business to Hi-Tech from Insulfoams, and it awarded the trustee
$29,672.62 in compensatory damages (the full amount of Hi-Tech's
profit on the seven contracts) and $55,602.38 in punitive
damages. The court calculated the total judgment of $85,275 to
fund fully 30% of the claims of the unsecured creditors as
provided in the plan. Insulfoams, 184 B.R. at 709. The
Donaldsons appealed to the district court, which affirmed, and
they then appealed to this court.
II. DISCUSSION
A. Standard of Review
Inasmuch as the district court sits as an appellate
court in bankruptcy proceedings, we exercise plenary review of
its decision. In re Swedeland Dev. Group, Inc., 16 F.3d 552, 559
(3d Cir. 1994) (in banc). We, in turn, review the bankruptcy
court's opinion under a clearly erroneous standard for findings
of fact and under a de novo standard for conclusions of law. In
re Sharon Steel Corp., 871 F.2d 1217, 1222-23 (3d Cir. 1989). We
review a bankruptcy court's decision whether to reopen a case
pursuant to 11 U.S.C. § 350(b) on an abuse of discretion
5
standard. Matter of Case, 937 F.2d 1014, 1018 (5th Cir. 1991);
In re Rosinski, 759 F.2d 539, 540-41 (6th Cir. 1985).
B. Subject Matter Jurisdiction
The Donaldsons argue that the bankruptcy court did not
have subject matter jurisdiction because prior to the
commencement of these adversary proceedings the court closed the
case after a final decree. The bankruptcy court, however, did
more than entertain this adversary proceeding. Rather, before
the trustee instituted these proceedings, the court reopened the
case pursuant to 11 U.S.C. § 350(b) and converted it to a Chapter
7 case pursuant to 11 U.S.C. § 1112(b)(8). Only then did it
appoint the trustee. Section 350(b) provides that "[a] case may
be reopened in the court in which such case was closed to
administer assets, to accord relief to the debtor, or for other
cause." Here, the court reopened the case "for other cause,"
namely the Donaldsons' material default with respect to
implementing the plan of reorganization, a basis to convert a
post-confirmation Chapter 11 case to a Chapter 7 case under 11
U.S.C. § 1112(b)(8). While no party sought the reopening, 11
U.S.C. § 105(a) empowered the bankruptcy court to reopen the case
on its own motion. See In re Doty, 129 B.R. 571, 579-80 (Bankr.
N.D. Ind. 1991). Clearly, in view of Insulfoams' failure to make
payments to the unsecured creditors as the plan required, the
court did not abuse its discretion in taking that action and
converting the Chapter 11 case to a Chapter 7 case. Thus, we
reject any contention that the bankruptcy court lacked
6
jurisdiction on the ground that it was acting in a closed case.
The Donaldsons, however, expand on their subject matter
jurisdiction argument as they contend that the confirmation of
the plan in itself, an act distinct from closing the Chapter 11
case, eliminated the bankruptcy court's jurisdiction to entertain
this proceeding. In this regard, they point out that the trustee
essentially bases this adversary proceeding on state law claims.
Furthermore, they note that this proceeding deals mainly with
events in 1992, two and a half years after the bankruptcy court
approved the reorganization plan and that the events even took
place after the bankruptcy court closed the case on October 2,
1991. The Donaldsons observe that there is a division of
authority with respect to the scope of a bankruptcy court's
jurisdiction following confirmation of a plan. Thus, some courts
have ruled that jurisdiction exists after confirmation of a plan
only for those matters expressly reserved by the confirmation.
See, e.g., In re Johns-Manville Corp., 7 F.3d 32, 34 (2d Cir.
1993). Other courts have held that jurisdiction extends to
proceedings designed to interpret, enforce or aid the operation
of the reorganization plan. See, e.g., In re Erie Hilton Joint
Venture, 137 B.R. 165, 170 (Bankr. W.D. Pa. 1992).
We, however, need not decide the general scope of a
bankruptcy court's jurisdiction following the confirmation of a
plan, for at a minimum it would have jurisdiction over a case
otherwise within its jurisdiction under 28 U.S.C. § 1334 if, as
here, the court has reopened a case after confirmation and
converted it to a Chapter 7 case. See Walnut Assocs. v. Saidel,
7
164 B.R. 487, 493-94 (E.D. Pa. 1994) (holding that reopening
closed case was necessary for bankruptcy court jurisdiction).
Thus, we conclude that the status of the case in the bankruptcy
court did not preclude the court from exercising jurisdiction in
these adversary proceedings either on the ground that the court
had confirmed a plan of reorganization or had closed the case.
We consider then the extent of a bankruptcy court's
jurisdiction under 28 U.S.C. § 1334. The fact that we have
concluded a court has not lost its jurisdiction here because of
the case's procedural posture does not mean that the court can
entertain any matter tendered to it. Rather, a bankruptcy court
can act only in cases and proceedings within its jurisdiction.
Bankruptcy courts have original jurisdiction over: (1) cases
under Title 11; (2) proceedings arising under Title 11; (3)
proceedings arising in a case under Title 11; and (4) proceedings
related to a case under Title 11. 28 U.S.C. § 1334. A case
under Title 11 is the bankruptcy petition itself, a basis for
jurisdiction clearly not applicable here. A proceeding fitting
within any of the three remaining categories is within the
bankruptcy court's jurisdiction and, since the third category is
the broadest, a court "need only determine 'whether a matter is
at least related to the bankruptcy.'" In re Marcus Hook Dev.
Park, Inc., 943 F.2d 261, 264 (3d Cir. 1991) (citations omitted).
A proceeding is "related to" the bankruptcy case if "the outcome
of that proceeding could conceivably have any effect on the
8
estate being administered in bankruptcy." Pacor, Inc. v.
Higgins, 743 F.2d 984, 994 (3d Cir. 1984).1
Some courts have held that the act of confirmation
changes the above test to mean "significantly affect consummation
of the plan as confirmed." In re Haws, 158 B.R. 965, 970 (Bankr.
S.D. Tex. 1993); see also Warren v. Calania Corp., 178 B.R. 279,
282 (M.D. Fla. 1995). In Haws, the court found it did not have
subject matter jurisdiction for a post-confirmation adversary
proceeding based on state law claims because the proceeding did
not involve construction or interpretation of the plan and any
damages awarded were not necessary to ensure funding of the plan.
178 B.R. at 971. The court found that the mere fact that the
trustee brought the proceeding on behalf of a group of creditors
did not make the proceeding sufficiently "related to" bankruptcy
for the court to exercise jurisdiction. Id. Other cases have
held that the possibility of recovering damages which could be
used to fund a plan is also an inadequate basis to provide
jurisdiction. See Warren, 178 B.R. at 282; In re H & L
Developers, Inc., 178 B.R. 71, 76 (Bankr. E.D. Pa. 1994); In re
Transamerica Natural Gas Corp., 127 B.R. 800 (S.D. Tex. 1991).
This proceeding, however, is different in several
respects from these cases limiting a bankruptcy court's
jurisdiction. First, this proceeding has a much closer nexus to
1. The Supreme Court effectively has overruled Pacor with
respect to the holding in Pacor that the prohibition against
review of a remand order in 28 U.S.C. § 1447(d) is not applicable
in a bankruptcy case. See Things Remembered, Inc. v. Petrarca,
116 S. Ct. 494 (1995). Things Remembered, however, does not
disturb the authority of Pacor on the point for which we cite it.
9
the bankruptcy case than the proceedings in Haws, Warren, H & L,
and Transamerica. Although the trustee bases his claims on state
law allegations of breach of fiduciary duty, he is arguing that
the Donaldsons violated their fiduciary duties to the unsecured
creditors by diverting business from Insulfoams and not funding
the reorganization plan. Therefore, even though the bankruptcy
court converted the bankruptcy to a Chapter 7 case, the trustee
basically is seeking to carry out the intent of the
reorganization plan. Thus, this case, unlike Haws, Warren, H &
L, and Transamerica, does not involve a dispute essentially
collateral to the bankruptcy case. Rather, this action
implicates the integrity of the bankruptcy process, as the
Donaldsons' actions impaired Insulfoams' ability to make the
payments required under the plan. In this regard we point out
that it has been held that "misconduct during the bankruptcy
proceeding" by the debtor often compels the court to allow the
fraud to be redressed. See In re Emmer Bros. Co., 52 B.R. 385,
394-95 (D. Minn. 1985).
Furthermore, it has been held that if there is a
sufficient nexus, a bankruptcy court can exercise subject matter
jurisdiction over a related state law matter by reopening a
closed bankruptcy case. See In re Burch, 88 B.R. 686, 690
(Bankr. E.D. Pa. 1988). Significantly, unlike in Haws, 158 B.R.
at 967, the court in this case did not reopen the bankruptcy case
merely to entertain an adversary proceeding. Indeed, as far as
we can ascertain, the court did not even consider the possibility
of a trustee bringing this proceeding when it reopened the case,
10
though we do not predicate our result on our belief in this
regard. Rather, the court reopened the case and converted it to
a Chapter 7 case because of Insulfoams' material default under
the plan. We conclude, however, that the adversary proceeding
brought at this stage of the case satisfies the requirements of
section 1334 because it relates back to the effectuation of the
Chapter 11 proceeding. We are satisfied, therefore, that the
bankruptcy court had jurisdiction over it.
In reaching our result on the jurisdictional issues we
have not lost sight of the theme which recurs in the reported
opinions that the jurisdiction of the bankruptcy courts must be
confined within appropriate limits and does not extend
indefinitely, particularly after the confirmation of a plan and
the closing of a case. We are in full accord with that approach
and indeed have expressed similar reservations regarding a
bankruptcy court's jurisdiction in other contexts. See Beard v.
Braunstein, 914 F.2d 434, 442-45 (3d Cir. 1990). Yet we
recognize, as the Court of Appeals for the Fifth Circuit has set
forth, that in an "analysis of the impact of a confirmed plan of
reorganization upon a subsequent conversion to Chapter 7 . . .
much depends on procedural nuances." Matter of Pavlovich, 952
F.2d 114, 116 (5th Cir. 1992). Here we are satisfied for the
reasons we have expressed that the bankruptcy court had
jurisdiction in these proceedings. We predicate our conclusion,
however, on the unusual "procedural nuances" here so our opinion
should not be used as authority in circumstances in which it
11
cannot be applied reasonably. Different "nuances" might bring a
different conclusion.
C. The Trustee's Standing
The Donaldsons also argue that the trustee does not
have standing to bring this action. They claim that the
conversion to Chapter 7 gave the trustee power only over
Insulfoams' pre-confirmation estate. They support this argument
by citing In re T.S. Note Co. TFC, 140 B.R. 812, 813-14 (Bankr.
D. Kan. 1992), in which the court indicated that new filings were
necessary to deal with post-confirmation entities and assets. We
reject the Donaldsons' reading of T.S. Note. The court there
said that all parties "are bound by the terms of the plan," and
"entities . . . acquiring rights in good faith reliance on the
confirmation order are to be protected." T.S. Note, 140 B.R. at
814. Furthermore, the "[t]erms of the plan discharge pre-
confirmation debt and substitute the obligations set forth in the
plan." In re H.R.P. Auto Ctr., Inc., 130 B.R. 247, 256 (Bankr.
N.D. Ohio 1991). Here, unlike in T.S. Note, which dealt with a
simple default under a plan and the likely inability of the
debtors to complete the plan as confirmed, the trustee based his
claim against the Donaldson on their breach of their fiduciary
duties to Insulfoams and thus to its creditors under the plan, a
circumstance not present in T.S. Note. Accordingly, even though
this case has been converted to a Chapter 7 case, the trustee is
attempting to satisfy Insulfoams' obligations under the plan.
Indeed, the bankruptcy court formulated its judgment to that end.
12
Thus, the circumstances here are distinguishable from those in
T.S. Note. The Donaldsons also cite In re Jartran, Inc., 886
F.2d 859 (7th Cir. 1989), but that case is distinguishable as it
deals with administrative expense priority, not post-confirmation
assets or claims.
We find, moreover, that the trustee is the proper party
to bring this action. The Donaldsons admit that the creditors
would have standing to bring this claim.2 Br. at 22. The
trustee, as the appointed representative of the creditors, is
empowered by the bankruptcy court to represent their interests.
"Property of the bankrupt remains in custodia legis in the
bankruptcy court during the period . . . after the discharge of
the trustee . . . remain[ing] dormant, in the estate, until the
bankruptcy court again appoints a trustee as enforcing guardian."
Stein v. United Artists Corp., 691 F.2d 885, 893 (9th Cir. 1982)
(holding that controlling shareholder of post-confirmation debtor
could not pursue unlisted pre-confirmation claim on behalf of
creditors).3
D. Res Judicata
2. The bankruptcy court found that under Pennsylvania law
creditors of an insolvent corporation have standing to sue the
directors and the trustee has standing as their representative.
In re Insulfoams, 184 B.R. at 704-05. See Branch v. Kaiser, 140
A. 498, 499-51 (Pa. 1928); West v. Hotel Pennsylvania, 25 A.2d
593, 595 (Pa. Super. Ct. 1942). The Donaldsons do not challenge
this holding. Instead they argue that the trustee does not have
standing as a matter of bankruptcy law.
3. The court decided Stein under the Bankruptcy Act of 1898
rather than under the current Bankruptcy Code, Stein, 691 F.2d
885, 888 n.1, but the principles in that case remain applicable.
13
The Donaldsons contend that the res judicata effect of
the confirmation of the plan bars the trustee's action. It is
true that "a confirmation order is res judicata as to all issues
decided or which could have been decided at the hearing on
confirmation." In re Szostek, 886 F.2d 1405, 1408 (3d Cir.
1989). The Donaldsons, however, base their argument on their
misconception that the trustee predicated his claim on pre-
confirmation activity. See br. at 17-20. The bankruptcy court
found, and we agree, that the Donaldsons' "liability is not based
upon the above alleged [pre-confirmation] false pretenses. The
gravamen of the trustee's complaint is that [the Donaldsons]
breached their fiduciary duty after [Insulfoams'] plan was
confirmed by failing to comply with [the plan] and by diverting
[Insulfoams'] business opportunities to Hi-Tech."4 In re
Insulfoams, 184 B.R. at 705.
Claims for post-confirmation acts are not barred by the
res judicata effect of the confirmation order. In Matter of
Pavlovich, 952 F.2d 114, a Chapter 11 case converted to a Chapter
7 case after plan confirmation, the court held that res judicata
did not bar claims of creditors "victimized by post-confirmation
acts" of the debtors.5 Id. at 119. "Creditors whose claims
4. While it is true that the bankruptcy court did consider
some pre-confirmation acts in deciding the damage award, it did
so only for purposes of ascertaining the Donaldsons' motive and
demonstrating a pattern of activity, not for establishing
liability. Further, those acts could not have been considered at
the confirmation hearing because they did not ripen into a cause
of action until the Donaldsons' later breach of fiduciary duty.
5. The claims in question were to revoke the debtor's
discharge, not state law claims of breach of fiduciary duty as we
have here.
14
arise from and after confirmation are not barred by the event of
confirmation from asserting such claims, except to the extent
that they arise from pre-confirmation acts." Id. That situation
exists here as we are dealing with post-confirmation conduct.
Another court, in denying a motion to revoke confirmation, was
careful to point out that res judicata would not bar a common law
action for damages for fraud "where the alleged fraud could not
have been asserted in the bankruptcy proceedings, the underlying
factual claims were not actually adjudicated, and the relief
sought would not upset the confirmed plan of arrangement."
Matter of Newport Harbor Assocs., 589 F.2d 20, 24 (1st Cir.
1978). These circumstances also are present here. The
Donaldsons undertook their wrongful conduct after confirmation
and it would not be reasonable to hold that when the court
confirmed the plan the creditors should have objected on the
basis of the fraud which had not as yet harmed them. Thus, the
trustee's claim could not have been asserted before confirmation
and the relief granted here by the bankruptcy court furthers
rather than upsets the intent of the plan.
E. Marion Donaldson's Liability
The Donaldsons contend that there is no evidence
showing that Marion had a fiduciary duty to Insulfoams and thus
to its creditors and therefore we should reverse the bankruptcy
court's finding that she had such a duty as clearly erroneous.
The bankruptcy court held that the Donaldsons were judicially
estopped from asserting that Marion had terminated her
15
relationship with Insulfoams on April 5, 1990, because they did
not disclose the alleged resignation when the court approved the
plan of reorganization. Thus, both the court and the creditors
relied on the representations in the amended disclosure statement
that Dennis and Marion Donaldson were running Insulfoams and
would guarantee the payments due under the plan. 184 B.R. at
706. The court also found that the Donaldsons' claim that Marion
had terminated her involvement with Insulfoams was not credible
and that she had not resigned as she claimed. Id. at 706-07.
Insulfoams' amended disclosure statement indicated that
Marion Donaldson was the "primary bookkeeper and financial
organizer of the business." Furthermore, the statement discussed
her salary for 1990 and included her as a guarantor of plan
payments. Supp. app. at 101. The bankruptcy court approved the
amended disclosure statement after a hearing on April 12, 1990,
one week after Marion now claims she resigned from Insulfoams.
This resignation was not disclosed at the hearing nor at any time
until 1994. The bankruptcy court relied on these statements in
the amended disclosure statement in approving it as well as the
reorganization plan.
When a party asserts a position inconsistent with a
position taken in a previous proceeding, the doctrine of judicial
estoppel is implicated. Oneida Motor Freight, Inc. v. United
Jersey Bank, 848 F.2d 414, 419 (3d Cir.), cert. denied, 488 U.S.
967, 109 S. Ct. 495 (1988). Judicial estoppel looks to the
relationship between the litigant and the court. Id. It
prevents a party from "playing fast and loose with the court" by
16
using "intentional self-contradiction . . . as a means of
obtaining unfair advantage." Scarano v. Central R.R. Co., 203
F.2d 510, 513 (3d Cir. 1953). See also Murray v. Silberstein,
882 F.2d 61, 66 (3d Cir. 1989). With respect to the situation
here, even if we assume that a bankruptcy disclosure statement is
not enforceable as a contract, it is at least a representation
which in appropriate circumstances can serve as the basis for
judicial estoppel. See In re Bridgepoint Nurseries, Inc., 190
B.R. 215, 223-24 (Bankr. D.N.J. 1996). While we recognize that
Marion claims she never read the disclosure statement, and claims
that the attorney who prepared it had no authority to give her
guaranty, she was served with a copy of the disclosure statement
and had every opportunity to examine it.
Nevertheless, Marion did not reveal her alleged 1990
resignation during the confirmation proceedings. Yet surely she
had an obligation to disclose her resignation to the bankruptcy
court, if she in fact had resigned, before the court approved the
amended disclosure statement inasmuch as she was an officer in
Insulfoams from the time it filed its Chapter 11 petition on
April 24, 1989, at least until the date of her purported
resignation on April 5, 1990. Thus, she was an officer and
shareholder of Insulfoams when it filed the amended disclosure
statement on December 28, 1989, in which the Donaldsons undertook
to guarantee the payments under the plan. The revelation in the
amended disclosure statement that Marion would guarantee
Insulfoams' payments is particularly significant because the
bankruptcy court rejected the original disclosure statement as it
17
did not include any such guaranty. Accordingly, we find that the
district court did not abuse its discretion in binding her to her
undertakings in the amended disclosure statement and therefore
she is judicially estopped from now asserting that she resigned
before plan confirmation. See McNemar v. The Disney Store, Inc.,
91 F.3d 610, 613 (3d Cir. 1996) ("This court reviews the district
court's application of judicial estoppel for abuse of
discretion.").
In any event, the bankruptcy court found not credible
Marion's claim that she had resigned, and thus on this basis as
well it treated her as an officer and fiduciary of Insulfoams at
the times material to this proceeding. In reaching its
conclusion, the bankruptcy court examined the totality of
circumstances surrounding the bankruptcy case, the severe doubts
as to the authenticity of her resignation letter, the failure to
disclose the resignation prior to 1994, her participation in the
preparation of the court documents after her alleged resignation,
and the credibility of the various witnesses. We cannot conclude
that the bankruptcy court's factual conclusions that she had not
resigned were clearly erroneous. Insulfoams, 184 B.R. at 706-07.
Accordingly, in fact, as well as by judicial estoppel, Marion
had a fiduciary obligation to the creditors.
F. Other Liability Issues
The Donaldsons do not challenge the bankruptcy court's
holding that they owed a fiduciary duty to the creditors, except
for their contention, which we have rejected, that Marion owed
18
them no duty because she severed her relationship with Insulfoams
in 1990. Thus, they have no basis to object to the award of
compensatory damages which, in any event, was justified.6
The Donaldsons contend, however, that the judgment for
punitive damages was inappropriate. It is clear that under
Pennsylvania law, which the bankruptcy court treated as
applicable in a determination not challenged here, a decision on
whether to award punitive damages and the scope of those damages
is in the discretion of the finder of fact. Delahanty v. First
Pennsylvania Bank, 464 A.2d 1243, 1263 (Pa. Super. Ct. 1983).
Punitive damages are appropriate when the act committed, in
addition to causing actual damages, constitutes "outrageous
conduct," either through reckless indifference or bad motive.
McClellan v. Health Maintenance Org. of Pennsylvania, 604 A.2d
1053, 1061 (Pa. Super. Ct. 1992); see also Feld v. Merriam, 485
A.2d 742, 747-48 (Pa. 1984) (Restatement (2d) of Torts § 908(2)
regarding imposition of punitive damages adopted in
Pennsylvania). Three factors can be considered when awarding
punitive damages: (1) the character of the act; (2) the nature
and extent of the harm caused; and (3) the wealth of the
6. While Dennis does not deny that as an officer of
Insulfoams he owed a fiduciary duty to its creditors, he does
deny that he understood the amended disclosure statement as
including his guaranty of the payments to fund the plan. In
these circumstances we have no need to review the bankruptcy
court's holding that the Donaldsons owed a fiduciary duty to
Insulfoams' creditors under Pennsylvania law. Of course, we
reject Dennis's contention that he is not bound by the amended
disclosure statement. We also point out that the Donaldsons do
not challenge the computation of the compensatory damages.
19
defendant. Kirkbride v. Lisbon Contractors, Inc., 555 A.2d 800,
803 (Pa. 1989).
The bankruptcy court found that the Donaldsons' actions
constituted outrageous conduct above and beyond the breach of
fiduciary duty which justified the compensatory damages. See
Smith v. Renaut, 564 A.2d 188, 193-94 (Pa. Super. Ct. 1989)
(holding that conduct must be beyond the fraud which supported
compensatory damages to award punitive damages). The court first
found that the Donaldsons usurped Insulfoams' corporate
opportunity for themselves. The court then found that they
either knowingly, or with reckless disregard of the truth,
misrepresented to the court and the creditors in the disclosure
statement that they personally would guarantee payments under the
plan. Both Donaldsons knew or should have known about the
guaranty and what it meant. The court found that they acted with
an evil motive: to obtain approval of the plan so that the tax
payments to the IRS and the State of Pennsylvania, for which they
were personally liable, could be made with estate funds, but that
they had no intention of ever paying the unsecured creditors.7
184 B.R. at 709.
The court awarded $55,602.38 in punitive damages, which
when combined with the compensatory damages exactly equals the
amount owed to the unsecured creditors under the plan. So, the
7. Although some of these events did take place prior to the
plan's confirmation, the claims are not barred by res judicata
because the breaches of fiduciary duty did not occur until well
afterward. The pre-confirmation events are looked at only for
background, pattern of activity, and for evidence of motive. See
n.4, supra.
20
bankruptcy court in effect held the Donaldsons to their
representations in order to deter and punish their misconduct.
We find that the weight of evidence supports such a decision and
accordingly we affirm the punitive damages award.8
The Donaldsons raise one last issue. They contend that
their personal guaranty is invalid under the Pennsylvania Statute
of Frauds, Pa. Stat. Ann. tit. 30, § 3 (1967), because they did
not sign it. While it is unclear whether they raised this
argument in the bankruptcy court, we will assume that they did,
but will reject it nevertheless. The Pennsylvania Statute of
Frauds provides that a guaranty must be in writing and "signed by
the party to be charged therewith, or some other person by him
authorized." Id. The amended disclosure statement was in
writing and signed by Kenneth Steidl, the attorney for
Insulfoams. See supp. app. at 104. As Insulfoams' only
shareholders and officers, the Donaldsons were involved
intimately in its reorganization. In the circumstances, there is
sufficient evidence that Steidl was authorized to give the
Donaldsons' guaranty.
III. CONCLUSION
8. We also find that the punitive damages were proportional
to the compensatory damages, less than a 2 to 1 ratio, and that
there is therefore no need to discuss a possible conflict between
Pacific Mutual Life Ins. Co. v. Haslip, 111 S. Ct. 1032 (1991)
(suggesting that punitive damages disproportionate to
compensatory damages may violate due process), and Kirkbride, 555
A.2d at 803 (holding that punitive damages do not need to be
proportional to compensatory damages). See Tunis Bros. Co. v.
Ford Motor Co., 952 F.2d 715, 741 (3d Cir. 1991) (refusing to
address same issue for different reason).
21
The order of the district court entered April 12, 1996,
affirming the opinion of the bankruptcy court will be affirmed.
22