1997 Decisions

Opinions of the United

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Precedential or Non-Precedential: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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Recommended Citation

"Donaldson v. Bernstein" (1997). 1997 Decisions. Paper 11.

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1

 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
2

 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 
3

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 
4

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 
5

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 
6

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 
7

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, 
8

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 
9

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. 
10

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, 
11

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 
12

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 preconfirmation 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. 
13

 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. 
14

 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 preconfirmation 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. 
15

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 
16

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 
17

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 
18

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 
19

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. 
20

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. 
21

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). 
22

 The order of the district court entered April 12, 1996, 

affirming the opinion of the bankruptcy court will be affirmed.