2003 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

7-28-2003

Krystal Cadillac v. GM Corp

Precedential or Non-Precedential: Precedential

Docket No. 01-2952

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PRECEDENTIAL

Filed July 28, 2003

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 01-2952

KRYSTAL CADILLAC-OLDSMOBILE GMC TRUCK, INC.,

Appellants

v.

GENERAL MOTORS CORPORATION AND GENERAL

MOTORS ACCEPTANCE CORPORATION,

On Appeal from the United States District Court

for the Middle District of Pennsylvania

District Judge: Hon. Sylvia H. Rambo

Argued: September 19, 2002

Before: SCIRICA,*Chief Judge, ALITO, and

MCKEE, Circuit Judges

(Opinion filed: July 28, 2003)

GERARD J. JACKSON, ESQ.

(Argued)

1260 Marlkress Road, Suite 2

P.O. Box 1820

Cherry Hill, NJ 08034-0109

Attorney for Appellant

* Judge Scirica began his term as Chief Judge on May 4, 2003. 
JAMES A. MOLLICA, ESQ. (Argued)

TIMOTHY MURRAY, ESQ.

450 Trimont Plaza

1305 Grandview Avenue

Pittsburgh, PA 15211-1205

Attorneys for Appellees

OPINION OF THE COURT

McKEE, Circuit Judge. 

Krystal Cadillac-Oldsmobile-GMC Truck, Inc., a Chapter

11 debtor, appeals an order of the District Court affirming

the Bankruptcy Court’s dismissal of the suit Krystal filed

against GMC for breach of contract and related causes of

action. The District Court concluded that the Bankruptcy

Court correctly relied upon the doctrine of judicial estoppel

in dismissing all of the counts in Krystal’s complaint. We

agree that judicial estoppel was properly invoked by the

Bankruptcy Court, and we will affirm the order of the

District Court.1

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Termination of the Franchise Agreement

Since 1987, Krystal Cadillac has operated a General

Motors automobile dealership in Gettysburg, Pennsylvania

pursuant to a franchise agreement with GM. Under the

terms of that agreement, Krystal maintained a line of credit

from a financial institution in order to finance Krystal’s

purchase of new GM vehicles.2 In October 1991, Krystal

1. The District Court had jurisdiction pursuant to 28 U.S.C. § 548(a). We

have appellate jurisdiction pursuant to 28 U.S.C. §§ 158(d) and 1291. 

In reviewing the decision of the District Court, we apply the same

standard of review the District Court employed in reviewing the

Bankruptcy Court’s decision. We review factual findings for clear error,

and we exercise plenary review over any legal conclusions. See In Re

Woskob, 305 F.3d 177 (3d Cir. 2002). 

2. Article 6.4.1 of the Dealer Agreement between Krystal and GM requires

Krystal “to have a reasonable quantity and variety of . . . Motor Vehicles

in inventory.” Article 10 requires Krystal “to maintain a separate line of

credit . . . to finance its purchase of new vehicles.” 

2
lost its “floor plan” financing with General Motors

Acceptance Corporation, GM’s financial arm, and Krystal

was not able to secure any other financing. This constituted

a default under the franchise agreement. Consequently, on

July 13, 1993, GM notified Krystal that GM intended to

terminate the dealer agreements. Following an extension,

that termination was to become effective on August 12,

1993. However, on August 11, 1993, the day before the

termination became effective, Krystal initiated a proceeding

before the Pennsylvania Board of Vehicle Manufacturers,

Dealers, and Salespersons (“Vehicle Board”) challenging the

legality of the franchise termination.3

The Vehicle Board held a hearing on Krystal’s petition on

August 8, 1994, and entered an Order and Adjudication

upholding GM’s termination of the dealership agreements

on September 27, 1994.4 Krystal thereafter appealed that

Order to the Commonwealth Court of Pennsylvania, but

3. The Board of Vehicles Act of December 22, 1983, P.L. 306, as

amended, 63 P.S. § 818.9)(c) provides, in pertinent part, the following: 

Canceling of franchises.—It shall be a violation of this act for any

manufacturer, distributor, officer, agent or any representative

whatsoever of a vehicle manufacturer to unfairly, without due regard

to the equities of said dealer and without just provocation, cancel

the franchise of any vehicle dealer . . . . At any time before the

effective date of such termination . . . the dealer or distributor may

appeal to the board for a hearing on the merits, and following due

notice to all parties concerned, such a hearing shall be promptly

held. No such termination . . . shall become effective until final

determination of the issue by the board. In the event of a dealer . . .

appeal of the termination . . . of its franchise, the burden of proof

shall be on the manufacturer or importer to show that such

termination . . . was based on the dealer’s failure to comply

substantially with the reasonable and material requirements of the

franchise. The manufacturer shall not meet its burden of proof to

terminate . . . the franchise if the acts of the manufacturer, in whole

or in significant part, caused the dealer to be unable to comply

substantially with the reasonable and material requirements of the

franchise. 

4. The Board found that GM’s termination of Krystal’s franchise was

proper because Krystal had failed to comply with the reasonable and

material franchise requirements for obtaining a line of credit, and had

failed to maintain an adequate inventory of new vehicles. 

3
that court affirmed the ruling of the Vehicle Board on

November 6, 1995.

B. The Proceedings in the Bankruptcy Court

(Krystal I).

On September 8, 1994, (approximately three weeks

before the Vehicle Board rendered its decision), Krystal filed

for Chapter 11 protection. Thereafter, on June 15, 1995,

Krystal filed a Plan of Reorganization in which it provided

for the sale of its GM franchise in order to raise funds to

pay creditors. GM objected to the plan arguing that it had

properly terminated the franchise agreement with Krystal

pursuant to the terms of that agreement. The appropriate

state agency had upheld the termination, and the

Commonwealth Court had affirmed the agency’s

determination that the termination was proper. Thus,

according to GM, the franchise was not an asset of the

estate available for sale in the bankruptcy proceedings. On

October 24, 1995, Krystal filed an Amended Reorganization

Plan and an Amended Disclosure Statement. Article V of

the Disclosure Statement stated:

Debtor also holds an Automobile Franchise

Agreement with General Motors Corporation. However,

the status of this franchise is now in litigation. General

Motors terminated the franchise prior to the

commencement of the case and the matter was in

litigation at the time the Chapter 11 petition was filed.

General Motors nevertheless proceeded with

termination and the matter is now on appeal in the

Commonwealth Court. Debtor takes the position,

which is vigorously contested by General Motors, that

this franchise agreement remains an asset of the case.

GM responded by filing a separate objection to the plan

and disclosure statement based upon its continuing

contention that Krystal’s franchise was not an asset of the

estate and could not be sold by Krystal or the Trustee to

satisfy Krystal’s creditors. 

The Bankruptcy Court affirmed GM’s objections and

ruled that the franchise had been validly terminated by

GM. Accordingly, the court held that the franchise could

4
not be sold as part of the bankrupt’s estate. The District

Court subsequently affirmed that ruling, and Krystal then

appealed to us. We reversed. We held that inasmuch as

Krystal had filed for bankruptcy before GM terminated the

franchise agreement, GM’s termination of that agreement

was a violation of the automatic stay imposed under § 362

of the Code. See, In Re Krystal Cadillac Oldsmobile GMC

Truck, Inc., 142 F.3d 631 (3d Cir. 1998) (“Krystal I”).

5

C. Krystal II: The Instant Dispute

On September 25, 1998, Krystal filed the instant action

in the District Court for the Eastern District of

Pennsylvania against GM. Krystal’s claims for relief arise

from GM’s violation of the automatic stay by terminating

Krystal’s franchise agreement after Krystal filed for Chapter

11 protection. More specifically, Krystal seeks damages on

each of the following seven grounds: (1) violation of the

automatic stay provisions of the Bankruptcy Code, 11

U.S.C. § 362(h); (2) breach of contract; (3) violations of

Federal Dealer’s Day in Court Act, 15 U.S.C. § 1221 and of

the Pennsylvania Board of Vehicles Act, 63 P.S. § 818 et

seq.; (4) conspiracy; (5) conversion; (6) tortious interference

with contractual relations; and (7) violation of the Sherman

Antitrust Act, 15 U.S.C. §§ 1-7. 

The Eastern District Court referred Krystal’s suit to the

District Court for the Middle District of Pennsylvania

because the claims were interwoven with the bankruptcy

action then pending in the Bankruptcy Court for the Middle

District. Although GM filed a motion to dismiss under Fed.

R. Civ. P. 12(b)(6), the court never ruled on that motion.

Rather, the court sua sponte dismissed Krystal’s complaint

in its entirety under the doctrine of judicial estoppel. In

doing so, the court noted that Krystal’s complaint could

5. We concluded that, under Pennsylvania law, termination of a

franchise does not become effective “until final determination of the issue

by the board.” Krystal Cadillac, 142 F.3d at 636 (3rd Cir. 1998). Since

the Vehicle Board did not issue its final determination on Krystal’s

appeal of GM’s purported termination until after Krystal filed for

bankruptcy, the subsequent termination of the franchise was a violation

of the automatic stay and therefore invalid. Id.

5
also be dismissed for (1) failure to state a claim upon which

relief could be granted, and (2) expiration of the applicable

statutes of limitations. As noted above, the District Court

affirmed the Bankruptcy Court’s application of the doctrine

of judicial estoppel, and this appeal followed.6

II. DISCUSSION

Krystal makes several arguments as to why judicial

estoppel was improperly applied here. However, before we

address any of those specific arguments, it will be helpful

to first provide a brief overview of that doctrine as a

framework for our analysis.

A. Judicial Estoppel In General

We first articulated the doctrine of judicial estoppel in

Scarano v. Central R. Co. of N.J., 203 F.2d 510 (3rd Cir.

1953). There, we stated that “a plaintiff, who has obtained

relief from an adversary by asserting and offering proof to

support one position, may not be heard later in the same

court to contradict himself in an effort to establish against

the same adversary a second claim inconsistent with his

earlier contention.” Id. at 513. In doing so, we recognized

the intrinsic ability of courts to dismiss an offending

litigant’s complaint without considering the merits of the

underlying claims when such dismissal is necessary to

prevent a litigant from “playing fast and loose with the

courts.” Id.7 (internal quotation marks omitted). 

Since Scarano, we have consistently stated that the

doctrine should only be applied to avoid a miscarriage of

justice. See Montrose Medical Group Participating Savings

Plan v. Bulger, 243 F.3d 773 (3rd Cir. 2001). Thus, in Ryan

Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d

6. Krystal’s bankruptcy case was still pending in Bankruptcy Court when

this case was argued. 

7. See also, Delgrosso v. Spang and Co., 903 F.2d 234 (3rd Cir. 1990)

(stating that unlike the concept of equitable estoppel, which focuses on

relationship between parties, judicial estoppel focuses on relationship

between litigant and judicial system, and seeks to preserve integrity of

system). 

6
355, 358 (3d Cir. 1996), we stated: “[t]he basic principle of

judicial estoppel . . . is that absent any good explanation,

a party should not be allowed to gain an advantage by

litigation on one theory, and then seek an inconsistent

advantage by pursuing an incompatible theory.” Id. 

Judicial estoppel is therefore not intended to eliminate all

inconsistencies no matter how slight or inadvertent they

may be. See, In re Chambers Development Co., Inc., 148

F.3d 214 (3rd Cir. 1998). In Montrose Medical Group, we

identified certain criteria for determining when seemingly

inconsistent litigation stances justify application of the

doctrine. We concluded: 

First, the party to be estopped must have taken two

positions that are irreconcilably inconsistent. Second,

judicial estoppel is unwarranted unless the party

changed his or her position “in bad faith —i.e., with

intent to play fast and loose with the court.” Finally, a

district court may not employ judicial estoppel unless

it is “tailored to address the harm identified” and no

lesser sanction would adequately remedy the damage

done by the litigant’s misconduct.

243 F.3d at 779-80 (emphasis added) (citations omitted).

We also noted that equity requires that the presiding court

give the party to be estopped a meaningful opportunity to

provide an explanation for its changed position. Id. at 780.

With these principles in mind, we turn to Krystal’s

alleged inconsistent representations here. 

B. Krystal’s Inconsistent Representations

As noted above, each of the claims in Krystal’s seven

count complaint is related to, and arises from, GM’s

termination of Krystal’s Franchise Agreement. The primary

claim is the violation of the automatic stay contained in

count I. All of Krystal’s other claims against GM rest upon

that violation.8

8. For reasons best known to GM and/or its attorneys, GM spends

considerable time and energy in this appeal arguing that its violation of

the automatic stay was not willful. See Appellee’s Br. at 17-21. For

7
When Krystal filed its Amended Disclosure Statement, it

knew about each of the claims it has now included in this

action. However, as quoted above, the Amended

Reorganization Plan and Amended Disclosure Statement

merely referenced Krystal’s position that the dealer

agreements were part of the bankruptcy estate and the

ongoing state proceedings wherein Krystal was attempting

to undo GM’s termination of them. 

The Bankruptcy Court found that Krystal limited the

reference to the instant claim in order to conceal the claims

from creditors in the hope of retaining any recovery for

itself. While Krystal concedes that the schedules and

statements it initially filed with the Bankruptcy Court on

October 24, 1995 “failed to specifically list as a potential

asset of Debtor’s estate any claims against General Motors

or GMAC,” Appellant’s Br. at 14,and 21, it vigorously denies

taking two irreconcilably inconsistent positions in this case.

Krystal argues that although it did not list the instant

claim as an asset in the October 24, 1995, Amended

Disclosure Statement, the language of that disclosure was

nevertheless adequate to inform creditors of claims Krystal

had against GM and therefore they knew of the contingent

asset of a potential damage award. 

Alternatively, Krystal argues that even if the disclosure

example, GM argues “In [Krystal I], this Court held that GM had violated

the automatic stay, but did not reach the issue of whether GM’s conduct

also constituted a willful violation under § 362(h).” Br. at 17-8.

(emphasis in original). GM obviously knows that we have already ruled

that its attempt to terminate the franchise agreement was a violation of

the automatic stay. We can not, and will not, revisit that issue here. 

Moreover, although § 362(h) requires a “willful” violation as a condition

precedent to recovering damages, we have noted that this does not mean

that the creditor must intend to violate the stay. “It is a willful violation

of the automatic stay when a creditor violates the stay with knowledge

that the bankruptcy petition has been filed. Willfulness does not require

that the creditor intend to violate the automatic stay provision, rather it

requires that the acts which violate the stay be intentional.” Landsdale

Family Restaurants Inc. v. Weis Food Service, 977 F.2d 826, 829 (3rd

Cir. 1992) (internal citations and quotation marks omitted). 

8
was insufficient, it could amend the disclosure statement

under Bankruptcy Rule 1009 and thereby cure any

inadequacy because the bankruptcy case is still open.

Krystal insists that it did effectively amend the disclosure

as soon as the Bankruptcy Court notified Krystal of the

possible application of judicial estoppel.9 Therefore, argues

Krystal, it legitimately cured “any conceivable defect in a

previously filed schedule or non-disclosure.” The

Bankruptcy Court was not impressed by Krystal’s eleventh

hour candor and neither are we. 

As the Bankruptcy Court properly noted, the language in

the Amended Disclosure Statement was “little more than

boilerplate.” It did not specify any of the claims contained

in the instant complaint against GM, much less attempt to

place any monetary value on them. We agree that such

boilerplate language is simply not adequate to provide the

level of notice required. The bankruptcy rules were clearly

not intended to encourage this kind of inadequate and

misleading disclosure by creating an escape hatch debtors

can duck into to avoid sanctions for omitting claims once

their lack of candor is discovered. 

Allowing [Krystal] to back-up, . . . and amend [its]

bankruptcy filings, only after [its] omission has been

[detected], suggests that a debtor should consider

disclosing potential assets only if . . . caught

concealing them. This so-called remedy would only

diminish the necessary incentive to provide the

Bankruptcy Court with a truthful disclosure of the

debtors’ assets.

Burnes v. Pemco Aeroples, Inc., 291 F.3d 1282, 1288 (11th

Cir. 2002). 

As noted above, judicial estoppel is properly applied only

when appropriate to redress the problem the doctrine was

9. Krystal thereafter added the following amendment to Schedule B

which asks disclosure of contingent and unliquidated claims: 

“Tort, contract and violation of automatic stay claims against

General Motors Acceptance Corporation.” 

It also noted that it did not know the value of the claims. 

9
designed to remedy. Krystal argues that the doctrine of

judicial estoppel is too drastic a remedy to apply here

because the “[p]lan calls for a one hundred (100%) percent

payment to all creditors.” Appellant’s Br. at 22. However, as

GM is quick to point out, full payment is contingent upon

Krystal’s ability to sell its GM franchises for some

undetermined profit. See App. 95, and 104, Appellee’s Br.

at 13. Moreover, GM represents without contradiction that

Krystal still has not paid its creditors in full, and that the

Amended Plan noted the necessity of Krystal’s owner

(“Pappas”) getting creditors to compromise their claims.

According to GM, creditors may not have been willing to

compromise their claims as much, if at all, had they known

of the possible addition of damages from the instant law

suit.

C. Bad Faith

In Oneida Motor Freight, Inc. v. United Jersey Bank, 848

F.2d 414, 416-18 (3d Cir. 1988), we concluded that a

rebutable inference of bad faith arises when averments in

the pleadings demonstrate both knowledge of a claim and

a motive to conceal that claim in the face of an affirmative

duty to disclose. That is precisely Krystal’s situation here.

Accordingly, the record is sufficient to support the

Bankruptcy Court’s finding of bad faith.

1. Krystal’s Knowledge of the Assets

Under 11 U.S.C. § 1125(b), a party seeking chapter 11

bankruptcy protection has an affirmative duty to provide

creditors with a disclosure statement containing “adequate

information” to “enable a creditor to make ‘an informed

judgment’ about the Plan.” 11 U.S.C. § 1125(a) (1). Debtors

must therefore identify and disclose all “property of the

estate” including all of the debtor’s “legal and equitable”

property interests. This includes such contingent assets as

any cause of action Krystal may have against GM, and

Krystal does not argue to the contrary. The nature of

Krystal’s purported misrepresentations here can fully be

appreciated if we place them within the proper context. 

10
“A long-standing tenet of bankruptcy law requires one

seeking benefits under its terms to satisfy a companion

duty to schedule, for the benefit of creditors, all his

interests and property rights.” Oneida, 848 F.2d at 416.

Therefore, “preparing and filing a disclosure statement is a

critical step in the reorganization of a Chapter 11 debtor.”

Id. at 417. It has been called by one commentator, “the

pivotal concept in reorganization of a Chapter 11 debtor.”

Id. 

The importance of full disclosure is underlaid by the

reliance placed upon the disclosure statement by the

creditors and the court. Given this reliance, we cannot

overemphasize the debtor’s obligation to provide

sufficient data to satisfy the Code standard of adequate

information.

Oneida, 848 F.2d at 417 (internal quotation marks

omitted). 

Krystal relies upon the history of this dispute in arguing

that it did not have any claim to disclose until we ruled in

Krystal I, that GM’s termination of the franchise agreement

violated the automatic stay. Until then, argues Krystal, the

appropriate state agencies had ruled that GM properly

terminated the franchise agreement and there was therefore

no cause of action against GM to include in the disclosure

statement of October 24, 1995. Therefore, according to

Krystal, when the Bankruptcy Court confirmed the Plan in

October of 1997, the “law of the case” was that (1) Krystal

had no ownership interest in the dealership franchise and

(2) GM had not violated the automatic stay provisions of the

Bankruptcy Code. Therefore, there was no cause of action

to disclose. Appellant’s Br. at 21. 

However, Krystal was aware of every allegation currently

asserted in Counts II through VII of its complaint when it

filed its Statement and Plan. Each of the events alleged in

those counts had already occurred when Krystal made the

applicable filings under the Bankruptcy Code. Moreover,

Krystal’s argument that it could not know that GM violated

the automatic stay as it alleges in Count I, is also

unpersuasive. Krystal clearly knew of this potential claim

because it vigorously argued that GM violated the

automatic stay when it appeared before us in Krystal I. 

11
Although it is true that the relevant state agencies had

upheld GM’s right to terminate the lease, the agencies were

never asked to consider the issue of Krystal’s alleged

violation of the automatic stay, and Krystal knew this when

it filed its disclosure statement in the Bankruptcy Court on

October 24, 1995. The Vehicle Board’s Adjudication and

Order did not reach this issue, and the Commonwealth

Court’s November 6, 1995 decision had not yet been filed.

Therefore the “law of the case” did not negate Krystal’s duty

to disclose its claims against GM. 

Krystal’s attempt to seek refuge in the law of the case

doctrine ignores the scope of the disclosure requirement as

well as the precise issues before the Vehicle Board and

Commonwealth Court. The Code requires that a debtor list

potential causes of action, not claims it actually intends to

sue on at the time of the required disclosure. “It has been

held that a debtor must disclose any litigation likely to arise

in a non-bankruptcy context.” Oneida, 848 F. 2d at 416.

Thus, Krystal’s own actions belie its contention that it did

not know it had a potential claim against GM. Krystal has

consistently and vigorously maintained that GM’s

termination of the franchise agreement violated the

automatic stay. That claim was not within the purview of

the proceeding Krystal brought before the Vehicle Board or

Commonwealth Court, and the record belies any argument

that it was not then within Krystal’s contemplation. To the

contrary, it appears that Krystal continuously believed that

GM had violated the automatic stay. Nothing here supports

Krystal’s current position that it had to await a court

decision to disclose this potential claim. Moreover, Krystal

ignores the rather damning fact that it included the

franchise as an asset of the estate in its disclosure

statement even though the Vehicle Board had already

upheld GM’s termination of it. App. at 142. 

Although we do not require debtors to list hypothetical

claims that are so tenuous as to be fanciful, we do require

them to advise creditors of the kind of potential claims that

Krystal is asserting here. “[C]reditors and the bankruptcy

court rely heavily on the debtor’s disclosure statement in

determining whether to approve a proposed reorganization

plan, [therefore] the importance of full and honest

disclosure cannot be overstated.” Ryan, 81 F.3d at 362. 

12
The Bankruptcy Court properly concluded that Krystal

had enough information prior to confirmation to know it

might have a claim against GM. “ ‘[I]f the debtor has enough

information . . . prior to confirmation to suggest that it may

have a possible cause of action, then that is a ‘known’

cause of action such that it must be disclosed.’ ” In re

Coastal Plains, 179 F.3d 197, 208 (5th Cir. 1999) (citations

omitted). It is difficult to understand why Krystal would list

the franchise as an asset after the administrative rulings

upholding GM’s termination of it and yet fail to disclose a

potential suit against GM for what Krystal has always

argued was an improper and ineffective cancellation other

than an intent to hide the claim from creditors. 

2. Krystal’s Motive to Conceal the Claims

The Bankruptcy Court found that (1) Krystal’s owner

(“Pappas”) agreed to contribute substantial funds toward

the payment of claims and expenses associated with

Krystal’s reorganization and (2) the owner was also engaged

in negotiating unsecured claims downward to minimize the

amount Pappas would have to pay.10 Krystal therefore had

every reason to minimize its assets so that creditors would

conclude they had no choice but to significantly

compromise their claims and approve Krystal’s

reorganization. Indeed, the argument that Krystal made in

support of its planned reorganization confirms this. The

liquidation analysis Krystal set forth in its Disclosure

Statement provides as follows:

[S]ecured and priority claims far exceed the value of

the Debtor’s assets. This means that in the event of a

liquidation no unsecured creditor will receive any

dividend. In fact, it is most likely that in the event of a

Chapter 7 liquidation secured and priority claims will

not be paid in full. 

Although Debtor’s proposed Plan actually amounts to

a liquidation of all Debtor’s assets, it is nevertheless

asserted that all creditors will still be treated much

better under the Plan than under a Chapter 7

10. GMAC’s $114,486 claim was negotiated down to $23,000. App. 12. 

13
liquidation. This is because the Plan provides for

substantial cash payments to almost all creditors. 

The reason Debtor can propose cash payments under

the Plan, and none can be expected under a Chapter 7

liquidation, is because Mr. Pappas is willing to

contribute substantial cash toward the payment of

claims and expenses associated with this

reorganization.

App. 27. Against this background, it is undeniable that

creditors should have been informed of this contingent

asset. 

3. Harm To Creditors

Judicial estoppel is only appropriate when the

inconsistent positions are “tantamount to a knowing

misrepresentation to or even fraud on the court.” Total

Petroleum, Inc. v. Davis, 822 F.2d 634-38 (8th Cir. 1987).

Not surprisingly, Krystal reminds us of this, as well as the

fact that the doctrine is to be used sparingly and reserved

for the most egregious case. According to Krystal,

employing that doctrine and the sanction of dismissal here

was “overkill,” even if the doctrine is otherwise appropriate.

This position is based upon Krystal’s assertion that

under the Plan, (1) the secured creditors receive 100%

payment; (2) unsecured creditors received 75% and stand

to receive full payment upon the sale of the franchise; and

(3) the legal claims are contingent assets of a highly

speculative nature and therefore would have been valued at

zero dollars even if disclosed. Krystal concludes that since

the creditors experienced no financial harm, the court erred

by finding that there was bad faith.

In making this argument, Krystal compares itself to the

debtor in Ryan. There, we held that a Chapter 11 debtorbuilder’s failure to disclose causes of action against

suppliers of allegedly defective wood trim in bankruptcy

proceedings did not bar debtor from pursuing those claims

outside of bankruptcy. Although the contingent assets

represented by those claims were not disclosed in the

bankruptcy proceedings, we rejected the Bankruptcy

14
Court’s application of judicial estoppel because the debtor

did not attempt to “play fast and loose” with the court. 

We also held that the application of judicial estoppel does

not turn on whether the estopped party actually benefitted

from its attempt to play fast and loose with the court. We

concluded that the presence or absence of any such benefit

is merely a factor in determining whether the evidence

would support a conclusion of bad faith. After raising the

issue of whether Ryan actually received a benefit from the

omissions there, we stated: “We readily conclude that the

doctrine of judicial estoppel in this circuit contains no such

requirement.” 81 F.3d at 361. We then explained: 

the critical issue is what the [party] contended in the

underlying proceeding, rather than what the jury

found. Whether the party sought to be estopped

benefitted from its earlier position or was motivated to

seek such a benefit may be relevant insofar as it

evidences an intent to play fast and loose with the

courts. It is not, however, an independent requirement

for application of the doctrine of judicial estoppel.

Id. (Internal citations and quotation marks omitted).

The totality of the circumstances in Ryan lead us to

conclude that the debtor did not omit any information in

bad faith. Ryan omitted certain assets from its disclosures,

but it also omitted counterbalancing liabilities. Therefore,

largely the “balance of assets and liabilities . . . may have

been unaffected by the failure to list [certain] claims as

assets.” 81 F.3d at 363. Ryan did not benefit from the

omission.11 Despite Krystal’s argument to the contrary, that

is not the situation here. 

The Bankruptcy Court could not accept Krystal’s

argument that its creditors were not harmed, and neither

can we. The Bankruptcy Court also reasoned that the

11. Because, as we have noted, the estopped party need not have

benefitted from the misrepresentation, we note the absence of a benefit

in Ryan only because it was relevant to an inquiry into that debtor’s bad

faith. For the same reason, we note that Krystal benefitted from the

omission here. At the very least, the record certainly supports the

Bankruptcy Court’s finding that it tried to derive such a benefit. 

15
impact of this nondisclosure must be measured in more

than monetary terms. Such nondisclosures affect creditors’

willingness to negotiate their claims and enhance the

debtor’s bargaining position by making the pot that

creditors look to for recovery appear smaller than it really

is. That is particularly important here because, as noted

above, Krystal’s owner negotiated very substantial

compromises of claims against Krystal. 

4. Lesser Sanctions

The fact that a sanction is to be used sparingly does not

mean that it is not to be used when appropriate. Applying

a lesser sanction here (such as requiring Krystal to pay

unsecured creditors the balance of their claims out of any

damages Krystal might recover from the instant action)

would reward Krystal for what appears to be duplicitous

conduct in the course of its bankruptcy proceeding. Krystal

would still reap the benefit of any recovery beyond the

amount paid to satisfy outstanding debts. In addition, the

integrity of both the bankruptcy process and the judicial

process would suffer. In short, allowing Krystal the lesser

sanction it advocates would send a message that “a debtor

should consider disclosing potential assets only if he is

caught concealing them.” Pemco, 291 F.3d at 1288. The

Bankruptcy Court was understandably reluctant to allow

Krystal to use sleight of hand to show its cards to its

creditors and so are we. Dismissal is necessary to prevent

Krystal from profiting from its omission. It is also “required

to preserve the integrity of the earlier proceedings.” Oneida,

848 F.2d at 418.

5. Opportunity to Explain

Lastly, Krystal argues that the Bankruptcy Court’s

finding of bad faith is undermined by the absence of any

testimony on this issue. It maintains that it never had an

adequate opportunity to explain. However, “[w]e have held

that a District Court need not always conduct an

evidentiary hearing before finding the existence of bad faith

for judicial estoppel purposes.” Montrose Medical Group,

243. F.3d at 780 n.5. 

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In Oneida, we held that if the pleadings show (1) the fact

of non-disclosure of the asset combined with (2) a debtor’s

obvious knowledge of the existence of the asset, a court

need not take testimony in order to make a finding of bad

faith. Although the Bankruptcy Court here raised the issue

of judicial estoppel sua sponte, the court gave Krystal the

opportunity to fully brief this issue and gave both parties

the opportunity for oral argument. We conclude that

Krystal had a fair opportunity to argue that the doctrine did

not apply and to ask the Bankruptcy Court not to dismiss

its complaint. We find no error in the Bankruptcy Court’s

ruling, and we conclude that the District Court properly

affirmed it.

III. CONCLUSION

For all of the above reasons, the judgment of the District

Court will be affirmed.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

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