Court Opinion

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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Precedential or Non-Precedential: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).

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

affirming the opinion of the bankruptcy court will be affirmed.

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