Opinions of the United
2003 Decisions 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Precedential or Non-Precedential: Precedential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.
2
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.”
3
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.
4
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
5
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.
6
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).
7
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
8
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).
9
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.
10
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.
11
“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.
12
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.
13
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.
14
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 debtor-
builder’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
15
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.
16
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.
17
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