Donaldson v. Bernstein
| Citation | 104 F.3d 547 |
| Decision Date | 14 January 1997 |
| Docket Number | No. 96-3208,96-3208 |
| Parties | , Bankr. L. Rep. P 77,288 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. |
| Court | United States Courts of Appeals. United States Court of Appeals (3rd Circuit) |
Donald R. Calaiaro (argued) Calaiaro, Corbett & Bower, Pittsburgh, PA, for Appellants.
Charles E. Bobinis (argued) Bernstein & Bernstein, Pittsburgh, PA, for Appellee.
Before: GREENBERG, ALITO, and ROTH, Circuit Judges.
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 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 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 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.
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 standard. Matter of Case, 937 F.2d 1014, 1018 (5th Cir.1991); In re Rosinski, 759 F.2d 539, 540-41 (6th Cir.1985).
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 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...
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