Oneida Motor Freight, Inc. v. United Jersey Bank, 87-5525

Citation17 BCD 1272,848 F.2d 414
Decision Date01 July 1988
Docket NumberNo. 87-5525,87-5525
Parties, 17 Bankr.Ct.Dec. 1272, Bankr. L. Rep. P 72,329 ONEIDA MOTOR FREIGHT, INC., a Corporation of the State of New York, Appellant v. UNITED JERSEY BANK, a Corporation organized under the Banking Laws of the United States of America. UNITED JERSEY BANK, a New Jersey Corporation, Defendant-Third Party Plaintiff, v. Donald T. SINGLETON, Third Party Defendant. In re ONEIDA MOTOR FREIGHT, INC., Debtor, B.C. # 85-03606(DV).
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Allan H. Klinger (argued), John A. Rizzo, Jane S. Shapiro, Klinger, Nicolette, Mavroudis & Honig, Oradell, N.J., for appellant.

William S. Katchen (argued), John L. Laskey, Vincent F. Papalia, Clapp & Eisenberg, Newark, N.J., for appellee.

Before SLOVITER, STAPLETON, and MANSMANN, Circuit Judges.


MANSMANN, Circuit Judge.

Oneida Motor Freight, a Chapter 11 debtor, appeals the dismissal of its contract and tort action against United Jersey Bank, a secured creditor. We must determine whether Oneida, seeking damages for the bank's alleged breach of certain loan agreements, is estopped from litigating this action by the preclusive effect of prior bankruptcy proceedings.

We conclude that Oneida violated both its statutory and fiduciary duty to disclose this current claim against the bank during the pendency of the bankruptcy case. By virtue of this failure to disclose, equitable and judicial estoppel operate against further litigation by Oneida. Accordingly, we shall affirm the order of the district court.


Oneida Motor Freight, engaged in the interstate and intrastate trucking industry, and United Jersey Bank have maintained a banking relationship since 1983. In the course of their business dealings, the parties entered into two lending agreements. Under the terms of a "Revolving Credit Agreement", the bank would extend up to five million dollars in credit through loans and letters of credit. The parties also negotiated an "Accounts Receivable Security Agreement", whereby the bank would lend Oneida a percentage of Oneida's accounts receivable while maintaining a security interest in Oneida's accounts, equipment and inventory. The lending limits of these agreements have never been reached or exceeded.

In February 1985, Oneida settled a dispute which arose in connection with its acquisition of another trucking company, Dorn Transportation Company. In order to satisfy its obligations under the terms of the settlement, Oneida called upon the bank to pay certain outstanding letters of credit. Rather than charging against the letters of credit, however, the bank withdrew the necessary funds from Oneida's operating account. As a result, Oneida's account became habitually overdrawn. Nonetheless, at least for a period time, the bank honored Oneida's overdrafts.

In July 1985, the bank requested that the owner of Oneida, Donald Singleton, personally guarantee Oneida's debt. According to Oneida, when Mr. Singleton refused, the bank ceased honoring Oneida's checks. The dishonor of these checks allegedly compelled Oneida, on July 10, 1985, to file a petition under Chapter 11 of the Bankruptcy Code. Oneida then ceased its operations and proceeded with liquidation.

On July 11, 1985, the bank filed a motion for relief from the automatic stay entered in the bankruptcy proceeding. The application for relief further sought an order establishing the validity and extent of the bank's lien. On that same date, Oneida requested permission of the bankruptcy court for Oneida to use cash collateral of the bank, which was granted.

A series of subsequent orders was entered by the bankruptcy court in regard to matters pertaining to Oneida's and the creditors' rights, including, on September 30, 1985, a stipulation and order confirming a settlement among the bank, Oneida and the official unsecured creditors' committee. This order provided for an unconditional payment by Oneida to the bank in the amount of $6,650,000. Thereafter, on January 14, 1986, an order and a judgment were entered by the bankruptcy court, further detailing the extent and validity of the bank's lien. In this order, the amount due the bank by Oneida was established at $7,631,322.73 an amount already paid in full.

On August 14, 1986 the bankruptcy court entered an order confirming Oneida's Joint Plan of Reorganization. Nowhere in the plan or in the confirmation order is reference made to Oneida's current claim against the bank. 1

Approximately seven months later, on March 11, 1987, Oneida commenced this action against the bank in the Superior Court of New Jersey. In its complaint, Oneida alleged breaches of the credit agreements, of the parties' course of dealing and of the bank's duty of good faith. Oneida also set forth a cause of action in tort for fraudulent misrepresentation on the part of the bank and its agents. Oneida alleged that the bank's prior assurances, coupled with its dishonor of certain checks "without notice" denied Oneida an adequate opportunity to seek alternate financing to satisfy the payees of the dishonored checks. Oneida additionally asserted that the actions of the bank seriously damaged its business reputation with its customers and creditors. Oneida cited these improper activities by the bank as the catalyst for its Chapter 11 filing.

The bank filed an answer and a third party complaint against Donald Singleton, Oneida's sole shareholder. 2 The bank then removed the action to the U.S. District Court for the District of New Jersey.

On May 14, 1987 the bank moved to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6), failure to state a claim upon which relief can be granted, and/or Rule 12(c), motion for judgment on the pleadings. The district court, after argument, dismissed the complaint, 75 B.R. 235. The court held that since Oneida's claims against the bank arose from the same series of transactions which were the subject of the extensive prior bankruptcy proceedings, its failure to bring this particular claim to the bankruptcy court's attention violated fundamental principles of preclusion and barred Oneida from proceeding with the action.

Oneida filed a notice of appeal from this final decision of the district court. We have jurisdiction under the authority of 28 U.S.C. Sec. 1291.

The historical facts are undisputed. It is the preclusive effect of the bankruptcy proceeding upon this current action, if any, which is contested; resolution involves interpretation of legal precepts over which we invoke our power of plenary review. 3


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. In Re Hannan, 127 F.2d 894 (7th Cir.1942).

Section 521 of the current Bankruptcy Code outlines a non-exhaustive list of the debtor's duties in a bankruptcy case. Foremost for our purposes, the debtor is required to "file a ... schedule of assets and liabilities ... and a statement of the debtor's financial affairs...." 11 U.S.C. Sec. 521(1) (1978).

An additional obligation is imposed by 11 U.S.C. Sec. 1125(b) mandating the filing of a disclosure statement containing "adequate information." Section 1125(a) defines adequate information as follows:

Sec. 1125. Postpetition disclosure and solicitation

(a) In this section--

(1) "adequate information" means information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor ... that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan


Concomitant with these prescribed duties is the debtor's "absolute and unlimited right to be heard in reorganization proceedings." Southmark Properties v. Charles House Corp., 742 F.2d 862, 871 (5th Cir.1984).

We regard the right-conferring language of Southmark as confirmation of the debtor's express obligation of candid disclosure. The preparing and filing of a disclosure statement is a critical step in the reorganization of a Chapter 11 debtor. One commentator, citing the relevant legislative history, labeled this duty as the pivotal concept in reorganization procedure under the Code. 5 Collier on Bankruptcy p 1125.03 (15th ed. 1988).

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."

From the legislative history of Sec. 1125 we discern that adequate information will be determined by the facts and circumstances of each case. H.R.Rep. No. 595, 97th Cong., 2nd Sess. 266 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6225. It has been specifically held that a debtor must disclose any litigation likely to arise in a non-bankruptcy contest. Monroe County Oil Company v. Amoco Oil Co., 75 B.R. 158 (S.D.Ind.1987). The result of a failure to disclose such claims triggers application of the doctrine of equitable estoppel, operating against a subsequent attempt to prosecute the actions. In Re Galerie Des Monnaies of Geneva Ltd., 55 B.R. 253 (Bankr.S.D.N.Y.1985), aff'd, 62 B.R. 224 (Bankr.S.D.N.Y.1986).

A strong interest to achieve finality pervades Chapter 11 arrangements. Bohack Corp. v. Iowa Beef Processors, Inc., 715 F.2d 703 (2d Cir.1983). This goal of finality was supported by the Supreme Court in Stoll v. Gottlieb, 305 U.S. 165, 59 S.Ct. 134, 83 L.Ed. 104 (1938), holding that confirmation of a plan acts to bar attempts by the parties to relitigate any of the matters that could have been raised during the bankruptcy proceedings. 5 Collier on Bankruptcy p 1141.01 (15th ed. 1988). See also, In...

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