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CENTRAL JERSEY FREIGHTLINER, INC. v. FREIGHTLINER

December 2, 1997

CENTRAL JERSEY FREIGHTLINER, INC., and ROBERT PEZZOLLA, individually, Plaintiffs,
v.
FREIGHTLINER CORP., Defendant.



The opinion of the court was delivered by: LIFLAND

 LIFLAND, District Judge

 Presently before the Court are: (1) a motion by plaintiffs, Central Jersey Freightliner, Inc. (hereinafter "CJF") and its President and sole shareholder Robert Pezzolla (hereinafter "Pezzolla") (hereinafter collectively "plaintiffs"), for a preliminary injunction enjoining defendant, Freightliner Corp. (hereinafter "defendant") from terminating three franchise agreements and (2) a cross-motion by defendant to dismiss part of the complaint, to compel arbitration of certain claims and to stay proceedings in this Court pending arbitration, and to dismiss Pezzolla as a party to the action. For the reasons set forth herein, plaintiffs' motion for a preliminary injunction is denied. Defendant's cross-motion to dismiss part of the complaint is denied. Defendant's cross-motion to compel arbitration and to stay proceedings pending arbitration is granted. Defendant's cross-motion to dismiss Pezzolla is granted.

 BACKGROUND

 On October 24, 1997, plaintiffs filed a complaint commencing this action. The complaint alleges violations of the New Jersey Franchise Practices Act (hereinafter the "NJFPA"), the New Jersey Antitrust Act, breach of contract and various economic torts arising out of defendant's threatened termination of three franchise agreements effective November 28, 1997. On the same day they filed the complaint, plaintiffs filed an ex parte application for an order to show cause and temporary restraining order enjoining defendant from terminating the franchise agreements. The Court denied the requested relief finding that plaintiffs had failed to establish any urgency which would warrant imposition of temporary restraints. The Court further directed plaintiffs to file a motion for a preliminary injunction by October 31, 1997 according to standard motion practice, and scheduled a return date of November 24, 1997.

 On October 31, 1997, plaintiffs filed their motion for a preliminary injunction. At issue are three franchise agreements: (1) the Heavy Duty Dealer Sales and Service Agreement (hereinafter the "Heavy Duty Franchise"); (2) the Medium Duty Dealer Sales and Service Agreement (hereinafter the "Medium Duty Franchise") and (3) the Century Class Franchise. The following allegations give rise to the instant dispute.

 On March 17, 1997, defendant served CJF with a notice threatening termination of the three franchise agreements. On March 19, 1997, CJF filed a chapter 11 bankruptcy petition. On September 23, 1997, the bankruptcy court dismissed CJF's case with CJF's consent. No plan of reorganization was ever confirmed. Shortly thereafter, CJF's lender, Freightliner Financial, repossessed much of CJF's new and used vehicle inventory. On September 25, 1997, defendant again served CJF with a notice of termination of the three franchise agreements, effective November 28, 1997.

 On October 24, 1997, plaintiffs commenced the instant action. Plaintiffs allege that defendant engaged in a course of conduct designed to destroy CJF and to re-obtain the franchises. Plaintiffs do not dispute that CJF has failed to meet its obligations under the three franchise agreements. Plaintiffs allege, however, that defendant orchestrated CJF's breaches by unfairly competing with CJF, selling vehicles to other entities, manufacturing and delivering defective vehicles, stealing CJF customers, making misrepresentations, impairing CJF's customer relations, failing to perform its obligations under the franchise agreements, acting in bad faith, imposing unreasonable standards of performance and restricting the amount of profit CJF could make. Plaintiffs contend that as a result of defendant's conduct, CJF was unable to obtain required floor plan financing, meet the minimum hours of operation required, employ a sufficient number of employees, fulfill its sales and promotion requirements, purchase new inventory, retain purchased inventory and pay its open account to defendant. Plaintiffs further allege that as a result of defendant's conduct, CJF incurred substantial floor plan charges, became insolvent and was forced to incur substantial legal fees and tax obligations. Plaintiffs allege that defendant's conduct forced CJF into bankruptcy.

 Plaintiffs argue that this Court should preliminarily enjoin defendant from terminating the franchises because "without the injunction, plaintiff will lose its franchises, cease to operate and will be unable to pay its creditors, which amount to several hundreds of thousands of dollars. Without the injunction, the impact will be suffered by CJF, Robert Pezzolla, but also by many members in our community. Without the injunction, plaintiffs will lose their livelihood. Without the injunction, plaintiffs will lose their investment." Plaintiffs' Brief in Support of Order to Show Cause, at 5. Plaintiffs further argue that there is a strong likelihood that plaintiffs will prevail on the merits, and that a preliminary injunction will not harm defendant because it was defendant who provoked the wrongful termination.

 Lastly, plaintiffs argue that this dispute is not subject to arbitration because: (1) the New Jersey Franchise Practices Act (hereinafter the NJFPA") prohibits arbitration of disputes between franchisors and franchisees and (2) defendant waived its right to seek enforcement of the arbitration provisions by failing to do so in CJF's bankruptcy.

 DISCUSSION

 CJF's Failure to Disclose Claims Against Defendant During Bankruptcy

 CJF's failure to disclose its claims against defendant in its bankruptcy schedules or statements does not estop plaintiffs from asserting them now. Under Bankruptcy Code §§ 521 and 1125, a chapter 11 debtor's failure to disclose causes of action during the pendency of a bankruptcy case generally precludes litigation of those claims in the future under principles of equitable and judicial estoppel. Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 417 (3d Cir. 1988) ("[A] debtor must disclose any litigation likely to occur in the non-bankruptcy context. The result of a failure to disclose such claims triggers application of the doctrine of collateral estoppel, operating against a subsequent attempt to prosecute the actions); Payless Wholesale Distribs. Inc. v. Alberto Culver Inc., 989 F.2d 570, 571-72 (1st Cir.), cert. denied, 510 U.S. 931, 126 L. Ed. 2d 309, 114 S. Ct. 344 (1993); see 11 U.S.C. §§ 521, 1125. The governing principles in these cases and the policy behind the debtor's disclosure obligation are threefold: (1) the reliance of creditors on the debtor's representations; (2) the need for finality because an order confirming a plan is an adjudication of claims on the merits which binds the debtor and creditors; and (3) protection against a debtor playing "fast and loose" against the court and its creditors. Significantly, all of the cases barring litigation of nondisclosed claims did so where a plan of reorganization had been confirmed.

 The preclusive effect of a debtor's failure to disclose is decidedly less clear where no plan was confirmed in the debtor's bankruptcy case. Defendant has not cited, and the Court's research has not yielded, any authority addressing nondisclosure in the context of a dismissal prior to confirmation.

 The principles behind the Code and case law do not favor application of estoppel to bar litigation of nondisclosed claims in such a circumstance. This is true for two reasons. First, under the Bankruptcy Code, a debtor retains the right to amend its schedules and statements up until confirmation of a plan. See Fed. R. Bankr. P. 1009. Absent confirmation of a plan, there is no definitive proof that a debtor would not have disclosed its causes of action before an order of confirmation. The possibility that the debtor would have amended cannot be overlooked especially where, as here, the bankruptcy case was voluntarily dismissed in its early stages. Second, absent a confirmed plan, it would be difficult for a creditor to demonstrate any real detrimental reliance on the debtor's nondisclosure. While a plan fixes parties' rights and obligations, dismissal of a bankruptcy case essentially restores the parties to the position they assumed prepetition. See Bankruptcy Code § 349 (addressing effect of dismissal).

 These principles, when applied to the case at bar, militate against dismissal of the nondisclosed claims. While CJF may have had numerous opportunities to disclose its causes of action, no plan was ever confirmed. CJF's bankruptcy case was voluntarily dismissed six months after filing and defendant has provided no proof that CJF would not have amended its schedules and statements to disclose the claims. Defendant argues that it entered into various consent agreements with CJF during CJF's bankruptcy case, but that it would not have done so had defendant known of CJF's potential claims. However, defendant has offered no evidence to suggest that the ...


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