EXCLUSIVE: Court Dismisses Teresa Giudice’s Malpractice Lawsuit Against Attorney James Kridel #RHONJ

A hallmark of the American legal system is discovery, which enables the parties to know before the trial begins what evidence may be presented.

The theory is parties should go to trial with as much knowledge as possible, and they should not be able to keep secrets from each other. But depositions, interrogatories, and a request for production of documents (discovery tools) will have to wait in the lawsuit Real Housewives of New Jersey’s Teresa Giudice filed against her former bankruptcy lawyer, James Kridel. The suit in Superior Court of New Jersey has been “DISMISSED without prejudice.”

The Order states, “At the conclusion of the relevant bankruptcy proceeding, this action may be reinstated at the request of any party as to any matters not resolved in bankruptcy.” The Hon. Robert J. Brennan signed the “Order Dismissing Action Because of Bankruptcy” on May 26, 2016.

When a lawsuit is dismissed without prejudice, it signifies that none of the rights or privileges of the parties are lost or waived. “Without prejudice” usually denotes that there is no decision on the merits and it leaves the parties free to litigate the matter at a later time.  “With prejudice” bars the plaintiff from bringing a new lawsuit based on the same set of circumstances whereas when a case is dismissed without prejudice, it leaves the plaintiff free to bring another suit based on the same grounds.

“The Court has been informed that a bankruptcy proceeding affecting one or more of the parties to this action is pending and that an automatic stay of this present proceeding is in force under the Bankruptcy Act,” the Superior Court of New Jersey declared.

James Kridel Speaks

The judge is basically saying to wait and see what happens in the bankruptcy court. It doesn’t mean game over.

“The judge didn’t address the merits.  We are just going through the procedures. There are a lot of standing issues, which is why it has been kicked back and forth,” James Kridel told me on May 31.

Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court.

“There are many people that the bankruptcy court helps that are not bad people, they just came under bad circumstances,” remarks Kridel.

Dismissals of this sort happen when the judge decides the case cannot go forward because of a legal reason. The procedural history of this case is not unusual. A debtor seeks damages for legal malpractice; a bankruptcy trustee moves to intervene in the action as the real party in interest claiming the malpractice action is an asset of the bankruptcy estate; and then the court grants the trustee’s motion to stay all proceedings in the state court malpractice action.

Dismissal without prejudice may be granted on the judge’s own motion or upon request by either party. The decision whether to dismiss an appeal without prejudice is within the sound discretion of the judge, and may be granted when the interests of fairness, due process, and administrative efficiency outweigh any prejudice to either party.  Generally, a dismissal without prejudice is not a final judgment and, therefore, is not appealable. 

The Role of the Bankruptcy Court

Why was the state court action dismissed without prejudice? Only the trustee can prosecute claims that belonged to the debtor.  Other parties, such as Teresa Giudice, are barred from doing so. Perhaps it would have been legally inappropriate for the Superior Court of New Jersey to proceed. It had no option but to dismiss the case against James Kridel.

The bankruptcy court can make a finding of the quality and value of the professional services rendered. That court has the power to reopen the bankruptcy of the debtor and administer previously unadministered assets. It is the trustee that retains the capacity to bring suit. The state court claims belong to the estate and not the debtor.

In the event of a pre-petition coverage dispute as to the insurance proceeds payable on a professional liability claim, it is likely that any settlement proceeds payable would belong to the estate (rather than to the debtor).

Filing a bankruptcy petition creates an estate in bankruptcy consisting of all legal and equitable interests held by the debtor as of the commencement of the bankruptcy action. Because the alleged malpractice is rooted in pre-bankruptcy events and ripened at the moment the bankruptcy case commenced, any award or settlement proceeds from the legal malpractice action are property of the estate under Section 541(a) of the Bankruptcy Code.

If a legal malpractice cause of action under state law accrued prior to the bankruptcy, then only the trustee may dispose of this asset of the estate. In essence, that would tend to discourage legal malpractice actions brought directly by a debtor. The trustee has standing to commence the legal malpractice action or dispose of it.

The Role of Teresa’s Lawyers

One result from this court dismissal is that Teresa’s attorneys may campaign to stay in the bankruptcy case but they will have to be appointed.  Think about it: If Teresa doesn’t cooperate with the bankruptcy court and the trustee, where are those entities going with the legal malpractice suit? Her lawyers might say to John W. Sywilok (the Trustee), “If you want her testimony, you need to hire us and appoint us as counsel to try the legal malpractice suit.” 

The trustee needs Teresa’s testimony if he wants to turn her legal malpractice action into an asset, i.e., money. But would that be extortion/threatening that the witness (Teresa) will not testify unless the trustee hires her lawyers?

Her lawyers could say, “Let us litigate, it won’t cost you a dime.”  Perhaps they’ll offer to litigate the malpractice for nothing and then what does Mr. Sywilok do?  Remember, he has to determine 1) the value of this asset and whether its liquidation will provide a meaningful payment to unsecured creditors in this case; 2) whether the retention of special counsel to the trustee is required; 3) whether the trustee should be substituted as Party Plaintiff in the State Court; and 4) what will be the cost of litigating this legal malpractice matter. 

Mr. Sywilok will engage in the above analysis before deciding whether to pursue the legal malpractice action against James Kridel.

Who Engaged in Misconduct?

Teresa claims that James Kridel is guilty of breach of contract, breach of fiduciary duty, and legal malpractice in his handling of her bankruptcy case. But in bankruptcy, the client’s circumstances that existed prior to the bankruptcy lawyer being hired dictate what is going to happen in a case. Prior to filing the case, bankruptcy attorneys can counsel one on what the debtor can and cannot do, but they cannot change the past. Stated another way, the bankruptcy attorney’s actions or inactions are rarely the cause of the harm.

Did James Kridel’s handling of the case change Teresa’s decision to file bankruptcy or the case outcome?  More likely, the debtor’s harm was caused by the debtor’s circumstances, not the attorney. It is difficult to link the attorney’s actions with any apparent harm to the debtor.

A client asserting a claim of legal malpractice must prove that the attorney failed to exercise the care, skill, and diligence commonly possessed and exercised by a member of the legal profession, that the attorney’s negligence was the proximate cause of the loss sustained, and that the client incurred actual damages.

“At the 341 hearing Teresa admits that she read the petition and it is correct and accurate. She was asked over and over if she reviewed it and she stated ‘yes.’  Yet everything alleged in her legal malpractice suit about the bankruptcy case and filings is just the opposite: She claims she never read it, never discussed it, didn’t know anything about it,” Kridel explains.

Bad Faith

The courts state that the debtor shall be a member of the class of “honest but unfortunate debtors” that the laws were enacted to protect. See Grogan v. Gardner, 498 U.S. 279, 287 (1991). Ultimately, bankruptcy courts have broad discretion in determining whether a debtor has acted in bad faith and the presence of bad faith may be a sufficient ground to deny a debtor’s motion or request, including an action against an attorney for legal malpractice.

The court may look to the nature of the debt; the timing of the petition; how the debt arose; the debtor’s motive in filing the petition; how the debtor’s actions affected the creditors; the debtor’s treatment of creditors both before and after the petition was filed; and whether the debtor has been forthcoming with the bankruptcy court and the creditors. In short, the court says that the debtor cannot abuse bankruptcy court or game the system.

Here, Teresa has admittedly not disclosed all of the assets that should have been revealed on her verified schedules. There remains uncertainty as to the assets that do or do not belong to the debtor, and the debtor does not or is unable to clarify the interests and assets that are or have been in her possession.

Is the Bankruptcy Code a means of breaking the law to Teresa? Is she trying to take advantage of the system? In order to get a lenient sentence she took full responsibility for her actions but then reneged during her first post-prison interview with Amy Robach on Good Morning America. (Teresa insisted that she had no idea she was breaking the law when committing fraud. “Definitely not. I didn’t know I was committing a crime …The government saw differently.”)

Grab your gavel, join the conversation, and tell us what you think should be the Trustee’s next move.

 

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