KRIDEL et al v. SYWILOK et al

Filing 20

OPINION. Signed by Chief Judge Jose L. Linares on 6/12/17. (DD, )

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

IN RE TERESA GUIDICE,
Civil Action No.: 16-9444 (JLL)

Debtor
JOHN SYWILOK,
GUIDICE, Debtor,

Trustee,

and

TERESA

OPINION

Appellees,
and
JAMES A. KRIDEL, JR.,
Appellant.

LINARES, District Judge.

This matter comes before the Court by way of Appellant James A. Kridel, Jr.’s Notice of
Appeal of the Bankruptcy Court’s Order Approving Settlement and Order Partially Granting
Motion to Intervene. (ECF No. 1). Appellees John Sywilok (“Trustee”) and Teresa Guidice
(“Debtor”) have submitted an opposition to the appeal, (ECF No. 6), which Appellant has replied
to (ECF No. 11). The Court has considered the parties’ submissions and decides this matter
without oral argument pursuant to Rule 78 of the Federal Rules of Civil Procedure. For the reasons
set forth below, the Court denies the Appellant’s Bankruptcy Appeal and affinns the Bankruptcy
Court.

BACKGROUND1

On July 28, 2015, Debtor filed a Complaint in the Superior Court of New Jersey alleging
that Appellant committed malpractice in the legal representation of Debtor. (See Bankr. No. 0939032 (“Bankruptcy Action”), ECF No. 180-3 at ¶J 1-2). Namely, Appellant was negligent in the
preparation and amendments of Debtor’s Chapter 7 bankruptcy petition. (See id. at

¶

88-16 1).

Debtor’s Complaint alleges that on June 30, 2010, Trustee filed a complaint in Bankruptcy Court
objecting to Debtor’s Chapter 7 bankruptcy discharge. (Id. at

¶

178). The Trustee’s three count

complaint alleged various concealments and falsities made before and during the Debtor’s petition
for Bankruptcy. (Id. at

¶J

179-81). Debtor alleges in the state Court action Trustee’s complaint

was the result of Appellant’s negligence. (Id. at ¶ 182).
In March of 2011, while the action between Debtor and Trustee was pending, Debtor
became the subject of a federal grand jury investigation for mortgage and bankruptcy fraud. (Id.
at

¶J

207, 209).

Debtor alleges that in relation to the investigation, Appellant concealed

conversations with the United States Government, and failed to explain the import of a “Target
Letter” or advise her of the necessity to retain a criminal defense attorney. (Id. at ¶J 207-12). On
December 15, 2011, Debtor waived her bankruptcy discharge, asserting that the waiver was
inevitable due to Appellant’s negligence. (Id. at

¶ 255).

Ultimately on March 4, 2014, Debtor

pled guilty, and on October 2, 2014, Debtor was sentenced to fifteen months of incarceration. (Id.
at

¶ 296-97).

Debtor alleges that her incarceration was the result of Appellant’s negligent legal

representation of her. (Id. at ¶ 4).
On April 29, 2016, Trustee moved to reopen the Bankruptcy Action after learning of the

This background is derived from the Bankruptcy Record which the parties have designated and submitted to this
Court. (ECF Nos. 2, 5).
2

above Malpractice Action.

(See Bankruptcy Action, ECF No. 177).

Trustee’s motion was

successful, and the Bankruptcy Action was reopened before Judge Meisel.

(See Bankruptcy

Action, ECF No. 18$). On July 12, 2016, Debtor requested that the parties be sent to mediation
due to a dispute between Trustee and Debtor as to the ownership of the claims in the Malpractice
Action. (See Bankruptcy Action, ECF No. 211). Judge Meisel ordered the parties to participate
in mediation and appointed Judge Joel Pisano, U.S.D.J. (ret.) as the mediator. (See Bankruptcy
Action, ECF No 225).
On October 5, 2016, the parties reached a settlement. (See Bankruptcy Action, ECF No.
240). As a part of the settlement, Debtor was entitled to 55% of the net proceeds from the
Malpractice Action and her Bankruptcy Estate would receive the remaining 45%. (Id.). The
portion assigned to the Bankruptcy Estate would be distributed in due course by Trustee and
pursuant to the Bankruptcy Code. (Id.). On November 1, 2016, Trustee submitted a Motion to the
Bankruptcy Court to approve the settlement, on notice to Appellant as well as to all Debtor’s
creditors. (See Bankruptcy Action, ECF Nos. 240-242). No creditor filed an objection to Trustee’s
Motion. (See generally Bankruptcy Action).
On November 22, 2016, Appellant filed an Objection to Trustee’s Motion as well as a
Cross-Motion to intervene in the Bankruptcy Action. (See Bankruptcy Action, ECF No. 249). The
Bankruptcy Court partially granted Appellant’s Motion to Intervene for the sole purpose of hearing
him with regards to the issue of a conflict of interest between counsel for Debtor and Trustee, Mr.
Carlos J. Cuevas, Esq., and the law finn of Brach Eichler, LLC, respectively. (See Bankruptcy
Action, ECF No. 257). Thereafter, Judge Meisel ruled that Appellant lacked standing to challenge
the settlement. (See Bankruptcy Action December 6, 2016 Transcript (“Dec. 6 Tr.”) 24:9-15). In

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so ruling, Judge Meisel cited Whitemore v. Arkansas, 495 U.S. 149 (1990), which stands for the
premise that “a party seeking Constitutional standing must demonstrate an injury in fact that is
concrete, distinct and palpable and actual or imminent.” (Id. 20:2-6). Furthermore, Judge Meisel
noted that in a Bankruptcy case, a party seeking standing must be a party-in-interest as articulated
in In re Global Inditstrial Technologies, Inc., 645 F.3d 201, 210 (3d Cir. 2011). (Id. 20:4-16).

Judge Meisel believed that Appellant did not meet the Constitutional requirement for standing
because Appellant failed to show any injury that would result from the settlement agreement
between Trustee and Debtor. (Id. 24:5-6).
Additionally, the Bankruptcy Court ruled that Appellant had standing to be heard on the
conflict of interest issue because based on the intent of In re Congoleum, 46 F.3d 675 (3d Cir.
2005), attorneys have a responsibility to apprise the court of potential ethical violations. (See id.
22:3-22). On the issue of whether there was a conflict of interest between counsel for Debtor and

Trustee, Judge Meisel acknowledged that previous to the proceeding the parties took
“diametrically opposed positions as to what was property of the estate and what wasn’t property
of the estate, namely, the cause of action.” (Id. 32:9-12). Nevertheless, Judge Meisel believed
that if she approved the settlement agreement, then the parties’ interests would align into one,
which would be to successfully pursue the Malpractice Action against Appellant. (Id. 32:14-20).
Afier ruling that the parties did not hold an adverse interest in violation of the New Jersey Code
of Professional Conduct Rule 1.7, the Bankruptcy Court analyzed the contours of 11 U.S.C.

§

327(e). (Id. 34:5-15). The Bankruptcy Court ruled that the retention was not in violation of 11
U.S.C.

§ 3 27(e) because it was for a particular purpose and the retained attorney’s do not “need to

show that they’re disinterested[]” parties. (Id.).

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Thereafter, the Bankruptcy Court heard argument on the issue of the settlement. (See Id.
34:35, 35:1-2). At that point, Appellant attempted to be heard on the issue of the settlement
agreement, but Judge Meisel reasserted her limited grant of standing. (See id. 43:4-10). Judge
Meisel

only

pennitted Appellant to be heard on the issue of the settlement agreement to raise it as

an example of the alleged conflict of interest. (See id. 43:11-13). Accordingly, the Bankruptcy
Court did not consider that argument as part of the approval of the settlement but rather considered
the settlement under the factors set forth under In re Martin, 91 f3d 389 (3d Cir. 1996). (See
Bankruptcy Action December 9, 2016 Transcript 22:12-18). The Bankruptcy Court ultimately
approved the settlement, finding that it was fair and equitable, and that it further did not constitute
an improper assignment of a tort claim. (See Bankruptcy Action, ECF No. 261). That same Order
also found that “[t]he 14 day stay contained in Federal Rule of Bankruptcy Procedure 4001 (a)(3)
is inapplicable.” (See id.). Thus, the Malpractice Action was allowed to proceed in due course.
Appellant now appeals the decisions of the Bankruptcy Court to grant only partial
intervention and to approve the settlement. (Bankruptcy Action, ECF No. 262 at 2). Specifically,
Appellant asserts four errors. (ECF No. 3 at 2). First, Appellant challenges the Bankruptcy Court’s
failure to determine the ownership of the Malpractice Action. (Id.). Second, Appellant claims that
the Bankruptcy Court erred in vacating the stay in state court on the Malpractice Action. (Id.).2
Third, Appellant challenges the detennination of the Bankruptcy Court that there was no conflict
of interest between counsel for Debtor and Trustee.

(Id.).

Fourth, Appellant challenges the

detennination of the Bankruptcy Court that the settlement was not an assignment of the
Malpractice Action from Trustee to Debtor. (Id.).

2

This issue has already been disposed of by this Court’s Order and Opinion dated May 1, 2017. (ECF Nos. 18, 19).

5

For the reasons set forth below, this Court only analyzes the issues of standing and the
conflict of interest, and affirms Judge Meisel’s rulings.
LEGAL STANDARD
I.

Standard of Review

A district court reviews a bankruptcy court’s legal conclusions under de novo review. See
In re Global Industrial Technologies, Inc., 645 F.3d 201, 209 (3d Cir. 2011). “A court’s decision

regarding standing is a legal conclusion subject to de novo review.” Id. The disqualification of a
law firm is reviewed for an abuse of discretion. See In re Marvel Entertainment Group, Inc., 140
F.3d 463, 470 (3d Cir. 199$). An abuse of discretion is a deferential standard, and reversal requires
this court to find that the decision of the bankruptcy court rested on “a clearly erroneous finding
of fact, an errant conclusion of law or an improper application of law to fact.” In re Nutraquest,
434 F.3d 639, 645 (3d Cir. 2006).
II.

Standing

To intervene in a bankruptcy action, a party must have at the minimum constitutional
standing. See In re Global Industrial Technologies, Inc., 645 F.3d 201, 210 (3d Cir. 2011).

Constitutional standing exists where a party shows that the party has suffered an injury-in-fact.
Whitmore v. Arkansas, 495 U.S. 149, 155 (1990). An injury-in-fact “must be concrete in both a
qualitative and temporal sense.” Id. In addition, an alleged injury “must be distinct and palpable,
as opposed to merely abstract, and the alleged harm must be actual or imminent, not conjectural
or hypothetical.” Id. Moreover, an alleged injury “need not be financial and only need[s] to be
fairly traceable to the alleged illegal action.” In re Congoleum Corp., 426 F.3d 675, 6$5 (3d Cir.
2005).

Indeed, a favorable decision must be likely to cure the alleged injury.

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Whitmore v.

Arkansas, 495 U.S. 149, 155 (1990). “The contours of the injury-in-fact requirement, while not
precisely defined, are very generous.” Bowman v. Wilson, 672, F.2d 1145, 1151 (3d Cir. 1982).
In a bankruptcy proceeding, a party seeking standing must be a party-in-interest as stated
under 11 U.S.C.

§ 1109(b). See 11 U.S.C. § 1109 (b); In re Global Industrial Technologies, Inc.,

645 F.3d 201, 210-11 (3d

Cir. 2011). Nevertheless, the requirement of a party-in-interest must be

“construed broadly” as “effectively coextensive” with constitutional standing. See In re Global
Industrial Technologies, Inc., 645 F.3d 201, 211 (3d Cir. 2011). Therefore, the appropriate test
for standing in a bankruptcy proceeding is the injury-in-fact requirement. Id. at 210. Of course,
“[a] party denied standing to sue, or to intervene, or to object, may obviously appeal such a
determination.” See In re Pittsburgh & Lake Erie R.R. Co. & Sec. & Antitrust Litig., 543 F.2d
1058, 1064 (3d Cir. 1976).
Further, the New Jersey Constitution provides that “[tjhe Superior Court shall have original
general jurisdiction throughout the State in all causes.” See N.J. Const. Art. VI,

§ 3, ¶ 2. This

broad grant ofjurisdiction, however, may be limited by the Supremacy Clause of the United States
Constitution. See U.S. Const. Art. VI, cl. 2. Therefore, where the United States Congress grants
to the federal courts the exclusive jurisdiction over a certain subject-matter, then a state court
cannot practice jurisdiction over that subject-matter. See Gulf Offshore Co. v. Mobil Oil Corp.,
454 U.S. 473, 478 (1981).
Morover, unless otherwise provided, “the district courts shall have exclusive jurisdiction
of all cases under title 11.” See 28 U.S.C.

§ 1334(a). Chapter 7 bankruptcy actions fall under title

11 of the United States Code. See 11 U.S.C.

§ 30 1-66. Nevertheless, where a state legal

malpractice claim is based on an alleged error in a bankruptcy action under the exclusive

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jurisdiction of the federal courts, then that does not necessitate the practice of exclusive jurisdiction
over the state legal malpractice claim. See Gunn v. Minton, 133 S.Ct. 1059, 1065 (2013) (holding
state legal malpractice claim based on alleged error in patent proceeding does not fall under
exclusive jurisdiction); Laures v. Wolf Haldenstein Adler Freeman & Herz, L.L.F., 2015 WL

10434722, *5 The question is whether the state legal malpractice claim falls under title 11 of the
United States Code. See Gunn v. Minton, 133 S.Ct. 1059, 1064 (2013). Nowhere under title 11
of the United States Code provides for such an interpretation. See generally 11 U.S.C. §S 301-66.
Moreover, where a cause of action, like a state legal malpractice claim, is the property of the estate,
there is no indication that Chapter 7 of the Bankruptcy Code confers exclusive jurisdiction to the
federal courts over those causes of action. See generally 11 U.S.C.
III.

§ 301-66.

Conflict of Interest

Under the New Jersey Code of Professional Conduct Rule 1.7, “a lawyer shall not represent
a client if the representation involves a concurrent conflict of interest.” See N.J. Rules of Prof 1
Conduct (“N.J. Rules”) R. 1.7(a). A concurrent conflict of interest exists under two circumstances.
(See Id.). First, it exists where “the representation of one client will be directly adverse to another

client[.]” See N.J. Rules R. 1.7(a)(1). Second, it exists where “there is a significant risk that the
representation of one or more clients will be materially limited by the lawyer’s responsibilities to
another client, a former client, or a third person or by a personal interest of the lawyer.” See N.J.
Rules R. 1 .7(a)(2). Notwithstanding, the affected parties to a concurrent conflict of interest may
waive the concurrent conflict of interest. See N.J. Rules R. 1.7(b).
Moreover, in bankruptcy court, 11 U.S.C.
for a specified special purpose,.

.

.

§ 327(e) provides that a trustee “may employ,

an attorney that has represented the debtor, if in the best interest

8

of the estate,” and if there is no conflict of interest between the attorney and the debtor or estate.
See 11 U.S.C.

§

327(e). Unlike 11 U.S.C.

§ 327(a), §

327(e) does not have a requirement that the

employed attorney be a disinterested person. See In re Congoleurn Corp., 426 F.3d 675, 688-89
(3d Cir. 2005).
ANALYSIS
I.

Appellant Lacks Standing to Challenge the Settlement Agreement

Appellant’s challenges the Bankruptcy Court’s failure to determine the ownership of the
Malpractice Action, decision to vacate the stay in state court on the Malpractice Action, and
determination that the settlement was not an assignment of a tort claim. These three challenges
rest on the validity of the settlement agreement. Therefore, for Appellant to win, this Court must
first decide that Appellant has standing to challenge the approval of the settlement agreement. If
this Court finds that Appellant has standing, then second, this Court must decide that the approval
of the settlement agreement was an abuse of discretion. Appellant fails from the outset. This is
because Appellant has failed to show that the approval of the settlement agreement caused an
injury-in-fact to Appellant, even by the liberal injury-in-fact standard. Assuming, arguendo, that
Judge Meisel erred in approving the settlement agreement, Appellant suffers no injury from this.
Appellant argues that he has standing because if the Malpractice Action belongs

exclusively to the estate, then New Jersey Superior Court does not have subject matter jurisdiction.
(See ECF No. 11 at 3). Appellant claims that the settlement agreement between Debtor and Trustee

impennissibly conferred subject matter jurisdiction to the New Jersey state court, and because
“[he] has personal assets

[1 at stake in the [state court] lawsuit,” he suffers

injury

and thus has

standing. (Id. at 4). This assertion requires the Appellant to first prove that the approval of the

9

settlement agreement conferred subject matter jurisdiction on the New Jersey Superior Court.
Second, Appellate must prove that conferring subject matter jurisdiction on the New Jersey
Superior Court is an injury-in-fact sufficient to give rise to standing. Appellant fails to meet the
first element thereby making analysis of the second element unnecessary.
Debtor filed the Malpractice Action against Appellant in the New Jersey Superior Court,
(see generally Bankruptcy Action, ECF No. 180-3), which is a Court of general and concurrent

jurisdiction. Although the alleged Malpractice Action is based on Appellant’s alleged malpractice
in a Chapter 7 bankruptcy proceeding, (see Id. at

¶f 1, 2), and Chapter 7 bankruptcy actions are

under the exclusive jurisdiction of the federal courts, (see 2$ U.S.C.

§ 1334(a)), a legal malpractice

claim is not under the exclusive jurisdiction of the federal courts. See Gunn v. Minton, 133 S.Ct.
1059, 1065 (2013). Moreover, even if the Malpractice Action belongs exclusively to the estate,

there is no law that Appellant cites to that would indicate that Trustee cannot independently bring
•suit in the New Jersey Superior Court based on the alleged malpractice.
Appellant, in his reply, relies on Laures v. WolfHaldenstein Adler freeman & Herz, L.L.F.,
2015 WL 10434722 (2005), for the proposition that the New Jersey Superior Court will not
practice jurisdiction over a malpractice claim if it sterns from a case under the exclusive
jurisdiction of the federal courts. (ECF No. 11 at 5-6). Laures, however, does not stand for such
a proposition. See generally Laures v. WolfHaldenstein Adler freeman & Herr, L.L.F., 2015 WL

10434722. Rather, Laures recognized that “[n]o one can seriously dispute that such expansive
authority [of a State Court] includes the authority to resolve legal malpractice clairns[]” even where
those claims stem from cases under the exclusive jurisdiction of the federal courts. Id. at *5
Although Appellant is correct that the court Laures reversed the lower Court for the practice of

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jurisdiction, that reversal was based on an order from United States District Court for the Eastern
District of Michigan retaining exclusive jurisdiction over all matters relating to the action in that
case. See Id. Indeed, “under the doctrine of comity[,J the Law Division should have declined to
hear the action until plaintiff first sought relief in the federal court.” Id. at *6.
Here, there is no order from the Bankruptcy Court retaining exclusive jurisdiction over all
(See generally Bankruptcy Action).

matters relating to the Bankruptcy Estate.

Rather, the

Bankruptcy Court found that “[t]he 14 day stay contained in federal Rule of Bankruptcy Procedure
400 l(a)(3) is inapplicable” thus indicating that it would not practice exclusive jurisdiction over the
Malpractice Action.

(See Bankruptcy Action, ECF No. 261).

Based on the aforementioned

analysis, Appellant lacks standing to challenge the settlement agreement. Thus, Appellant cannot
challenge the Bankruptcy Court’s failure to determine the ownership of the Malpractice Action,
decision to vacate the stay in state court on the Malpractice Action, and determination that the
settlement was not an assignment of a tort claim.
II.

Counsel for Debtor and Trustee Are Not Under a Conflict of Interest

Appellant asserts that the Bankruptcy Court erred in its determination that there was no
conflict of interest between counsel for Debtor and Trustee, Mr. Carlos J. Cuevas, Esq., and the
law firm of Brach Eichler, LLC, respectively. (See ECF No. 3 at 2). For reversal, Appellant must
prove that it was an abuse of discretion for the Bankruptcy Court to so order. See In re Marvel
Entertainment Group, Inc., 140 F.3d 463, 470 (3d Cir. 1998). Appellant argues that there is a

conflict of interest between counsel for Debtor and Trustee “by virtue.
have advocated and continue to advocate.

.

.

.“

.

.

[ofi the positions they

(See ECF No. 3 at 21). It is true that Debtor and

Trustee have opposed one another up until the settlement and have specifically litigated the

11

reopening of the Bankruptcy Action and the ownership of the Malpractice Action. (See ECF No.
3 at 2 1-24). Appellant further argues that, contrary to Judge Meisel’s belief that the settlement
agreement aligned the parties’ interests, there is still a conflict of interest because the ownership
of the Malpractice Action is left unresolved, which will cause later litigation that is not in the best
interest of the estate. (See Id. at 24). This Court does not determine whether that is true or not,
but assuming it is, Appellant fails to explain how 11 U.S.C.

§ 327(e) does not resolve this potential

issue.
Under 11 U.S.C.

§ 327(e), counsel for Debtor and Trustee are only employed for the

“specified special purpose” to prosecute the Malpractice Action.

See ii U.S.C.

§ 327(e);

Bankruptcy Action, ECF No. 261. Debtor and Trustee only have one interest in the Malpractice
Action, which is to be successful in prosecution. Even if Appellant is correct, that the ownership
of the Malpractice Action is left unresolved, the pending Malpractice Action in the New Jersey
5uperior Court has no bearing on the actual ownership of the Malpractice Action. That issue, if
later litigated, would be for the Bankruptcy Court to detenriine, and counsel for Debtor and Trustee
are not retained for both parties in the Bankruptcy Action. Therefore, counsel for Debtor and
Trustee, the subject attorney and law firm, do not hold an adverse interest to either Debtor or
Trustee and thus do not violate New Jersey Code of Professional Conduct Rule 1.7 or ii U.5.C.

§

3 27(e).
In addition, the slight disparity the net proceeds to Debtor and Trustee in the settlement
agreement, i.e., 55% of the net proceeds going to Debtor and 45% of the net proceeds going to
Debtor’s Bankruptcy Estate, is not in violation of 11 U.s.C.

§ 327(e). This is because 11 U.S.C.

§ 327(e) does not have a requirement that the employed attorney be a disinterested person. (See
12

11 U.s.c. §327(e); In re Congolettm Corp., 426 f.3d 675, 688-89 (3d Cir. 2005)). Therefore, the
Bankruptcy Coui-t did not abuse its discretion in its determination that counsel for Debtor and
Trustee, Mr. Carlos J. Cuevas, Esq., and the law firm of Brach Eichler, LLC, do not have a conflict
of interest.
CONCLUSION
For the reasons above, the Court denies the Appellant’s Bankruptcy Appeal and affirms
the Bankruptcy Court on all issues. An appropriate Order accompanies this Opinion.

DATED: JuneC-, 2017
J
L. UNARES
UNITED STATES DISTRICT JUDGE

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