In Stevens v. Sharif, et. al., No. 15 C 1405 (N.D. Ill. August 30, 2019), Judge Durkin of the United States District Court for the Northern District of Illinois found that defendant’s attorney in Wellness International Network Ltd. v. Sharif, 135 S. Ct. 1932 (2015) had not committed legal malpractice by failing to raise the Stern objection before it was deemed waived. A “Stern objection,” as it is known, is the result of the ruling in Stern v. Marshall, 564 U.S. 462 (2011), where the Supreme Court held that the bankruptcy court lacked constitutional authority to issue a final and binding judgment on a state law counterclaim. Wellness International resolved a circuit split regarding whether a party could waive a Stern objection by failing to raise the objection to the bankruptcy court’s power. In Wellness International, the defendant’s discovery abuses in an adversary proceeding eventually led the bankruptcy court to sanction defendant by entering judgment against him. The defendant appealed to the district court and after the appeal was fully briefed, sought leave to file supplemental briefing asserting a Stern objection. The district court found the argument had been waived. The defendant appealed to the Seventh Circuit and again waited until the reply brief to assert the Stern argument. While noting that defendant waited to long to assert his argument, the Seventh Circuit held the Stern issue could not be waived. The plaintiff, Wellness International, appealed, and the Supreme Court held that the objection can be waived.
In Stevens v. Sharif, the defendant’s attorney in Wellness International sued his client (and the defendant in Wellness International) for payment of fees. The client counterclaimed, asserting his attorney had committed malpractice by not raising Stern objections earlier in the district court and circuit court appeals. Judge Durkin found that failing to raise the Stern objection violated the standard of care imposed on the attorney. Technically, he had committed malpractice. However, the attorney was not found liable because there was no proximate cause between the failure to raise the Stern objection and the client’s damages. As Judge Durkin noted: “no reasonable court would have concluded otherwise” given the client’s numerous discovery abuses.
While the attorney in Wellness International avoided liability because there was no proximate cause between his failure to raise the Stern objection and the client’s damages, he was found to have violated the standard of care. Practice pointer for all attorneys: make sure your client makes a fully informed, knowing waiver of any potential Stern objections.