Did the lawyer who lost Wellness International Network Ltd. v. Sharif commit legal malpractice by failing to raise a Stern defense before filing his reply brief in the Seventh Circuit?
A district judge in Chicago says that failing to raise a Stern objection about the inability of a bankruptcy court to enter a final judgment amounts to malpractice unless the lawyer “actually made a reasoned decision to omit” the issue. The opinion also implies that a lawyer should always raise an available Stern argument to obviate the risk of malpractice.
Wellness International was the decision in 2015 where five justices on the Supreme Court held that actual or implied consent can enable a bankruptcy court to enter final judgment on an issue where Stern otherwise would only allow the bankruptcy court to issue proposed findings of fact and conclusions of law.
Sharif was the client who lost when the bankruptcy court held that property in a trust was actually property of his bankrupt estate. In 2011, before his lawyer filed the first brief on appeal to the district court, the Supreme Court decided Stern v. Marshall. After the Seventh Circuit handed down its Ortiz decision dealing with Stern, the lawyer finally raised a Stern issue when he sought leave from the district court to file a supplemental brief.
After the district court affirmed the bankruptcy court, the lawyer appealed to the Seventh Circuit but did not interject a Stern argument until his reply brief. The Seventh Circuit nonetheless reversed, holding that Stern issues could not be waived.
When the Supreme Court permitted waiver and reversed, the high court remanded the case for the appeals court to decide if Sharif’s lawyer had waived the objection. The Seventh Circuit then decided that the lawyer had waived Stern by failing to raise the issue before his reply brief.
Sharif responded by suing his lawyer for malpractice, not for losing in the Supreme Court, but for failing to raise Stern earlier. Sharif’s lawyer filed a Rule 12(b)(6) motion to dismiss and lost in an opinion on August 4 by District Judge Thomas M. Durkin.
The lawyer raised the defense of “judgmental immunity,” which absolves counsel of malpractice for “an honest exercise of professional judgment.”
Judge Durkin denied the motion to dismiss because the lawyer failed to provide an “argument or explanation” for his delay in raising Stern.
Judge Durkin said that courts can rule on judgmental immunity as a matter of law. Consequently, a lawyer cannot defeat a client’s summary judgment motion by raising an issue of fact. In other words, a lawyer must persuade a judge that omitting a Stern objection was tactically reasonable, if not mistaken. Evidently, liability will be decided one way or another on cross-motions for summary judgment.
Judge Durkin’s opinion also could be read to suggest that a lawyer should always raise an available Stern objection to avoid the chance that a disgruntled client will claim malpractice after a bad result.
Even if there is theoretical malpractice liability, there often may be no damages if the bankruptcy court’s opinion went up on appeal and was affirmed. In those circumstances, the client would need to show that the result in the appellate court would have been different were the review de novo.