PBCBA BAR BULLETINS pbcba_bulletin_Dec. 2019 | Page 8

BANKRUPTCY CORNER Waiving a Stern Objection Could Result in Malpractice JASON S. RIGOLI Eight years ago, the Supreme Court issued its opinion in Stern v. Marshall, 561 U.S.462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), holding that bankruptcy courts lack the constitutional authority to enter a final judgment in an “action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.” Id. at 499, 131 S.Ct. 2618. Four years later, the Supreme Court answered the question of whether a Stern objection could be waived, holding that a Stern objection could be waived. See Wellness Int’l Network, Ltd. v. Sharif, 135 S.Ct. 1932, 1944, 191 L.Ed.2d 911 (2015) (“The entitlement to an Article III adjudicator is ‘a personal right’ and thus ordinarily ‘subject to waiver[.]’”) (internal citations omitted)). It is from the Wellness opinion that this warning arises. After remand from the Supreme Court, the Seventh Circuit held that Sharif forfeited his Stern argument. See Wellness Int’l Network, Ltd. v. Sharif, 617 Fed. App'x 589, 590 (7th Cir. 2015). Subsequently, Sharif’s attorney filed suit seeking payment of attorney’s fees and Sharif countered with a claim for malpractice. One of the bases of malpractice alleged by Sharif was that his former counsel “failed to properly raise an argument before the district court and court of appeals based on Stern that would have permitted the district court to review the bankruptcy court’s entry of judgment against Sharif under a lower standard.” Stevens v. Sharif , Case No. 15 C1405, 2019 WL 4862171 at *2 (N.D.Ill. Sept. 30, 2019). In Stevens, the District Court determined that the attorney had breached the applicable standard of care by not raising the Stern Objection which would have lowered the standard of review. Id. at *4. 1 The attorney defended the breach of his standard of care on two grounds: (i) consent and (ii) that the district court would have reached the same conclusion even if the Stern objection had been properly raised. Id. at *4. The Stevens Court quickly dismissed the “consent” argument, because “knowing and voluntary” consent could not have been given where there was no evidence that the litigant or his counsel were aware of the possibility to consent. Ibid. The court than conducted a “case within a case” analysis to determine whether properly raising the Stern objection would have changed the outcome. Id . at *5. The Court ultimately determined that a properly raised Stern objection would not have impacted the result based upon the findings in the underlying orders. Ibid. Conclusion Counsel who are prosecuting or defending adversary proceedings in bankruptcy court should be considering whether their client has a Stern objection to raise and whether to raise such an objection or consent. Further, counsel would be well advised to have a form for the client to review and sign when consenting to the bankruptcy court issuing final judgment in actions not stemming from the bankruptcy itself or the claims process. This is especially important since Rule 7008 of the Federal Rules of Bankruptcy Procedure was amended, post- Wellness , requiring each pleader to make a statement regarding consent to the entry of a final judgment in every adversary proceeding and each bankruptcy judge in Southern District of Florida has pretrial scheduling orders with deadlines for objecting or consenting to the bankruptcy court entering final judgment. The District Court was applying Illinois law with respect to the malpractice claim which required the plaintiff “[t]o prevail on such a claim, a plaintiff must plead and prove that (1) the defendant attorneys owed the plaintiff a duty of due care arising from the attorney- client relationship; (2) the defendants breached that duty; and (3) as a direct and proximate result of that breach, the plaintiff suffered injury.” “To satisfy the element of proximate cause, the plaintiff must plead sufficient facts to establish that ‘but for’ the negligence of the attorney, the plaintiff would not have suffered actual damages.” Stevens , at *2 (internal citations and quotation marks omitted). Florida law on malpractice is essentially the same. See JBJ Investments of South Florida, Inc. v. Southern Title Group, Inc., 251 So. 3d 173, 177 (Fla. 4th DCA 2018) (“A cause of action for legal malpractice has three elements: (1) the attorney's employment by the client; (2) the attorney's neglect of a reasonable duty; and (3) the attorney's negligence was the proximate cause of loss to the client.”) (citations omitted)). 1 This article is submitted by Jason S. Rigoli, Esq., Furr Cohen, 2255 Glades Road, Suite 301E, Boca Raton, FL 33431, [email protected]. PBCBA BAR BULLETIN 8