Court Grants Motion To Dismiss Legal Malpractice Claim

In an Opinion, dated May 2, 2023, in Prospect Capital Corp. v. Morgan Lewis & Bockius LLP, 2023 NY Slip Op 31505(U), Justice Margaret A. Chan granted defendant’s motion to dismiss a complaint for legal malpractice. The case concerned the narrowing of a turnover provision in a subordination agreement during the agreement’s negotiation. Plaintiff alleged that defendant failed to detect and inform it of the revision to the turnover provision, which effectively precluded its remedy against a junior lender. Justice Chan rejected defendant’s argument that it could not be held liable since plaintiff was supposed to read and know the contents of the subordination agreement, which it signed, and had its own General Counsel, noting that:

"the binding nature of that agreement ... is not a complete defense to the professional malpractice of the law firm that generated the agreement to its client's detriment" (Arnav Indus., Inc. Retirement Trust v Brown, Raysman, Millstein, Felder & Steiner, LLP, 96 NY2d 300, 305, 751 N.E.2d 936, 727 N.Y.S.2d 688 [2001].

However, the Court agreed that plaintiff had not alleged causation and damages, explaining:

Under the [plaintiff’s] first theory, plaintiff alleges that if defendants had detected and informed it of the narrowing of the turnover provision, it would have pushed back in the negotiation to ensure that the subordination agreement include the turnover right at issue. Plaintiff alleges that the turnover remedy is customary in debt subordination agreements so its request would have been an "easy give" for SVB (complaint, ¶ 54). However, as it was SVB that made the revision to exclude Keane Holdings from "Keane Entity," the group of entities subject to the turnover provision, plaintiff's theory has to rely on the presumption that SVB and other deal parties would have been willing to take the change back.

…

Plaintiff's alternative theory also fails as it is based on mere speculation of unspecified future events. Plaintiff alleges that its strategy with respect to the winddown of Venio was based on defendants' erroneous advice that it had a turnover remedy against SVB. The essence of this theory is that if plaintiff had been made aware of its lack of a turnover remedy, it would have proceeded with other proposed options instead of consenting to the sale of Venio's assets. However, while the complaint vaguely refers to other proposed deals, such as (1) investment of new cash by Venio's indirect equity owner and (2) converting some debt into equity and other credit restructuring, the complaint does not specify what those proposed deals would entail and how they would have yielded a more favorable outcome.

(internal citations omitted). Thus, the Court granted defendant’s motion to dismiss.

This case demonstrates that even where malpractice is adequately alleged, a plaintiff should not forget that causation and damages must still be pled as well and should not give those elements short shrift.

The attorneys at Schlam Stone & Dolan frequently litigate legal malpractice disputes. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such issues.