Commercial Division Blog

Posted: December 8, 2023 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Seth D. Allen, Joshua Wurtzel, Channing J. Turner / Categories Commercial, Contracts, Malpractice, Reargument, Causation

Court Denies Motion To Dismiss Upon Reargument Finding Causation Was Alleged

In a Decision and Order, dated October 25, 2023, in Prospect Capital Corp. v. Morgan Lewis & Bockius LLP, Index No. 653941/2022, Justice Margaret A. Chan granted plaintiff’s motion for reargument and, upon reargument, denied defendant’s motion to dismiss.  The case concerned plaintiff’s claim for legal malpractice in connection with services rendered by defendants while negotiating the terms of a subordinated debt agreement.  The Court had previously granted defendants’ motion to dismiss due to failure to allege causation or damages.  However, upon reargument, the Court explained:

According to the complaint, defendants failed to identify edits to a draft subordination agreement that significantly narrowed Prospect's turnover remedy against SVB and created a mismatch between the debt subordination provision of section 1 and the turnover remedy set forth in section 5 (compl ¶¶ 14-18). Despite this error, defendants nevertheless continued to advise Prospect that it had a broad turnover remedy by referencing an incorrect version of the subordination agreement (id., ¶¶ 20-24). Prospect, in turn, detrimentally relied upon that advice by (1) holding off on enforcing its rights and remedies under the subordination agreement upon learning of the Citizens Loan, (2) allowing Venio to sell its assets, and (3) upon the conclusion of Venio's sale, pursuing a turnover remedy it erroneously believed it possessed under Subordination Agreement (id., ¶¶ 29-40). In reality, Prospect lacked a turnover remedy under the correct version the Subordination Agreement, and, as a result, it was forced to withdraw that claim (see id., ¶¶ 40, 55; NYSCEF #s 29·30).  The import of defendants' alleged negligence is significant because the remedy that Prospect had lost the disgorgement of unpermitted payments to SVB (here, $12 million) is distinct from that available under the more general subordination provision (see compl, ¶¶ 12, 27, 52).

This is the precise causal link that the court evidently overlooked when  reaching its conclusion on causation in the Prior Order (cf. Prior Order at 6-7). Instead, accepting the complaint's allegations as true and drawing all reasonable inferences in Prospect's favor (as this court must), the court should have determined, as it does now upon reargument, that the purported harm flowing from defendants' alleged negligence was Prospect's loss of a cause of action and its distinct remedies, rather than its ability to obtain a more favorable economic result in the SVB Litigation after losing the turnover remedy.[] With this understanding of Prospect's allegations in mind, the court is able to reasonably conclude that Prospect sufficiently alleged the requisite causation flowing from defendants' negligence, as well as a reasonable inference of damages, that is needed to survive a motion to dismiss[] (see Lappin, 34 AD3d at 280; cf. also Dodge v King, 19 AD3d 359, 360 [2d Dept 2005] [concluding that complaint sufficiently alleged claim for legal malpractice where plaintiff alleged that defendant failed to assert viable claim for adverse possession in underlying action, thereby causing plaintiff to lose claim to title of property]; David v Mallilo & Grossman, 17 Misc 3d 1103[A], at *4 [Civ Ct, NY County, 2007], affd 19 Misc 3d 142[A] [App Term, 1st Dept, 2008] [concluding that plaintiffs met initial burden of establishing malpractice claim where despite settlement of underlying claim, record indicated that counsel filed personal injury claim in civil court rather than supreme court, thereby depriving plaintiffs of full value of their claim]).

Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning reargument or causation.