Prospect Capital Corp. v Morgan Lewis & Bockius LLP 2023 NY Slip Op 33797(U)
October 25, 2023 Supreme Court, New York County Docket Number: Index No. 653941/2022 Judge: Margaret A. Chan is a very unusual example of a court hearing a reargument motion and changing its mind. The judge notes in minute detail the court’s misapprehension of the causation issues and reverses the initial dismissal.

“On October 21, 2022, Plaintiff Prospect Capital Corporation (Prospect or
plaintifO commenced this action against Defendants Morgan Lewis & Bockius LLP
(Morgan Lewis) and Matthew Schernecke (together, defendants), alleging a claim
for legal malpractice in connection with legal services rendered by defendants while
negotiating the terms of a debt subordination agreement on plaintiffs behalf
(NYSCEF # 2 – compl). Defendants thereafter moved pursuant to CPLR 321l(a)(l)
and (a)(7) for an order dismissing plaintiffs complaint, and by Decision and Order,
dated May 2, 2023, this court granted defendants’ motion (NYSCEF # 61). Plaintiff
now moves for reargument pursuant to CPLR 2221 or, in the alternative, for leave
to file a First Amended Complaint pursuant to CPLR 3025 (NYSCEF # 63). For the
following reasons, plaintiffs motion for reargument is granted, and upon
reargument, defendants’ motion to dismiss is denied.”

“Despite this conclusion, the court held that Prospect failed to adequately
allege causation and damages (id. at 5·7). To start, the court considered Prospect’s
theory that if defendants had detected the narrowed turnover provision and
informed Prospect of the change, Prospect would have pushed back in negotiations
to ensure that the subordination agreement included the correct turnover right,
which it then could have properly enforced in the SVB Litigation (id. at 6). On this
point, the court determined that, even assuming SVB agreed to Prospect’s
negotiation request, Prospect had not sufficiently alleged that, with the turnover
remedy, it would have necessarily collected $12 million from SVB (id.). The court
reasoned that, in light of the SVB Litigation’s settlement, Prospect failed to explain
how the turnover remedy would have yielded it a more favorable economic result
when the subordination provision seemingly provided a basis for full recovery (id.
citing NYSCEF # 36 at 3). The court further reasoned that settlement severed the
causal chain because Prospect failed to allege that it would not have opted to settle

the SVB Litigation if it had the turnover remedy, or it would have otherwise
achieved a better result in its settlement (id. at 6·7).
The court next turned to Prospect’s alternative theory that, had it been aware
it lacked a turnover remedy, it would have proceeded with other proposed options
with respect to Venio instead of consenting to the sale of Venio’ s assets (id. at 7). On
this issue, the court determined that Prospect’s allegations were premised on
nothing more than mere speculation of unspecified future events (id.).
Based on this analysis, the court granted defendants’ motion to dismiss,
dismissed complaint in its entirety, and directed that costs and disbursements be
taxed by the Clerk of the Court. Prospect now seeks to reargue the Prior Order,
averring that the court overlooked three points. First, Prospect contends that the
court misapprehended the nature of the turnover provision as alleged in the
complaint by (1) assuming, without factual basis, that Prospect could have
recovered full damages from a breach of section 1 of the Subordination Agreement
alone and (2) overlooking that defendants’ negligence resulted in Prospect losing a
cause of action under the subordination agreement that had a separate and distinct
remedy for damages (NYSCEF # 67 -MOL at 5·6). Second, Prospect argues that the
court misapprehended or overlooked the law on settlements by concluding that
Prospect’s settlement with SVB broke the causal chain of damages arising from
defendants’ malpractice (id. at 8·11). Finally, Prospect avers that the court
misapprehended the nature of Prospect’s damages claims related to payment of
legal fees and costs (id. at 11·12).”

“Here, as noted above, the parties’ dispute centers around the issue of
causation. To plead a claim for legal malpractice, a party must sufficiently allege
proximate cause and actual damages (Reibman v Senie, 302 AD2d 290, 290-291 [1st
Dept 2003]). If an attorney’s actions resulted directly in the loss of a cause of action,
the “measure of damages is generally the value of the claim lost” (McKenna v
Forsyth & Forsyth, 280 AD2d 79, 80 [4th Dept 2001], Iv denied96 NY2d 720
[2001]). And when the alleged injury is the value of the claim lost, plaintiff “must
meet the ‘case within a case’ requirement, demonstrating that ‘but for’ the
attorney’s conduct the client would have prevailed in the underlying matter or
would not have sustained any ascertainable damages” ( Weil, Gotshal & Manges,
LLP v Fashion Boutique of Short Hills, Inc., 10 AD3d 267, 271 ·272 [1st Dept 2004]).
In order to survive a pre-answer motion to dismiss, a pleading “need only state
allegations from which damages attributable to the defendant’s conduct may
reasonably be inferred” (Lappin v Greenberg, 34 AD3d 277, 279 [1st Dept 2006]).

Applying the above principles, the court agrees with Prospect that it
misapprehended the complaint’s allegations concerning Prospect’s turnover remedy
when determining that the complaint failed to plead causation. Thus, reargument
on the issue of causation is warranted.2

When the court addressed the issue of causation under Prospect’s first theory
in the Prior Order, it had determined that Prospect failed to explain how the
addition of the turnover remedy would have yielded it a more favorable outcome
(Prior Order at 6). The court further held that Prospect failed to allege how
defendants’ negligence either caused it to settle rather than obtain a more favorable
result in litigation or prevented it from obtaining a more favorable settlement (id. at
6-7). The basis for the court’s decision was that Prospect’s loss of a turnover remedy
did not implicate its ability to pursue contractual damages under the Subordination
Agreement during the SVB Litigation or otherwise impact the settlement it
eventually obtained (see id.). A careful review of Prospect’s claim, however, reveals
that, as alleged, the true causal link between defendants’ negligence and Prospectharm flows from the loss of a cause of action and not the end result of the SVB
litigation (including its eventual settlement).”