MEDLEY MANAGEMENT INC v. LOWENSTEIN SANDLER LLP (2026)

Order, Supreme Court, New York County (Joel M. Cohen, J.), entered July 7, 2025, which granted defendants' motion for summary judgment dismissing the complaint, unanimously affirmed, with costs.

In this legal malpractice case arising from defendants' representation of both plaintiff and nonparty Medley LLC, the debtor in a bankruptcy proceeding, plaintiff argues defendants were negligent in failing to follow instructions in formulating and implementing a bankruptcy reorganization plan and in later withdrawing that plan without the debtor's approval.  Plaintiff's primary asset was its 98% ownership interest in the debtor.

Supreme Court properly concluded that defendants satisfied their initial burden of demonstrating the lack of triable issues of fact as to the claim for legal malpractice (see Hudson Yards LLC v Segal, 188 AD3d 419, 419 [1st Dept 2020], quoting Barbara King Family Trust v Voluto Ventures LLC, 46 AD3d 423, 424 [1st Dept 2007] ).  The Disclosure Statement, affirmation of the Chair of the Restructuring Committee, and the testimony of plaintiff's designee make clear that the initial bankruptcy plan included a two-pronged strategy of seeking a consensual reorganization with creditors and a cramdown if the first approach was unsuccessful.  Plaintiff's expert testified that this was the best way to accomplish the reorganization.  As the court noted, even if plaintiff did not approve this course of action, as it now claims, the advice was reasonable (see Rosner v Paley, 65 NY2d 736, 738 [1985];  Brookwood Cos., Inc. v Alston & Bird LLP, 146 AD3d 662, 667 [1st Dept 2017] ).

Plaintiff's reliance on the disinterested requirement of 11 USC § 327(a) to argue that the professional judgment defense does not apply is misplaced because that requirement applies only to defendants' representation of the debtor, not their representation of plaintiff.  Nor did plaintiff present sufficient evidence to show that any conflict of interest between it and the debtor had an adverse effect, and the Bankruptcy Court never ruled on this issue.  Moreover, an individual with both a 25% interest in plaintiff and the debtor testified that the interests of these entities were “aligned,” and the potential conflict was known by both parties from the outset.

With respect to plaintiff's claim that defendants withdrew the plan without authorization, defendants provided prima facie evidence that the Restructuring Committee approved this action through its submission of the affirmation of the Committee's Chair and notes that were prepared by an attorney who was present at the relevant meeting.  Plaintiff failed to present sufficient evidence to raise a triable issue of fact as the testimony it provided of two members of the Restructuring Committee on this issue was equivocal and contradictory.  In any event, the withdrawal was a reasonable course of action given that the initial plan could not be approved without sufficient new value, which at that point no one had agreed to provide to the satisfaction of the creditors' committee.

The court also correctly concluded that defendants demonstrated the absence of proximate cause.  Defendants showed prima facie that plaintiff could not prove that but for their malpractice, a reorganization plan presented by the debtor would have been approved by the Bankruptcy Court (see Nazario v Fortunato & Fortunato, PLLC, 32 AD3d 692, 695 [1st Dept 2006] ).  There are “numerous obstacles to pursuing, let alone successfully achieving, Chapter 11 reorganization” (Heritage Partners, LLC v Stroock & Stroock & Levan LLP, 133 AD3d 428, 429 [1st Dept 2015], lv denied 27 NY3d 904 [2016] ).  Plaintiff's assertion that the Bankruptcy Court would have confirmed a reorganization plan was speculative and thus, insufficient to raise a triable issue of fact (see id.;Hudson Yards LLC, 188 AD3d 419).

Nor does plaintiff's argument that a cramdown plan would have been confirmed by the Bankruptcy Court fare any better.  In addition to having to meet the enumerated requirements of 11 USC § 1129(b), that plan would also have required a finding by the Bankruptcy Court that it was “fair and equitable” to each impaired objecting class (see In re Hertz Corp., 120 F4th 1181, 1202–1203 [3d Cir2024], cert denied 146 S Ct 1512 [2026] ).  This too suffers from speculation.

Furthermore, defendants established prima facie that plaintiff could not show actual and ascertainable damages (see Zarin v Reid & Priest, 184 A.D.2d 385, 387–388 [1st Dept 1992] ).  Defendants' expert stated that the debtor's notes were trading substantially below face value and that the debtor would need to satisfy more than $100 million in debt, which it could not do, before its shareholders, including plaintiff, would be entitled to any recovery under the absolute priority rule.  In opposition, plaintiff failed to raise a triable issue of fact in that plaintiff did not present any evidence as to how much equity, if any, it would have received in the reorganized debtor.

We have considered plaintiff's remaining arguments and find them unavailing.