Key Points

  • The Appellate Division, First Department unanimously affirmed summary judgment dismissing Medley Management Inc.'s legal malpractice suit against Lowenstein Sandler LLP.
  • The court held that the firm's two-pronged Chapter 11 strategy, seeking a consensual reorganization and then a cramdown, and its later withdrawal of the plan were reasonable professional judgment.
  • The court held that the Bankruptcy Code's disinterestedness requirement in 11 USC § 327(a) applied only to the firm's representation of the debtor, Medley LLC, and not to its representation of Medley Management.
  • Medley Management could not show proximate cause because its claims that a reorganization or cramdown plan would have been confirmed were speculative.
  • Medley Management could not show actual and ascertainable damages because the debtor owed more than $100 million it could not repay before shareholders could recover under the absolute priority rule.

A New York appeals court has upheld the dismissal of Medley Management Inc.'s legal malpractice suit against Lowenstein Sandler LLP. The court ruled that the law firm used reasonable judgment in handling the bankruptcy of Medley LLC, a company in which Medley Management held a 98% ownership interest, and that Medley Management could not prove the firm's work cost it anything.

The Appellate Division, First Department ruled unanimously in an unsigned decision issued Oct. 22. Justice Scarpulla presided over the five-justice panel, which also included Justices González, Rodriguez, Rosado and O'Neill Levy. The decision leaves in place a July 7, 2025, order by Justice Joel M. Cohen of State Supreme Court in New York County granting the firm summary judgment.

The panel held that Medley Management failed to make either of two showings the court required. The company had to prove that, but for the firm's alleged malpractice, the Bankruptcy Court would have approved a reorganization plan. It also had to prove "actual and ascertainable damages." The court found the company's evidence insufficient on both.

Lowenstein Sandler represented both Medley Management and Medley LLC, the debtor in the bankruptcy proceeding. Medley Management's primary asset was its stake in the debtor. The company argued that the firm was negligent in failing to follow instructions in formulating and implementing a bankruptcy reorganization plan. It also argued that the firm withdrew that plan without the debtor's approval.

The panel first held that the firm's strategy was a reasonable exercise of professional judgment. The disclosure statement, an affirmation by the chair of the restructuring committee and testimony from Medley Management's own designated witness showed that the initial plan had two prongs, the court wrote. The firm would seek a consensual reorganization with creditors and, if that failed, a cramdown.

Medley Management's expert testified that this approach was the best way to accomplish the reorganization, the panel noted. Endorsing Justice Cohen's finding, the court wrote that "even if plaintiff did not approve this course of action, as it now claims, the advice was reasonable."

The panel also rejected Medley Management's argument that the firm's dual role stripped it of the professional-judgment defense. The company relied on the disinterestedness requirement of Section 327(a) of the Bankruptcy Code. The panel held that the requirement "applies only to defendants' representation of the debtor, not their representation of plaintiff."

The court added that Medley Management had not presented sufficient evidence that any conflict of interest between it and the debtor had an adverse effect, and that the Bankruptcy Court never ruled on the issue. An individual with a 25% interest in both companies testified that their interests were "aligned," the panel wrote, and both parties knew of the potential conflict from the outset.

On the withdrawal of the plan, the panel held that the firm offered prima facie evidence that the restructuring committee approved the step. That evidence consisted of the chair's affirmation and notes prepared by an attorney who attended the meeting. Medley Management relied on testimony from two committee members, which the court called "equivocal and contradictory."

Withdrawing the plan was reasonable in any event, the panel held. 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 wrote.

The court then turned to causation. Quoting a 2015 decision of its own, the panel wrote that there are "numerous obstacles to pursuing, let alone successfully achieving, Chapter 11 reorganization." It concluded that Medley Management's evidence did not overcome them. "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," the panel wrote.

The court gave the same treatment to Medley Management's alternative theory that a cramdown plan would have been confirmed. Such a plan would have had to meet the requirements of Section 1129(b) of the Bankruptcy Code, the panel wrote. It also would have required a finding that the plan was "fair and equitable" to each impaired objecting class. The panel drew that standard from the Third Circuit's 2024 decision in In re Hertz Corp. "This too suffers from speculation," the court wrote.

The panel separately held that Medley Management could not show damages. Lowenstein Sandler's expert stated that Medley LLC's notes were trading substantially below face value. The expert also stated that the debtor would need to satisfy more than $100 million in debt, which it could not do, before shareholders such as Medley Management would be entitled to any recovery under the absolute priority rule.

In opposing summary judgment, Medley Management "did not present any evidence as to how much equity, if any, it would have received in the reorganized debtor," the court wrote. The panel said it had considered the company's remaining arguments and found them "unavailing."

Lawyers for Medley Management included Alan L. Frank of Alan L. Frank Law Associates, P.C. Lowenstein Sandler and the other defendants were represented by Samir Deger-Sen of Latham & Watkins LLP.

The First Department affirmed the dismissal with costs awarded to the defendants. The decision, 2026 NY Slip Op 06202, is uncorrected and subject to revision before publication in the Official Reports.