May 15 (Reuters) - A $500 million lawsuit accusing K&L Gates
of botching an internal investigation into a top executive at
defunct beverage maker Le-Nature Inc. can go forward, a state
appeals court ruled Monday.
A three-judge panel of the Superior Court of Pennsylvania
revived the 2009 lawsuit, which claims the firm negligently
handled the investigation into the company's former chief
executive, Gregory Podlucky. The suit was brought by the trustee
overseeing the liquidation of Le-Nature, which filed for
bankruptcy in 2006.
The litigation arose out of investigatory work K&L Gates and
accounting firm Pascarella & Wiker performed for Le-Nature's
board of directors following the resignation of several senior
executives at the company in 2003. The executives in their
resignation letters said they suspected Podlucky had engaged in
Federal prosecutors would later accuse Podlucky of operating
a $685 million loan-fraud pyramid scheme. In October, he was
sentenced to 20 years in prison for fraud, money laundering and
income tax evasion.
During the internal investigation, K&L Gates and its lead
partner on the case, former firm chairman Sanford Ferguson,
ignored signs of fraud and ceded control of the investigation to
Podlucky, according to the trustee's lawsuit. A report by K&L
Gates issued in 2003 found no evidence of fraud or malfeasance,
according to the complaint.
In 2010, Allegheny County Common Pleas Court Judge R.
Stanton Wettick Jr. dismissed the complaint, finding that the
trustee could not sue K&L Gates for professional negligence
since the firm was retained to protect the interests of
Le-Nature's investors rather than the company itself.
Wettick also held that the trustee had failed to prove it
had been financially harmed, since Le-Nature was insolvent when
K&L Gates issued its report.
The appellate court disagreed.
Judge John Musmanno, writing for the panel, said the
trustee, Marc Kirschner "has averred the existence of an
attorney-client relationship sufficient to impose a duty upon
K&L Gates to Le-Nature's." He also said the trustee could seek
"The fact of Le-Nature's insolvency does not negate the harm
allegedly resulting from K&L Gate's professional negligence,"
The court also reinstated claims against the
Pennsylvania-based accounting firm Pascarella & Wiker, which was
retained by K&L Gates as part of the investigation.
Judge Musmanno was joined in the opinion by Judges Cheryl
Allen and Sallie Mundy.
"The court made clear that when a law firm holds itself out
as an expert in corporate fraud investigations, it owes a
fiduciary duty as well as contractual duties to the full board
for the benefit of the corporation as a whole," Kirschner said
in a statement.
Michael Rick, a spokesman for K&L Gates, said the firm had
no comment. Jeffrey Sotland, a lawyer for the accounting firm,
Pascarella & Wiker, did not respond to requests for comment.
The case is Kirschner v. K&L Gates LLP, Court of Common
Pleas of Allegheny County, Pennsylvania, No. GD-09-015557
For Kirschner: Hector Torres of Kasowitz, Benson, Torres &
For K&L Gates: Craig Singer of Williams & Connolly
For Pascarella & Wiker: Jeffrey Sotland and Daniel McCarthy
of Mintzer Sarowitz Zeris Ledva & Meyers
(Reporting By Nate Raymond)
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