Corporate Law

Appeals Court OKs Trustee's $500M Suit Blaming K&L Gates for Missing Massive Fraud


A Pennsylvania appeals court has revived a bankruptcy trustee’s $500 million lawsuit against K&L Gates, finding that an Allegheny County trial court dismissed the malpractice case in error.

The law firm had argued that it could not be sued by the trustee on behalf of Le-Nature’s Inc., because K&L Gates represented only a special committee of the now-defunct beverage company’s board. A written representation agreement expressly said that K&L Gates did not represent Le-Nature’s, the firm pointed out.

But in an appellate opinion (PDF) Monday, a three-judge panel of the state superior court found that this representation agreement limitation was void because the board members on the special committee had a fiduciary duty to act in the company’s best interest. Delaware law applied because Le-Nature’s was incorporated in Delaware.

A board resolution authorizing the special committee to retain a law firm to investigate fraud allegations against company executives said it was to do so “on behalf of the company,” the superior court panel notes, and K&L Gates had a copy of this board resolution.

Further, the law firm provided an advance copy of its findings to the company’s founder, who was subsequently determined to be involved in what the opinion describes as a massive fraud, and was not a member of the special committee. (Former CEO Gregory Podlucky has since been criminally convicted and is serving a 20-year prison term, a Reuters article on the appellate ruling points out.)

The opinion authorizes the trustee’s suit to proceed not only on a theory that K&L Gates was negligent in failing to uncover the Le-Nature’s fraud but on a theory that the law firm could potentially be held vicariously liable for the work of an accounting and financial expert it retained to work on the investigation.

Although the trial court had held that K&L Gates could not be held vicariously liable for any negligence by Pascarella & Wiker, the superior court reversed because of a master-servant relationship between the two that allowed the law firm to control the accountant’s work.

A K&L Gates spokesman declined to comment when contacted by Reuters and a lawyer for Pascarella & Wiker firm didn’t respond to a request for comment.

Hat tip: Bloomberg.

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