A Pennsylvania appeals court reinstated a $500 million lawsuit that charges law firm K&L Gates with mishandling an internal investigation into now-bankrupt drink maker Le-Nature Inc. Bankruptcy trustee Marc Kirschner filed the suit in September 2009, alleging that the firm’s failure to uncover fraud at the company contributed to hefty financial losses.

Le-Nature’s board of directors enlisted K&L Gates to lead an internal investigation into the company following the 2003 resignation of several executives, who cited concerns about co-founder Greg Podlucky in their resignation letters.

The suit alleges that K&L Gates eventually turned control of the investigation over to Podlucky, who, at the time, was busy running a $685 million loan-fraud pyramid scheme and stashing more than $1 million worth of jewels and gold watches in a secret room at Le-Nature’s Pennsylvania plant. He is currently serving a 20-year prison term for fraud, tax evasion and money laundering.

A trial court dismissed the original case in 2010, saying that the firm had not been negligent because it was hired to protect the interests of Le-Nature investors, not those of the company itself. The judge added that Kirschner failed to prove financial harm, as Le-Nature was insolvent at the time of the firm’s report. A three-judge panel reversed that decision this week, ruling that “the fact of Le-Nature’s insolvency does not negate the harm allegedly resulting from K&L Gates’s professional negligence.”

Kirschner lauded the court’s ruling in a statement, saying “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.”

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