The Pennsylvania Superior Court has accepted an amicus brief from 14 of the state’s law firms in support of K&L Gates’ bid for reargument of the court’s decision to reinstate a $500 million malpractice action against the firm by the Le-Nature’s trustee.
Dechert’s Robert C. Heim is leading a group of amicus curiae filers that also includes Conrad O’Brien; Dickie, McCamey & Chilcote; Fox Rothschild; Hawke, McKeon & Sniscak; Lamb McErlane; Margolis Edelstein; McNees Wallace & Nurick; Morgan, Lewis & Bockius; Rhoads & Sinon; Schnader Harrison Segal & Lewis; Stevens & Lee; Stradley, Ronon, Stevens & Young; and Swartz Campbell.
The firms argue the court’s ruling misapplied long-held principles of what constitutes an attorney-client relationship in Pennsylvania.
Separately, three attorneys and a law firm have filed an amicus brief on behalf of Le-Nature’s trustee Marc Kirschner. The court has not yet ruled as to whether it will accept the brief, which was signed by Grant & Eisenhofer, Geoffrey C. Hazard Jr., John Gibbons and Grover C. Brown.
On May 14, a three-judge panel of the court ruled an Allegheny County trial judge should not have dismissed the trustee’s claims against K&L Gates and accounting firm Pascarella & Wiker for their alleged failure to detect fraud within the company when they were hired to do an internal investigation three years before Le-Nature’s went bankrupt.
K&L Gates and Pascarella & Wiker had argued the firms only had a duty to the special committee of Le-Nature’s that hired them in 2003, and not to a trustee of the now-bankrupt company. Allegheny County Court of Common Pleas Senior Judge R. Stanton Wettick Jr. agreed, finding they had no obligation beyond the special committee and that the trustee could not claim damages for deepening insolvency of the company between the 2003 internal investigation and the 2006 collapse of the company.
But Superior Court Judge John L. Musmanno said in his opinion that the special committee had a duty to the company and K&L Gates was providing legal services to Le-Nature’s through the special committee.
“K&L Gates was retained to investigate the exact type of injury being inflicted upon Le-Nature’s,” Musmanno said. “By negligently conducting its investigation, K&L Gates affirmatively caused harm to Le-Nature’s by concealing the looting of the company and wrongdoing by [former CEO Gregory J.] Podlucky, and affirmatively representing that no evidence of fraud or misconduct existed.”
Judges Cheryl Lynn Allen and Sallie Updyke Mundy joined Musmanno in the decision that the court is now being asked to reconsider en banc.
The 14 law firms argued in their amicus brief to the court that the judges’ ruling determined for the first time that an implied attorney-client relationship could be inferred even when two “sophisticated” parties have entered into an agreement that expressly disavows such a relationship exists.
If the court’s ruling stands, it will “serve to weaken thousands of attorney-client relationships” in the state, the firms argued.
The firms said it has long been the law that a plaintiff must be in “strict privity” with an attorney to bring a malpractice action. They said the record is clear here that no contract for legal services was entered into between Le-Nature’s and K&L Gates. The agreement was between the special committee and K&L Gates and the engagement letter “expressly and unambiguously disavowed” any attorney-client relationship between the firm and Le-Nature’s, the law firms said in their brief.
“Should the panel’s decision stand, it would no longer be the law of Pennsylvania that lawyers are able to determine who they do and do not represent — a result which runs directly counter to the dictates of the Supreme Court of Pennsylvania,” the firms said. “Attorneys will be repeatedly forced to risk incurring duties to nonclients, and will be inhibited in providing advice clients may need, as there will always be uncertainty as to the scope of their duties and to whom they are owed.”
The court’s ruling also makes it difficult to follow the state’s Rules of Professional Responsibility, the firms said, regarding duties owed, maintaining attorney-client privilege and conflicts of interest.
“It is crucial to the ongoing health of the legal profession in Pennsylvania that attorneys and their clients be able to define the scope and nature of a legal representation,” the firms said. “The panel’s decision greatly undermines their ability to do so and will have a sweeping negative effect on thousands of attorney-client relationships going forward.”
The firms said they were narrowing the arguments in their brief to the issue of the attorney-client relationship, but added that they supported K&L Gates and Pascarella & Wiker in all of their arguments for reconsideration.
Kirschner sued K&L Gates, K&L Gates partner Sanford Ferguson, Pascarella & Wiker and its principal, Carl A. Wiker, for failing to detect fraudulent behavior by Le-Nature’s founder Podlucky when the firms were hired to conduct an internal investigation of the company in 2003.
Kirschner alleged the firms’ failure to detect the fraud allowed Podlucky to continue his fraudulent behavior, costing the company an additional $500 million in damages until its bankruptcy filing in 2006.
The firms were hired in 2003 after three senior financial professionals resigned from Le-Nature’s over concerns of fraud. The company’s accountants recommended it conduct an internal investigation of the allegations. A special committee of the board of directors was created to lead the investigation and the committee hired K&L Gates and Pascarella & Wiker.
The two firms issued a report that they found “‘no evidence of fraud or malfeasance with respect to any of the transactions’” they investigated, according to the opinion.
Wettick dismissed Kirschner’s professional negligence claim because of an absence of any obligations K&L Gates owed to Le-Nature’s and the absence of any losses, he said.
But Musmanno said that while K&L Gates’ engagement letter was with the special committee, it was investigating fraud by Le-Nature’s and was set to recommend action to be taken by Le-Nature’s if fraud was found. Musmanno applied Delaware law on this issue because Le-Nature’s was a Delaware corporation.
“As a committee to the board, the special committee had the fiduciary duty to act in the best interests of not only the shareholders, but also the corporation,” Musmanno said.
He said K&L Gates agreed to provide legal advice to Le-Nature’s through its special committee. Musmanno said K&L Gates and Pascarella & Wiker’s fees were billed to Le-Nature’s. In furtherance of proof that K&L Gates represented Le-Nature’s and not just the board, Musmanno pointed out that Ferguson shared a copy of his report and findings with Podlucky before he showed the special committee.
“In summary, we conclude that the trustee has averred the existence of an attorney-client relationship sufficient to impose a duty upon K&L Gates to Le-Nature’s,” Musmanno said.