The Pennsylvania Supreme Court has declined to take a case in which K&L Gates was appealing the reinstatement of a $500 million lawsuit against the firm by the trustee of bankrupt bottling company Le-Nature’s.
K&L Gates and co-defendant accounting firm Pascarella & Wiker had asked the justices to review the Superior Court decision to reinstate the professional negligence and breach of fiduciary duty case against them. The high court denied that request in a one-page order late Wednesday.
K&L Gates was hired by a special committee of the Le-Nature’s board in 2003 to investigate whether there was fraudulent activity by certain of the company’s executives. K&L Gates found no evidence of fraud, but three years later the company went into bankruptcy and its president was later convicted of fraudulent financial practices and sentenced to more than 20 years in prison.
Le-Nature’s trustee Marc Kirschner argued the company suffered increased losses because of the firms’ failure to detect the financial fraud in 2003.
The denial of allocatur is also a loss for a number of large Pennsylvania law firms who sought to file an amicus brief with the court in support of K&L Gates.
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 May 2012 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."
The amici law firms had argued in their brief to the Superior Court that "for the first time," the court ruled "an implied attorney-client relationship could be inferred from circumstantial evidence even where two sophisticated parties have entered into a representation agreement that expressly disavows that such a relationship exists." They argued the engagement letter between K&L Gates and the special committee expressly disavowed any relationship between the law firm and Le-Nature’s.
Musmanno also looked to the issue of losses. Wettick had rejected Kirschner’s claims for damages because Le-Nature’s was insolvent at the time K&L Gates prepared its report in December 2003. Wettick had ruled the shareholders were not harmed by the increased insolvency between 2003 and 2006 because their interests had no value as of 2003. Wettick rejected "deepening insolvency" as a legal basis for an award of tort damages.
Musmanno said, however, that Kirschner was not making a claim for deepening insolvency and the damages claimed were "cognizable and compensable."
"Trustee does not allege that Le-Nature’s insolvency at the time of the alleged tortious conduct created additional damages or negated the harm caused by the allegedly tortious conduct," Musmanno said. "Rather, trustee seeks tort damages for Le-Nature’s increased liabilities, decreased asset values and losses proximately caused by the professional negligence of K&L Gates."
Musmanno said Le-Nature’s insolvency does not negate the harm allegedly caused by K&L Gates.
Calls to attorneys for the parties were not immediately returned Wednesday.
K&L Gates declined to comment.