K&L Gates Aims to Settle Malpractice Case for $23.8 Mil.

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K&L GATES

K&L Gates has agreed to settle a $500 million legal malpractice case filed against it by the trustee of defunct beverage manufacturer Le-Nature's for $23.75 million, according to a proposed settlement agreement filed in the Le-Nature's bankruptcy case.

Le-Nature's trustee Marc S. Kirschner alleged K&L Gates and partner Sanford Ferguson failed to detect fraud in the beverage company when hired in 2003 to conduct an internal investigation of whether certain executives were mismanaging finances. Kirschner said that failure allowed the company to sink deeper into debt for the next three years until the fraud came to light and the company went bankrupt in 2006.

The case, filed in the Allegheny County Court of Common Pleas, was initially thrown out by the trial judge. The Pennsylvania Superior Court reinstated it and the state Supreme Court denied K&L Gates' appeal of that reinstatement, resulting in a lengthy response to the suit by K&L Gates denying all claims against it.

Kirschner is now asking U.S. Bankruptcy Judge Thomas P. Agresti of the Western District of Pennsylvania to approve a proposed settlement between the parties of $23.75 million in an effort to put an end to the protracted litigation in state court in Kirschner v. K&L Gates. As the proposed agreement states, K&L Gates is not admitting any liability or wrongdoing by settling. Agresti has set a hearing on the issue for Feb. 27. Any objections to the settlement must be filed by Feb. 20, he said in Tuesday's order scheduling the hearing.

The two sides agreed to mediation before Eric Green of Resolutions LLC. The mediation, which lasted for more than 10 hours, was held in Miami on Jan. 8.

The settlement is in line with other settlements Kirschner has reached in similar cases brought against Le-Nature's banks and accounting firms. Kirschner noted in his motion to Agresti that he has previously received approvals of settlements with Wachovia for $38 million, BDO Seidman for $12 million and Krones for $30 million.

Kirschner estimated the continued prosecution of the case against K&L Gates could rack up more than $5 million in additional litigation expenses on top of the $5 million already spent.

"In addition to the complexities and risks involved in proving the trustee's claims against the K&L parties at trial, the award of any damages against the K&L parties could have presented an additional complex trial issue, requiring a determination of the allocation of fault as between the K&L parties and other joint tortfeasors, including other settling defendants, resulting in further delay and added cost and unpredictability," Kirschner said in the motion, filed Jan. 24.

In July, K&L Gates filed a 298-page answer to the complaint. The firm outlined several defenses and looked for credit toward any damages that might be levied against it given other entities have settled with the trustee on similar claims.

The firm said it couldn't do the investigation it wanted because of limitations placed on it by the special committee that hired the firm. It further argued the special committee ignored the corporate governance recommendations the firm suggested in its report. And despite Le-Nature's claims it faced steeper losses from the fraud in the three years between K&L Gates' investigation and the Le-Nature's bankruptcy, K&L Gates argued the company benefited financially during that time because of the fraud, according to the response.

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