Co-Defendant Opposes K&L Gates, Le-Nature's Accord

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Pascarella & Wiker, the accounting firm that was sued along with K&L Gates by the trustee of bankrupt Le-Nature's, has opposed a $23.75 million settlement between the law firm and the trustee.

The accounting firm told the U.S. Bankruptcy Court for the Western District of Pennsylvania, charged with approving the settlement, that the accord doesn't protect Pascarella & Wiker's ability to offset certain damages levied against it by the amount for which K&L Gates would jointly be responsible.

As part of the settlement between K&L Gates and trustee Marc S. Kirschner reached last month in the state-court malpractice action filed against K&L Gates and Pascarella & Wiker in Allegheny County, the parties said nonsettling defendant Pascarella & Wiker would have the benefit of a Griffin release. Such a release means the settling defendant, in this case, K&L Gates, would concede joint tortfeasor liability in order for the nonsettling defendants to have a right of setoff, Pascarella & Wiker said in its motion.

Pascarella & Wiker is arguing that a Griffin release only protects parties in actions that sound in negligence, not breach of contract actions, which was one of the claims against the accounting firm.

"While the settlement agreement and release executed between the trustee and the K&L parties may protect the P&W parties in the event that there is a finding of joint negligence on the part of P&W and K&L, by contrast, the settlement agreement neither includes comparable terms that concede K&L's liability as a joint obligor under the P&W/K&L contract, nor provides for any method of apportioning fault between the co-obligors with respect to the trustee's breach of contract claim," Pascarella & Wiker said in its memorandum.

Pascarella & Wiker argued in its memorandum that while the settling parties fashioned a remedy to protect the accounting firm from paying full damages on the tort-based claims, the settlement seeks the court's approval to bar Pascarella & Wiker from asserting any claims for contribution or indemnity, not just for those that sound in negligence.

"The trustee does not cite any authority for the novel proposition that a Griffin release is appropriately utilized with respect to causes of action that do not arise in the context of negligence by joint tortfeasors or would have effect as to non-tort claims," Pascarella & Wiker said. "In fact, P&W has found no case law that suggests that Pennsylvania courts have held that a Griffin release, which is wholly grounded in tort principles, has any applicability to contract claims."

The contract at issue is that between K&L Gates and Pascarella & Wiker. The former hired the latter to assist it in an investigation K&L Gates was hired to do in 2003 on behalf of a special committee of the board of trustees of Le-Nature's charged with looking into whether certain executives were mismanaging finances. Kirschner has argued in the state-court action that K&L Gates and Pascarella & Wiker's failure to detect any fraud allowed the fraudulent activity to continue for three more years until Le-Nature's went into bankruptcy in 2006.

Kirschner sued K&L Gates for breach of contract, professional negligence, breach of fiduciary duty, negligent misrepresentation and vicarious liability for the alleged negligence of Pascarella & Wiker. He sued Pascarella & Wiker for breach of contract and negligent misrepresentation.

Pascarella & Wiker said Kirschner noted in the complaint that Pascarella & Wiker acted at K&L Gates' direction and that the law firm dictated the scope of the accounting firm's work.

"Indeed, because the trustee has alleged that K&L controlled and limited P&W's performance of the contract and P&W's access to information, K&L would bear primary, if not sole, responsibility for the alleged breach of contract if the trustee's allegations are proven at trial," Pascarella & Wiker said.

The accounting firm said the proposed settlement agreement takes away the firm's right to seek indemnification from K&L Gates. Pascarella & Wiker argued the settlement would force it at trial to prove that K&L Gates, who would not be at the trial, was a co-obligor and is liable for the breach of contract.

Kirschner said in his motion seeking approval of the settlement that, if he is unable to settle his claims with the accounting firm, he will "promptly" proceed with the remaining claims.

Kirschner said that if Pascarella & Wiker does not agree to an entry of discontinuance of the action against K&L Gates in state court, he would ask the court to enter an order of discontinuance. There has been no movement on the state-court docket. U.S. Bankruptcy Judge Thomas P. Agresti set a hearing on the proposed settlement for Thursday. In light of Pascarella & Wiker's opposition, he ordered Kirschner to respond to the motion by today.

Patricia L. Dodge of Meyer, Unkovic & Scott in Pittsburgh represents Pascarella & Wiker and did not respond to a request for comment. Sigmund S. Wissner-Gross of Brown Rudnick in New York represents Kirschner and declined to comment. Craig D. Singer of Williams & Connolly in Washington, D.C., represents K&L Gates and declined to comment.

Gina Passarella can be contacted at 215-557-2494 or at gpassarella@alm.com. Follow her on Twitter @GPassarellaTLI.

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