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.

Allegheny County Court of Common Pleas Senior Judge R. Stanton Wettick Jr. dismissed the claims against K&L Gates, finding the firm represented the special committee and not the company. He ruled that Kirschner, who is standing in the shoes of the company as trustee, had no standing to sue the law firm that never represented the company.

The Superior Court disagreed, finding the special committee and the company were essentially one and the same, and the court reinstated the suit. In April, the Pennsylvania Supreme Court denied K&L Gates' appeal of that ruling, bringing the case back to the trial court.

In its July answer, K&L Gates continued to argue that it had no duty to Kirschner or Le-Nature's because the engagement letter expressly noted the firm only represented the special committee and not the company. K&L Gates said the arrangement was set up that way to ensure the firm's investigation was as independent as possible.

K&L Gates further noted its investigation was bound by the parameters set by the special committee. The firm said Le-Nature's refused to allow certain interviews or provide certain documents and the special committee didn't compel their production.

K&L Gates listed 17 defenses to the suit, including the doctrine of unclean hands, a lack of privity, contributory negligence, statute of limitations, a lack of proximate cause and collateral estoppel.

One of those factors—the doctrine of collateral estoppel—played into Kirschner's decision to settle.

In dismissing Kirschner's arbitration claims against accounting firm Ernst & Young in June 2011, the panel cited the trial court's opinion in K&L Gates' case, noting the judge found K&L Gates couldn't be liable for "deepening insolvency" under Pennsylvania law, according to the arbitration panel's report. The panel found the E&Y case "could not be closer" to K&L Gates' case.

"The E&Y award against the trustee in favor of E&Y acts as collateral estoppel in this case and requires dismissal of all of the trustee's claims against K&L Gates," the firm had said in its answer.

In the motion for settlement approval, Kirschner said there were factual and legal uncertainties about its case against K&L Gates, including the risks posed by the E&Y arbitration panel's reasoning.

David B. White of Burns White in Pittsburgh and Craig D. Singer of Williams & Connolly in Washington, D.C., represent K&L Gates in the case. White referred a request for comment to Singer, who wasn't available by press time. A K&L Gates spokesman said the firm had no comment.

James H. Joseph of Sweetwater Law in Sewickley, Pa., and Sigmund S. Wissner-Gross of Brown Rudnick in New York are representing Kirschner. Wissner-Gross said he could not comment.

According to the settlement agreement, accounting firm Pascarella & Wiker, which was a co-defendant with K&L Gates in the malpractice action, is not party to the settlement. Kirschner said in his motion 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. Patricia Dodge of Meyer, Unkovic & Scott represents Pascarella & Wiker and did not return a call for comment.

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

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