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K & L Gates and attorney Sanford Ferguson entered into a $23.7 million settlement with bankruptcy trustee Mark Kirschner late last month.  The legal malpractice action arose out of representation by K & L Gates to investigate the possibility of financial mismanagement of a company known as Le-Nature’s Beverages, Inc.  The bankruptcy trustee contended Ferguson ignored evidence of the illegal activities of Le-Nature’s  CEO Gregory Podlucky before the company was forced into bankruptcy.  Podlucky and six of his family members and business associates are currently serving a federal prison time for a fraud estimated to be between $600 and $900 million.

In 2012, the Superior Court reversed an order sustaining preliminary objections in favor of K & L Gates.  In sustaining the preliminary objections, the trial court found K & L Gates was retained by the investors in Le-Nature’s Beverages, Inc., and the bankruptcy trustee did not bring the legal malpractice action on behalf of the investors.  The Superior Court disagreed finding:

K & L Gates was retained to investigate the exact type of injury being inflicted upon Le-Nature’s.  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 Podlucky, and affirmatively representing that no evidence of fraud or misconduct existed.

Kirschner v. K & L Gates LLP, 46 A.3d 737 (Pa. Super. 2012).   The Superior Court opinion permitted the lawsuit to proceed against K & L Gates on both direct liability and vicarious liability claims, including a claim that K & L Gates was vicariously liable for the work of accounting and financial experts it retained as part of the investigation.  Ferguson was criticized for not giving appropriate scrutiny to Podlucky’s statements, and for sharing information with Podlucky who was suspected by his business partners who hired K & L Gates of fraud.

Among the potential lessons to be learned from this action is the danger of uncritically accepting statements from clients (or in this case the CEO of the firm you were retained to investigate).  It is an old, and not entirely true, adage that an attorney’s client is the attorneys worst enemy.  However, in terms of legal malpractice avoidance it is often in the best interest of the practitioner to examine a client’s claims with a critical eye.