An appellate court in Pennsylvania has resurrected a lawsuit by the Trustee of insolvent Le-Nature's, Inc. against the law firm that conducted an allegedly inadequate internal investigation. Kirschner v. K&L Gates LLP, 46 A.3d 737 (Pa. Super. Ct. 2012). The case arises out of the 2006 insolvency of Le-Nature’s and the indictment of several of its officers (including its founder and CEO, who was convicted of fraud and received a 20-year sentence). In 2003, during a routine audit, several of the company’s officers expressed concerns about the accuracy of the company’s sales figures, and three of those officers resigned. The company’s Board formed a Special Committee to investigate possible wrongdoing, and the Special Committee engaged a law firm. The law firm conducted an investigation that found no wrongdoing. Three years later, a separate investigation by another firm uncovered a massive fraud and the company was forced into bankruptcy. The trustee filed a complaint on the company’s behalf against the first law firm, alleging that firm should have uncovered the fraud in 2003. The trial court dismissed the complaint for a variety of reasons, including a lack of an attorney-client relationship between the law firm and the company. The trial court noted among other things that the retention agreement provided, “We [the law firm] understand that we are being engaged to act as counsel for the special committee and for no other individual or entity, including the Company or any affiliated entity, shareholder, director, officer or employee of the Company not specifically identified herein.” On appeal, the Superior Court reversed. The Superior Court focused on language in other documents – including the Board resolution authorizing the retention of the law firm and an engagement letter between the law firm and a financial expert – that the investigation was conducted on behalf of the company. The Superior court also found that in retaining the law firm, the Special Committee was acting on behalf of the Board, which in turn was acting on behalf of the company. Accordingly, the court found there was an attorney-client relationship between the law firm and the company. The law firm has appealed the decision to the Pennsylvania Supreme Court, arguing that the Superior Court’s ruling creates uncertainty in attorney-client relationships and makes it difficult to structure an attorney-client relationship that avoids a later finding that the firm represented a third party.
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Retention by special committee created client-relationship with company
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