Pepper Hamilton have been hit by a malpractice lawsuit brought by a former bankrupcy trustee that claims “hundreds of millions of dollars of harm,” but which the law firm claims is baseless.

Pepper Hamilton and one of its prominent tax partners, W. Robert Gagne, have been hit with a potentially massive legal malpractice suit brought by a bankruptcy trustee who claims the firm ignored blatant conflicts of interest when it allowed Gagne family members and trusts to invest heavily in an ailing company in order to hide its deteriorating financial condition from its creditors.

The suit, filed in U.S. Bankruptcy Court in Delaware, stems from the demise of Student Finance Corp., and alleges that Pepper Hamilton’s simultaneous representation of SFC and its affiliates, as well as its insurer and the Gagne family members as investors created a situation in which Pepper Hamilton had “unavoidable and inevitable divided loyalties.”

Pepper Hamilton’s conduct “foreseeably contributed to the financial demise of SFC” and caused “hundreds of millions of dollars of harm,” the suit alleges.

The complaint in Stanziale v. Pepper Hamilton was filed by attorneys Peter C. Hughes and Dawn Zubrick of Dilworth Paxson’s Wilmington, Del., office along with attorneys James J. Rodgers and Derrick A. Dyer of Dilworth Paxson’s Philadelphia office.

In addition to Pepper Hamilton and Gagne, the suit names as defendants Gagne’s wife, Pamela Bashore Gagne; his uncle, Robert L. Bast; and seven Gagne family trusts.

Pepper Hamilton’s executive partner, Robert E. Heideck, said Monday that the suit has “no merit.”

In an interview, Heideck said the alleged conflicts of interest were all properly addressed with letters that waived any conflict, and that the lawsuit’s allegation that the conflicts were “unwaivable” is simply wrong.

Heideck also said Pepper Hamilton bears no responsibility for SFC’s demise and that it withdrew from its representation of SFC soon after the alleged financial improprieties came to light.

“When we learned that everything was not as it had been represented by SFC, Pepper insisted that SFC make immediate disclosure and take immediate internal corrective actions. When SFC did not take all of the actions that it had agreed to undertake, we immediately resigned from any further representation of SFC,” Heideck said.

“Far from concealing any wrongdoing at SFC, Pepper insisted on prompt disclosure and correction,” Heideck said.

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