KKR & Co. v. Commonwealth

• Docket Number: 2022-CA-0347-MR,2022-CA-0350-MR,2022-CA-0352-MR,2022-CA-0353-MR
• Decision Date: 01 December 2023
• Parties: KKR & CO. INC. APPELLANT v. COMMONWEALTH OF KENTUCKY APPELLEE v. AND v. PAAMCO PRISMA, LLC; PAAMCO/PRISMA HOLDINGS, LLC; AND PRISMA CAPITAL PARTNERS LP APPELLANTS v. v. v. COMMONWEALTH OF KENTUCKY APPELLEE v. AND v. DANIEL BOONE FUND, LLC APPELLANT v. v. v. COMMONWEALTH OF KENTUCKY APPELLEE v. AND v. BLACKSTONE ALTERNATIVE ASSET MANAGEMENT ASSOCIATES LLC; BLACKSTONE ALTERNATIVE ASSET MANAGEMENT L.P.; AND BLACKSTONE HENRY CLAY FUND, LLC APPELLANTS v. v. v. COMMONWEALTH OF KENTUCKY APPELLEES
• Court: Kentucky Court of Appeals

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KKR & CO. INC. APPELLANT v. COMMONWEALTH OF KENTUCKY APPELLEE AND PAAMCO PRISMA, LLC; PAAMCO/PRISMA HOLDINGS, LLC; AND PRISMA CAPITAL PARTNERS LP APPELLANTS v. COMMONWEALTH OF KENTUCKY APPELLEE AND DANIEL BOONE FUND, LLC APPELLANT v. COMMONWEALTH OF KENTUCKY APPELLEE AND BLACKSTONE ALTERNATIVE ASSET MANAGEMENT ASSOCIATES LLC; BLACKSTONE ALTERNATIVE ASSET MANAGEMENT L.P.; AND BLACKSTONE HENRY CLAY FUND, LLC APPELLANTS v. COMMONWEALTH OF KENTUCKY APPELLEES

Nos. 2022-CA-0347-MR, 2022-CA-0350-MR, 2022-CA-0352-MR, 2022-CA-0353-MR,

Court of Appeals of Kentucky

December 1, 2023

NOT TO BE PUBLISHED

Appeal from Franklin Circuit Court Honorable Phillip J. Shepherd Judge Action No. 21-CI-00348 Briefs for Appellant KKR & Co., Inc:

Barry Barnett Abigail Noebels Ryan Weiss Max Straus Houston, Texas

Steven Shepard New York, New York

Seth Thomas Church Barbara B. Edelman Grahmn New Morgan John Moose Spires Lexington, Kentucky

Briefs for Appellants Paamco Prisma, LLC, Paamco/Prisma Holdings LLC and Prisma Capital Partners LP:

David Elbaum Michael J. Garvey Peter E. Kazanoff Sara A. Ricciardi New York, New York

Seth Thomas Church Barbara B. Edelman Grahmn New Morgan John Moose Spires Lexington, Kentucky

Briefs for Appellee Commonwealth of Kentucky:

Daniel Cameron Attorney General of Kentucky

Daniel John Grabowski John Christian Lewis Victor Bruce Maddox Alexander Y. Magera Aaron John Silletto Brett R. Nolan Assistant Attorneys General Frankfort, Kentucky

Briefs for Appellant Daniel Boone Fund, LLC:

Brian Michael Johnson Carol Anne Stewart Lexington, Kentucky

Briefs for Appellants Blackstone Alternative Asset Management Associates LLC, Blackstone Alternative Asset Management L.P. and Blackstone Henry Clay Fund, LLC:

Andrew J. Ehrlich Brad S. Karp Lorin L. Reisner Brette Tannenbaum New York, New York

Donald Joseph Kelly Jordan Michael White Louisville, Kentucky

Amici Curiae Brief for Law Professors:

Christopher D. Belelieu New York, New York

Michael W. Oyler Louisville, Kentucky

Before: Caldwell, Dixon, ^[1] and Eckerle, Judges.

OPINION

CALDWELL, JUDGE

The main question presented in these appeals is whether indemnity clauses in several investment-related contracts involving the Kentucky Retirement Systems, now called the Kentucky Public Pensions Authority ("Retirement") are unconstitutional. The Kentucky Attorney General ("OAG") challenged the constitutionality of those indemnity clauses by filing a declaratory judgment action in the Franklin Circuit Court. The trial court found the indemnity clauses to be unconstitutional in a seventy-six-page order.^[2] We agree. However, we must reverse and remand for an evidentiary hearing the trial court's grant of summary judgment to the OAG stemming from a motion to dismiss for lack of personal jurisdiction filed by KKR.

I. RELEVANT FACTUAL AND PROCEDURAL HISTORY

The facts underlying these appeals are complex and the circuit court record is over 5,000 pages long, so we shall attempt to simplify, streamline, and summarize to the maximum extent possible. Moreover, we have considered the entirety of the parties' voluminous briefs but will only discuss the arguments and factual recitations therein which we deem crucial to resolve properly these appeals. All issues raised by the parties which are not discussed herein lack merit, are redundant or are otherwise unnecessary for us to address.

To understand why the OAG filed the underlying declaratory judgment action we must discuss what is commonly referred to as the Mayberry action, which was filed in 2017 by eight individual members of Retirement. As we explained in an unpublished opinion resolving a case related to Mayberry:

The Mayberry Plaintiffs originally sued current and former trustees and officers of [Retirement], as well as certain outside advisors and investment managers, including Appellants PAAMCO and Prisma, for leading [Retirement] to enter into three "fund-of funds" hedge-fund investments. The Plaintiffs alleged that these investments were unsuitable, underperformed relative to the stock market, and increased [Retirement's] unfunded pension liabilities. The Plaintiffs did not provide [Retirement] with advance notice that they were filing suit, nor did they obtain legal authorization to bring claims on behalf of [Retirement]. Rather, they opted to sue [Retirement] as a nominal defendant, contending that [Retirement's] Board of Trustees was conflicted and incapable of evaluating whether [Retirement] should assert the claim independently. ...

[Eventually], the Mayberry Plaintiffs and "Nominal Defendant" [Retirement] filed a Joint Notice with the circuit court indicating that . . . [Retirement] "will not pursue the claims asserted by [the Mayberry] Plaintiffs" but the claims "appear to have merit," and [Retirement] "believes that it is in the best interests of [Retirement] for [the Mayberry] Plaintiffs to continue their pursuit of these claims on a derivative basis on [Retirement]'s behalf."

Prisma Capital Partners, LP v. Kentucky Retirement Systems, No. 2019-CA-000700-MR, 2020 WL 5083454, at *2 (Ky. App. Aug. 28, 2020). In another related opinion, our Supreme Court described the Mayberry plaintiffs as having alleged the "fund-of-fund" investments had "lost over $100 million by 2018 and further accumulated fees expected to measure in the hundreds of millions of dollars. These losses, according to [the Mayberry] Plaintiffs, contributed to what is now a $25 billion funding shortfall in [Retirement's] general pool of assets." Overstreet v. Mayberry, 603 S.W.3d 244, 250 (Ky. 2020) (internal quotation marks omitted).

The merits of Mayberry were never fully resolved because our Supreme Court unanimously held the Mayberry plaintiffs lacked standing and remanded the matter to the Franklin Circuit Court "with direction to dismiss the complaint." Id. at 266. However, in the gap between the issuance of that opinion and it becoming final, the OAG asked the trial court to intervene as a plaintiff in Mayberry. See KKR & Co., Inc. v. Mayberry, __S.W.3d__, 2023 WL 2939473, at *2 (Ky. App. Apr. 14, 2023) (not yet final). The OAG also filed a similar separate action, id., which - as of the writing of this Opinion - remains pending. Franklin Circuit Court Action No. 20-CI-00590. Despite our Supreme Court's directive to "dismiss the complaint[,]" the Franklin Circuit Court granted the OAG's motion to intervene as a plaintiff in Mayberry. Id. But we recently held the trial court erred by permitting that intervention since our Supreme Court had specifically ordered the case to be dismissed. Id. at *3-4.

Meanwhile, having incurred substantial defense costs in Mayberry, some Appellants sought indemnity from Retirement.^[3] Specifically, Prisma sued Retirement in a Delaware state court, BAAM sued Retirement in a Delaware state court, and PAAMCO sued Retirement in a California state court. BAAM later dismissed its Delaware action and sued Retirement in the Franklin Circuit Court. The circuit court dismissed BAAM's action on ripeness grounds, a decision we recently affirmed. Blackstone Alternative Asset Management L.P. v. Kentucky Public Pensions Authority, No. 2022-CA-0494-MR, 2023 WL 3556612, at *1 (Ky. App. May 19, 2023) (unpublished).

Although each contract has its own specific language, the essential gist of each indemnity clause is the same (except for, as we shall later discuss, the Boone Fund's agreement which requires the indemnity to be paid from the Boone Fund's assets, not Retirement's): Retirement agreed to reimburse Appellants for costs they incurred due to a breach by Retirement. Appellants assert Retirement committed an actionable breach when it agreed with the Mayberry plaintiffs' allegations of wrongdoing regarding the hedge fund investments after having asserted in the investment agreements challenged in Mayberry that it (Retirement) was an informed, sophisticated, experienced investor.

Against that jumbled backdrop, the OAG filed this declaratory judgment action in April 2021. Though lengthy, the complaint sought limited relief: first, a declaration that the indemnity clauses were unenforceable and, second, a declaration that the Commonwealth of Kentucky - in the form of Retirement - is immune from the Delaware and California breach of contract suits. KKR filed a motion to dismiss based upon a lack of personal jurisdiction. Ultimately, the trial court issued a ruling wholly favorable to the OAG. Appellants then filed the four appeals at issue, all of which we shall resolve in this Opinion.^[4]

II. ANALYSIS

A. Amici Curiae Motion

Before we address the issues, we first resolve a motion to file a brief as amici curiae submitted by three law professors. Though we ultimately do not adopt their positions, we appreciate their scholarly input and have granted the amici's motion by separate order.

B. Standards of Review

But before we attempt to untangle that Gordian procedural knot inherent in the trial court granting summary judgment to the OAG on a motion to dismiss filed by KKR, we first briefly list the applicable standards of review.

Motions to dismiss are governed by CR^[5] 12.02, which provides:

Every defense, in law or fact, to a claim for relief in any pleading . . . shall be asserted in the responsive pleading thereto if one is required, except that the following defenses may at the option of the pleader be made by motion: . . . (b) lack of jurisdiction over the person .... If, on a motion asserting the defense that the pleading fails to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment ....

When deciding a motion to dismiss "the pleadings should be...