Salovaara v. Shoemaker

Decision Date01 August 1999
Docket NumberDocket No. 99-7702
Citation222 F.3d 19
Parties(2nd Cir. 2000) MIKAEL SALOVAARA, individually and in his capacity as a fiduciary pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA") and the common law, Plaintiff-Appellant, PAUL T. SHOEMAKER, Appellant, v. ALFRED C. ECKERT, III, Defendant-Appellee
CourtU.S. Court of Appeals — Second Circuit

Appeal from a judgment of the United States District Court for the Southern District of New York (Kimba M. Wood, Judge), which: (1) denied plaintiff's request for attorney's fees under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §1132(g)(1); (2) granted defendant's request for attorney's fees under ERISA §1132(g)(1); and, in the alternative, (3) imposed a sanction on plaintiff and plaintiff's counsel under Rule 11 of the Federal Rules of Civil Procedure and on plaintiff's counsel under 28 U.S.C. §1927.

We affirm the denial of plaintiff's request for attorney's fees under ERISA; reverse the award of attorney's fees to defendant under ERISA and the sanction insofar as it was imposed on plaintiff's counsel under §1927; vacate the sanction insofar as it was imposed on plaintiff and his counsel under Rule 11; and remand for further proceedings consistent with this opinion. [Copyrighted Material Omitted]

[Copyrighted Material Omitted] ANDREW J. LEVANDER (Guy Petrillo and Preetinder S. Bharara, on the brief), Swidler Berlin Shereff Friedman, LLP, New York, NY, for Plaintiff-Appellant and Appellant Paul T. Shoemaker.

DANIEL A. ROSS (Richard M. Sharfman, on the brief), Dechert Price & Rhoads, New York, NY, for Defendant-Appellee.

Before: MESKILL and CABRANES, Circuit Judges, and TELESCA, District Judge:*

JOSE A. CABRANES, Circuit Judge:

This case, a bitter dispute between two former partners and co-fiduciaries under the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§1001 et seq., is before this Court for a second time. In a previous appeal, we affirmed by summary order a judgment of the United States District Court for the Southern District of New York (Kimba M. Wood, Judge) granting summary judgment to defendant Alfred C. Eckert, III, and dismissing plaintiff Mikael Salovaara's claims under ERISA and the common law. See Salovaara v. Eckert, 182 F.3d 901 (table), Nos. 98-7892 & 98-9132, 1999 WL 461820 (2d Cir. June 24, 1999) ("Salovaara V").1 Salovaara and his trial counsel, Paul T. Shoemaker, now appeal from a final judgment of the District Court, entered June 1, 1999, which: (1) denied Salovaara's motion for attorney's fees under ERISA §1132(g)(1); (2) granted Eckert $466,599 in attorney's fees under ERISA; and, in the alternative, (3) imposed a sanction of $92,343.50 jointly and severally on Salovaara and Shoemaker under Rule 11 of the Federal Rules of Civil Procedure ("Rule 11") and on Shoemaker under 28 U.S.C. §1927 ("§1927").2

We hold that the District Court properly denied Salovaara's motion for attorney's fees under ERISA and affirm the judgment in that respect. However, for the reasons stated below, we conclude that the District Court erred in several ways with respect to the other aspects of its judgment. We therefore reverse the award of attorney's fees to Eckert; reverse the sanction insofar as it was imposed on Shoemaker under §1927; vacate the sanction insofar as it was imposed on Salovaara and Shoemaker under Rule 11; and remand for the District Court to consider whether, in light of this opinion, Rule 11 sanctions of some amount should be reimposed and, if so, whether they should be reimposed on Salovaara alone or on Salovaara and Shoemaker jointly and severally.

I.

The following facts are, unless noted otherwise, undisputed. Salovaara and Eckert were, at all times relevant to this case, joint managers of an investment fund, the South Street Corporate Recovery Fund, L.P. ("South Street"). Because South Street held, among other assets, pension fund investments, Salovaara and Eckert were fiduciaries under ERISA. See 29 U.S.C. §1002(21)(A) (defining "fiduciary" to include, inter alia, any person who "exercises any authority or control respecting management or disposition of [a plan's] assets"). In late 1993, while he was still Salovaara's partner at South Street, Eckert assumed a management position in Greenwich Street Capital Partners ("Greenwich Street"), a private equity fund. Several months later, in May 1994, Salovaara filed the underlying complaint in this action, alleging that Eckert had violated, and was violating, his fiduciary duties under ERISA and the common law by working simultaneously for South Street and Greenwich Street.3 Salovaara's complaint sought both injunctive relief and damages.

A. The 1995 Preliminary Injunction Motion

In January 1995, the Marcus Cable Operating Company, L.P. ("Marcus Cable"), in which Greenwich Street had invested, purchased cable operations in the same viewing market as WEAU-TV, a Wisconsin television station operated by the Busse Broadcasting Corporation ("Busse"), in which South Street had invested. Eight months later, prior to any discovery in this action, Salovaara moved for a preliminary injunction "restraining Eckert from violating his ERISA fiduciary duties by entering into substantial competition" with South Street. Salovaara v Eckert, No. 94 Civ. 3430, 1996 WL 14444, at *1 (S.D.N.Y. Jan. 16, 1996) ("Salovaara I"). Salovaara argued that Eckert was breaching his fiduciary duties to South Street because Marcus Cable, a Greenwich Street investment, was competing with Busse, a South Street investment. See id.

By Opinion and Order filed January 18, 1996, the District Court granted Salovaara's motion. Noting that a fiduciary owes a duty of loyalty, the District Court ruled first that Salovaara was likely to prevail on the merits of his ERISA claim for injunctive relief. Specifically, the District Court concluded that "[b]ecause Busse's WEAU-TV and Marcus Cable share the same market of Wisconsin viewers, Busse and Marcus Cable are in direct competition with each other. This situation creates a potential conflict of loyalties and puts Eckert in a position in which he will likely be tempted to act contrary to the best interests of the pension fund beneficiaries." Id. at *3; see also id. at *4 ("Eckert is presently violating his fiduciary duties under ERISA, in that he has placed himself in a position in which his conflicting loyalties, to South Street and Greenwich Street, may pull him in different directions." (emphasis added)).

In addition, the District Court ruled that Salovaara had established a sufficient risk of irreparable injury. The District Court explained that "[m]arket competition generally inflicts an injury which is incapable of being precisely measured, and hence difficult to compensate with damages." Id. at *3. Accordingly, the District Court granted Salovaara's motion and ordered Eckert to resign one of his two management positions or to arrange for another Greenwich Street manager to handle all matters concerning Marcus Cable. See id. at *5. Eckert chose the latter, "Chinese wall," approach.

B. The First Summary Judgment Motion and the December 9, 1996 Conference

In August 1994, thirteen months before Salovaara moved for the preliminary injunction, Eckert and his co-defendants had moved for summary judgment with respect to Salovaara's ERISA claims. By Order filed March 20, 1996, three months after the District Court had granted Salovaara the preliminary injunction, the District Court granted the summary judgment motions in part and denied them in part. See Salovaara v. Eckert, No. 94 Civ. 3430, 1996 WL 1730272 (S.D.N.Y. Mar. 15, 1996) ("Salovaara II"). With respect to Salovaara's ERISA claims, the District Court granted summary judgment and dismissed Salovaara's claims insofar as they alleged that: (1) Eckert abandoned his obligations to perform work on South Street's behalf; (2) Eckert wrongfully recommended to South Street investors that South Street's assets should be liquidated; and (3) Eckert was "currently causing Greenwich Street substantially to compete with South Street for investors." Id. at *5 (emphasis in original). The District Court denied Eckert's summary judgment motion, without prejudice to renewal, insofar as Salovaara alleged that: (1) "Eckert in the past caused Greenwich Street substantially to compete with South Street for investors" and (2) "Eckert has caused, and is currently causing, Greenwich Street's investments to compete with South Street's investments." Id. (emphasis in original). With respect to these claims, the parties thereafter conducted discovery.

On December 9, 1996, the District Court held a pretrial conference with the parties to narrow the remaining disputes and determine whether trial would be necessary. During the conference, the District Court expressed some doubt that Salovaara could prove that South Street suffered economic damage as a result of the competition between Busse and Marcus Cable. In addition, the District Court stated that Salovaara had no basis to claim damages to South Street with respect to certain Greenwich Street investments in Flint, Michigan, and Buffalo, New York (the "Flint and Buffalo investments"). Although Shoemaker conceded that Salovaara had no proof of damages with respect to the Flint and Buffalo investments, he nevertheless insisted that these investments were relevant for the purposes of showing Eckert's "state of mind" and "disregard for whether or not ... he was competing with and causing damage to the South Street funds." It appears that the District Court rejected this argument because the District Court later declared the Flint and Buffalo investments "off the table."

During the December 9, 1996 hearing, Eckert's counsel indicated that he would soon file a second summary judgment motion seeking dismissal of Salovaara's remaining claims. Near the close of the hearing,...

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