Salovarra v. Jackson Nat'l Life Ins. Co.

• Decision Date: 05 April 2001
• Docket Number: No. 99-5647,99-5647
• Parties: (3rd Cir. 2001) MIKAEL SALOVAARA, individually and derivatively on behalf of SOUTH STREET LEVERAGED CORPORATE RECOVERY FUND, L.P.; SOUTH STREET CORPORATE RECOVERY FUND I.L.P.; SSP PARTNERS, L.P.; SSP ADVISORS, LP; SSP, INC., Appellants v. JACKSON NATIONAL LIFE INSURANCE COMPANY, a Company Organized Under the Laws of the State of Michigan; LAZARD FRERES & CO., a Limited Liability Corporation Organized Under the Laws of the State of New York
• Court: U.S. Court of Appeals — Third Circuit

Page 289

246 F.3d 289 (3rd Cir. 2001)

MIKAEL SALOVAARA, individually and derivatively on behalf of SOUTH STREET LEVERAGED CORPORATE RECOVERY FUND, L.P.; SOUTH STREET CORPORATE RECOVERY FUND I.L.P.; SSP PARTNERS, L.P.; SSP ADVISORS, LP; SSP, INC., Appellants v. JACKSON NATIONAL LIFE INSURANCE COMPANY, a Company Organized Under the Laws of the State of Michigan; LAZARD FRERES & CO., a Limited Liability Corporation Organized Under the Laws of the State of New York

No. 99-5647

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued June 1, 2000

Filed April 5, 2001

[Copyrighted Material Omitted]

Joseph L. Buckley, Esq. (Argued), Sills, Cummis, Radin, Tischman, Epstein & Gross, Newark, NJ, Counsel for Appellants as to Jackson National Life Insurance issues.

Richard H. Epstein, Esq. (Argued), Sills, Cummis, Radin, Tischman, Epstein & Gross, Newark, NJ, Counsel for Appellants as to Lazard Freres & Co. issues.

Steven I. Cooper, Esq., John H. Doyle, III, Esq. (Argued), Anderson, Kill & Olick, New York, NY. Forrest B. Lammiman, Esq., Randall Hack, Esq., Lord, Bissell & Brook, Chicago, IL, Counsel for Appellee Jackson National Life.

Thomas G. Rafferty, Esq. (Argued), Cravath, Swaine & Moore, New York, NY, Counsel for Appellee Lazard Freres & Co.

Before: BEFORE: SCIRICA, and NYGAARD, Circuit Judges, and POLLAK, District Judge.^*

OPINION OF THE COURT

PER CURIAM:

INTRODUCTION

Plaintiff-Appellant Mikael Salovaara appeals from the District Court's dismissal of the derivative action he brought on behalf of several entities, described in more detail below, against Defendant-Appellees Jackson National Life Insurance company and Lazard Freres & Co. As explained below, we will dismiss Salovaara's appeal with regard to Jackson because it is moot and will affirm the dismissal order regarding Salovaara's complaint against Lazard Freres & Co.

JURISDICTION

The District Court had jurisdiction pursuant to Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. 78aa, and under 28 U.S.C. 1331, 1332, and 1367. The parties consented to allow a Magistrate Judge to decide the dispositive motion in this case, pursuant to Fed. R. Civ. P. 73 and 28 U.S.C. 636. Because the Magistrate Judge dismissed Salovaara's Third Amended Complaint, we have jurisdiction pursuant to 28 U.S.C. 636(c) and 1291.

FACTS AND PROCEDURES

This appeal arises from the District Court's dismissal of a derivative suit, alleging fraud in the sale of certain debt securities. The plaintiff-appellant in this case is Mikael Salovaara. He brought suit on behalf of himself,² as well as on behalf of the following entities: South Street Leveraged Corporate Recovery Fund, South Street Corporate Recovery Fund (collectively "the South Street Funds"); SSP Inc.; and SSP Partners and SSP Advisors (collectively "the SSP LPs").³

SSP Inc. is the general partner of the SSP LPs. The SSP LPs are in turn general partners of the South Street Funds. The South Street Funds make investments by buying debt securities from various companies. A sale of debt securities by the South Street Funds to the Jackson National Life Insurance Company ("Jackson" or "JNL") is at issue in this case.

Two people are behind the SSP LPs and the South Street Funds: Salovaara and Alfred C. Eckert, III. Salovaara and Eckert each own 50% of the stock of SSP Inc. Eckert is a director of the corporation, while Salovaara is not. Salovaara and Eckert also own all the equity in the SSP LPs. Salovaara and Eckert used the SSP LPs to make investments in the South Street Funds. They created these entities in 1991, but have since had a falling out. Salovaara was a limited partner of the SSP LPs at the time of the transactions at issue, although he is not today. Currently, the directors of SSP Inc. are Eckert, Gary Hindes, and Denise Hindes. Following a dispute and litigation between Salovaara and Eckert over control of the South Street Funds, the Hindes were given control over a majority of the South Street Funds assets. As a result, the Hindes controlled more than 95% of the Notes held by the South Street Funds, while Salovaara maintained control over less than 5%.

In 1992, before Salovaara and Eckert had their falling out, the South Street Funds invested in the debt of Bucyrus-Erie International ("Bucyrus"), by securing financing for that company. In 1994, Bucyrus filed for relief under Chapter 11 of the Bankruptcy Code. A reorganization plan for Bucyrus was confirmed in December of 1994. Under this plan, the South Street Funds received notes issued by Bucyrus (the "Notes") as a replacement for the debt they had acquired in 1992. The South Street Funds also received 11% of the stock of the reorganized company. By late 1995, the South Street Funds held Notes issued by Bucyrus with a face value (or "par value") of more than $ 55 million.

In late 1995, the Hindes decided to sell the Notes under their control, and hired defendant-appellee Lazard Freres & Co. ("Lazard") to assist them by providing advice concerning the actual market value of the Notes and the reasonableness of any offers made to purchase them.⁴ Lazard entered into negotiations on behalf of the South Street Funds with the other defendant-appellee in this case, the Jackson National Life Insurance Company. On February 28, 1996, the Hindes sold the majority share of the Notes to Jackson, through Lazard, on behalf of the South Street Funds. Jackson paid a price of approximately 94% of the par value of the Notes. Lazard, as the broker, received approximately 1% of this value as a commission. On February 29, 1996, Salovaara sought to enjoin this sale in the U.S. District Court for the Southern District of New York. The court denied this relief, and the trade settled on March 4, 1996.

Salovaara claims that Jackson engaged in insider trading when it bought the Notes, assisted by Lazard. He states that Jackson was the "controlling shareholder" of Bucyrus at the time of the transaction, and that it appointed two of its nominees to Bucyrus' Board of Directors. He claims that as a result of its ties with Bucyrus, Jackson knew in early 1996 that Bucyrus was considering refinancing the Notes at their par value. Jackson further knew that Bucyrus' business prospects had improved dramatically, and that it was appointing a new and respected head for the company. This information was not available to the general public at the time.

Salovaara claims that Jackson misappropriated inside information from Bucyrus, from which it learned the Notes were worth their face value and not 94% of that value. Salovaara states that the South Street Funds only consented to sell the Notes to Jackson at 94% of their par value because it did not realize they were actually worth more than that on the market. Salovaara claims that Lazard told the Funds that 94% of par value was a fair price. Thus, according to Salovaara, Lazard told the South Street Funds that the Notes were worth 94% of par while at the same time it advised Bucyrus that they were worth more. According to Salovaara, Jackson was able, through its access to this inside information, to take a "risk free profit" by buying these Notes for less than they were worth. Lazard received a 1% commission for its part in facilitating the sale. Salovaara claims Lazard never told the South Street Funds that it was advising Bucyrus at the same time that it was advising the Funds, and that it breached its duty to the South Street Funds due to this undisclosed conflict of interest.

Salovaara sued Jackson for insider trading, in violation of the Securities Exchange Act 10(b), and SEC Rule 10b-5. Jackson and Salovaara disagree over whether Salovaara pleaded a claim under the misappropriation theory, or whether Salovaara only pleaded a 'traditional' claim of insider trading. Salovaara's complaint also asserted a state common-law claim against Jackson for fraudulent non-disclosure of material information. Salovaara sued Lazard for breach of contract and breach of its fiduciary duty to the South Street Funds. The District Court, with the consent of the parties, turned the case over to a Magistrate Judge for resolution. We shall simply refer to the action of the District Court when discussing the prior proceedings in this matter.

Jackson then filed a motion to dismiss the complaint, and a motion to transfer the case to the Southern District of New York. The court initially granted the transfer, but the Southern District returned the case to the District of New Jersey. Jackson then moved that the complaints against it should be dismissed because it did not have a duty to disclose any information about Bucyrus in its possession to the South Street Funds. Jackson similarly argued that it did not have a duty to speak giving rise to common law cause of action, even if Salovaara stated one in his complaint. Finally, Jackson argued that Salovaara was not the proper party to bring this suit on behalf of the South Street Funds, because he did not meet the requirements set forth in Fed. R. Civ. P. 23.1.

Salovaara replied that if the Notes were stocks and not bonds, he would clearly have alleged a case of insider trading. He argued for extension of precedents regarding stocks to cover debt securities such as the bonds in question. Salovaara further replied that Jackson did have a duty to speak with regard to the common law claim. Finally, Salovaara claimed he was a proper party to bring this suit because his interests and those of the South Street Funds are aligned in this case, even though they are engaged in adversarial litigation on other matters.

Lazard responded that Counts II, IV and V of the complaint should be dismissed against it because it entered into a forum selection clause as part of an Indemnification Agreement with the South Street Funds that covers the subject matter of this suit. This forum selection clause specified that any disputes arising over the sale of the Notes must be resolved in the New York State courts located...