State Street Bank and Trust Co. v. Salovaara
| Decision Date | 15 April 2003 |
| Docket Number | Docket No. 02-9003.,Docket No. 02-7683. |
| Citation | 326 F.3d 130 |
| Parties | STATE STREET BANK AND TRUST COMPANY, as Trustee of the DuPont/Conoco Private Market Group Trust and as Trustee of the American Airlines, Inc. Master Fixed Benefit Pension Trust, SSP Advisors, L.P, and SSP, Inc. Plaintiffs-Appellees, v. Mikael SALOVAARA, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Second Circuit |
Leo V. Gagion, Dewey Ballantine LLP, New York, N.Y. (Sanford M. Livack, Helena Tavares Erickson, of counsel, on the Brief), for Plaintiffs-Appellees.
Andrew J. Levander, Swidler Berlin Shereff Friedman, LLP, New York, N.Y. (Joseph F. Donley, Robert W. Topp, of counsel; Joseph L. Buckley, Richard H. Epstein, Sills Cummis Radin Tischman Epstein & Gross, P.C., New York, NY, on the Brief), for Defendant-Appellant.
Before: STRAUB, KATZMANN, and RAGGI, Circuit Judges.
Defendant-Appellant Mikael Salovaara appeals from an order of the United States District Court for the Southern District of New York (Hellerstein, J.) granting summary judgment to Plaintiff-Appellee State Street Bank and Trust ("State Street") and entering a declaratory judgment that Salovaara is not entitled to look to an investment fund he founded for indemnification of legal expenses incurred while pursuing six lawsuits ostensibly connected with that fund. Salovaara also appeals the district court's decision to award attorneys' fees to State Street. For the following reasons, we affirm the judgment of the district court.
Salovaara is a former partner in a major investment bank and an operator and manager of private investment funds. He has a special expertise in "distressed securities funds," which are investment funds that buy the stock or bonds of companies in financial trouble with the expectation that the companies' performance will rebound, thereby increasing the value of their securities.
In 1991, Salovaara and his former investment banking partner, Alfred C. Eckert III, formed an investment fund called the South Street Corporate Recovery Fund, L.P. ("South Street" or "the Fund"), along with several other funds ("the Other Funds"), to invest in distressed securities. The Fund raised most of its capital from large institutional investors; because more than 25% of the capital it raised was from pension plans, the Fund was subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001-1381 (2000). See 29 C.F.R. § 2510.3-101 (2002).
South Street is organized in a "three-tier" structure. The bottom level is the Fund itself, organized as a limited partnership under Delaware law. The Fund's investors participate as limited partners within South Street. The general partner within South Street is SSP Advisors, a plaintiff-appellee in this case and itself a Delaware partnership. SSP Advisors in turn has as its general partner an entity known as SSP, Inc. ("SSP"), also a plaintiff-appellee in this case. SSP possesses all management authority for the Fund, and is owned 50-50 by Salovaara and Eckert. Salovaara and Eckert also established another entity known as Greycliff Partners ("Greycliff"), which served as the exclusive investment advisor for South Street and the Other Funds. The terms of South Street's structure and rules are set forth in the Agreement of Limited Partnership, executed June 18, 1992 ("the Agreement"). Section 10 of the Agreement contains a clause broadly indemnifying the General Partner (SSP Advisors) and any affiliate or agent of the General Partner for "any and all" expenses arising from the operation of the fund, including legal expenses. See Agreement § 10(a), at 45. Unlike the typical indemnification agreement, the indemnification clause in the South Street Agreement can be read to indemnify Salovaara, not only for defensive legal fees, but also for the costs of bringing affirmative lawsuits related to the operation of the fund. Moreover, because the indemnification "shall be paid ... from the assets of the Partnership," Agreement § 10(e), at 45, Salovaara's reimbursement for any lawsuits that he might chose to initiate would be paid directly from the assets of the ERISA pension plan investors.
The twenty-nine investors in South Street include eight mutual fund companies, four trust funds, three insurance companies, two Forbes-400 individuals, a foundation, and a college. All but two made initial investments of at least $1 million, and the average investment was approximately $5 million. The total initial capital came to $146 million. The leading investor was the Dupont/Conoco Private Market Group Trust ("DuPont"), a trust representing two ERISA retirement funds. DuPont invested $40 million, more than four times as much as the next largest investor. Appellee-plaintiff State Street Bank and Trust Company ("State Street"), trustee for DuPont, acts on the trust's behalf in this action.
In 1993, Eckert became sole director and assumed day to day managerial control over SSP. Salovaara and Eckert subsequently had a falling-out because Eckert began to participate in an unrelated fund formed by Greenwich Street Capital Partners, Inc. ("Greenwich Street"), while still maintaining control over South Street. Meanwhile, in 1994, a committee representing South Street's investors decided to liquidate the Fund's holdings. This concomitant dispute with Eckert and Fund liquidation precipitated a series of lawsuits that underpins the current appeal.
Over the years between 1994 and the present, Salovaara has been involved in seven lawsuits related in some way to South Street and relevant to this appeal. We describe each in turn.
Salovaara v. Eckert, MRS-C-29-94 (N.J.Super.Ct.1994) ("Salovaara I") was filed in February 1994. The Complaint charged that Eckert's work with Greenwich Street was a conflict of interest that breached the duties he owed to Greycliff. Salovaara sought a preliminary injunction to prevent Eckert from managing Greenwich Street, which the court denied. Eckert asserted counter-claims alleging that Salovaara mismanaged funds controlled by Greycliff and sought Greycliff's dissolution. After a bench trial, the court found in July 1998 for Salovaara, awarding him $4 million in damages and the right to direct Greycliff's dissolution.
Salovaara v. Eckert, 94-Civ.-3430 (S.D.N.Y.1994) ("Salovaara II") was filed in May of 1994 against Eckert, Greenwich Street, and various affiliates. The Complaint alleged violations of ERISA and common law duties based on various investments made by South Street. Salovaara sought damages and equitable relief for himself and for South Street. In January 1996, the district court (Wood, J.) granted Salovaara's motion for a preliminary injunction and ordered Eckert either to resign from Greenwich Street, resign from South Street, or arrange for an independent manager for investments that presented a conflict. Eckert chose the last option.
In May 1998, the court dissolved the injunction, granted Eckert's motion for summary judgment on the ERISA claims, and declined to exercise jurisdiction over the common-law claims. Salovaara v. Eckert, 1998 WL 276186 . The court held that Salovaara had failed to establish any loss to South Street from Eckert's actions. Id. at *8. This Court summarily affirmed. Salovaara v. Eckert, 182 F.3d 901 (2d Cir.1999) (table).
Eckert moved for sanctions and attorneys' fees, and Salovaara cross-moved for attorneys' fees. The district court denied Salovaara's cross-motion, stating that Salovaara had "never showed that there was any benefit conferred upon anyone (other than himself) by the Court's decision to grant a preliminary injunction." Salovaara v. Eckert, 1999 WL 33117364, at *5 . The court also awarded fees to Eckert and imposed sanctions on Salovaara and his counsel. Id. at *9. This Court affirmed the denial of fees to Salovaara, but reversed the fee award to Eckert and vacated the sanctions. Salovaara v. Eckert, 222 F.3d 19, 23 (2d Cir.2000).
In May 1996, Salovaara filed Greycliff Partners v. SSP, Inc., Civ.-96-601366 (N.Y.Sup.Ct.1996) ("Greycliff"). He sued SSP, Inc., SSP Advisors, and SSP Partners, L.P. on behalf of Greycliff (of which he was still a 50% owner), alleging that the SSP entities had not paid Greycliff approximately $411,000 in fees owed pursuant to the advisory agreement between the parties. The SSP entities counterclaimed, arguing that Salovaara had breached his fiduciary duties to South Street. On July 20, 2000, the court found for Greycliff after a bench trial, awarded it the money sought, and denied the counterclaims.
In May of 1996 Salovaara sued Gary and Denise Hindes in the Southern District of New York. Salovaara v. Hindes, 242 F.3d 367. Salovaara alleged that the Hindeses, who were officers and directors of SSP, breached their fiduciary duty to the Fund by authorizing the sale of certain securities at an unreasonably low price. Although the complaint was styled as a derivative ERISA action, the only relief sought was damages for Salovaara. Salovaara, in his brief in opposition to a summary judgment motion, later dropped the personal claims. On March 15, 2000, the district court (Hellerstein, J.) granted the Hindeses' motion for summary judgment and dismissed the complaint in an oral decision. This Court summarily affirmed. 242 F.3d 367 (2d Cir.2000) (table).
Salovaara then sued Jackson National Life Insurance, the party that had bought the securities in dispute in Hindes, in federal court in New Jersey. Salovaara v. Jackson Nat'l Life...
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