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Sterling Grace 1992 Limited Partnership, Cc Investors Iii v. Alfred C. Eckert Iii

May 23, 2011

STERLING GRACE 1992 LIMITED PARTNERSHIP, CC INVESTORS III, L.P., HEDY GOLDBERG, JAM PARTNERS, INC., JONES INVESTMENT FUND, EUGENE P. POLK 1968 REVOCABLE TRUST, EES DISTRESSED SECURITIES FUND, L.P., AND WYSIWYG, L.P., INDIVIDUALLY AND DERIVATIVELY ON BEHALF OF SOUTH STREET LEVERAGED CORPORATE RECOVERY FUND, L.P., PLAINTIFFS-APPELLANTS,
v.
ALFRED C. ECKERT III, SSP PARTNERS, L.P., SSP, INC., STROOCK & STROOCK & LAVAN, L.L.P., DECHERT, L.L.P., AND RICHARDS, LAYTON & FINGER, P.A., DEFENDANTS-RESPONDENTS,
AND SOUTH STREET LEVERAGED CORPORATE RECOVERY FUND, L.P., NOMINAL DEFENDANT.



On appeal from the Superior Court of New Jersey, Law Division, Morris County, Docket No. L-000710-07.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued January 4, 2011

Before Judges Carchman, Graves and Messano.

This appeal requires us to determine whether the State of Delaware's discovery rule applied under the facts of this case to extend the three-year statute of limitations period. We conclude that the Delaware discovery rule must be applied narrowly, does not apply here and the trial judge correctly dismissed plaintiff's complaint as untimely.

I.

A.

We first provide a brief synopsis of the various multi-state actions that prompted this litigation and appeal as well as an expansive recitation of the facts.

Plaintiffs are partners in South Street Leveraged Corporate Recovery Fund, L.P. (Leveraged), an investment partnership organized under the laws of Delaware. In 1998, defendant Alfred C. Eckert, III and others caused plaintiffs to file an action in Delaware against one of their former business associates, Mikael Salovaara. At various times, defendants Stroock & Stroock & Lavan, L.L.P. (Stroock); Dechert, L.L.P. (Dechert); and Richards, Layton & Finger, P.A. (RLF), all law firms, represented Leveraged in the Delaware litigation (the Delaware Action). The Delaware Action was resolved when summary judgment was entered against Leveraged in June 2002, with final judgment being entered in January 2004.

Plaintiffs thereafter filed an action in New Jersey in November 2006 alleging a breach of a fiduciary duty and legal malpractice, all derived from the adverse judgment in the Delaware Action. The New Jersey action was dismissed on motion based on the failure of plaintiffs to file within the Delaware three-year limitations period and a finding that the Delaware discovery rule did not toll the statute.

B.

These are the facts giving rise to these various actions. After working together as partners at Goldman Sachs & Company, Eckert and Salovaara left that employment in 1991 and joined together to form their own investment funds. Toward that end, they formed and equally owned an investment advisory firm, Greycliff Partners (Greycliff), a New Jersey general partnership.

In 1992 and 1993, Greycliff created and raised money for six investment funds. Five of those funds were Delaware limited partnerships, including Leveraged and the South Street Corporate Recovery Fund I, L.P. (Fund I). The sixth fund, South Street Corporate Recovery Fund (International) (International Fund), was a limited partnership "for non-U.S. investors [that was] . . . set up in the Cayman Islands."

Greycliff formed the "management structure" for the six limited-partnership funds. SSP Advisors, L.P. (Advisors), was the general partner of the "non-leveraged" funds, including Fund I, while defendant SSP Partners, L.L.P (Partners) was the general partner of the "leveraged" funds, including Leveraged. Defendant SSP, Inc. (SSP) was the general partner of both Advisors and Partners, "making it the ultimate general partner" of all of the funds. Accordingly, because Eckert became the sole director and officer of SSP by "early 1997," he effectively "controlled" Leveraged, Fund I, Advisors, and Partners from that time forward.

Pursuant to Section 10.6 of Leveraged's limited-partnership agreement, Eckert and Salovaara, in their capacities as both "Principal[s]" and "Affiliate[s]" under the terms of the agreement, were entitled to indemnification in any litigation involving the partnership. Because Leveraged's investors did not include pension funds, Leveraged was not subject to statutory restraints on indemnification under the Employee Retirement Income Security Act of 1974, 29 U.S.C.A. §§ 1001-1461 (ERISA).

Leveraged's circumstances were unlike that of Fund I, which did include pension funds. Consequently, Fund I would later be judicially precluded under ERISA from providing any indemnification to Salovaara because he sought such indemnification for his litigation in pursuit of personal gain and not for litigation for the exclusive benefit of Fund I.

However, although Leveraged was not statutorily precluded under ERISA from providing such personal-gain indemnification to Salovaara, Section 10.3 of Leveraged's limited-partnership agreement, which addresses the "Duties of the General Partner and Its Affiliates, Employees and Agents," states that

[t]he sole duty of the General Partner to the Partnership and to the Limited Partners shall be, without regard to whether the assets of the Fund are Plan Assets or whether the business and assets of the Fund are then subject to ERISA, to act in a manner that does not constitute a violation of the standard of care, skill, prudence and diligence of a fiduciary of an employee benefit plan under ERISA.

Eckert, controlling Leveraged, had a contractual, if not a statutory, obligation under the agreement to conduct himself in accordance with ERISA standards. Eckert had a basis in the limited partnership agreement for refusing to allow Leveraged to indemnify Salovaara for litigation that Salovaara conducted for personal gain and not for Leveraged's exclusive benefit. In sum, the partnership agreement provided Eckert and Leveraged with an "ERISA defense" to Salovaara's claims for indemnification from Leveraged.

In late 1993, Eckert and Salovaara had a falling out when Eckert became associated with a "leveraged buyout fund" "which Salovaara considered [to be] a competitor." Thereafter, beginning in early 1994, Eckert and Salovaara proceeded to file numerous lawsuits against one another.*fn1

Six of those actions were initiated by Salovaara in the 1990s "to obtain personal recovery as a plaintiff." On July 30, 1998, Salovaara sent six letters to Eckert demanding that Leveraged and Fund I indemnify him for his expenses in prosecuting those six actions. On behalf of the funds, Eckert refused to provide such indemnification and, instead, filed the Delaware Action on August 10, 1998, seeking an "Interpretation of [the Leveraged and Fund I] Partnership Agreements" concerning indemnification.

The plaintiffs in the Delaware Action sought a declaration by the Delaware Court of Chancery, determining, "among other things, whether Salovaara was entitled to indemnification of his legal fees and expenses in connection with suits that Salovaara initiated to obtain personal recovery as a plaintiff in connection with various legal actions that Salovaara initiated" in various courts. The Delaware Action plaintiffs asked the Delaware court "to determine whether the indemnificationprovisions [of the partnership agreements] include actions brought by Affiliates," like Salovaara.*fn2

The Delaware Action plaintiffs also sought a declaration concerning which entities should bear the cost of indemnifying Eckert for his litigation expenses in the various legal actions involving Salovaara. Significantly, the complaint noted that the partnership agreements provided for an ERISA-based standard of care to govern "General Partner" and "Affiliate" conduct but did not explicitly suggest that an ERISA defense could be asserted against Salovaara's claims.

In 1998 and 2000, Leveraged and Fund I liquidated some investments and made distributions to their investors. To receive the monies in distribution, the investors agreed to return the monies if the funds required the monies to satisfy unresolved "potential" liabilities, including Salovaara's then outstanding claims for indemnification.

On February 3, 1999, the limited partners of Fund I filed a motion to intervene in the Delaware Action, arguing that ERISAprecluded indemnification claims like that of Salovaara, which sought recovery for litigation that did not exclusively benefit the fund. The Fund I limited partners sought "a declaration that Salovaara's claimed right to indemnification [by Fund I] for the Underlying Lawsuits is barred by the provisions of ERISA."

The Delaware Court of Chancery denied the Fund I limited partners' motion to intervene on July 9, 1999. The court found the partners' claims to be "redundant" of those made by the Delaware Action plaintiffs. Concerning the partners' "claims that Salovaara's various indemnification requests against Fund I cannot be honored by Fund I's general partner without violating the general partner's ERISA fiduciary duties," the Chancery Court indicated that such claims comprised "a legal argument that can be raised [by the Delaware Action plaintiffs] under Count I or Count II of the original [Delaware Action] complaint." As events unfolded, however, the Delaware Action plaintiffs did not explicitly set out any ERISA defense until much later in that litigation.

On September 24, 2001, the trustee of two of Fund I's limited partners, along with Advisors and SSP, filed an action against Salovaara in federal court in New York. The "New York Action" plaintiffs sought a declaration that any indemnification of Salovaara with Fund I's monies would violate ERISA because Salovaara's litigation was for personal gain and not for the exclusive benefit of Fund I.

On February 12, 2002, following the collapse of settlement negotiations with Salovaara, the Delaware Action plaintiffs filed a motion for the voluntary dismissal, without prejudice, of their complaint against Salovaara. The plaintiffs asserted that the litigation was too expensive to continue and that any further expenditures in prosecuting the matter would be a "waste of money."

The Delaware Action plaintiffs' dismissal motion noted that the New York Action was ongoing at that time, that the ERISA defense had been explicitly raised by the plaintiffs in that litigation, and that, while only Fund I "has a statutory defense under ERISA, both Funds [Leveraged and Fund I] have, within their indemnification provisions, an 'ERISA' standard of care. Thus, a ruling in the New York Action that some or all of Salovaara's [indemnification] demands violate ERISA might impact on . . . Leveraged's liability to Salovaara." The dismissal motion, for the first time, expressly set out that the ERISA defense was pleaded in the New York Action and implicitly revealed that the defense had not yet been asserted in the Delaware Action, even though the plaintiffs recognized that it "might impact" on the issue of Leveraged's liability for indemnification.

Additionally, the Delaware Action plaintiffs' dismissal motion noted that the plaintiffs had earlier "proposed that Salovaara agree not to enforce any judgment against . . . [FundI] until resolution of the New York Action so that the federal court -- the only court with jurisdiction over the particular issue -- would have the opportunity to determine whether payments by . . . [Fund I] to Salovaara would violate ERISA." The plaintiffs' motion also noted that Salovaara had rejected that proposal as "fundamentally unacceptable." Significantly, however, the Delaware Action plaintiffs' dismissal motion did not indicate that the plaintiffs had made a similar request that Salovaara not enforce any judgment in the Delaware Action involving Leveraged until the New York Action was resolved.

On February 20, 2002, Eckert sent a letter to Leveraged's limited partners, informing them of the decision to "withdraw" the Delaware Action because "[o]ur counsel advised that we were likely to lose both actions [involving Salovaara's indemnification and the issue of which entities should indemnify Eckert] and I believe the cost of a futile trial would have been in excess of $1 million."

In his letter, Eckert further noted that he had "advised the Delaware court that, subject to the outcome of the New York Action, it is my intention to honor [Salovaara's] demand that . . . [Fund I and Leveraged] pay his legal fees, allocating 20 percent of those fees to . . . [Leveraged] and 80 percent to . . . [Fund I]." Eckert closed his letter by noting that he was "not pleased" at the prospect of indemnifying Salovaara, "[b]ut given the broadly written indemnification rights [in the limited ...


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