Opinion ID: 781612
Heading Depth: 2
Heading Rank: 1

Heading: the formation of the fund

Text: 2 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. 3 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). 4 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. 5 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. 6 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.