STERLING GRACE 1992 LIMITED PARTNERSHIP v. ALFRED C. ECKERT III

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

 

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-5221-08T3

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.

________________________________________________________________

May 23, 2011

 

Argued January 4, 2011 - Decided

 

Before Judges Carchman, Graves and Messano.

 

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

 

Robert J. Fettweis argued the cause for appellants (W.J. Cahill & Associates, P.C., and Tressler, Soderstrom, Maloney & Priess, L.L.P., attorneys; W.J. Cahill and Mr. Fettweis, on the brief).

 

Michael K. Furey argued the cause for respondents Alfred Eckert, SSP Partners, L.P. and SSP, Inc. (Riker, Danzig, Scherer, Hyland & Perretti, L.L.P., attorneys; Mr. Furey, of counsel and on the brief, and Daniel W. Zappo, on the brief).

 

Arthur S. Goldstein argued the cause for respondent Dechert, L.L.P. (Wolff & Samson, P.C., attorneys; Mr. Goldstein, on the brief).

 

Robert C. Brady argued the cause for respondent Stroock & Stroock & Lavan, L.L.P. (Gibbons, P.C., attorneys; Mr. Brady and Lawrence S. Lustberg, on the brief).

 

Elizabeth J. Sher argued the cause for respondent Richards, Layton & Finger, P.A. (Day Pitney L.L.P., attorneys, joins in the briefs of respondents.

PER CURIAM

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.1

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 indemnification provisions [of the partnership agreements] include actions brought by Affiliates," like Salovaara.2

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 ERISA precluded 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 . . . [Fund I] 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 partnership agreements], in the end we had no choice, especially in light of counsel's estimate of the expenses [of] going through trial."

In response to the Delaware Action plaintiffs' motion for voluntary dismissal without prejudice, on February 26, 2002, Salovaara filed a cross-motion for summary judgment and the dismissal of the plaintiffs' complaint with prejudice.

On April 12, 2002, the Delaware Chancery Court heard oral argument on the competing voluntary dismissal and summary judgment motions. At the hearing, the Delaware Action plaintiffs proposed that the court "enter a dismissal but stay the judgment" until the New York Action was decided in about ten days. Such a resolution was appropriate, plaintiffs' counsel argued, because a ruling in the New York Action that Salovaara was precluded on ERISA grounds from obtaining indemnification from Fund I would probably preclude such indemnification from Leveraged as well. Critically, immediately prior to any decision on their motion for voluntary dismissal without prejudice, the plaintiffs argued the applicability of an ERISA defense on behalf of Leveraged.

The Delaware Chancellor did not expressly agree or disagree with the plaintiffs' argument. Rather, at the close of argument, the Chancellor indicated that he would sign an order that dismissed the complaint with prejudice but stayed enforcement of the judgment until the New York Action was resolved. The Chancellor tacitly rejected the plaintiffs' motion for a voluntary dismissal. The Chancellor ended the hearing by requesting that the parties submit "competing orders" to him so that he could "pick the one I want to enter."

On April 17, 2002, the Delaware Action plaintiffs submitted a proposed order to the Chancellor that provided, in the Chancellor's words,3 that Salovaara's indemnification by Leveraged "would 'not violate Section 10.3 [of the Leveraged Partnership Agreement],' that is, that the indemnification was not precluded by the ERISA fiduciary standard set forth in Section 10.3."

On April 22, 2002, the federal district court in the New York Action entered summary judgment in favor of the plaintiffs there and against Salovaara. The district court determined that, while the New York Action plaintiffs had a contractual obligation under the Fund I partnership agreement to indemnify Salovaara, ERISA barred any indemnification of Salovaara by Fund I for his legal expenses in his litigations against Eckert, all of which were for his personal benefit and not for the benefit of Fund I. Salovaara appealed.4

On May 7, 2002, the general partner of CC Investors III, L.P. (CC Investors), Alan L. Wurtzel, sent a letter describing problems in another Eckert-run investment fund: Greycliff Leveraged Fund 1993, L.P. (Greycliff-Leveraged). CC Investors was a limited partner in both Leveraged and Greycliff-Leveraged and is also a plaintiff in the present case. In his letter to the Greycliff-Leveraged investors, Wurtzel indicated, among other things, that he intended to sue Eckert because Eckert had caused substantial losses to Greycliff-Leveraged and to a "sister" fund, Leveraged, "in which many of us are also invested, which losses he [Eckert] has repeatedly assured us he did not cause and would be reversed on appeal."

While defendants here focus on Wurtzel's letter as proof that at least one of the plaintiffs in the present case (CC Investors) realized in May 2002 that it had a viable cause of action against Eckert for Leveraged's losses attributable to Salovaara's indemnification, Wurtzel certified that the letter dealt with another subject. He maintained that he did not "learn of the true situation" concerning Eckert's abandonment of "defenses and legal arguments that could have entitled Leveraged to prevail against Salovaara's claims for indemnification" until after the Chancellor entered final judgment in the Delaware Action in January 2004.

On June 14, 2002, the Chancellor entered an "Order of Dismissal with Prejudice, Judgment and Stay" in the Delaware Action, granting Salovaara's summary judgment motion and explicitly indicating that the plaintiffs' "action is DISMISSED WITH PREJUDICE."

The Chancellor noted the decision by the district court in the New York Action and concluded that "none of the payments provided for herein may come directly or indirectly from the assets of Fund I." Accordingly, after indicating that Salovaara was entitled to indemnification under Section 10.6 of Leveraged's partnership agreement, the order provided that Leveraged was required to indemnify Salovaara for the "$4,111,194.98, plus pre-judgment interest" in litigation expenses that he had incurred in the six underlying cases.

The order further provided that the entry of judgment against Leveraged was "stayed pending the final disposition of the New York Action," which was then on appeal. The order also noted that "[t]his Order shall not constitute an adjudication on the merits of the appropriate allocation of any payments as amongst . . . Leveraged and any other appropriate entities."

On July 26, 2002, Eckert sent a letter to Leveraged's limited partners, advising them both of the decision in the Delaware Action and of the more than $4,000,000 in indemnification costs that Leveraged was ordered to pay on behalf of Salovaara. In his letter, Eckert also advised that enforcement of the order in the Delaware Action had been stayed pending the resolution of Salovaara's appeal in the New York Action challenging the district court's ruling that "ERISA bars . . . [Fund I] from making the indemnification payments" to Salovaara.

Eckert also indicated that Leveraged had approximately $2,000,000 in assets that it would distribute, subject to the same restrictions that it had previously imposed in 1998 and 2000 concerning liability for Salovaara's indemnification. In response, Salovaara filed a motion with the Delaware Chancery Court in August 2002, seeking to enjoin any such distribution, arguing that Leveraged would not have sufficient funds to pay for his ordered indemnification if such a distribution were made. On September 6, 2002, the Delaware Chancery Court entered an order granting Salovaara's motion and enjoining Leveraged from making any distributions.

On October 10, 2002, Salovaara sent a letter to the Greycliff-Leveraged limited partners, at least two of which (CC Investors and the Eugene P. Polk 1968 Revocable Trust) were also limited partners in Leveraged and plaintiffs in the present action. In his letter, Salovaara pertinently noted that, "[e]arlier this year, Fred [Eckert] conceded in writing to a number of limited partners that the Delaware court would throw out his argument against paying me [by way of indemnification for legal expenses]. The Delaware action has since ended in a recognition that I am contractually entitled to indemnification." At least two plaintiffs in the present case were informed in October 2002, that Eckert, on behalf of the Delaware Action plaintiffs, had effectively conceded both liability for indemnification and, necessarily, the absence of any viable defense in the Delaware Action.

On April 15, 2003, the United States Court of Appeals for the Second Circuit affirmed the district court's order in the New York Action, holding that, under ERISA, "Salovaara is not entitled to indemnification [by Fund I] for the expenses incurred while prosecuting the six lawsuits at issue."

On May 2, 2003, Salovaara filed a motion with the Delaware Chancery Court to lift the stay of the court's order of June 14, 2002, and to enter final judgment in his favor in the Delaware Action.

The Delaware Action plaintiffs opposed Salovaara's motion on June 16, 2003, arguing that it was "crystal clear" that they had repeatedly preserved the right to assert the ERISA defense in the Delaware Action. Relying on the ERISA defense, the plaintiffs argued that the decision against Salovaara in the New York Action concerning Fund I meant that he was collaterally barred from receiving indemnification from Leveraged in the Delaware Action. The Delaware Action plaintiffs asserted that "either the stay [of the June 14, 2002 order] now in place should be made permanent, or, in the alternative, a further Order should be issued by this Court barring Salovaara's claims against Leveraged."

On July 10, 2003, Salovaara responded in a reply brief asserting that the Delaware Action plaintiffs could not raise the ERISA defense at that time. This was so, according to Salovaara, both because the plaintiffs had effectively waived that defense when they submitted their proposed order on April 17, 2002, and because they "never attempted to litigate the ERISA issue in this action until after they had already conceded that Salovaara was contractually entitled to indemnification."

On December 22, 2003, the Delaware Chancery Court issued a written decision in the Delaware Action granting Salovaara's motion to lift the stay of the order of June 14, 2002, and concluding that "Leveraged must indemnify Salovaara for his legal fees and expenses associated with the Underlying Actions." Germane to this appeal, in the decision, the Chancellor pointedly addressed and rejected the Delaware Action plaintiffs' contention that they had preserved the ERISA defense, noting that:

Eckert's [that is, the Delaware Action plaintiffs'] twelfth-hour argument, that he should be allowed to raise the "exclusive Benefit" section of ERISA as a defense to Salovaara's indemnification claim because such a defense has been "reserved" by Eckert, is completely without merit. For one thing, Eckert submitted a form of judgment to this Court on April 17, 2002, that provided that Salovaara's indemnification would "not violate Section 10.3 [of the Leveraged Partnership Agreement]," that is, that the indemnification was not precluded by the ERISA fiduciary standard set forth in Section 10.3. Regardless of what Eckert's position might have been before that date, as of April 17, 2002, he waived his right to assert an ERISA defense to Salovaara's indemnification claim. In addition, this Court, in denying the Fund I limited partners' motion to intervene, ruled that their proposed claim, alleging that Salovaara's lawsuits violated his ERISA fiduciary duties, could be asserted by Eckert under Count I or Count II of the complaint in this action. Despite this invitation, Eckert never attempted to litigate the ERISA issue in this action until after he had conceded [that] Salovaara was entitled to indemnification. Finally, nothing in my stay Order, and nothing in my comments from the bench at the September 4, 2002 TRO hearing, indicated that the action was stayed in order to preserve Eckert's ability to litigate the previously conceded ERISA [defense] issue. The only reason I

granted a stay was to allow the New York Federal Court to rule. It has done so.

On January 15, 2004, the Delaware Chancery Court entered a "Final Order and Judgment" in the Delaware Action, requiring Leveraged to indemnify Salovaara. "Leveraged and its General Partner appealed the Judgment to the Delaware Supreme Court. The appeal was denied on July 22, 2004."

On January 29, 2004, Leveraged sent letters to its limited partners, announcing that Leveraged owed Salovaara "over $6,362,152.09" for indemnification and asking that the partners "recontribute[]" amounts distributed to them in 1998 and 2000. Some partners agreed to do so, while others refused. Salovaara thereafter began settlement negotiations with the non-recontributing Leveraged limited partners and entered into a settlement agreement with them. Under the agreement, the limited partners paid monies to Salovaara and also agreed to file an action against Eckert and others. On November 22, 2006, the Leveraged limited partners filed the present action.

II.

On appeal, plaintiffs assert that the Delaware discovery rule tolls the statute of limitations until December 2003 when the Delaware Court lifted the stay to put plaintiffs on notice of defendants' malfeasance; and the motion judge incorrectly resolved disputed issues of fact precluding the entry of summary judgment. We address the issues seriatim.

A.

In her oral decision in which she determined that plaintiffs' action was time-barred, the motion judge examined the "six acts of alleged misconduct" set forth in plaintiffs' amended complaint and concluded that the "heart of the action" concerned the Delaware Action plaintiffs' decision to voluntarily dismiss the Delaware Action "based on the belief that Mr. Salovaara was likely to prevail on those claims asserted there." The judge focused on the basis for the voluntarily dismissal and treated the other "acts of alleged misconduct" as being resolved on their face or as moot. Plaintiffs ground their argument on Eckert's alleged failure "to assert the ERISA defense in a timely fashion" in the Delaware Action and the lawyer-defendants' "bad advice" to Eckert in that regard. Plaintiffs assert that, until the Delaware Chancery Court issued its written decision lifting the stay order on December 22, 2003, Eckert and the lawyers did not themselves recognize that they had, respectively, breached a fiduciary duty and committed legal malpractice when they "waived the imposition of an ERISA defense against Salovaara's claims" for indemnification. Plaintiffs maintain that "[n]ot until December 22, 2003, did it become discernible to the Leveraged limited partners that Leveraged's interests had been badly represented." Only by that date, plaintiffs assert, could they have discovered the "fiduciary or attorney misfeasance" of Eckert and the lawyers.

In sum, plaintiffs maintain that "the Delaware discovery rule tolls the statute of limitations because nothing that occurred until December 2003 put the Leveraged limited partners on notice of the defendants' misfeasance." Because plaintiffs filed their complaint on November 22, 2006 less than three years after the posited earliest discovery date of December 22, 2003 plaintiffs maintain that the trial judge erred in determining that their action was time-barred. We disagree.

Both plaintiffs and defendants concur that the Delaware statute of limitations applies and that the three-year limit set forth in Del. Code Ann. tit. 10, 8106 (2006), for the filing of claims is the appropriate limitations period. That statute provides that "[n]o action to recover damages caused by an injury unaccompanied with force or resulting indirectly from the act of the defendant shall be brought after the expiration of 3 years from the accruing of the cause of such action." Ibid. The critical inquiry is the date the cause of action began to accrue.

The general rule in Delaware was set forth in Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 319 (Del. 2004), where the Delaware Supreme Court noted that it "has repeatedly held that a cause of action 'accrues' under Section 8106 at the time of the wrongful act, even if the plaintiff is ignorant of the cause of action." "Generally, a cause of action arising in tort 'accrues' at the time the tort is committed. Under Section 8106, the period of limitations normally begins to run at the time of the wrongful act" and "[i]gnorance of the cause of action will not toll the statute . . . ." Coleman v. PricewaterhouseCoopers, L.L.C., 854 A.2d 838, 842 (Del. 2004).

Delaware recognizes a discovery rule. "Even after a cause of action accrues, the 'running' of the limitations period can be 'tolled' in certain limited circumstances." Wal-Mart Stores, Inc., supra, 860 A.2d at 319. However, the application of such rule is narrow and it will be applied in circumstances that include "concealment or fraud, [if] the injury is inherently unknowable and the claimant is blamelessly ignorant of the wrongful act and the injury complained of." Coleman, supra, 854 A.2d at 842.

The "inherently unknowable/blamelessly ignorant" standard is at the heart of the "discovery rule." The "statute of limitations begins to run upon the discovery of facts 'constituting the basis of a cause of action or the existence of facts sufficient to put a person of ordinary intelligence and prudence on inquiry which, if pursued, would lead to the discovery' of such facts." Ibid. (quoting Becker v. Hamada, Inc., 455 A.2d 353, 356 (Del. 1982)); see Wal-Mart Stores, Inc., supra, 860 A.2d at 319 (same).

There are two "threshold" conditions that must be present before the discovery rule may be utilized to toll the limitations period. Seidel v. Lee, 954 F. Supp. 810, 816-17 (D. Del. 1996). First, "inherently unknowable" requires that "there must be no observable or objective factors which would put a party on notice of an injury." Ibid. Second, "blamelessly ignorant" requires that "the party seeking to toll the statute must show that he was blamelessly ignorant of the act or omission and the injury." Id. at 817. Additionally, it is the burden of the party seeking the relief provided under the discovery rule "to plead specific facts to demonstrate that the statute of limitations was, in fact, tolled . . . ." Weiss v. Swanson, 948 A.2d 433, 451 (Del. Ch. 2008).

Here, the judge determined that the discovery rule would not be applied to toll the statute of limitations, so as to bring the filing date of plaintiffs' complaint (November 22, 2006) within the three-year limitations period. Instead, she concluded that, as early as 2002, documented facts existed in the public record5 that should have put plaintiffs on inquiry notice, which would have led plaintiffs to discover other facts constituting the bases for their causes of action against defendants, including their claim grounded on defendants' failure to assert the ERISA defense in a timely manner.

Critical to the analysis is a series of publicly available documents that should have prompted the inquiry as to the alleged misconduct of counsel. We address each of the documents:

1. The Chancellor's denial of the motion by the Fund I limited partners to intervene in the Delaware Action. In seeking to intervene, the partners asserted an ERISA defense based on provisions of the Fund I limited partnership agreement that were identical to provisions of the Leveraged limited partnership agreement. In denying the motion, the Chancellor noted in his written decision, dated July 9, 1999, that the ERISA defense amounted to a "legal argument that easily could be made under Count I or II of the original complaint" in the Delaware Action.

Because the Delaware Action involved both Fund I and Leveraged, the Chancellor's ruling was, in the Chancellor's words, an obvious "invitation" to the Delaware Action plaintiffs to assert the previously unasserted ERISA defense on behalf of Leveraged at that time. Similarly, the Chancellor's decision provided notice to plaintiffs in the present case that a possibly viable defense to Salovaara's indemnification claims existed but had not yet been asserted as of July 9, 1999.

2. The Delaware Action plaintiffs' motion for the voluntary dismissal of the Delaware Action without prejudice. This document was filed on February 12, 2002, three-and-one-half years after commencement of that litigation. The motion papers noted the then-ongoing New York Action involving Fund I and indicated that, while only Fund I had a statutory ERISA defense, both Fund I and Leveraged "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 demands violate ERISA might impact on . . . Leveraged's liability to Salovaara."

The motion papers revealed that Leveraged and Fund I "might" have a common, viable, contractual ERISA defense against Salovaara's indemnification. The papers also indicated that the Delaware Action plaintiffs were seeking to preserve that defense by moving for dismissal "without prejudice." If their motion was granted, the Delaware Action could be filed again and the defense asserted later, especially if the result in the New York Action was favorable.

3. Eckert's February 20, 2002 letter to Leveraged's limited partners. In that letter, Eckert informed the partners of his decision to voluntarily "withdraw the [Delaware] action" because "[o]ur counsel advised that we were likely to lose" that litigation. On its face, Eckert's statement that the Delaware Action plaintiffs were likely to lose the long-fought case is at odds with the motion papers' statement that Leveraged might have a viable, if not yet asserted, ERISA defense against Salovaara's claims.

This conflict was exacerbated by Eckert's further statement in the letter that, as part of his "withdrawal" of the Delaware Action, he was going to pay Salovaara's demand for indemnification, "subject to the outcome of the New York Action." This statement is confusing because, while it indicates Eckert's concession that Salovaara would be paid the indemnification monies he demanded from the Delaware Action plaintiffs, it also suggests that the "outcome of the New York Action" may affect the matter; no explanation is forthcoming as to why this is so or what that effect could be. Such ambivalence invited inquiry into Eckert's apparently conflicting statements.

In response to the motion for voluntary dismissal without prejudice, Salovaara moved for dismissal of the Delaware Action with prejudice. At oral argument on the motions on April 12, 2002, the Delaware Action plaintiffs argued that, if Salovaara lost in the ongoing New York Action, then the ERISA defense would bar his indemnification in the Delaware Action. The Chancellor then issued an oral decision, granting Salovaara's motion for dismissal with prejudice. The Chancellor requested the parties to submit proposed orders memorializing his decision, and, on April 17, 2002, the Delaware Action plaintiffs did so.

4. The Delaware Action plaintiffs' proposed order. This document provided that Salovaara's indemnification by Leveraged would not violate Section 10.3 of the Leveraged limited partnership agreement and that indemnification was not precluded by the ERISA fiduciary standard set out in that section. The proposed order indicated that the Delaware Action plaintiffs were conceding that the contractual ERISA defense arising out of the partnership agreement's provisions presented no barrier to Salovaara's indemnification; the order confirmed that they were waiving that defense. Plaintiffs, here, do not dispute that they had access to the proposed order. In fact, plaintiffs do not address the order even though it was of pivotal importance to the Chancellor in his later rejection of any reliance by the Delaware Action plaintiffs on the ERISA defense.

5. The Chancellor's order of June 14, 2002. This order dismissed the Delaware Action with prejudice and stayed the entry of judgment pending resolution of the appeal of the New York Action. The order provided that Leveraged, not Fund I, was required to indemnify Salovaara and, as the Chancellor later noted, nothing in the order "indicated that the action was stayed in order to preserve Eckert's ability to litigate the previously conceded ERISA [defense] issue." The order indicated that Leveraged did not prevail in the Delaware Action litigation.

6. Eckert's letter of July 26, 2002 to the Leveraged limited partners. This letter advised the Leveraged limited partners of the Chancellor's decision and of the over $4,000,000 in indemnification costs that Leveraged owed to Salovaara. No mention is made of whether the Delaware Action plaintiffs had asserted or preserved the ERISA defense.

7. Delaware Action plaintiffs' brief of June 16, 2003. This brief opposed Salovaara's motion to lift the stay, arguing that the plaintiffs had preserved the ERISA defense. Plaintiffs also asserted the ERISA defense at that time, contending that Salovaara was barred under that defense from receiving indemnification from Leveraged.

8. Salovaara's reply brief of July 10, 2003. This brief contended that the Delaware Action plaintiffs could not rely upon the ERISA defense because they had waived that defense in their proposed order of April 17, 2002, and because they "never attempted to litigate the ERISA [defense] issue in this action until after they had already conceded that Salovaara was contractually entitled to indemnification." This document, filed more than three years prior to the filing date of the complaint in the present action, recognized that the Delaware Action plaintiffs' failure to timely assert the ERISA defense.

On December 22, 2003, the Chancellor issued a written decision lifting the stay of his order of June 14, 2002, and directing that "Leveraged must indemnify Salovaara for his legal fees and expenses." Plaintiffs, here, maintain that not until then (December 22, 2003) did they realize that the Delaware Action plaintiffs had failed to assert the ERISA defense in a timely fashion, and only then did the three-year limitations period begin to run on their causes of action for breach of fiduciary duty and legal malpractice based upon the ERISA defense.

The documents are to the contrary and reveal that the ERISA defense was recognized and considered possibly viable (though unasserted) by the Delaware Action plaintiffs in early 2002, was waived and abandoned by them in mid-2002, and was nonetheless belatedly asserted by them thereafter. At a minimum, those documents presented facts and circumstances that raised significant questions about the Delaware Action plaintiffs' handling of the ERISA defense.

Additionally, the documents undermine any perception that plaintiffs met the "inherently unknowable" requirement of the discovery rule because the documents provided "observable or objective factors" that should have put plaintiffs on notice of the Delaware Action plaintiffs' possible mishandling of the ERISA defense. See Seidel, supra, 954 F. Supp. at 816-17.

Under the discovery rule, the documents presented "facts sufficient to put a person of ordinary intelligence and prudence on inquiry which, if pursued, would lead to the discovery" of other facts that could have provided a basis for a cause of action grounded on the Delaware Action plaintiffs' mishandling of the ERISA defense. Coleman, supra, 854 A.2d at 842. Accordingly, the documents put plaintiffs (the Leveraged limited partners) on notice to inquire of the Delaware Action plaintiffs as early as mid-2002 why they did not explicitly assert the defense then, when it may have had some positive effect for Leveraged.

At the same time, the documents undermine any perception that plaintiffs met the "blamelessly ignorant" requirement of the discovery rule because, by failing to conduct an inquiry when doing so was plainly appropriate, plaintiffs' purported ignorance of the circumstances surrounding the ERISA defense cannot be considered blameless. These documents preclude plaintiffs from obtaining any benefit under the tolling provision of the discovery rule.

Plaintiffs must meet their burden to demonstrate that the statute of limitations was tolled and that they "were not on inquiry notice" to ask about the unasserted ERISA defense. Weiss, supra, 948 A.2d at 451.

Finally, plaintiffs rely on an unreported Delaware opinion, Shuttlework v. Lynch, 1995 Del. Super. LEXIS 236 (Del. Super. Apr. 25, 1995). Aside from limitation on the use of unreported opinions, see R. 1:36-3, Shuttlework is distinguishable on its facts. Unlike Shuttlework, where the only indication of damage or malpractice arose from the Chancellor's decision, here, the Delaware Action plaintiffs had access to numerous documents informing them about the ERISA defense. They knew that the defense might be applicable to thwart Salovaara's indemnification claims against Leveraged, and yet they suffered the dismissal of their complaint without either asserting or preserving that defense. They had documents before them that should have raised questions and caused them to inquire about the conduct of the Delaware Action plaintiffs in prosecuting and defending that litigation. We conclude that the motion judge did not err in concluding that the Delaware discovery rule did not apply.

III.

Plaintiffs also assert that the granting of summary judgment was in error since the judge had to determine disputed issues of fact. Plaintiffs allege three specific errors.

First, they contend that "there was no 'red flag' that 'clearly and unmistakably' would have led the plaintiffs to inquire whether their fiduciary [Eckert] or his attorneys [the law-firm defendants] were in error in proclaiming until December 2003 that Leveraged could successfully assert an ERISA-based defense." See Boerger v. Heiman, 965 A.2d 671, 675-76 (Del. 2009) (quoting Coleman, supra, 854 A. 2d at 843) (noting where reversing that the "trial court inappropriately resolved disputed issues of fact" because, "there was 'no red flag that clearly and unmistakably would have led a prudent person to inquire'" whether the defendant lawyers and accountants there had negligently failed to restructure the plaintiff's business in a way that would have avoided double taxation). According to plaintiffs, "[w]hether a red flag requiring further inquiry existed in 2002 . . . is a question of fact" which the trial court inappropriately resolved against them.

As we have noted, by mid-2003, there were numerous documents available to them that should have alerted them that there was a problem concerning the ERISA defense. These documents should have indicated to plaintiffs that there were problems involving the failure of the Delaware Action plaintiffs to assert the ERISA defense in a timely manner. Either standing alone or collectively, the documents were a "red flag" that should have triggered an inquiry into the matter by plaintiffs.

Plaintiffs next contend that, assuming they were on inquiry notice, "it cannot be determined, on the present record, whether a diligent inquiry by plaintiffs would have uncovered facts sufficient for them to assert [a] malpractice claim." Coleman, supra, 854 A.2d at 843. Plaintiffs argue that any such inquiry by them in the present case would have been futile because Eckert and the lawyer defendants would simply not have admitted error.

Although not addressed directly, the motion judge alluded to Eckert's letter of August 9, 2002, to Leveraged's limited partners, in which he discussed Salovaara's pending motion to enjoin Eckert's proposed distribution to the partners. She noted that Eckert was

inviting the limited partners to give him a call, and he will give them whatever information they are seeking. Now, I don't know whether they called, or not. I don't know what kind of a reception was given to them, but the gesture was certainly there, and I don't have any indication that it was a hollow gesture.

Nothing suggests or raises a fact issue that a pertinent inquiry concerning the ERISA defense directed to the Delaware Action plaintiffs by plaintiffs in the present case would have been futile.

In Coleman, the Court noted that it could not be determined from the record that a diligent inquiry would have uncovered facts suggesting accounting malpractice because the issues there were so complex that, even with "full access" to all "books and records," it took investigators "eight months to uncover the accounting irregularities" after the investigation there was commenced. Ibid.

Here, the issues were much less complex. The only inquiry was whether the Delaware Action plaintiffs had asserted the ERISA defense in a timely manner or had preserved that defense for later utilization. If the answer to either question were yes, the follow-up question would require the Delaware Action plaintiffs to present documentary proof of such assertion or preservation. If the answer to either question were no, a reasonable inquiry would be similarly simple.

Plaintiffs' final contention is that the "special relationship between a fiduciary [Eckert] and his beneficiaries [plaintiffs] and between an attorney [the lawyer-defendants] and client [Leveraged] precludes a finding, as a matter of law, that a red flag existed" that should have put plaintiffs on inquiry notice of problems concerning the ERISA defense. Plaintiffs assert that the trial court judge erred in granting summary judgment against them because it was a factual issue whether they reasonably relied upon the statements of Eckert and the lawyer-defendants.

The flaw in this argument is that it is premised on ignoring all of the publicly available documents and, instead, relying exclusively on the later statements of Eckert and the lawyers that the ERISA defense had been preserved and was viable. Such reliance will not shield a litigant from the requirements of the discovery rule.

In Seidel, supra, 954 F. Supp. at 817, the plaintiff maintained that the "defendants' scheme" was inherently unknowable because "he was entitled to rely upon his fiduciaries" and their representations to him. The court agreed that "beneficiaries are entitled to trust their fiduciaries," but added that:

[B]eneficiaries should not put on blinders to such obvious signals as publicly filed documents, annual and quarterly reports, proxy statements, and SEC filings. Here, the Court concludes that the public documents, which form the basis of many of Plaintiff's claims, could have provided Plaintiff with adequate notice of any alleged misconduct by Defendants. Therefore, the Court concludes that the doctrine of inherent unknowability is not applicable, and Plaintiff's common law claims based on pre-October 14, 1990 transactions are time-barred.

 

[Ibid.]

 

Similarly, here, plaintiffs could not "put on blinders" and ignore the documents available to them, indicating that the Delaware Action plaintiffs had failed to assert the ERISA defense in a timely manner.

The documents that we have identified manifestly demonstrate that plaintiffs should have made an inquiry pursuant to the discovery rule concerning the ERISA defense. Plaintiffs' argument that the trial court erred in granting summary judgment on that basis fails. Brill v. Guardian Life Ins. Co., 142 N.J. 520, 540 (1995).

Affirmed.

1 We have been advised that much of this litigation continues to this day.

2 The plaintiffs in the Delaware Action were represented by RLF. In the past, Eckert had been represented by New York attorneys Daniel Ross and Richard Scharfman and, at Eckert's behest, Ross was admitted pro hac vice in the Delaware Action to act in an "of counsel" capacity for the Delaware Action plaintiffs. Both Ross and Scharfman subsequently joined Dechert in 1999, which then became "of counsel" to the Delaware Action plaintiffs until the two attorneys joined Stroock in 2002, at which time Stroock became "of counsel" to those plaintiffs.

3 The record does not include a copy of the Delaware Action plaintiffs' proposed order, but only provides the Chancellor's description of that order in a later decision by him. However, neither plaintiffs nor defendants here dispute the Chancellor's description of the order.

4 At oral argument before the district court in the New York Action, counsel for plaintiffs SSP and Advisors (Ross, then of Dechert) asserted that he would argue in the ongoing Delaware Action that the court's decision denying Salovaara indemnification by Fund I on statutory grounds under ERISA might not be binding "in the Delaware Court" on the issue of contractual indemnification under the partnership agreements. The motion judge here considered Ross's comment insufficient, by itself, to put plaintiffs in the present case "on notice" of facts that would trigger the running of the applicable Delaware limitations period.

5 Information present in "publicly filed documents" can defeat a party's claim that such information was "inherently unknowable" under the discovery rule. Seidel, supra, 954 F. Supp. at 817; U.S. Cellular Inv. Co. of Allentown v. Bell Atl. Mobile Sys., 677 A.2d 497, 503-04 (Del. 1996) (same, "public filings").