MIKAEL SALOVAARA, et al. 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NOT FOR PUBLICATION WITHOUT THE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-1939-06T51939-06T5

MIKAEL SALOVAARA, individually and

derivatively on behalf of SSP

Partners, L.P., SSP Advisors,

L.P., and SSP Investors, L.P.,

Plaintiffs-Appellants,

v.

ALFRED C. ECKERT, III,

Defendant-Respondent,

and

SSP PARTNERS, L.P., SSP ADVISORS,

L.P., and SSP INVESTORS, L.P.,

Defendants-Respondents

and Nominal Defendants.

_______________________________________________________

 

Argued April 24, 2007 - Decided May 17, 2007

Before Judges Coburn, R.B. Coleman and Gilroy.

On appeal from the Superior Court of New Jersey,

Law Division, Morris County, L-2060-04.

Joseph L. Buckley argued the cause for appellants

(Sills, Cummis, Epstein & Gross, attorneys; Mr.

Buckley, Richard H. Epstein and James M.

Hirschhorn, of counsel and on the brief; Jonathan

S. Jemison, on the brief).

Michael K. Furey argued the cause for respondents

(Riker, Danzig, Scherer, Hyland & Perretti,

attorneys; Mr. Furey, of counsel and on the

brief, Daniel W. Zappo, on the brief).

PER CURIAM

Plaintiff, Mikael Salovaara, and defendant, Alfred C. Eckert, III, left their positions at Goldman Sachs in the early nineties and set up a series of private investment funds. The funds did reasonably well for a while, but in November 1993 Eckert accepted a position as the manager of a competing fund, and shortly thereafter the jointly-owned funds began to falter. Over twenty lawsuits ensued, some filed in New Jersey and others elsewhere.

This case began in 2004, and was essentially an attempt by Salovaara to tie up all the loose ends surrounding the years of litigation between him and Eckert. On October 19, 2006, a Law Division judge issued an order, granting Eckert's motion for partial summary judgment, thereby dismissing several of Salovaara's claims as barred by the Entire Controversy Doctrine (ECD). The dismissed claims fall into the following three categories: (1) Salovaara's claims for indemnification for his legal expenses in several of the underlying actions; (2) Salovaara's claims for waste of partnership assets in several of the underlying actions; and (3) Salovaara's claim for breach of fiduciary duty, resulting from Eckert's failure to adequately capitalize one of the funds. After these claims were dismissed, Salovaara made a motion for leave to appeal, which we granted. After carefully considering the record and the parties' briefs, we affirm substantially for the reasons expressed by Judge Deanne M. Wilson in her oral opinions of September 6, 7, and 8, 2006. Nevertheless, we add the following comments.

The ECD is an equitable preclusionary doctrine designed to encourage comprehensive and conclusive adjudications, promote judicial economy and efficiency, and achieve party fairness. It requires that, whenever possible, all claims that arise from the same transactional facts should be brought in one lawsuit. Harley Davidson Motor Co., Inc. v. Advance Die Casting, Inc., 150 N.J. 489, 497 (1997).

Regarding the application of the ECD to claims for indemnification, the Harley Court concluded that, while some forms of indemnity may not accrue until a judgment has been entered, in a products liability action claims for indemnification from third parties must be joined in the original action or face preclusion pursuant to the ECD. Id. at 502. The Harley court held that, "the accrual of a cause of action . . . occurs when a plaintiff knows or should know the facts underlying those elements, not necessarily when a plaintiff learns of the legal consequences of those facts." Ibid. (quoting Circle Chevrolet Co. v. Giordano, Halleran & Ciesla, 142 N.J. 280, 296 (1995)). Thus, the Harley Court's decision, while instructive as to general principles regarding the applicability of the ECD, did not address the specific issue of when claims for contractual indemnification accrue.

More recently, in K-Land Corp. No. 28 v. Landis Sewerage Authority, 173 N.J. 59 (2002), the Supreme Court emphasized that equitable considerations should guide application of the ECD, including fairness to the parties and the judiciary. Id. at 70-73. The K-Land Court maintained that fairness to a party whose claim is precluded pursuant to the ECD demands that he or she had an opportunity to litigate the claim in the original action. Id. at 73. But, the K-Land Court also emphasized that the ECD should not be interpreted to require the filing of premature or unaccrued claims, or force claims into the courts that have a reasonable likelihood of private resolution. Id. at 74-75.

In McNally v. Providence Washington Ins. Co., 304 N.J. Super 83, 90-91 (App. Div. 1997), this court held that a clause in an insurance policy, which prohibited litigation against the insurer in the underlying lawsuit, did not preclude application of the ECD because a declaratory judgment action could have been filed that would have determined the insurer's liability. Regarding the scope of ECD preclusion, the McNally court reasoned as follows:

If the consequences of omitting a component of a controversy means that the litigants, after final judgment is entered, will likely 'have to engage in additional litigation in order to conclusively dispose of their respective bundles of rights and liabilities which derive from a single transaction or related series of transactions, then the omitted component must be regarded as constituting an element of the minimum mandatory unit of litigation.'

[Id. at 93 (quoting Wm. Blanchard Co. v. Beach Concrete Co., Inc., 150 N.J. Super. 277, 293-94 (App. Div.) certif. denied, 75 N.J. 528 (1977)).]

The McNally court also explicitly acknowledged that the Supreme Court has yet to provide clear guidance on the issue of when contractual indemnification claims begin to accrue for purposes of ECD preclusion. Id. at 95.

In the present case, Salovaara argues that his indemnification claims were wrongly dismissed under the ECD because they did not begin to accrue until ten days afte r he made a written demand for indemnification and posted an undertaking. Salovaara maintains that the language of the indemnification clauses in the respective partnership agreements indicates that he had no right to sue until he had made a written demand for indemnification, furnished an undertaking, and the partnerships failed to honor the written demand. Thus, according to Salovaara, the indemnification claims in this case are not untimely because they were asserted within a reasonable time of his demands for indemnification.

The main problem with this argument is its practical implications. If Salovaara's argument were accepted, the trial judge would be faced with the task of reviewing, in depth, four separate lawsuits that are intertwined with a controversy that has lasted thirteen years and encompassed twenty-two separate actions in order to determine whether indemnification was appropriate, considering the specific factual circumstances of each case. This is exactly the type of predicament that the ECD was designed to prevent.

Requiring a single judge or jury to determine whether indemnification is appropriate in a potentially unlimited number of separate lawsuits is neither practical nor wise. Salovaara's argument, if accepted, would permit him to toll the accrual of his indemnification claims indefinitely, because he could have made a written demand any time he chose. If we were to hold that Salovaara's claims for indemnification did not accrue until ten days after he made a written demand, claims for contractual indemnification could be brought years after the underlying litigation is resolved. Such a result would be unfair to the litigants and unduly burdensome on the judiciary.

Further, the indemnification clauses at issue require an assessment of the parties' good faith in bringing the action, which is a function much better suited for the trial judge who presided over the underlying action because he or she would be familiar with the facts of the case. In addition, precluding Salovaara's claims for indemnification pursuant to the ECD does not compromise the goal of party fairness because Salovaara had ample opportunity to litigate these issues in the underlying actions or in the two "Delaware Actions," wherein his entitlement to indemnification under the partnership agreements was at issue.

Salovaara contends that forcing indemnification demands into the courts before private resolution is attempted would hinder judicial economy and efficiency. However, this argument ignores the reality of the relationship between Salovaara and Eckert, which has encompassed over thirteen years of litigation and twenty-three lawsuits, in many of which indemnification was a contentious issue. This argument is also belied by statements in Salovaara's complaint in the "Second Delaware Action," where he indicated that he had not waited the required ten days from the time he made his written demand for indemnification before bringing suit because he felt that there was no chance that Eckert would honor the agreement.

Salovaara, a former executive at Goldman Sachs and law school graduate, should have foreseen that indemnification for his legal expenses would be disputed. Indemnification under the partnership agreements had been contentious since the "Salovaara II" action in 1996, so it cannot be reasonably argued that Salovaara was unaware of the possibility that his indemnity demands would be denied. Therefore, we are satisfied that indemnification for legal expenses incurred in each of the underlying actions began to accrue when the legal fees began to accumulate and should have been resolved in those actions.

Salovaara also claims that Eckert wasted partnership assets by forcing the SSP Partnerships to indemnify him for legal fees incurred in pursuing several frivolous claims. Aside from the fact that Salovaara cites no direct authority for the proposition that indemnification for legal expenses incurred in pursuing frivolous claims can be considered a waste of partnership assets, he fails to consider that our Court Rules have mechanisms for dealing with frivolous claims. If an action is truly frivolous, it can be addressed through a motion for sanctions pursuant to R. 1:4-8 and N.J.S.A. 2A:15-59.1, which can include fines and attorneys' fees. In each of the underlying New Jersey actions in which Salovaara claimed that Eckert wasted partnership assets by engaging in frivolous litigation, he could have made a motion for sanctions under the statute and R. 1:4-8. In any case, an action seeking damages for waste in connection with frivolous litigation, whether brought here or elsewhere, is much better suited for the court that presided over the underlying action because of its familiarity with the specific facts of the case. It would be unfair to the parties and a waste of judicial resources for a judge who has no familiarity with the underlying facts of a case to be asked to evaluate a claim for waste resulting from conduct that occurred therein.

Salovaara's "shift-down" claim essentially asserts that Eckert failed to maintain adequate reserves in the Leveraged Fund to reimburse the SSP Partnerships for indemnification expenses that he knew or should have known would ultimately be assigned to the Leveraged Fund. The January 2004 final judgment in the First Delaware Action required the Leveraged Fund to reimburse the SSP Partnerships for indemnification paid to Eckert for his expenses in the underlying actions and required the Leveraged Fund to indemnify Salovaara for over $6 million in legal fees and pre-judgment interest. Eckert thereafter asked the Leveraged Fund's limited partners to return their distributions so that the fund would have sufficient assets to satisfy the judgment. Many of the limited partners refused, and Salovaara now asserts that Eckert is liable for the difference between the assets of the Leveraged Fund and the judgment entered in the First Delaware Action because he failed to ensure that the fund had adequate reserves.

In support of his position, Salovaara cites Karo Marketing Corp. v. Playdrome America, 331 N.J. Super. 430 (App. Div.), certif. denied, 165 N.J. 603 (2000). Karo involved a corporate officer who fraudulently removed assets from the corporation before the plaintiff obtained a judgment but after his cause of action began to accrue. Id. at 443. We held that the plaintiff's cause of action based on the fraudulent conveyance did not begin to accrue until after the judgment was entered. Id. at 444.

However, unlike the situation in Karo, here Salovaara had specific knowledge that Eckert was transferring assets out of the Leveraged Fund, as evidenced by his motion for a temporary restraining order in August 2002, seeking to stop the Leveraged Fund from making a distribution to its limited partners, for the specific reason that he feared it would not have sufficient assets to satisfy the $6 million judgment, which had been temporarily stayed pending the outcome of ERISA litigation in New York. In his motion for the temporary restraining order, Salovaara expressly argued that the Leveraged Fund was insolvent. Thus, Salovaara cannot credibly argue that he did not know that Eckert was causing the Leveraged Fund to distribute its assets while a massive judgment was pending.

More importantly, Salovaara already litigated this issue in the Delaware Actions. Specifically, in the "Second Delaware Action," Salovaara sought indemnification from the SSP Partnerships because he feared that the Leveraged Fund would not have sufficient assets to cover the judgment pending in the "First Delaware Action." Thus, the essence of the controversy that was litigated in the Delaware Actions is precisely the same as is contained in Salovaara's "shift-down" claim here; namely, whether the Leveraged Fund is responsible for indemnifying Salovaara and whether the fund improperly distributed assets to evade such responsibility. As Eckert essentially controls the funds and the SSP Partnerships, his personal liability for the distribution of assets from the Leveraged Fund is unquestionably part of the same controversy that was litigated in the Delaware Actions because it arises from the same transactional facts. As such, the ECD acts to bar this claim.

 
Affirmed.

(continued)

(continued)

11

A-1939-06T5

May 17, 2007