Blackstone Alternative Asset Management L.P. v. Kentucky Public Pensions Authority

• Court: Court of Appeals of Kentucky
• Decided: May 18, 2023
• Docket: 2022 CA 000494
• Status: Unknown

Opinion

RENDERED: MAY 19, 2023; 10:00 A.M. NOT TO BE PUBLISHED

Commonwealth of Kentucky Court of Appeals

NO. 2022-CA-0494-MR

BLACKSTONE ALTERNATIVE ASSET MANAGEMENT L.P. APPELLANT

APPEAL FROM FRANKLIN CIRCUIT COURT v. HONORABLE PHILLIP J. SHEPHERD, JUDGE ACTION NO. 21-CI-00617

KENTUCKY PUBLIC PENSIONS AUTHORITY; BOARD OF TRUSTEES OF THE COUNTY EMPLOYEES RETIREMENT SYSTEMS; BOARD OF TRUSTEES OF THE KENTUCKY RETIREMENT SYSTEMS; KENTUCKY RETIREMENT SYSTEMS INSURANCE FUND; AND KENTUCKY RETIREMENT SYSTEMS PENSION FUND APPELLEES

OPINION AFFIRMING

** ** ** ** **

BEFORE: CETRULO, DIXON, AND EASTON, JUDGES. DIXON, JUDGE: Blackstone Alternative Asset Management L.P. (BAAM)

appeals from the order of the Franklin Circuit Court entered on April 6, 2022,

dismissing its claims against Kentucky Public Pensions Authority; Board of

Trustees of The County Employees Retirement Systems (CERS); Board of

Trustees of the Kentucky Retirement Systems; Kentucky Retirement Systems

Insurance Fund; and Kentucky Retirement Systems Pension Fund (collectively

referred to as KPPA1). Following a careful review of the record, briefs, and law,

we affirm.

FACTS AND PROCEDURAL BACKGROUND

On August 29, 2011, KPPA, BAAM, and Blackstone Alternative

Asset Management Associates LLC (BAAMA)2 entered a limited liability

company (LLC) agreement in which KPPA and BAAMA were members and

BAAM was the sole manager of Blackstone Henry Clay Fund, LLC (Henry Clay

Fund). The following day, KPPA entered two subscription agreements to the

Henry Clay Fund as an investor, one for $335,000,000 and the other for

$80,000,000. The subscription agreements specifically incorporated the terms and

conditions of the LLC agreement. The main purpose of forming the LLC and

entering the subscriptions was for BAAM to manage KPPA’s investments to profit

1 Formerly known as the “Kentucky Retirement System.” 2 BAAMA is not a party to this action.

-2- both entities. KPPA also invested money with other companies. These

investments later became the subject of multiple lawsuits. We will address only

the ones pertaining to this appeal.

The Overstreet Action

In late 2017, eight members of KPPA’s defined-benefit retirement

plan brought claims alleging funding losses against certain former KPPA trustees

and officers, as well as private investment advisors and hedge funds and their

principals. In early 2018, the complaint was amended, bringing the number of

defendants to 32, including BAAM, as well as KPPA as a nominal defendant.

The KPPA trustee and officer defendants filed interlocutory appeals

of the standing and sovereign immunity rulings, which were transferred and

consolidated before the Supreme Court of Kentucky in Overstreet v. Mayberry,

603 S.W.3d 244 (Ky. 2020). In its opinion, rendered July 9, 2020, the Supreme

Court found “Plaintiffs lack an injury in fact sufficient to support constitutional

standing,” and remanded to the trial court for dismissal. Id. at 251.

On July 21, 2020, the Attorney General of Kentucky (OAG) filed a

separate action with a complaint mirroring Overstreet. That action was

consolidated with, and later unconsolidated from, the Overstreet action and is still

pending. Even so, the OAG moved to intervene in the Overstreet action as well.

-3- On December 28, 2020, the trial court addressed the OAG’s

intervention motion in the Overstreet action and the motion of the original

plaintiffs and three new plaintiffs to file an amended complaint. It entered an order

allowing the OAG to intervene, but dismissed the plaintiffs’ complaint and motion

to file an amended complaint. As a result, the only remaining plaintiff in the

Overstreet action was the OAG.

Plaintiffs appealed a second time but later voluntarily dismissed their

appeal. Defendants cross-appealed, and their combined appeals were before

another panel of our court in KKR & Co., Inc. v. Mayberry, No. 2021-CA-1307-

MR, 2023 WL 2939473 (Ky. App. Apr. 14, 2023). That panel held, even though

the trial court complied with the Supreme Court’s directive and dismissed the

complaint, it “exceeded its authority when it entertained various motions to amend

and to intervene, and more specifically by permitting the OAG to intervene.” Id. at

*3. Accordingly, the panel affirmed the trial court’s order dismissing the

plaintiffs’ claims, but vacated the orders pertaining to motions made after the

Supreme Court’s opinion in Overstreet. Id. at *4. Its opinion is not yet final.

The Declaratory Action

On April 28, 2021, the OAG filed a declaration of rights action

against BAAM, KPPA, and others. Concerning BAAM, the OAG sought for the

trial court to declare the indemnification provisions in Section IV(A) of the

-4- subscription agreements void and unenforceable under Sections 50, 171, 177, and

230 of the Kentucky Constitution. The defendants, including BAAM, moved the

trial court to dismiss the action, and the OAG moved for summary judgment. On

March 24, 2022, the trial court denied the defendants’ motions to dismiss and

granted the OAG’s motion for summary judgment. Defendants appealed, and their

consolidated appeals are currently before another panel of our Court (Case Nos.

2022-CA-0353-MR, 2022-CA-0347-MR, 2022-CA-0350-MR, and 2022-CA-0352-

MR).

This Action

On July 30, 2021, BAAM sued for breach of contract, asserting:

In the contracts through which [KPPA] invested in the Clay Fund [KPPA] represented in plain language that it understood its investment, and that the investment was “suitable.” [KPPA] also acknowledged that it understood the “method of compensation” established under the Clay Fund [LLC Agreement] and the “nature of” and “risks associated with” the fees paid to BAAM and the underlying portfolio managers in which the Clay Fund would invest. [KPPA] expressly agreed to reimburse BAAM against all damages and expenses arising from [KPPA’s] material breach of those representations.

BAAM alleges KPPA breached its contracts when, beginning in 2018,

it “declared its support” for the Overstreet action – these allegations also extend to

the complaints filed by the OAG that mirror Overstreet. BAAM further contends

-5- KPPA breached its contracts when it “supported” the declaratory action discussed

previously herein.

BAAM ultimately claims that since the Overstreet action, the OAG’s

action similar to Overstreet, and the declaratory action “are predicated on the

rejection of [KPPA’s] contractual representations to BAAM, and because [KPPA]

has supported and is now directly standing behind [those actions, KPPA] should be

required to reimburse BAAM for the damages from those breaches.” It claims

those damages include its “costs in defending these meritless lawsuits and, in the

unlikely event of an adverse judgment in the [Overstreet and the OAG’s similar

action], for that judgment.”

Defendants moved to dismiss BAAM’s complaint for various reasons

including: (1) they owe no duty to BAAM to stop third parties from seeking relief

against BAAM for its alleged wrongdoings, (2) BAAM’s claims are unripe, (3)

BAAM’s claims for indemnification are unconstitutional, and (4) BAAM’s claims

are barred by sovereign immunity. The CERS Board of Trustees moved to dismiss

BAAM’s complaint asserting: (1) the CERS Board did not exist until April 1,

2021; (2) the CERS Board members were not individually named or served; (3) the

CERS Board is not liable for the OAG’s actions; (4) the CERS Board and its

members are entitled to sovereign immunity, and (5) the CERS Board members, as

individuals, are entitled to qualified immunity. After the matter was fully briefed

-6- and argued, the trial court granted the motions to dismiss, finding BAAM’s claims

unripe, and this appeal followed.

STANDARD OF REVIEW

Appellees moved the trial court to dismiss the complaint under CR3

12.02(f) for failure to state a claim upon which relief can be granted. Kentucky’s

highest court has observed:

A motion to dismiss for failure to state a claim upon which relief may be granted “admits as true the material facts of the complaint.” So a court should not grant such a motion “unless it appears the pleading party would not be entitled to relief under any set of facts which could be proved. . . .” Accordingly, “the pleadings should be liberally construed in the light most favorable to the plaintiff, all allegations being taken as true.” This exacting standard of review eliminates any need by the trial court to make findings of fact; “rather, the question is purely a matter of law. Stated another way, the court must ask if the facts alleged in the complaint can be proved, would the plaintiff be entitled to relief?” Since a motion to dismiss for failure to state a claim upon which relief may be granted is a pure question of law, a reviewing court owes no deference to a trial court’s determination; instead, an appellate court reviews the issue de novo.

Fox v. Grayson, 317 S.W.3d 1, 7 (Ky. 2010) (footnotes omitted).

3 Kentucky Rules of Civil Procedure.

-7- LEGAL ANALYSIS

On appeal, BAAM raises multiple arguments. However, the trial

court dismissed the action solely because it found BAAM’s claims to be

“premature” or unripe. Therefore, we will address this issue first.

“Ripeness is a threshold issue: ‘Because an unripe claim is not

justiciable, the circuit court has no subject matter jurisdiction over it.’” Berger

Fam. Real Est., LLC v. City of Covington, 464 S.W.3d 160, 166 (Ky. App. 2015)

(citations omitted). “The basic rationale of the ripeness requirement is ‘to prevent

the courts, through the avoidance of premature adjudication, from entangling

themselves in abstract disagreements[.]’” W.B. v. Commonwealth, Cabinet for

Health & Family Servs., 388 S.W.3d 108, 114 (Ky. 2012) (quoting Abbott Labs. v.

Gardner, 387 U.S. 136, 148, 87 S. Ct. 1507, 18 L. Ed. 2d 681 (1967)). As a

practical matter, “courts would rather avoid speculative cases, defer to finders of

fact with greater subject matter expertise, decide cases with fully-developed

records, and avoid overly broad opinions, even if these courts might

constitutionally hear a dispute.” Id. at 114-15 (internal quotation marks and

citations omitted).

In the case herein, the trial court relied on the following sections of

the LLC agreement in determining BAAM’s claims were premature or unripe:

Section 2.3 Limitation of Liability; Indemnification

-8- (a) [BAAM] shall not be liable to [KPPA] or the Company for any and all loss, liability and expenses, judgments, civil fines, amounts paid in settlement, monetary or other damages and other amounts reasonably paid or incurred to the Company or [KPPA] arising out of, related to or in connection with any act or omission of [BAAM] taken, or omitted to be taken . . . except for any loss, liability and expenses, judgments, civil fines, amounts paid in settlement, monetary or other damages and other amounts arising out of, related to or in connection with any act or omission that is Judicially Determined to be primarily attributable to fraud, bad faith, willful misconduct or gross negligence of [BAAM.]

(b) So long as [BAAM] acts in good faith, [BAAM] shall be fully protected in relying upon . . . information, opinions, reports or statements presented to the Company by [KPPA.]

(c) So long as [BAAM] acts in good faith, [BAAM] may rely upon and shall be protected in acting or refraining from action upon any instruction from, or document signed by, any authorized person of [KPPA.]

(Emphasis added.)

The trial court found that when “[r]ead together these provisions

create a requirement in which BAAM’s ability to rely on [KPPA’s] representations

is predicated on its own compliance with a ‘good faith’ standard of conduct.

BAAM’s compliance with this standard is among the rights and liabilities currently

being litigated in the Underlying Action[s].” It further observed that “[u]ntil the

legal and factual issues surrounding such rights and liabilities are established in the

Underlying Action[s], the claims raised in this action cannot be adequately

-9- evaluated.” In other words, “to the extent it is ascertained in the Underlying

Action[s] that BAAM did not comply with the ‘good faith’ standard, such failure

would ‘necessarily render[] moot’ any claims of breach by [KPPA.] Accordingly,

BAAM’s claim in this action is ‘premature[.]’” (Emphasis in original.) We agree

with the trial court. We also disagree with BAAM’s assertions that there is no

allegation in the Overstreet action or declaratory action that BAAM did not

comply with the “good faith” standard of conduct. See Overstreet amended

complaint ¶¶ 105, 106, 175, 184, 186, 230-237, 239-44, 246, 248-49, and 286-323

(this includes allegations against BAAM for breaches of statutory, fiduciary, and

other duties; civil conspiracy; aiding and abetting breaches of statutory, fiduciary,

and other duties; and for punitive damages). See also declaratory action complaint

¶¶ 25-26, 36-38, 40 and 45-46 (these are derivative claims from Overstreet).

At its core, “ripeness involves weighing two factors: (1) the hardship

to the parties of withholding court consideration; and (2) the fitness of the issues

for judicial review.” W.B., 388 S.W.3d at 114. Herein, the trial court was well

within its authority to determine that the issues raised by BAAM are not presently

“fit” for judicial review as the outcome of this case is largely dependent on the

outcome of the underlying actions. If it is determined that BAAM’s actions fall

within the exceptions contained in Section 2.3 of their LLC agreement, BAAM is

precluded from recovering its requested damages. Therefore, the more prudent

-10- course of action is to either litigate these issues in those actions or file another

action after a judicial determination is reached in those actions.

The trial court also considered the potential hardship to the parties of

withholding its consideration of the issues raised herein.4 It appropriately

concluded that, due to the necessity of a judicial determination on whether BAAM

acted in good faith to determine whether it was entitled to relief, any hardship in

waiting for resolution of the underlying actions would not be sufficient to justify

hearing this case at this time. Because the other arguments do not change the

outcome, we need not address them.

CONCLUSION

Therefore, and for the foregoing reasons, the order of the Franklin

Circuit Court is AFFIRMED.

ALL CONCUR.

4 In its order, the trial court stated:

The Court must also weigh the fitness for judicial review of the present action against potential hardship for BAAM. However, this balancing does not weigh in favor of allowing the current action to proceed. The Court does not see how allowing the Underlying Action[s] to conclude before assessing whether [KPPA] was in breach of the Subscription Agreement would create hardship for BAAM. In fact, it is impossible to adjudicate this dispute until the claims of bad faith and breaches of duty against BAAM in the Underlying Action[s] have been resolved.

-11- BRIEFS FOR APPELLANT: BRIEF FOR APPELLEES KENTUCKY PUBLIC PENSIONS Brad S. Karp AUTHORITY, BOARD OF Lorin L. Reisner TRUSTEES OF KENTUCKY Andrew J. Ehrlich RETIREMENT SYSTEMS, Brette Tannenbaum KENTUCKY RETIREMENT New York, New York SYSTEMS INSURANCE TRUST FUND, KENTUCKY EMPLOYEES Donald J. Kelly RETIREMENT SYSTEM, AND Jordan M. White STATE POLICE RETIREMENT Louisville, Kentucky SYSTEM:5

Paul C. Harnice Christopher E. Schaefer Sarah J. Bishop Connor B. Egan Andrew T. Hagerman Frankfort, Kentucky

BRIEF FOR APPELLEE COUNTY EMPLOYEES RETIREMENT SYSTEM:

W. Eric Branco William E. Johnson Joseph P. Bowman Frankfort, Kentucky

5 Although the “State Police Retirement System” was not named as an appellee in the notice of appeal, they purport to join in this appellee brief.

-12-