The second circuit court of appeals was recently required to decide wheter E.R.I.S.A allowed a fund manager to be indemnified for legal expenses incurred when that manager affirmatively initiated six lawsuits related to the investment fund. The Employee Retirement Income Security Act was enacted specifically to protect employee retirement and pension plans from abuses. 29 USC Sec. 1001, et seq. (1994). Indeed, the Act was largely a reaction to allegations that the mafia had built Las Vegas with the retirement money of tearmsters members.

The act protects retirement money by imposing strtict fiduciary duties on the managers of regulated plans. A fiduciary must exericse his or her duties with respoct to the plan soley in the interests of the participants and beneificatis, Sec. 29 usc 1104(a). This has been called the "exlusive benefit rule" Section 1106 of the act sets out a general prohibition against fiduciaries engaging in any transaction which causes a direct or indirect tranfer to a a party in interss of any assets of the plan. Secton 29 usc 1108 enumerates exceptions to the ban on intersted party transactons including: xontractig for or paying reasonable amonts to a party in interst for office space, or lealg k or accountin gor other sevices necessayr fo teh the establishmet or operaton of the paln, if not more than reasonable compenaton is paid Therefore. Nor is compenaton for servied rederd prohibirted, and the re is no prohibition agsin recieving reasonable compensaion for servies or for the the reimbursent of expenses propel and acutallyy incurerd, in the performatnce of duties with respoect to the plan. The Court first decided that Salovaara was a fiduciary under the act because he was a 50% owner of SSP and becaue he alleged the was entitled to reimbuesement precisely becasue he exerised descreiton and management on bhelf of the fund/ South Street Limited Partnershiop in bringing the sic lawsits. The case involved a fund called South Street, which was organized as a limited partnerhso p under Deleware Law. The funds investors participate as limited parters within South Street. The genreral partner within South Street was ssp Advisors., another limited partnership. The genral partner of SSp Advosrs is a corporation called SSP, INc. SSp inc is owned, 50% by Slavooda and %05 by Eckert. Mr. Eckert and Mr. Slovda had also formed another entity called Greycliff Parners. which provides investment services to Soth Street. The south street agreement of limied partnershop contained a clasue indemifying the managers and agents of the limited parnershop for costs, including legal costs incurred, where that manger or agent is called to litigate on behalf of the fund. The indemnification clause was unusual, insorar as it purported to recompense an agent or manager for legal fees incurred defensively when incurred on behalf of the fudns, but also for legal action taken affirmatively on behalf of the funds. Mr. Slaovoda did not hesitate to take legal actioin on behalf of the funds in question. IN fact, over a period of 7 years he initiated six leal actiosn against his parner Mr. Ehert, and Mr xz. Mr. Slavoda then sought to invoke the section of the limited partnershop agreemtn wherein he woudl be recompensed for hiw legal costs in connection with those actions. Thys the court was called upon to decide whether ERISA's fidicuary mandates allowed such indemntification to be paid when the expnese would clearly be chareged to funds held for the pension plans described above. The Court applied teh language of the aAct to the facts of the case directly,staing that ERISA permits indemnification for reasonable compensaton or reimburement fot expenses properly and acutall incurred. Where a party seeks reimbursemt not only for defensive legal costs, but also for legal legal cost of intiation lawsits, ERISA limits such reimbursmet to such expenss that are "properly incurred in the performance of teh fiduciaries fiduciaries duties with the plan.. the court states that when an indeminfication agreement grants a party control over plan assets, the porper measure of whether an expnes e was propelr incurred hso8ulb be made by reference to the exclusive benefit rule. The Court held specifically, that where an ERISA fiduciary, who alaso has dicsretionsl contol over plan assets by irue of an indemnitfication agreemtn, may be indenfifeid by th eplan only for those expens that are incrred purusnt to his dities with the plan, and that are undertaken for the exluse beneit of the paln. With respect to Salovads, to prevail, the person seeking such indemnificaton must show that the intitiate the lawsit in aquetion as part of his dieis with Soth Steet and with an "eye single" toward the benefit of Sotu Sreet. With those principals in mind the court analyzed each of the lawsuits intitiated by Saloovada, for which he sought recompense. The Court stated that each lawsuit should be analzye accorign to the purpose of the suit and the relief sought, not by th eparticilar result. The Corut decided that each of the suits were primarily fot eh benefit of Saalavoda, and not for investors in the South Street Fund. The court also declined to to allow Sallavoda costs or fees incurred in defending the various conterclaims which resulted form the lititgation., findig that he had initiated the lawsuits primarily for his own beneift and with out the authotity of the General Parter ( half owned by Eckert who was the defendant in much of the litigation), and that therefore he can not recover for the expenses incurred in defending the counterclaims. Becaues all of the South Street fund was not owned by pension plans, Salovoda next argued that even if ERISA prohibited the indemnification he sought, he was neverthesless entitled to pro-rata compenation from the portion of the fund not representing investments by pensoin plans. The Corut summarily rejected this argument becaue ERISA investors hold an undivided interest in fund assets accourding to ffedieral regulations (29 CFR 2510:3-101(a)(2) 2002.h The case isState Street Bank and Trust v. Mikael Salovaara 2nd Circuit Court of Appeals, Docket No.s 02-7683, 02-9003, April 15, 2003.

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