Bhep Gp I, LLC v. Kentucky Retirement Systems ( 2022 )

IMPORTANT NOTICE
NOT TO BE PUBLISHED OPINION
THIS OPINION IS DESIGNATED “NOT TO BE PUBLISHED.”
PURSUANT TO THE RULES OF CIVIL PROCEDURE
PROMULGATED BY THE SUPREME COURT, CR 76.28(4)(C),
THIS OPINION IS NOT TO BE PUBLISHED AND SHALL NOT BE
CITED OR USED AS BINDING PRECEDENT IN ANY OTHER
CASE IN ANY COURT OF THIS STATE; HOWEVER,
UNPUBLISHED KENTUCKY APPELLATE DECISIONS,
RENDERED AFTER JANUARY 1, 2003, MAY BE CITED FOR
CONSIDERATION BY THE COURT IF THERE IS NO PUBLISHED
OPINION THAT WOULD ADEQUATELY ADDRESS THE ISSUE
BEFORE THE COURT. OPINIONS CITED FOR CONSIDERATION
BY THE COURT SHALL BE SET OUT AS AN UNPUBLISHED
DECISION IN THE FILED DOCUMENT AND A COPY OF THE
ENTIRE DECISION SHALL BE TENDERED ALONG WITH THE
DOCUMENT TO THE COURT AND ALL PARTIES TO THE
ACTION.
RENDERED: AUGUST 18, 2022
NOT TO BE PUBLISHED
Supreme Court of Kentucky
2022-SC-0151-I
BHEP GP I, LLC; BHEP GP II, LLC; BHEP MOVANTS
GP II-B, LLC; BHEP GP III, LLC; BAY HILLS
CAPITAL MANAGEMENT, LLC; AND LANCE
MANSBRIDGE
ON APPEAL FROM COURT OF APPEALS
V. NOS. 2021-CA-1155 & 2021-CA-1524
FRANKLIN CIRCUIT COURT NO. 18-CI-00377
KENTUCKY RETIREMENT SYSTEMS RESPONDENT
OPINION AND ORDER OF THE COURT
DENYING CR 65.09 RELIEF
BHEP GP I, LLC; BHEP GP II, LLC; BHEP GP II-B, LLC; BHEP GP III,
LLC; Bay Hills Capital Management, LLC; and Lance Mansbridge1 (collectively
referred to as “Bay Hills”) have moved this Court for interlocutory relief
pursuant to Kentucky Rule of Civil Procedure (CR) 65.09. The Movants seek
relief from an order of the Court of Appeals denying their CR 65.07 motion to
vacate a temporary injunction issued by the Franklin Circuit Court. For the
following reasons, we deny their CR 65.09 motion.
1 Lance Mansbridge is the founder and managing partner of Bay Hills Capital
Management, LLC.
I. BACKGROUND
A. Factual Background
Beginning in 2007, Kentucky Retirement Systems (Kentucky Retirement)
invested over $180 million to be managed by Bay Hills Capital Management,
LLC.2 To facilitate these investments, Bay Hills Capital Management and
Kentucky Retirement entered into four written limited partnership agreements
(LPAs). Kentucky Retirement is the only limited partner and is the sole investor
of each limited partnership. The limited partnerships are “funds of funds,”
meaning that they invest in other private equity funds. The partnerships are
separate legal entities. The four limited partnerships are: (1) Bay Hills
Emerging Partners I (Fund I); (2) Bay Hills Emerging Partners II (Fund II); (3)
Bay Hills Emerging Partners II-B (Fund II-B); and (4) Bay Hills Emerging
Partners III (Fund III) (collectively referred to as the “Funds”).3
Bay Hills also established four limited liability companies to run and act
as the general partner for each partnership (collectively referred to as “Fund
GPs”). The general partner for Fund I is BHEP GP I, LLC. The general partner
for Fund II is BHEP GP II, LLC. The general partner for Fund II-B is BHEP GP
II-B, LLC. The general partner for Fund III is BHEP GP III, LLC.
The Funds also employ Bay Hills Capital Management as an advisor and
pay it annual management fees. Bay Hills Capital Management employees
2 We note at the outset that because this is before us on a CR 65.09 motion, we
do not have a certified record from the courts below. We only have the portions of the
record that were supplied by the parties, and our review is limited thereto.
3 The Funds are not parties to this litigation.
2
manage and operate the Funds for the general partners. Each of the Funds are
governed by separate LPAs. Notably, each of the LPAs contain a removal
provision by which the limited partner can remove the general partner for
cause after providing notice to the general partner and an opportunity for the
general partner to cure the alleged cause. The LPAs also contain “Key Person
Event” provisions by which Kentucky Retirement could elect to dissolve and
wind up the Fund if certain key employees of Bay Hills Capital Management
died, became incapacitated, ceased being employed by the company, or failed
to devote a substantial amount of time to the applicable Bay Hills General
Partner or the Fund.
Under the LPAs, the partners are first paid back the capital they invested
in the private equity fund and then a 12% preferred return on the principal
investment. After the 12% preferred return has been paid to the partners, the
general partner receives an additional 8% of the excess of the return of capital,
called the carried interest. After the carried interest is paid, any excess profit is
distributed in the amounts of 92% to all partners in accordance with their
ownership interests and 8% to the general partner. In each fund, Kentucky
Retirement holds an ownership interest of 98 to 99%.
In 2016, a Kentucky Retirement employee noticed that the Fund GPs
were being paid more than what they were supposed to receive under the LPAs.
The Kentucky Retirement investigation revealed that the Fund GPs received
distributions over several years that were equivalent to 8% of the total amount
distributed from the Funds’ investments rather than 8% of the excess of the
3
return of capital. This resulted in the Fund GPs being overpaid by over $2
million. The Fund GPs eventually repaid this overpayment in mid-2017 but
only did so after Bay Hills obtained a bank loan to facilitate the repayment.
Nonetheless, during its investigation into the overpayment of carried interest,
Kentucky Retirement found multiple other areas where it believed Bay Hills
was improperly taking payments from the Funds.
By late 2016, a Key Person Event identified in the LPA for Fund III had
occurred. Kentucky Retirement sought to exercise its right to dissolve and wind
up that Fund and provided its intent to do so to BHEP GP III. Kentucky
Retirement alleges that Bay Hills failed to act in good faith in the wind-up
process and obstructed this process.
B. Procedural Background
Due to the Fund GPs’ overpayment and the alleged obstruction of the
wind-up process for Fund III, as well as other alleged financial
mismanagement, Kentucky Retirement served a notice of removal for cause on
the Fund GPs on May 10, 2017. Kentucky Retirement later withdrew this
notice based on promises made by the Fund GPs. However, when the Fund
GPs allegedly failed to uphold their promises, Kentucky Retirement served a
second notice of removal for cause. This second notice was served on February
8, 2018, and informed the Fund GPs that they would be removed from their
respective partnerships unless they cured the alleged cause within sixty days.
The Fund GPs did not attempt to cure the alleged cause. Instead, on
April 2, 2018, they filed suit in the Delaware Court of Chancery challenging
4
their removal and seeking a declaration of rights. On April 10, 2018, Kentucky
Retirement filed the underlying action in Franklin Circuit Court seeking
monetary damages and declaratory and injunctive relief to enforce Kentucky
Retirement’s decision to remove the Fund GPs. Kentucky Retirement moved to
dismiss or stay the Delaware action in favor of the Kentucky action, asserting
that Kentucky was the proper forum pursuant to the forum selection clauses in
the LPAs. The Delaware court stayed that action pending the resolution of the
Kentucky action, deferring to Kentucky “in the interests of the orderly and
efficient administration of justice.”
In its complaint in the Kentucky action, Kentucky Retirement sought a
declaratory judgment of removal of the Fund GPs from the partnerships
alleging cause for removal existed as defined by each of the LPAs including
miscalculations of carried interest, failure to disclose how carried interest was
calculated, and calculation of expenses in a manner contrary to the LPAs.
Kentucky Retirement further alleged that all of the defendants were grossly
negligent, that the Fund GPs breached their fiduciary duties, that Bay Hills
Capital Management and Mansbridge aided and abetted the Fund GPs in
breaching their fiduciary duties, and that the Fund GPs breached their duty of
good faith and fair dealing. Kentucky Retirement also claimed that all the
defendants engaged in fraud and conversion and that the Fund GPs breached
the contract as found in the LPAs. Finally, Kentucky Retirement claimed unjust
enrichment and sought an equitable accounting and a constructive trust.
5
Contemporaneous with filing its verified complaint in Franklin Circuit
Court, Kentucky Retirement also filed a motion for a temporary injunction
under CR 65.04. Kentucky Retirement sought a temporary “injunction to
remove Bay Hills as general partner of the Funds and to comply with the
Agreements’ requirement for transition of the Funds to a new general partner.”
Bays Hills opposed the motion for a temporary injunction.
On May 15, 2020, the trial court entered an order granting a temporary
injunction to “preserve the status quo and prevent the improper distribution of
assets pending final adjudication on the merits.” In so doing, the trial court
temporarily enjoined the defendants “from taking further management fees,
distributions, carried interest, tax advances, or other payments from the Funds
without prior approval of either the Court or Plaintiff.” The trial court found
that this relief would “ensure[] that the rights of all litigants will be preserved”
pending “a full consideration of all relevant facts and evidence.” The trial court
did not grant Kentucky Retirement the relief it sought, finding such remedy
would be improper, inequitable to the defendants, and would function as a
substitute for trial.
In its order granting a temporary injunction, the trial court found that,
absent the injunction, Kentucky Retirement would suffer “irreparable injury
attendant to the allege[d] breaches of fiduciary duty that could leave [Kentucky
Retirement] with no meaningful remedy.” The trial court further found there
was “at least a substantial possibility that [Kentucky Retirement] will prevail on
its ultimate claim against [Bay Hills], and [Kentucky Retirement] has without
6
doubt presented a substantial legal question on the merits regarding [Bay
Hills’s] alleged misconduct and misallocation and improper distribution of the
assets of the partnerships.” Relying on the testimony and written report of
Kentucky Retirement’s expert witness, Marti Murray, the trial court concluded
that
the overcharges by Bay Hills across several categories of fees and
expenses—including management fees, carried interest, and
operating expenses—as well as the lack of affirmative steps taken
to wind-up the business of Funds I, II, and III, constitute conduct
that would be “well outside the bounds of what a reasonable
investor in Private Equity would find tolerable, in terms of both
their magnitude and recurrence.”
Thus, the trial court found that a substantial question exists as to “whether the
lack of affirmative steps to dissolve the Funds and the continued taking of
payments by the General Partners constitutes Cause for removal under the
LPAs.” Specifically, the trial court found that “a substantial legal question”
exists as to whether the Defendants’ behavior constitutes gross negligence and
whether this behavior materially and adversely affected the Funds, thus
providing grounds for removal for cause under the LPAs.
Finally, the trial court found “continuing harm through breached
fiduciary obligations to Plaintiff that is separate and distinct from any
monetary injury.” The trial court recognized that if only monetary injury was at
issue, Kentucky Retirement would not be entitled to an injunction. However,
the trial court found that “allowing Defendants to continue to award
themselves carried interest, management fees, or expenses represents a breach
of trust and a breach of fiduciary obligations to [Kentucky Retirement]’s
7
interests.” Finally, the trial court found that the breach of trust and breach of
fiduciary obligations “is a present, nonspeculative, nonmonetary harm that
[Kentucky Retirement] would continue to suffer if preliminary injunctive relief
were not granted, and [Kentucky Retirement]’s remedy would thereby be
irreparably impaired.”
Bay Hills did not seek interlocutory relief from the trial court’s May 15,
2020 order granting a temporary injunction. Instead, on June 19, 2020, Bay
Hills filed a Motion for Approval of Payment of Fees and Expenses Incurred by
the Funds. In this motion, Bay Hills also requested that the trial court “vacate
the May 15 Order or modify that Order in a manner that is not inconsistent
with the terms of the LPAs, including allowing Defendants to pay and collect
reimbursements for entire categories of expenses as provided under the LPAs.”
Bay Hills sought approval to pay expenses
associated with preparing the Funds’ annual financial reports,
outside auditors’ fees, tax preparation fees, the legal expenses
relating to this action, costs associated with investing, monitoring
or managing the Funds’ capital, costs incurred in investigating or
evaluating investment opportunities, interest on Fund borrowings,
costs of reports to the limited partners and insurance premiums.
In its motion, Bay Hills alleged that it was “owed $484,393.32 in fees and
expenses associated with managing the Funds, preparing annual financial
reports, outside auditors’ fees, tax preparation fees and legal expenses, the
later category being the lion’s share of [Bay Hills]’ reimbursement
entitlements.” These expenses were only itemized to the extent that Bay Hills
alleged that it was owed $408,839.39 for “legal expenses” and $60,000 for
“reimbursement” for “audit fees incurred and unpaid.” No additional
8
explanation for those expenses was included in the motion, and proof of those
amounts was not attached to the motion.4
Kentucky Retirement filed its own motion for an order prescribing the
procedure for enforcement of the injunction order. In its motion, Kentucky
Retirement averred that Bay Hills was withholding information that would
allow Kentucky Retirement to determine whether Bay Hills was complying with
the terms of the injunction and to determine whether to approve distribution.
Kentucky Retirement’s proposed procedure would allow the Funds to continue
to distribute money to Kentucky Retirement, place in an escrow account any
payment to which Bay Hills believed it was entitled, and provide information
received by Bay Hills from the Underlying Funds so that Kentucky Retirement
could monitor compliance with the injunction order.
On December 16, 2020, the trial court held a hearing at which it heard
arguments on both motions. At the outset of the hearing, the court explained
that it had expected Bay Hills to present an itemized list of fees and expenses it
was seeking as well as the justification for those fees and expenses. The court
noted that there was nothing in Bay Hills’s filings to provide this information
and that it “really want[ed] to know the specifics” regarding the monies to
4 Four months later and after failed mediation, Bay Hills renoticed its Motion for
Approval of Payment of Fees and Expenses Incurred by the Funds and filed a
supplemental memorandum in support of said motion. In the supplemental
memorandum, Bay Hills alleged it was then owed a total of $635,490.93, broken down
as follows: $393,572.17 for legal fees, $69,300.00 for audit fees, $24,000.00 for fund
administration, $119,400.00 for tax preparation, and $9,218.76 for insurance. Bay
Hills further alleged it was owned $238,009.09 in management fees and approximately
$1,050,625.97 in carried interest payments. Again, no proof of these expenses or how
they were calculated was included with the memorandum.
9
which Bay Hills thought it was entitled. Following the hearing, the trial court
took the parties’ motions under submission.
On April 26, 2021, Bay Hills filed a Motion to Vacate Order Granting
Temporary Injunction. Attached to this motion were spreadsheets that
purported to justify Bay Hills’s calculation of the distributions and carried
interest to which it was entitled. Kentucky Retirement opposed, arguing that
Bay Hills was attempting to improperly relitigate the original injunction, and
sought a status hearing. With three motions then pending, the trial court held
a hearing on June 9, 2021, to hear arguments from both parties.
On September 14, 2021, the trial court entered an order resolving each
of the motions. The trial court denied Bay Hills’s request for payment of its
attorneys’ fees. The trial court denied Bay Hills’s requests for the court to
amend or vacate its injunction order. The trial court ordered that Bay Hills
could pay from the Funds any outstanding third-party claims after providing
“complete documentation for such payments to” Kentucky Retirement and that
Bay Hills would be required to petition the court for any future third-party
claims before paying those from the Funds. Finally, the trial court ordered that
Bay Hills could petition the court for payments of carried interest, management
fees, or any other amounts to be paid to Bay Hills directly out of the Funds but
that Bay Hills would be required to “provide sufficient documentary proof that
they are entitled to such. Otherwise, the [c]ourt orders that these payments be
deposited in an escrow account during the pendency of this action.”
10
Specifically, regarding attorneys’ fees for the underlying litigation, the
trial court found that “because the Funds are composed of assets contributed
by [Kentucky Retirement], any payment from the Funds to cover [Bay Hills’s]
legal fees improperly shifts [Bay Hills’s] costs associated with this litigation to
[Kentucky Retirement].” The court found that allowing Bay Hills to recover its
legal fees for the underlying litigation from the Funds would “violate[] the
established rule that each party must bear its own costs during the course of
litigation.” The court found that to do so would be “especially inappropriate” in
this case “given the strong showing made by [Kentucky Retirement] that [Bay
Hills has] misappropriated funds and wrongful [sic] paid out compensation to
themselves in violation of the agreements.” The court went on to say that “[t]his
principle is even more compelling in this case by virtue of the fact that all of the
funds at issue are public funds that are held in trust for the benefit of public
retirees.” Finally, the court concluded that “[t]here is a strong presumption
against indemnification provisions in contracts applying to suits between the
parties to the contract, and the circumstances surrounding the present case—
as well as language of the LPAs themselves—do not overcome that
presumption.”
On October 4, 2021, Bay Hills filed a Motion for Interlocutory Relief in
the Court of Appeals under CR 65.07. While that motion was pending in the
Court of Appeals, Bay Hills filed a Motion for Approval of Payment of Partner
Distributions, Carried Interest and Management Fees in the trial court. In its
motion, Bay Hills sought over $3.8 million in distributions and close to $1
11
million in management fees. Bay Hills justified these amounts by providing the
trial court with spreadsheets and explanations based on calculations reached
by a third-party fund administrator. Kentucky Retirement responded in
opposition of Bay Hills’s motion, arguing that Bay Hills was not entitled to any
carried interest or management fees after the effective date of the for-cause
removal.
On December 9, 2021, the trial court entered an order denying Bay
Hills’s motion and ordering “that the disputed amounts be held in escrow until
this litigation has concluded, or the [c]ourt after notice and hearing approves
full or partial distribution of those sums.” The trial court again noted that
Kentucky Retirement had “made an extremely strong showing that [Bay Hills]
took compensation that [it was] not entitled to, and, in fact, [Bay Hills has]
acknowledged that [it] overcharged the funds by over a million dollars in
carried interest payments.” The court further noted that Bay Hills’s “right to
the compensation requested is highly disputed” and that if Kentucky
Retirement ultimately prevailed on the underlying claims for breach of fiduciary
duty claims, Bay Hills “may not be entitled to the requested compensation at
all.” On December 29, 2021, Bay Hills filed a second Motion for Interlocutory
Relief in the Court of Appeals under CR 65.07.
On April 14, 2022, the Court of Appeals entered an order denying both of
Bay Hills’s CR 65.07 motions for interlocutory relief. The Court of Appeals held
that the trial court did not abuse its discretion in entering either its September
10, 2021 order or its December 9, 2021 order. The Court of Appeals further
12
noted that Bay Hills’s failure to seek relief from the trial court’s May 15, 2020
injunction order effectively waived any objection it had to that order. Therefore,
the Court of Appeals deemed waived any arguments Bay Hills made that went
to the substantive decisions the trial court made in the first injunction order
that were subsequently implicitly incorporated into the trial court’s later
orders. Thereafter, Bay Hills filed a Motion for Interlocutory Relief with this
Court pursuant to CR 65.09.
II. INJUNCTION STANDARD OF REVIEW
A preliminary injunction is an “extraordinary remedy” and should only be
issued “where absolutely necessary to preserve a party’s rights pending a trial
on the merits.” Commonwealth ex rel. Cowen v. Wilkinson, 828 S.W.2d 610, 612
(Ky. 1992) (emphasis added), overruled on other grounds by Commonwealth ex
rel. Conway v. Thompson, 300 S.W.3d 152 (Ky. 2009); see also Bartman v.
Shobe, 353 S.W.2d 550, 554 (Ky. 1962) (explaining that courts “frequently
withhold[] the granting of an injunction when the benefit to the plaintiff will be
small in comparison to the injury to the defendant”). “[A] temporary injunction
is designed merely to hold the status quo until the merits can be decided.”
Curry v. Farmers Livestock Mkt., 343 S.W.2d 134, 135 (Ky. 1961).
Injunctive relief is governed by CR 65.04, which states that a temporary
injunction may be granted if
it is clearly shown by verified complaint, affidavit, or other evidence
that the movant’s rights are being or will be violated by an adverse
party and the movant will suffer immediate and irreparable injury,
loss, or damage pending a final judgment in the action, or the acts
13
of the adverse party will tend to render such final judgment
ineffectual.
This rule effectively requires that a trial court only grant injunctive relief if each
of the following is met: first, that the movant presents a “substantial question”
in the case (“i.e. that there is a substantial possibility that the movant will
ultimately prevail”); second, that the injury resulting absent injunctive relief
would be immediate and irreparable; and third, that the temporary injunction
“will not unduly harm other parties or disserve the public.” Price v. Paintsville
Tourism Com’n, 261 S.W.3d 482, 484 (Ky. 2008) (citing Cyprus Mountain Coal
Corp. v. Brewer, 828 S.W.2d 642 (Ky. 1992)). “Realizing that the elements of CR
65.04 must often be tempered by the equities of any situation, injunctive relief
is basically addressed to the sound discretion of the trial court.” Maupin v.
Stansbury, 575 S.W.2d 695, 697–98 (Ky. App. 1978) (citations omitted).
However, “mere injuries, however substantial, in terms of money, time and
energy necessarily expended in the absence of a stay, are not enough.”
Norsworthy v. Ky. Bd. of Med. Licensure, 330 S.W.3d 58, 62 (Ky. 2009) (quoting
Sampson v. Murray, 415 U.S. 61, 90 (1974)).
Under CR 65.07, a party adversely affected by a temporary injunction
may seek relief from the Court of Appeals. “In requesting interlocutory relief
pursuant to 65.07, a party is arguing that, by granting or denying an
injunction under CR 65.04, the trial court’s decision is not based on
substantial evidence and is clearly erroneous.” Kindred Hosps. Ltd. P’ship v.
Lutrell, 190 S.W.3d 916, 919 (Ky. 2006) (citation omitted). However, the Court
14
of Appeals may only reverse the trial court’s decision to grant or deny a
temporary injunction if the movant shows that “injury or loss will occur in light
of the trial court’s decision.” Id.“A party adversely affected by the Court of Appeals’ ruling may, under
CR 65.09(1), move this Court for further review. We grant such review only
upon a showing of ‘extraordinary cause.’” Boone Creek Props., LLC v. Lexington-
Fayette Urban Cnty Bd. of Adjustment, 442 S.W.3d 36, 38 (Ky. 2014) (quoting
Nat’l Collegiate Athletic Ass’n v. Lasege, 53 S.W.3d 77, 84 (Ky. 2001)).
Extraordinary cause is a high bar. “While additional review by this Court is
limited to those cases which demonstrate ‘extraordinary cause,’ abuses of
discretion by the courts below can supply such cause.” Lasege, 53 S.W.3d at
84 (footnote omitted). This Court reviews the circuit court’s decisions on
temporary injunctions for an abuse of discretion. Boone Creek, 442 S.W.3d at
38. “Unless a trial court has abused that discretion, this Court has no power to
set aside the order below.” Maupin, 575 S.W.2d at 698 (citations omitted).
Thus, “we give considerable deference to the circuit court’s evaluation of the
dispute, the issues involved, the weighing of the equities, and whether an
injunction is proper under the particular circumstances at hand.” Boone Creek,
442 S.W.3d at 38.
III. ANALYSIS
Bay Hills moves this Court to vacate the order of the Court of Appeals
which denied relief from the September 14 and December 9 orders issued by
the trial court. Bay Hills first argues that the injunctions they challenge were
15
improperly granted because they provide only monetary relief. Although the
trial court justified its order as an injunction related to fiduciary duties and not
monetary relief, Bay Hills argues that the order’s effect is to withhold money
from Bay Hills. As a matter of law, injunctions may not be granted solely for
monetary relief. Bay Hills contends that because economic harm is not
irreparable, Kentucky Retirement failed to meet its burden before the trial
court for a temporary injunction. As such, Bay Hills argues that the trial court
clearly abused its discretion.
Second, Bay Hills argues that the trial court abused its discretion by
“rewriting the LPAs” at issue in the case. By this, it appears that Bay Hills
disputes the trial court’s interpretation of the Funds’ indemnity clauses
through the trial court’s orders. The LPAs for three of the Funds require that
the “General Partner . . . shall be indemnified to the fullest extent permitted by
law by the Partnership against any cost, expense (including attorneys’ fees),
judgment and/or liability incurred by or imposed upon them in connection
with any action, suit or proceeding” stemming from their participation as
General Partner.
The LPAs contain an exception to this indemnity clause where “as
determined by a final judgment, order or decree” a party was found to have
breached fiduciary duties. Despite no determinative finding of a breach of
fiduciary duties, the trial court through one of its contested orders granting a
temporary injunction denied attorneys’ fees for Bay Hills. In so doing, Bay Hills
contends, the trial court “did violence” to the parties’ contracts in its indemnity
16
provisions and provisions complimentary to indemnity.5 Bay Hills additionally
argues that the requirement to gain approval for costs is directly counter to
these provisions of the LPAs.
Kentucky Retirement, in response, makes four arguments. First,
Kentucky Retirement argues that Bay Hills waived any arguments regarding
the LPAs’ terms because Bay Hills failed to seek relief from the first injunction.
Similarly, it next argues that Bay Hills also waived any arguments regarding
irreparable harm. Kentucky Retirement contends that neither of the orders
before this Court modified the original injunction ordered by the trial court,
and accordingly if Bay Hills were to challenge irreparable harm, it would have
needed to do so on the first injunction.
Third, Kentucky Retirement contends that Bay Hills’s arguments on
irreparable harm fail on the merits because the trial court’s order was not for
monetary relief, but rather addressed the threat Bay Hills posed as fiduciaries
if permitted to continue in that role unchecked. It was in part on these grounds
that the Court of Appeals affirmed the trial court’s orders, writing that
“Kentucky Retirement seeks to enforce a bargained-for right to remove the
general partner upon ‘cause’ or breach of fiduciary duty—a right that is
difficult, if not impossible, to value and could be meaningless or substantially
diminished in value by the end of the litigation absent injunctive relief.”
5 The “complimentary” provisions include sections “Authority of the General
Partner,” “Obligations of General Partner,” “Liability of General Partner and Adviser,”
and “Expenses.” Bay Hills’s arguments related to these complimentary provisions are
that they support Bay Hills’s interpretation of the indemnity clause in the LPAs, as
they require the Funds to pay all partnership expenses.
17
Finally, Kentucky Retirement contends that Bay Hills’s contractual
arguments also fail on the merits. Kentucky Retirement claims that neither the
indemnification provision, nor any other provision, provides for fee-shifting.
Kentucky Retirement alleges that indemnification such as that within the LPAs
applies only to third-party claims, not first-party indemnification. Since
Kentucky Retirement and Bay Hills are the parties to the LPAs, Kentucky
Retirement argues that the indemnification provisions do not apply. We
address the parties’ arguments regarding both irreparable harm and indemnity
in turn.
A. Irreparable Harm
Bay Hills first argues that “the Court of Appeals erred in upholding
injunctions that are purely monetary in nature and not fashioned to address
any risk of irreparable harm.” Generally, injunctions should not be issued to
provide purely monetary relief, as monetary injury is generally not irreparable.
Norsworth, 330 S.W.3d at 62 (“[M]ere injuries, however substantial, in terms of
money, time and energy necessarily expended in the absence of a stay, are not
enough.” (quoting Sampson, 415 U.S. at 90)); see also Zirkle v. District of
Columbia, 830 A.2d 1250, 1256–57 (D.C. 2003) (“[F]or it is well established that
economic and reputational injuries are generally not irreparable.”). However,
these arguments go to the merits of the trial court’s May 15, 2020 injunction
order, not the modifications made to that injunction order in the trial court’s
September 14, 2021 and December 9, 2021 orders. Significantly, Bay Hills did
not seek relief from the May 15 injunction order.
18
In its May 15 injunction order, the trial court found “irreparable injury
attendant to the allege[d] breaches of fiduciary duty that could leave [Kentucky
Retirement] with no meaningful remedy.” The court further found that the
breach of trust and breach of fiduciary obligations “is a present,
nonspeculative, nonmonetary harm that [Kentucky Retirement] would continue
to suffer if preliminary injunctive relief were not granted, and [Kentucky
Retirement]’s remedy would thereby be irreparably impaired.” If Bay Hills
believed these findings were in error, it should have sought relief from this
injunction order. It cannot now complain about those findings.
Relatedly, Bay Hills argues that “the injunction orders below still violate
Kentucky law because there is no nexus between the monetary relief . . . and
the so-called harm that the lower courts purport to address.” The monetary
relief ordered, however, absent the attorneys’ fees issue discussed below, was
the same in each of the trial court’s three orders. All of the orders required Bay
Hills to petition the trial court for any payments it wished to make from the
Funds. Although the Court of Appeals described the December 9 order as
“foreclose[ing] Bay Hills from petitioning the court for approval of payments
from the Funds,” we do not view the trial court’s order in the same way.
In its December 9 order, the trial court ordered “that the disputed
amounts be held in escrow until this litigation has concluded, or the [c]ourt
after notice and hearing approves full or partial distribution of those sums.”
(Emphasis added). Although the trial court appears unlikely to allow Bay Hills
to pay itself carried interest and management fees from the Funds while the
19
litigation is ongoing, the trial court did not foreclose that possibility entirely, as
it still allows Bay Hills to present those sums to it for approval.6 This is the
same relief provided in the initial May 15 injunction order from which Bay Hills
did not seek relief. Accordingly, Bay Hills cannot not now allege that the trial
court erred.
Because Bay Hills did not seek relief from the trial court’s May 15
injunction order, we must assume, without deciding, that the trial court did
not abuse its discretion in entering said order. We must further assume that
none of the trial court’s factual findings in its May 15 order were clearly
erroneous. We cannot hold that the trial court abused its discretion in entering
its September 14 and December 9 orders, as they were primarily applications
or enforcements of the original May 15 injunction order.
B. Indemnity
Unlike Bay Hills’s arguments regarding irreparable harm, its contractual
arguments regarding indemnity stem from an order that is properly before us.
In the trial court’s September 14 order appealed to this Court, the trial court
denied Bay Hills’s request for attorneys’ fees and indemnity from the Funds.
Specifically, the trial court wrote that the LPAs “contain only broad language
regarding indemnification and do not specifically contemplate indemnification
6 Bay Hills also argues that the trial court “rewrote the LPAs” by refusing to
allow Bay Hills to collect management fees, compensation, and distributions. However,
as noted, the trial court did not prohibit Bay Hills from collecting these monies all
together and for all time, but instead merely required Bay Hills to obtain the trial
court’s approval first. Further, this argument goes to the trial court’s May 15
injunction order from which Bay Hills did not seek relief.
20
by the Funds of the General Partners or any of the Defendants in suits against
[Kentucky Retirement].” In doing so, Bay Hills argues that the trial court
violated Bay Hills’s bargained-for right to indemnity.
The Funds provide that they will indemnify their General Partner, Bay
Hills, in any litigation.7 Bay Hills claims that this should include litigation
between the parties to the contract. In essence, Bay Hills would have this Court
interpret general indemnity provisions such as the one in this case to apply to
first-party indemnity (in which a Partnership indemnifies the parties to the
contract when litigation arises between those partners regarding their
partnership) in addition to third-party indemnity.
This Court has not yet interpreted the application of general indemnity
provisions to first-party claims. However, when this Court has interpreted
contractual disputes, we have been careful not to nullify the purpose of the
contract: “In order to carry out the intent of the parties, it is our duty to
disregard the broad language used which would have the effect to defeat the
purpose of the contract and render it a nullity.” Henderson v. Cont’l Cas. Co.,
239 Ky. 93, 39 S.W.2d 209, 211 (1931).
Here, requiring Kentucky Retirement to secure and protect Bay Hills for
its own alleged breaches of contract even where they stem from a breach of
fiduciary duties—one of the exceptions to the indemnity provisions—would
“operate effectively to relieve their agent of any obligation to perform [its]
7 Only three of the four Funds include the indemnity provisions at issue in this
case.
21
duties” by invalidating the exception, eliminating incentives to act in good faith,
and compensating Bay Hills for their own malfeasance.8 R.&J. Oil v. Rodgers,
No. 3:18-CV-00117-GNS-CHL, 2020 WL 201053, *3 (W.D. Ky. Jan. 13, 2020).
This cannot have been the intention of the parties in drawing their contract,
since it would effectively nullify Bay Hills’s duty to act as a fiduciary. The trial
court, in issuing its September 14 order, saw this contradiction and issued its
order accordingly.
The complimentary provisions that Bay Hills cites as providing additional
support for their argument in favor of attorneys’ fees similarly fail. The
“Authority of the General Partner” and “Obligations of General Partner”
provisions each give the General Partner the “power and authority” to
“commence or defend litigation that pertains to the Partnership;” as such, the
same analysis applied to the indemnity provision also applies to these
provisions. The “Liability of General Partner and Adviser” provision states that
General Partners may not be liable to Limited Partners. This provision, since it
relates to Partnership liability, does not speak to the issue of indemnity on this
appeal. Finally, in the “Expenses” provision, the contract provides that the
Partnership must pay litigation fees for “expenses and liabilities incurred by or
on behalf of the Partnership or for its benefit.” This provision clearly does not
apply, since the purpose of the underlying suit is to dissolve said Partnership
8 The “finality” language in the exception does not alter our analysis.
22
and hold Bay Hills accountable for their alleged failure to act appropriately as
General Partner.
As such, the trial court did not abuse its discretion by denying Bay
Hills’s request for the payment of fees incurred in the course of litigation.
IV. CONCLUSION
For the foregoing reasons, we deny Bay Hills’s Motion for Interlocutory
Relief pursuant to CR 65.09.
All sitting. All concur.
_________________________________________
CHIEF JUSTICE MINTON
COUNSEL FOR APPELLANTS: BHEP GP I, LLC; BHEP GP II, LLC; BHEP GP II-
B, LLC; BHEP GP III, LLC; BAY HILLS CAPITAL MANAGEMENT, LLC; AND
LANCE MANSBRIDGE:
William A. Hoskins, III
Patrick Flanagan Estill
Jackson Kelly PLLC
Mark Craig Goodman
Christina Wong
Baker & McKenzie LLP
COUNSEL FOR APPELLEE, KENTUCKY RETIREMENT SYSTEMS:
Paul Christopher Harnice
Christopher Edward Schaefer
Sarah Jackson Bishop
Connor Bailey Eagan
Stoll, Keenon & Ogden, PLLC
Mark A. Cameli
Ryan S. Stippich
Reinhart Boerner Van Deuren s.c
23