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As reported in The American Lawyer, Paul, Weiss won a landmark victory on behalf of The Blackstone Group and Blackstone Alternative Asset Management (BAAM) in a $50 billion derivative claim brought by beneficiaries of Kentucky’s public pension fund. In Mayberry et al. v. KKR & Co., L.P., et al., the Kentucky Supreme Court brought the case to a close, unanimously holding that defined-benefit beneficiaries of the state’s pension plans lacked statutory and constitutional standing to bring their claims on behalf of the fund or the Commonwealth. With a number of states contending with underfunded pension plans, the lawsuit has been viewed as a critical test case for whether beneficiaries of underfunded public pension plans may assert claims against third-party asset managers on behalf of those plans, and the decision has significant implications for the future of such claims.
The action was initially filed in December 2017 in Franklin Circuit Court by eight individual Kentucky Retirement System (KRS) beneficiaries who purported to sue derivatively, on behalf of KRS, and as taxpayers, on behalf of the Commonwealth of Kentucky. The derivative plaintiffs alleged that BAAM and two other alternative asset managers, Prisma and PAAMCO, breached fiduciary duties by unlawfully selling KRS custom funds of hedge funds in August 2011 that they knew were “illiquid, opaque and unsuitable” and “provided exceptionally large fees.” According to the derivative plaintiffs, these investments were particularly unsuitable in light of KRS’s deteriorating financial condition. The derivative plaintiffs also alleged that BAAM, Prisma, and PAAMCO conspired with dozens of former KRS trustees, officers and advisors to hide the risky nature of the funds of funds from the public. The plaintiffs sought $50 billion in damages, an amount equivalent to the entire KRS funding deficit accrued over more than two decades, as well as disgorgement of fees. The lawsuit attracted enormous attention both locally and nationally. It was a key issue in the Kentucky attorney general and gubernatorial elections, and the subject of a PBS Frontline episode, portions of which were shot in our office.
In February 2018, Blackstone and other defendants moved to dismiss the action on multiple grounds, including that the derivative plaintiffs lacked statutory and taxpayer standing to pursue their claims. The Franklin Circuit Court denied that motion on November 30, 2018. It became evident to our team and the client that there was a decided, perhaps insurmountable, “home court” advantage in Franklin County, Kentucky, and that the defendants, with $50 billion at stake, would face overwhelming challenges before the trial judge. With no right to an interlocutory appeal, Paul, Weiss filed a petition on behalf of Blackstone in the Kentucky Court of Appeals for a “writ of prohibition” against the Franklin Circuit Court. Although such writs have been granted only a handful of times in the history of the Kentucky judicial system, the Court of Appeals granted our petition in April 2019, finding that the Circuit Court was acting outside its jurisdiction to hear the case because the derivative plaintiffs lacked standing under the state’s constitution. The derivative plaintiffs then appealed to the Kentucky Supreme Court.
Writing for a unanimous Kentucky Supreme Court, Chief Justice John D. Minton Jr. wrote that “as a matter of law, these eight Plaintiffs, as beneficiaries of a defined-benefit plan who have received all of their vested benefits so far and are legally entitled to receive their benefits for the rest of their lives, do not have a concrete stake in this case. And without a concrete stake in the case, the Plaintiffs lack constitutional standing to bring their claims in our courts.” In so holding, the Kentucky Supreme Court rejected each of the standing theories asserted by the derivative plaintiffs, including that they had standing as trust beneficiaries; in a derivative or representational capacity to sue on behalf of the pension plans; in their own right as taxpayers or in a derivative capacity as taxpayers suing on behalf of the commonwealth; and in their own right to sue on the theory that plan mismanagement had increased the risk of plan default.
The Paul, Weiss team included litigation partners Brad Karp, Lorin Reisner, Andrew Ehrlich and Brette Tannenbaum and corporate partner Udi Grofman.