A Missouri court has denied a state pension fund’s request to halt its capital commitments to Catalyst Capital Group Inc., throwing a wrench into the pension plan’s lawsuit against the Toronto-based private-equity firm.
Last fall, the Missouri State Employees’ Retirement System, or MOSERS, sued Catalyst, alleging the firm and its founder, Newton Glassman, failed to provide the necessary duty to protect its interests. MOSERS also alleged that Catalyst breached a limited partnership agreement by repeatedly extending financial lifelines to one of its portfolio companies, Callidus Capital Corp.
As part of the lawsuit, MOSERS requested a preliminary injunction permitting it to ignore capital calls from Catalyst that ask its limited partners to contribute more money. MOSERS has invested in three Catalyst funds dating back to 2011.
The lawsuit also alleged breach of fiduciary duty and negligence, among other things.
Missouri’s Circuit Court for Cole County has denied MOSERS’s request to ignore the capital calls, and in doing so has also pushed back on some of the pension fund’s other allegations. MOSERS originally committed to invest US$100-million in Catalyst Fund V, but has only put in US$60-million so far.
In the ruling, the judge wrote that MOSERS willingly signed contractual agreements with Catalyst that permitted the capital calls, and that more than 70 other limited partners did the same. “MOSERS agreed to the consequences it now asks the court to enjoin,” the judge wrote, adding that the pension fund is a “sophisticated entity.”
The ruling backstops a November court decision that came to the same conclusion, but was made without as much substantive debate and submissions.
“We are pleased that the Missouri court has, for the second time in this matter, decidedly ruled in favour of Catalyst in denying MOSERS’ questionable requests for injunctive relief,” Catalyst spokesperson Dan Gagnier wrote in a statement.
In its original petition, which was filed in October, MOSERS argued it did not have to fund its capital calls because Catalyst’s dealings with Callidus amounted to negligence and breach of fiduciary duty, and that it suffered financial losses as a result.
MOSERS also claimed Catalyst breached its limited partnership agreement, partly by failing to provide information about the investment funds when requested. Besides compensation for the losses, which are tallied, the pension fund is also seeking punitive damages.
The new ruling denying the injunction pushes back on some of these allegations – but doesn’t go so far as to rule against MOSERS on them.
For one, the judge argued that MOSERS has not proved that Catalyst’s transactions with Callidus were not on market terms. He also noted MOSERS did not demonstrate Catalyst failed to consult with advisory panels that help govern the investment funds.
The judge also pushed back on the allegation that Catalyst gave Callidus special consideration, in part because Mr. Glassman had been CEO of the company. MOSERS alleged that Catalyst backstopped loans that Callidus had on its books by extending a $200-million unsecured bridge loan to Callidus in 2014. The size of the loan was increased by $50-million a year later, and then the maturity of the loan was extended and other covenants were waived in subsequent years.
Catalyst has argued that its fundamental strategy is to invest for control of distressed companies. “If Mr. Glassman serving as CEO of a portfolio company created a conflict of interest, then most of the funds’ investments would create conflicts of interest. That makes no sense,” the judge wrote.
A spokesperson for MOSERS declined to comment, saying the fund does not comment on continuing litigation.
Callidus was a lender to distressed companies and went public at $14 a share in 2014. In 2019, Braslyn Ltd., its second-largest investor, bought out the minority shareholders for 75 cents a share. Catalyst funds retained the majority interest in the company, which is now known as FrontWell Capital Partners.
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